Smoothening the cliff edge in EU-UK relations

The Trade and Cooperation Agreement (TCA) between the United Kingdom and the European Union came into effect on January 1, 2021, capping a tumultuous four-and-a-half-year period since the shocking result of the July 2016 Brexit referendum, in which 51.9% of the British voters voted in favor of leaving the EU. Subject to the delayed assent of the European Parliament, this UK-EU free trade agreement (FTA) extends zero-tariff and quota-free trade in goods between the two economic areas.

It is a remarkable and unprecedented agreement in its nature, size and scope: It is remarkable insofar as it regulates total trade of 730 billion euros in value between the UK and the EU, and covers sectors as diverse as fisheries, transportation, security and manufacturing. It is very ambitious in its depth as it provides for the setup of complex new institutional infrastructure that comprises a new partnership council, 19 specialized committees, four working groups and a bevy of dispute resolution mechanisms. To boot, it is unprecedented as it is the first time in history that an FTA has amounted to an instance of disintegration in the sense that it follows the withdrawal of the UK from the EU’s Single Market.

Ever since the UK joined the European Communities in 1973, the country consistently positioned itself at the outer layers of the European integration project for its own idiosyncratic reasons. Its ambivalence toward the long-term federalist aims of “political union” and the simmering Euroskepticism of its electorate eventually boiled over in the outcome of the 2016 Brexit referendum, which presumably boded ill not only for its own economic well-being but also for the cohesion of the EU-27 itself in light of the populist backlash spreading through the continent. With very few comparable cases to fall back on, scholars and pundits alike were portending that the highly intertwined nature of UK and EU relations would make it extremely hard to cleave the two markets apart in an orderly manner; in other words, the UK could presumably only leave the integrated bloc by crashing out and landing on the minimal safety net of WTO rules and agreements that – albeit inclusive and multilateral in nature – are very restrictive and distortionary in comparison to the frictionless trade of the Single Market.

The signing of the EU-UK Withdrawal Agreement (WA) in October 2019, and more recently the Trade and Cooperation Agreement (TCA) in December 2020, has belied this dictum that while the process of integration is gradual, incremental and slow, the process of disintegration can only be disorderly, abrupt and unmanageable. It rather speaks to the effectiveness of the model of flexible integration, which as it seems can work both in the direction of deeper and shallower cooperation. Accordingly, the UK selectively decided to opt into some (e.g. the Horizon research and innovation program) and out of other European projects (e.g. the Erasmus student exchange program). The bespoke nature of this new FTA introduces varying degrees of precision, obligation and enforcement through a slew of sectoral agreements, annexes, political declarations and phase-in periods, while at the same time maintaining a coherent overarching framework.

During the tumultuous period in the runup to the WA in 2019, the danger of “no deal” was a real possibility because there were at the time three options on the table: “deal,” “no deal” and “remain.” Once the WA came into force on February 1, 2020, there was always going to be a subsequent agreement on the future relationship simply because any such FTA would be win-win for both sides and preferable to the cliff-edge disagreement outcome of a WTO-based trade relationship. Despite his government’s frequent grandstanding and posturing – most notably through the passing of the Internal Market Bill that undermined the Irish Protocol of the WA – Boris Johnson was well aware of the potentially devastating economic repercussions of “no deal” that would come to compound the recessionary effects of the Covid-19 pandemic. Interestingly enough, the provisions of the WA for the transitional period of 2020 stipulated that the time-limited status quo of UK membership in the Single Market would have to be replaced by either a new FTA or “no deal” by the end of the year.

Both sides seemingly took on a defensive posture during the negotiation, eager to protect their core defensive interests, namely the integrity of the Single Market for the EU and the sovereignty of its legal jurisdiction for the UK. The EU under Chief Negotiator Michel Barnier was adamant throughout in proposing a menu of options (from a basic FTA to a proper customs union) that reflected the clear trade-off between single market access and policy sovereignty. It was up to Boris Johnson to decide which one of these options respected the spirit of the Leave vote while remaining acceptable to the various factions of his internally divided Tory party.

This logic allowed both sides to reach a compromise on the thorny issues of fishing quotas, state aid and regulatory alignment and sign a TCA that smoothens the cliff edge in their commercial and political relations, erects a new institutional framework, and sets a roadmap for the future. However, as is typical of tough EU negotiations, both sides agreed to “kick the can down the road” in a number of key areas, such as fisheries, subsidies, financial services, technical standards and professional services through vague stipulations of rebalancing, equivalence and renegotiation. For example, in the area of financial services, where the UK maintains a substantial trade surplus vis-à-vis the EU, passporting rights that had previously allowed UK-based firms to sell their services in the EU without the need for further regulatory clearances have now expired and UK financial firms will have to renegotiate access with individual EU member-states or rely on equivalence decisions.

The negotiation of a such a broad and deep trade agreement – unlike any other such EU agreement with third countries – within the short stretch of nine months is a remarkable achievement in its own right. And yet, that should not divert our attention from the fact that the British ended up with a much harsher version of Brexit than originally envisioned, one that compared to the status quo ante of EU membership introduces substantial friction in commercial and political relations – not only across the English Channel but also the Irish Sea – and is bound to impose a hefty toll on its economy. With several issues that were previously regulated by EU treaties remaining unresolved, only time will tell whether the two sides will gradually align closer or get bogged down in perpetual Swiss-like bilateral negotiations.

Nikitas Konstantinidis is assistant professor in international and comparative political economy at IE University’s School of Global & Public Affairs.