Round 2 of Brexit will start in 2019 – Time to prepare for the risks and opportunities of the future EU-UK relationship

by Michael Tscherny and Carmen Bell

At an extraordinary summit on Sunday, EU leaders endorsed the UK’s Withdrawal Agreement, putting a provisional end to the first phase of Brexit. The deal still needs to be approved by both the British and the European Parliament – a matter which keeps countless commentators busy these days, although it is not the subject we will dwell on here. For whether the UK “crashes out” of the EU in a “no deal” scenario or the agreement eventually gets endorsed, both sides will ultimately reconvene to discuss their future relations.

This is where Brexit gets interesting for economic operators. For them little will change during the transitional period – assuming it will happen – of 21 to 45 months at most. But beyond? A week may be a short time in politics; four years is shorter than most investment cycles. In other words: Whoever cares about the future EU-UK trading terms needs to start acting soon.

If the tension around the divorce agreement is anything to go by, we will be in for a rough ride. EU unity held to the last day of the Brexit talks because the other 27 Member States wanted to get it over with. But in the days leading up to the November 25 summit, France lobbied for stronger language around fisheries, Poland demanded clarity on climate change obligations and a variety of trade-heavy Member States – from Denmark to the Netherlands to Belgium – grumbled about the vagueness around a future trading relationship. Most vocal, however, was Spain which threatened to “veto” the agreement until it got explicit guarantees about Madrid’s say on Gibraltar’s future status in any long-term EU-UK agreement.

These issues were eventually resolved or, rather, kicked into the long grass. They will come back when the real prize will be negotiated – the close economic partnership, as it is often described.

That deal will, in terms of process and adoption, be akin to a Free Trade Agreement (FTA), albeit a so-called “mixed” one – an anodyne term denoting that assent will be required not only by the EU, as such, but by each and every Member State. This is because the envisaged broad scope of this agreement will include both matters handled by the EU – for instance trade in goods or services, public procurement and intellectual property rights – and issues remaining in the national and regional domain, like non-direct foreign investment and investor-state dispute settlement mechanisms.

By now alarm bells should be ringing. Much more so than in a “classical” FTA, a “mixed” agreement offers plenty of scope for uncertainty, attempts at blackmail, or unsuspected trade-offs. Remember CETA, the EU-Canada trade deal? Just two years ago, Belgium’s Walloon region announced – due to competition concerns for its farmers – that it would not endorse the deal, despite contrasting strong support from Belgium’s Flemish region. Both – and four more regional assemblies – had to approve the treaty, alongside the Belgian federal parliament. It took some last-minute tweaks to the agreement and some serious arm-twisting to get the Walloons to agree. And whilst CETA is being provisionally applied, a number of Member States still haven’t ratified it to this day.

The real peculiarity, however, of the future EU-UK trade is going to be its objective: It won’t be an agreement about facilitating mutual access or opening markets – all this is a given between EU member states – but a negotiation designed to minimise disruption from potentially divergent legal, regulatory and tax regimes; an attempt to keep the long-term cost of the divorce as manageable as possible for both sides.

In this process, many players will wish to keep as much as possible unchanged. Already that could be a challenge and will require good lobbying. Conversely, other operators may actively seek new hurdles to keep competitors from the other party at bay. Again, this will be a legitimate concern –and it won’t happen by itself either. And some yet will want to know what regulatory divergence could give them in terms of new opportunities with third-country markets. The question is to what degree the UK and EU will end up reversing their 45 years of economic integration – and which sectors or companies on each side will be the winners or the losers as a result.

“If you don’t want to be on the menu you have to be at the table” is a favourite joke among diplomats. Whilst industry never directly sits at the negotiating table, the implications for business are clear: First, to get your interests represented and strategically influence the future economic partnership agreement, there is little time to be lost. You need to define these interests, explain them to both European and national decision-makers and convince them to adopt these interests as an EU (or UK) position before talks on the future accelerate.

Second, in trade talks with “third countries” every Member State pushes for the interests of its own producers and service providers whilst trying to shield them from a competitive disadvantage with the future trading partner. EU spirits producers will want to gain an edge over Scotch Whisky and British Gin; continental airlines will seek to steal market shares from UK rivals; Paris, Frankfurt and Amsterdam are already strategizing how to replace London as Europe’s new financial hub.

In fact, both EU and UK firms have good reasons to fear certain outcomes and favour others. Depending on what you produce, where you have invested and what your long-term business strategy is, you may wish the UK to espouse or eschew the EU’s changing approach to investment screening, reject or rejoice at its new thinking around third-country equivalence for financial services, love or loathe its environmental and social standards.

Whether you are a UK- or EU-based producer, importer or processor, the one fatal mistake to avoid is to lean back, watch the show and hope your Minister or the competent EU Commissioner will fix it.  Officials will need input from economic operators just like the latter will need to stay close to the talks. Now is the time for businesses to decide how they want to influence “Brexit Round Two”.