Chapter 4

Everybody Needs Good Neighbors: Looking at Long-Term UK–EU Relations

IN THIS CHAPTER

Bullet Introducing the political declaration regarding future UK–EU relations

Bullet Outlining the plan for future trade

Bullet Aiming for regulatory cooperation between the UK and the EU

Bullet Looking at the vision for customs arrangements

Bullet Agreeing on the movement of people between the EU and the UK

Bullet Setting the scene for post-Brexit negotiations

If you set foot in the United Kingdom (UK) at any point during the 1980s and 1990s, you’ll be well familiar with the theme tune from Neighbours, the Australian soap opera that had Brits hooked when it first aired on the BBC in 1986. “Neighbors,” the annoyingly catchy tune began, “everybody needs good neighbors… .” (The theme tune’s still the same, by the way, even though the show was long ago relegated from the Beeb to Channel 5.)

And even though many Brits actively avoid making eye contact with their real-life neighbors, let alone bother to learn their names, the sentiment still means something. Everybody needs good neighbors, don’t they?

And so I turn to the UK’s neighbors on the continent, and the future (post-Brexit) relationship between the UK and the European Union (EU), as outlined in the joint political declaration released in November 2018.

Will “good neighbors become good friends,” as the theme tune goes, or will there be passive-aggressive arguments over whose trash can is blocking whose driveway? Read on to find out.

Understanding the Declaration on Future Relations and How It Differs from the Withdrawal Agreement

November 2018 was a key point in the UK–EU negotiations, because the final draft withdrawal agreement (see Chapter 3) and political declaration on the future relationship were both released. Together, these documents gave everyone a much clearer idea of how Brexit — and life after Brexit — would play out. Most of the media attention focused on the withdrawal agreement, but the political declaration shouldn’t be ignored.

The withdrawal agreement focuses on the exit process, but the political declaration on future relations (full title: “Political declaration setting out the framework for the future relationship between the European Union and the United Kingdom”) looks beyond Brexit to outline how the two sides plan to work together in the future, after the end of any transition period (see Chapter 3).

Remember Unlike the withdrawal agreement, the political declaration on future relations (to save my fingers, I’m just going to call it “the declaration” from now on) isn’t legally binding. Nor is it particularly detailed; the declaration is a trim 26 pages, compared to the whopping near-600 pages of the withdrawal deal.

If it’s not legally binding, what’s the point of the declaration? For one thing, it sets out a goal of continued close cooperation between the UK and the EU, establishing an “ambitious, broad, deep, and flexible partnership.” In other words, the EU and the UK intend to remain friends.

Remember The declaration has also been described by the UK government as “a set of instructions to negotiators” who’ll be sorting out the nitty-gritty aspects of the UK’s ongoing relationship with the EU. In that way, it’s like a stepping-stone on the road to negotiating a post-Brexit relationship.

Areas covered in the declaration include:

  • Trade
  • Economic cooperation
  • Law enforcement
  • Crime and justice
  • Security and defense
  • Foreign policy

Remember Formal negotiations on these areas won’t begin until the UK exits the EU (whether that’s in October 2019 or at a later date). In an ideal world, the two sides will agree as much as possible before the transition period ends in December 2020 (that’s if the transition period isn’t extended). But, in reality, the UK and EU are likely to be in negotiations for years to come.

And although both sides have said they want a relationship that’s “as close as possible,” until all post-Brexit negotiations have been completed, we don’t know what that relationship will really look like in practice. That’s why the declaration itself is pretty vague.

But let’s look at what the agreement does say, and what this may mean for the UK. In this chapter, I largely focus on the parts of the declaration that will be of most interest to UK businesses.

Trading in Goods and Services in the Future

Although the UK no longer wants to be part of the EU, it certainly doesn’t want to lose access to the world’s largest single market, which is what the EU is. Likewise, the UK is an important customer for European goods and a critical partner in matters like security.

Remember Therefore, despite the political chatter and infighting, it’s in the interests of both the UK and the EU to agree on a long-term trade arrangement that not only allows smooth trade between the two parties (thereby benefitting businesses and citizens on both sides) but also allows the two bodies to work together on areas like defense, security, fraud prevention, and so on.

Looking at the UK’s potential trading relationship with the EU

The word frictionless is often mentioned in relation to future trade between the UK and the EU, but as the saying goes, there’s no such thing as a free lunch. What I mean is, easy trade between the UK and the EU can only be achieved with a certain amount of regulatory compliance between the two.

Remember So, when the declaration states the intention of creating a trading relationship that’s “as close as possible,” it goes on to specify that “the Parties envisage comprehensive arrangements that will create a free-trade area, combining deep regulatory and customs cooperation, underpinned by provisions ensuring a level playing field for open and fair competition.”

