Thursday, 11 January 2018

Davis and Barnier set out their Negotiating Strategies for the Next Phase of Brexit Talks

Both Mr David Davis MP and Monsieur Michel Barnier have been on their travels. Mr Davis to Germany and Monsieur Barnier to Belgium.  Both had something to say about Brexit. Mr Davis published an article in the Frankfurter Allgemeine Zeitung calling for a deep and special partnership with the EU which he wrote with the Chancellor of the Exchequer (a translation of which appears on the Department for Exiting the EU website) on 10 Jan 2018.  The day before, Monsieur Barnier made a speech at the Trends Manager of the Year event which anticipated and answered the article by Mr Davis and Mr Hammond (see Commission press release Speech by Michel Barnier at the Trends Manager of the Year 2017 event 9 Jan 2018).

The British argument is encapsulated in the following words:
"As two of Europe’s biggest economies, it makes no sense to either Germany or Britain to put in place unnecessary barriers to trade in goods and services that would only damage businesses and economic growth on both sides of the Channel.
So as Brexit talks now turn to trade, the UK will look to negotiate a new economic partnership with the EU – the most ambitious in the world – that recognises the extraordinary levels of interconnectedness and cooperation that already exist between us.
When we leave the European Union, we will leave the Customs Union and Single Market, but in agreeing a new model of cooperation, we should not restrict ourselves to models and deals that already exist.
Instead we should use the imagination and ingenuity that our two countries and the EU have shown in the past, to craft a bespoke solution that builds on our deeply integrated, unique starting point to maximise economic cooperation, while minimising additional friction.
The economic partnership should cover the length and breadth of our economies including the service industries — and financial services.
Because the 2008 Global Financial Crisis proved how fundamental financial services are to the real economy, and how easily contagion can spread from one economy to another without global and regional safeguards in place."
By publishing that article in an influential newspaper the Secretary of State and Chancellor were appealing to the German public and in particular to those German businesses that have invested in the UK, export a lot of goods to us or hope to raise capital in London.  The message is that we are an important market and London is an important financial centre and you wouldn't like anything nasty to happen to either of those, would you?  So come on, chaps. Be sensible.  Have a word with Mrs Merkel particularly while she needs all the support that she can get to form a government and get her to rein in the attack dogs in the Commission art 50 task force.

The principal attack dog has already thought of that and this is his answer.  He gave it in a country "which has long had close commercial and political ties with the United Kingdom." As Monsieur Barnier acknowledged, those ties go back a long way:
"There was a time when England's prosperity depended on the wool trade, particularly with Flanders. A reduction in the supply of English or Scottish wool yarn could threaten the jobs of thousands of Flemish artisans.
And some centuries later, it was an Englishman, William Cockerill, who imported the first machines for spinning wool to Verviers, in 1799, and then the steam engine to Seraing, making Liège the starting point for the industrial revolution on the Continent."
And, as he also acknowledged, the link between Belgium and the United Kingdom is still important:
"Today the UK is still an important partner for your country, representing 7 % of Belgian trade in goods."
But not that important.
"But, at the same time, 61 % of your trade is with the other Member States of the European Union. Almost 10 times more!"
As he added a few lines later:
"Our Single Market will still have 440 million consumers and 22 million businesses after the UK's departure."
And that gives it bargaining power not only in the Brexit negotiations but in all the markets outside Europe with which our Department for International Trade wish to enter trade deals including the former dominions in the Antipodes:
"by continuing to build a 'global Europe', which is preparing to offer our businesses new opportunities to export to Australia and New Zealand."
In their article Messieurs Davis and Hammond call for  "a deep and special partnership" with the EU but nobody on our side has actually spelt out what that means.  "However", as Barnier observed, "we can proceed by deduction, based on the Union's legal system and the UK's red lines." He added:

"By officially drawing these red lines, the UK is itself closing the doors, one by one."
The British government wants to end the free movement of persons, which is indivisible from the other three freedoms. It has therefore indicated its intention of leaving the Single Market.
The British government wants to recover its independence to negotiate international agreements. It has therefore confirmed its intention of leaving the Customs Union.
The UK no longer wishes to recognise the jurisdiction of the Court of Justice of the European Union, which guarantees the application of our common rules.
It follows that the only model possible is a free trade agreement, which could obviate the need for trade barriers, such as customs duties, and could facilitate customs procedures and product certification.
This will of course be adapted to the specificities of the relationship between the EU and the UK, in the same way that our agreement with Canada is not identical to our agreements with Korea or Japan."
It is obviously in the interests of all parties that we negotiate a comprehensive an agreement as possible  but, as Monsieur Barnier observed, "a free trade agreement, however ambitious, cannot include all the benefits of the Customs Union and the Single Market." With regard to financial services, a free trade agreement may include provisions on regulatory cooperation as is the case with Japan or a regular dialogue like the one with the United States but
"A country leaving this very precise framework and the accompanying supervision gains the ability to diverge from it but by the same token loses the benefits of the Internal Market. Its financial service providers can no longer enjoy the benefits of a passport to the Single Market nor those of a system of generalised equivalence of standards."
As Monsieur Barnier added, it is not a question of punishment or revenge but a trading relationship with a country that does not belong to the European Union can never be frictionless.

Anyone wishing to discuss this article or Brexit in general should call me on +44 (0)20 7404 5252 during office hours or send me a message through my contact form.

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