In trade talks, Britain moves away from European Union

On Monday (March 2), Britain and the European Union (EU) start negotiations on a trade deal, with the two sides having very different visions of the future.

Britain left the EU on January 31 but without a detailed agreement on their future trade relationship. The two sides must conclude a deal by December 31 this year, the end of the Brexit transition period.

Britain’s position has hardened over the last three months. This is because of the general election in December which put the Conservatives in power with a majority of 80 seats over the other parties. So it can enact policy as it wishes. Previously, the party governed without a majority, forcing it to negotiate with other parties.

On February 25, the 27 members of the EU published their 46-page policy on the talks. Two days later, Prime Minister Boris Johnson published a 30-page plan setting out Britain’s policy.

Two of the toughest issues are finance and fishing. In 2018, financial services accounted for 6.9 percent of Britain’s gross domestic product. From January 1 next year, the City of London will lose unfettered access to EU markets.

The EU is offering “respective unilateral equivalence frameworks”, under which each recognizes the other’s regulations. But the EU can withdraw this with 30 days’ notice. Britain wants a more stable arrangement.

Uncertain of the outcome, many international financial institutions are diversifying operations away from London. Last week Citigroup announced that it was appointing a regional chief for Europe based in Frankfurt.

“It is a clear endorsement of Frankfurt as centre of our post-Brexit EU operations,” the bank said. “We will have a combination of a Europe-wide headquarters in Dublin and a broker-dealer hub in Frankfurt.”

Fishing was one of the most emotive issues during the Brexit referendum. Britain’s fishing grounds are richer than those of EU states. In its mandate, the EU demands long-term guaranteed access to British waters for its fishermen; but Britain is only offering annual negotiations.

The EU mandate calls for Britain to follow its standards on state aid, labor and the environment. It does not want Britain to become an offshore low-tax haven with regulations weaker than those in Europe.

“The UK cannot expect high-quality access to the single market if it also insists on diverging from our rules,” said Michel Barnier, the EU’s chief negotiator.

But last Thursday Michael Gove, Minister of the Cabinet Office, said that Britain wanted full autonomy to fix its own rules on state aid, labor and the environment and did not want to be tied to EU standards.

The timetable is tight. The two sides are due to hold six rounds of talks before a summit in June. Agreement must be reached by September, to allow the parliaments of the 27 states to ratify it before the end of the year.

The British mandate said that, if good progress had not been made before June, the UK could shift to preparations to leaving on World Trade Organization (WTO) terms — this would include new tariffs and quotas on trade. WTO terms are used between countries that have no free trade agreements with each other. It would amount to a “No Deal”.

Under WTO rules, cars would be taxed at 10 percent when they cross the UK-EU border. Agricultural tariffs would be higher, rising to an average of more than 35 percent for dairy products.

This is an outcome greatly feared by business, and manufacturing in particular, especially by firms that secure a portion of their parts and components from suppliers in EU countries.

London’s negotiating position has been changed by the election. It has put in power a government of “Brexiteers” who lobbied to leave before the 2016 referendum. They are willing to sacrifice economic benefit in the name of sovereignty and full control of their own affairs.

On February 17, David Frost, Britain’s chief negotiator, gave a bullish speech at ULB Brussels University. “We will set our own standards for commerce and state aid even if that means giving up privileged access to the EU single market,” he said. “If the UK were to abide by EU rules, that would contradict the whole point of Brexit, which is for the UK to be able to make its own decisions.”

All this is bad news for British business and industry, both local and foreign-owned. The previous Conservative government, under Theresa May, listened more to their needs — they want tariff- and quota-free access to the EU market.

It now looks very likely that they will lose this unfettered access. This will have profound consequences for British industry and the country’s attraction as a destination for foreign investment.