Technical stuff A free-trade agreement is an international trade agreement between two parties (usually between two countries, but in the case of the EU, the whole union negotiates with other countries as one trading bloc). Free-trade agreements are designed to boost international trade and make it easier for countries to trade. How? Mainly by cutting tariffs (taxes on imports and exports) and other trade barriers. Read more about how trade deals are negotiated in Chapter 5.

With the declaration wording as it is, the EU is subtly reminding the UK that the more economic rights it retains, the more EU obligations it’ll need to sign on for. In other words, a free-trade agreement with the European single market will likely come at the price of accepting certain EU laws and product standards. That’s the “level playing field” that the declaration is talking about.

Bottom line? “As close as possible” isn’t the same as “frictionless,” and you can expect trade to be one of the trickier factors in the UK’s future negotiations with the EU.

Tip At the time of writing, nothing has been agreed on UK–EU trade, and the vague “as close as possible” wording of the declaration opens up all sorts of potential trading scenarios. In Chapter 12, I speculate on some of these scenarios in more detail, and highlight other key Brexit developments to keep an eye on.

Considering whether the UK can just trade with the EU under World Trade Organization rules

The UK can certainly trade with the EU under World Trade Organization (WTO) rules. In fact, if the UK leaves the EU without getting parliamentary approval on the withdrawal deal (a “no-deal Brexit”; see Chapter 3), then WTO rules will immediately come into force (because no deal means no transition period).

Remember The WTO is the organization that helps countries negotiate the terms of international trade. When two trading partners (say, the UK and the EU) don’t have a free-trade agreement in place, they trade under WTO rules. So, if the UK and the EU are unable to reach a trade agreement in the future, then they’ll simply trade under WTO rules.

Trading under WTO rules would have its pluses and minuses for the UK. On the plus side:

  • With 164 members, the WTO covers 98 percent of global trade.
  • In the short term, WTO rules forbid the EU from imposing more checks on UK goods, while the UK abides by EU regulations.

But the downsides include the following:

  • No major country trades with the EU under WTO rules alone. Most choose to negotiate a separate free-trade agreement, or have additional agreements on top of the WTO rules. (The United States, for example, trades with the EU under WTO rules but has more than 20 additional agreements covering specific areas of trade.)
  • Tariffs can be pretty steep under WTO rules. For example, cars crossing the UK–EU border would be taxed at 10 percent.

Remember Overall, a specially negotiated free-trade agreement between the UK and the EU is likely to be more beneficial to both parties.

Seeing what will happen with trading in financial services

These days, the UK excels as a service-led country, particularly when it comes to financial services; the London financial sector is considered by many as the number-one financial market in the world. Billions of euros of European business loans are financed through London, so this is a key area of negotiations for both parties.

According to the declaration, the future agreement for financial services will be based on a system of “equivalence,” which basically means London will need identical laws and regulations as EU financial sectors.

Both sides aim to have agreement on financial services sewn up by the end of June 2020. Whatever’s agreed may potentially impact the overall UK economy because financial services — indeed, the services sector in general — form a key part of the UK economy.

Looking at UK trade with the rest of the world

As a member of the EU, the UK trades with countries around the world under preferential EU free-trade agreements — agreements that the UK will no longer be party to after Brexit (or, more specifically, after the end of any transition period).

This has prompted a mad rush to “roll over” as many of the existing beneficial trade agreements with non-EU countries as possible. However, as of February 2019, just one month before the original Brexit deadline of March 29, 2019, the UK government had only managed to roll over 7 of the 69 existing trade agreements. Those seven agreements were with Switzerland, Chile, Mauritius, Madagascar, Zimbabwe, the Faroe Islands, and the Seychelles.

That leaves a lot of agreements still to sort out with the UK’s non-EU trading partners, including with major countries like Canada, Japan, and Turkey. And that’s on top of negotiating the attractive new trade deals with countries like the United States, as promised during the referendum campaign.

Remember It’s important to note that, under the terms of the withdrawal deal (see Chapter 3), the UK’s pre-Brexit trading relationships with the rest of the world will still apply until the end of the transition period; after that, the UK will need to have its own trade agreements in place if it wants to retain the preferential access to worldwide markets that it has been used to. This will involve either rolling over existing trade agreements or negotiating whole new agreements.

Many of those in favor of Brexit are keen to point out the potentially huge opportunity the UK has to negotiate new free-trade deals with the rest of the world. Of course, the EU is a significant part of the worldwide economy, but it’s dwarfed by the United States and China. And as emerging economies grow stronger, they may further tip the balance of economic power away from the world’s largest single market.

