European Union: Brexit: Are We Any Clearer About Anything?

The last two weeks have seen major speeches on Brexit from opposition leader Jeremy Corbyn and UK government figures including Theresa May and Philip Hammond, setting out their vision of the UK's future relationship with the EU.  Meanwhile the EU has issued its draft guidelines for Phase 2 of the negotiations, which will cover the Withdrawal Agreement and the transitional period. But has this left us any the wiser about where the Brexit negotiations might be heading?

The Labour party's position

Jeremy Corbyn's speech signalled that the opposition Labour Party supports forming a customs union with the EU – so on that issue, we did learn something new. In doing so, he highlighted some of the problems that leaving the EU Customs Union will create. These issues were explored in more detail in our recent Webinar "Is your supply chain Brexit-ready?", which sets out what the introduction of customs controls would be likely to mean in practice and what steps businesses can take now – despite all the continuing uncertainty surrounding Brexit– to prepare for that eventuality.

In our view, it is doubtful that a UK-EU customs union on its own would resolve all these difficulties;  if the UK wishes to avoid or minimise the need for customs checks after Brexit, it will probably need to align its own product regulations with Single Market rules on goods, as well as entering into a customs union with the EU. However, Corbyn's speech fell short of committing Labour to continued participation in the Single Market (or measures akin to that).

The UK government's position

Theresa May's speech, by contrast, contained little that was genuinely new, although it sought to explain the UK's approach in more detail and there was a marked shift in tone towards greater realism on some of the difficulties posed by Brexit. She reiterated that the UK government does not want to remain in the Single Market or in a customs union with the EU, but is instead seeking a free trade agreement with the EU, focussing on access to each other's markets based on mutual recognition. A subsequent speech by Philip Hammond focussing on financial services also contained little that was genuinely new, again focussing heavily on mutual recognition as the way forward.

Mutual recognition involves party A accepting that although party B's regulations may be different, they are sufficiently similar that party A should accord companies from party B the same treatment/status as its own companies in that sector – and vice versa. It is already used by the EU in areas such as product conformity assessment, where the EU recognises that laboratories which have been certified by the US government as competent to carry out tests of products intended for the US market are also competent to test whether those same products meet EU standards. This means that US firms do not have to get their products tested by an approved EU lab – although they are still expected to prove that their products meet EU standards, not just US ones.

However, mutual recognition is not a panacea and the EU's use of it to date has been fairly limited. In some areas  - including financial services - the UK government appears to be seeking levels of market access through mutual recognition which approach those which it has already. For reasons explained below, this is likely to be unacceptable to the EU.

The EU's position

This week has also seen the publication of draft guidelines on the EU's negotiating mandate for Phase 2 of the Brexit talks.

If adopted, these would commit the EU to negotiating a free trade agreement with the UK, although one which "cannot offer the same benefits as Membership and cannot amount to participation in the Single Market or parts thereof." This may well be problematic for the UK government's attempts to secure extensive access via mutual recognition. The speech delivered this week in London by French Finance Minister, Bruno Le Maire, confirmed that, for financial services at least, equivalence rather than mutual recognition is likely to be the most the EU could offer. The draft guidelines also emphasise the need for a "level playing field" including measures designed to prevent the UK undercutting the EU on competition and state aid. These remarks may well be problematic for Labour, given the reservations about state aid and competition rules expressed by Jeremy Corbyn in his recent speech on Brexit.

On the positive side, however, the draft states that its approach "reflects the levels of rights and obligations compatible with the positions stated by the UK. If these positions were to evolve, the Union will be prepared to reconsider its offer." This appears to leave room for a compromise, if the UK is prepared to shift its position on some of its red lines.  

The UK Parliament

Another potential key player in the Brexit negotiations is the UK Parliament, where amendments have been tabled to the Taxation (Cross Border Trade) Bill and the Trade Bill which would make it a negotiating objective of the UK government to either remain in the EU Customs Union or enter into a new customs union with the EU after Brexit.

No date has been set for a vote on the amendments and it is expected that the government will seek to delay it for as long as possible. However, it is not inconceivable that the amendments could command a majority in Parliament, especially with support from Labour and more pro-European Conservative MPs. If such amendments were passed, they would force the government to change its approach to the negotiations – which could also prompt a shift in the EU's position.

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