Brexit trade talks face bleak future as U.K. reportedly plans to undermine existing agreement

07.09.2020 13:33

Fortune.com

The Brexit withdrawal agreement was signed just months ago, but the U.K. government is reportedly ready to tear up some of its terms.

There are fewer than six weeks left for the United Kingdom and the EU to finalize the terms of their new trade deal, if it is likely to enter into force by the end of the Brexit transition period on December 31.

But as things stand, it seems increasingly unlikely that any deal will appear—an outcome that would mean massive trade barriers flying up between the U.K. and its giant neighbor as 2021 dawns.

Sticking points around fishing and state-aid rules remain unresolved, and now the U.K. may be set to infuriate the EU by ripping up several key points in the Brexit withdrawal agreement, a treaty that was ratified by both sides in January.

On Sunday, the Financial Times reported that the British government is planning to undermine the withdrawal agreement in three ways, all of which relate to the contentious issue of Northern Ireland—the part of the U.K. that features its only land border with an EU member state, namely the Republic of Ireland. As goods and people can move freely through the EU, this border is crucial to the future U.K.-EU trading relationship.

Undermining the deal

According to the FT, a new internal market bill will allow the British government to avoid notifying the EU when introducing state-aid measures that affect businesses in Northern Ireland; the agreement says all such state-aid decisions must be notified to Brussels.

The bill, due to be proposed Wednesday, would apparently also allow Northern Ireland businesses to avoid filing export paperwork when sending goods to the British mainland. Again, this is a crucial element of the withdrawal agreement.

Meanwhile, the law implementing the U.K.’s upcoming fall budget would “have much the same effect on the potential obligation to collect tariffs on goods entering Northern Ireland from Great Britain,” the FT reported.

Bit of a delayed reaction, but sterling now clearly no likey @pmdfoster's excellent story (https://t.co/AxegR19cmP)

-1% ish vs USD pic.twitter.com/HQQWgMFnAN
— Katie Martin (@katie_martin_fx) September 7, 2020

If the report is accurate, there would likely be a strong effect not only on the Brexit trade talks—Prime Minister Boris Johnson enthusiastically signed the withdrawal agreement in January, so overriding it just months later would be a staggering move—but also on the U.K.’s trustworthiness in other future international diplomacy. Such as, for example, the negotiation of a U.K.-U.S. free-trade agreement.

“We are taking limited and reasonable steps to clarify specific elements of the Northern Ireland Protocol in domestic law to remove any ambiguity and to ensure the government is always able to deliver on its commitments to the people of Northern Ireland,” a Johnson spokesman told Reuters Monday.

The government has established October 15 as the absolute deadline for the negotiations to yield a deal—a reflection of the fact that the EU has been hoping to be able to endorse the deal at a summit on October 15-16, before its adoption and signature in November.

“If we can’t agree by then, then I do not see that there will be a free trade agreement between us, and we should both accept that and move on,” Prime Minister Boris Johnson will reportedly say Monday, according to remarks given to Reuters ahead of time by his office.

Fishing and state aid

The FT‘s bombshell report came shortly after the government’s chief negotiator, David Frost, told the Mail on Sunday that the U.K. would not accept the EU’s red lines on fishing rights (it wants to maintain access to British waters) and state aid (it wants the U.K. to follow EU rules so as to maintain fair competition.)

“We are not going to accept level playing field provisions that lock us in to the way the EU do things,” Frost said. “We are not going to accept provisions that give them control over our money or the way we can organize things here in the U.K. and that should not be controversial—that’s what being an independent country is about, that’s what the British people voted for and that’s what will happen at the end of the year, come what may.”

“If we can reach an agreement that regulates trade like Canada’s [trade deal with the EU], great,” the negotiator added. “If we can’t, it will be an Australian-like trading agreement and we are fully ready for that.”

The British government has repeatedly talked about following the model of Australia’s trading relationship with the EU. However, as there is no EU-Australia trade deal, that effectively means a no-trade-deal Brexit.

In practice, that would mean hefty EU tariffs on many British goods—agriculture secretary George Eustace spoke Monday of 40% duties on British beef—and regulatory barriers for British financial services, which can currently operate freely across the English Channel.

With coronavirus cases soaring again in the U.K., it is clear that such an outcome would arrive at a moment when the country and its economy are already under great stress. Much rides on the round of negotiations that will take place Tuesday to Thursday this week.

Abbott appointment

If Australia is code for no-deal in this context, it is a little ironic that former Australian Prime Minister Tony Abbott was on Friday appointed as a trade adviser to the U.K. government.

Abbott’s appointment was controversial in the U.K. because of sexist and homophobic comments he has made in the past. But it has also proved controversial back home, on conflict-of-interest grounds—senior opposition figures in Australia have called for Abbott to be registered as a “foreign agent”.

The former prime minister has never been a popular figure and his appointment drew a degree of mockery in Australia, with one newscaster creating a viral moment by smirking that “beggars can’t be choosers.”