Remember For example, a report by PricewaterhouseCoopers (PwC), titled The World in 2050, makes some interesting predictions about the global economic order in 2050, including the following:

  • Emerging markets could grow approximately twice as fast as advanced economies.
  • The EU27’s share of global gross domestic product (GDP) will be 9 percent in 2050; China alone will account for 20 percent of global GDP.

    Remember The EU27 is the name given to the remaining 27 EU member states, excluding the UK.

  • The largest economies in the world are tipped to be China (first place), India (second place), the United States (third place), and Indonesia (fourth place).
  • The UK may drop down to tenth place, but remain above France and Italy.
  • The worldwide economy could double in size by 2050.

PwC’s paper states that emerging economies will need to invest heavily in infrastructure if they’re going to realize their growth potential. This need for emerging economies to invest in infrastructure could lead to significant business opportunities for the UK (and the EU, for that matter).

Building Regulatory Cooperation between the UK and the EU

Central to all future trade talks between the UK and the EU is this idea of a level playing field, meaning similar or identical rules and regulations on either side. So, although the declaration talks about the “regulatory autonomy” of both sides, it also talks about “common principles in the fields of standardization, technical regulations, conformity assessment, accreditation, market surveillance, metrology, and labeling.”

Remember The declaration also talks about the level playing field in terms of “state aid, competition, social and employment standards, environmental standards, climate change, and relevant tax matters.” So, from a practical point of view, this may mean the UK has to align with the EU on matters like value-added tax (VAT) rates, state assistance, and employment law.

Warning Remember that, as a non-EU country, the UK will have no say whatsoever in how these rules and regulations are decided. This has plenty of people worried that the UK will simply have to follow where the EU leads (in terms of rules), with no role in shaping those rules.

Employment law is a particularly interesting area to watch because the UK’s two main political parties have quite different stances in this area. The Labour Party has been very vocal in relation to future protections for employees, while the Conservative government has, over the last few years, attempted to weaken employee rights (for instance, by giving employers an extended period under which they can make new staff redundant with no reason).

Alignment with the EU may not just affect the UK’s own laws and practices; it may also limit the UK’s ability to strike trade deals with non-EU countries. For example, the UK may be prevented from accepting certain goods from non-EU countries that don’t meet EU standards. Or, if the UK joins a customs union with the EU, as many in the UK Parliament have proposed, it’ll mean the UK charging the same external tariffs as the EU — another factor that may limit the UK’s ability to strike new trade deals.

Solving the Thorny Issue of Customs Arrangements

Closely related to trade and regulatory alignment is the issue of customs arrangements.

Aiming for tariff-free trade with Europe

Here’s what the declaration has to say about customs:

The economic partnership should ensure no tariffs, fees, charges, or quantitative restrictions across all sectors, with ambitious customs arrangements that, in line with the Parties’ objectives and principles above, build and improve on the single customs territory provided for in the Withdrawal Agreement… .

Sounds good right, no tariffs or other customs barriers to trade? Yet customs arrangements are likely to be a major bone of contention between the UK and the EU.

Remember For one thing, many are concerned that the temporary customs arrangements set out in the withdrawal agreement (see Chapter 3), particularly in relation to Northern Ireland, will end up tying the UK to some sort of permanent customs union. The declaration wording does little to allay those specific fears, except to say that both sides are open to any permanent solution that avoids a hard Irish border and indefinite backstop.

If the UK were tied to the European customs union indefinitely, it might restrict the UK’s ability to strike independent trade deals with other countries, and mean the UK has to continue to follow EU rules and regulations.

Those on the UK side might prefer to create a new single customs territory with the EU, which would allow the UK free access to the EU market, without compromising the integrity of the EU’s single market. But, at the time of writing, we don’t yet know what the formal customs arrangements will be and how they may restrict the UK’s ability to strike trade deals with other trading partners around the world.

Knowing what will happen to VAT on goods from the EU

Under EU rules, VAT is not payable on goods imported from within the EU. Depending on the customs arrangement agreed between the UK and the EU, this may well change, and UK businesses may need to change their VAT processes.

For example, if the UK were to revert to WTO rules for trade with the EU, then VAT would be payable upon the arrival of those goods within the UK. This would create a cash-flow nightmare for many businesses in the UK, and it has prompted the government to promise that it will step in to help businesses overcome this potential VAT nightmare.

Warning I talk more about VAT and importing and exporting in Chapter 5, but remember that VAT is an extremely technical topic. Always talk to your accountant about VAT rules and have her clarify any changes you need to make to your VAT processes.

