By EACCNY member Georges Ugeux | CEO at Galileo Global Advisors and Adjunct professor Columbia Law School.
“The clock stopped ticking. Today is a day of relief,” E.U. negotiator Michel Barnier said at a news conference in Brussels. “But tinted by some sadness, as we compare what came before with what lies ahead.”
First of all, let’s salute the achievement and its authors.
The dramatic breakthrough of the Brexit Trade Agreement is avoiding complete chaos of the export and imports of goods across the North Sea. It resolves the complexity of the Irish situation. It does, at last, gives businesses the opportunity to make the necessary changes within a framework that has been too long to obtain.
As usual, an exercise in futility started: some commentators believe that either the UK or the EU is a winner, a statement that requires at least the reading of the agreement that is not published yet. In a multi-year negotiation, one can assume that both parties have reached the limits of what they could and were prepared to concede. This nationalistic need to have a winner and a loser serves no purpose.
1. The negotiation was difficult, for fundamental reasons.
The United Kingdom wanted from the beginning to fulfill the promises of the Brexiteers (including the Mayor of London, Boris Johnson) and have its cake and eat it. In their rendering of the deal, both parties acknowledged that it was a very difficult negotiation. The devil was in the details, but there were questions of principle that could not be overcome. Even at the last minute, the Prime Minister renegated an agreement he had himself been the proponent of.
The dynamics of the discussions have not changed from Day One. Europe could not compromise its internal market whose principles apply to the remaining 27 Member States. It was not a red line: it was politically and constitutionally impossible. A level playing field had to be found, without which the no tariff, no quota agreement could not be reached.
2. Reaching fairness was a challenge
In any divorce with a legacy, reaching a fair agreement is an exercise in equilibrium. Boris Johnson’s victory speech was a perfect example of a balancing act between pretending that the UK had regained its freedom of decision and the economy would strive.
At the core of that fairness is the difficulty to maintain free trade while playing by the rules. This agreement will evolve, but its core will remain the framework of the parties’ commercial relationships.
Fairness could not be assumed over decades and needs robust enforcement and arbitration mechanisms if one of the parties changes the rules of the game in a distorting way.
3. It’s only about goods, not about services: the 300 billion euros question
One might be excused for considering that the entire trade between the UK and the EU was at stake.
What is at stake here is only trade in goods that need to be physically transported from one to the other area. Services are a very different trade, accounting for 42% of the UK’s exports to the EU in 2019. If we look at financial services, both parties will want their regulation to be “equivalent”. There are mechanisms about it in the European Treaties and they could not be bent. The UK will also have a similar right. It is not part of the Trade Agreement because it is not needed. The future of the City of London is at stake.
4. Vigilance is the core of the agreement
An agreement is not a blank cheque. It assumes that parties will be fair play (an English word), but it must provide one form or another of conflict resolution if one of the parties were to conduct or regulate its business in an unfair way. To be fair, this mechanism had to create a forum where both parties have an equal voice. It is the case.
Should the arbitration designate a party in breach, that party must immediately remedy and may be fined for not applying the principles of the agreement. The EU renounced a key element of the project: the overarching authority of the European Court of Justice (ECJ). It was unacceptable to British negotiators.
In the absence of remedy tariffs or quotas will reemerge for that segment of trade. That leaves both UK Courts and the ECJ will retain their powers of interpretation and sanctions under the UK or European Law. Once again, it is fair, even if it is not ideal.
5. What is sovereignty?
The word used many times by Prime Minister Johnson is often a synonym for isolationism. The United Kingdom is more than ever an island. That does not make it a disconnected entity.
The EU and the UK will cooperate in many international arenas where they share common principles and values. They will be members of the same multilateral institutions and Treaties. That includes the World Trade Organization, the global trade custodian.
The UK never really adopted the principles of solidarity that cements the European Union. It regularly wanted to get advantages but opt out of what they did not like. That is unlikely to change, but the critical element is that, as it trades with the EU, Britain will no longer be part of the law-making process of the EU: it will be confronted with the regulatory and legislative changes of the EU, and might, to keep its trade status, adjust to it.
In today’s world, trade is no longer sovereign: sovereignty is often limited to domestic rules and regulations. In an interconnected world, all countries have to measure the impact of their trade.