Considering What “No More Free Movement” Will Mean in Practice

A key promise of Brexit was that the UK would take back control of its borders and stop the free movement of people from the EU. This is confirmed in both the withdrawal deal and the declaration. In theory, this position won’t change; however, if the UK decided to remain in the EU single market after Brexit (see Chapter 1), then it would have no choice but to accept free movement of people. This prospect seems unlikely, though, and, at the time of writing, the intention is for free movement to end after Brexit.

Remember With this in mind, the declaration recognizes that “the principle of free movement of persons between the Union and the United Kingdom will no longer apply” after the transition period has ended. The flip side, of course, is that Brits will no longer be freely able to live, work, study, or retire in the EU.

But don’t worry, this won’t affect your summer holiday to Tuscany or Corfu. The declaration says that both sides aim to allow “visa-free travel” for short-term visits. Longer-term stays and employment, on the other hand, may require a visa — although, like everything else in the declaration, this is yet to be negotiated in any detail.

Depending on what the UK agrees with the EU, after the end of the transition period, EU citizens who want to come and work in the UK may have to apply for a skilled worker visa. They may also have to meet minimum salary requirements if the UK government’s proposed immigration plans come into force (see Chapter 3). Low-skilled workers from the EU, who are so vital for sectors like agriculture, will likely be allowed to work in the UK for up to 12 months without needing a visa.

Remember The declaration also states that the UK will have to treat citizens of all EU member states in the same way — so, the UK can’t, for example, allow workers from Spain to come to the UK without a visa while insisting on visas for workers from Bulgaria and Romania. (Ireland will be the only exception to this rule because the UK and Ireland already have a separate arrangement for free movement between the two; Ireland will be treated differently from other EU member states, and that’s fine.)

Read more about the UK government’s immigration plans in Chapter 3 and employing EU citizens in Chapter 7.

Forming the Basis for Formal Post-Brexit Negotiations

Remember that the declaration isn’t legally binding, which means everything contained in it is still, at the time of writing, up for negotiation — including whether the UK will enter into a permanent customs union with the EU, as many in the UK Parliament are pushing for (see Chapter 3).

Remember Things like trade and economic cooperation can’t be officially negotiated until the UK finally leaves the EU, but the declaration itself could potentially be amended before the exit date. For example, if the UK Parliament reached a consensus on joining a customs union with the EU, then the declaration may need to be amended to reflect that before the withdrawal agreement can be approved by Parliament.

But assuming the declaration stays as it is for now, how will it underpin ongoing UK–EU negotiations? Read on.

Preparing for a potentially bumpy road ahead

What will these ongoing negotiations look like? Well, if you thought the withdrawal agreement and political declaration were difficult to negotiate, you ain’t seen nothing yet! Negotiating every aspect of the UK’s ongoing relationship with the EU will probably take years and will no doubt prompt some juicy insults and burns on both sides, just as the withdrawal negotiations did. (See Chapter 3 for some of the best quotes to come out of the withdrawal negotiations.)

The declaration may state the intention of remaining “as close as possible,” but you know what they say about good intentions and the road to hell. Glass-half-empty types may point out that we don’t yet know how those good intentions will hold up under the strains of tough negotiations, where each side is out to protect its own interests.

As a glass-half-full type, I prefer to put a more positive spin on the negotiations. It may not always be obvious, but there’s a general consensus between the UK and the EU to find workable solutions while maintaining their independence and negotiating positions. It’s in both sides’ interests to find common ground.

Looking at some of the factors that may impact negotiations and future relations

Considering that the negotiations are likely to take a while, what sort of issues are there on the horizon that may influence (and/or be influenced by) negotiations? Let’s take a look:

  • If there’s a change in UK government or prime minister, will that bring a totally different approach to the post-Brexit negotiations? Probably, especially if Theresa May were to be replaced with a hardline Brexiteer prime minister. The next general election is scheduled for May 2022, although the Labour Party has called for an earlier election (and Theresa May isn’t averse to calling snap elections herself).
  • Scotland will leave the EU with the rest of the UK, despite the people of Scotland voting firmly in favor of remaining in the EU. Will Scotland hold a new independence referendum and decide to leave the UK? If so, will that impact the UK’s negotiating position?
  • Will a rise in nationalism across the EU dilute the current move toward a federal Europe? If so, will this weaken the EU’s negotiating position?
  • How will the EU Parliament elections in May 2019 impact the shape and timing of ongoing UK–EU relations? At the time of writing, the UK was reluctantly preparing to take part in EU elections and select its own Members of the European Parliament (MEPs) — even though those MEPs may only be in their posts for a few months, if the UK leaves the EU in October 2019, as planned.

In Chapter 12, you can find ten other Brexit developments to keep an eye on.

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