International

The Brexit Cliffhanger – and How to Resolve It

At the EU Commission headquarters in Brussels, Belgium, in 2016. (Yves Herman/Reuters)
The EFTA Court may serve as a model for future EU–UK governance.

While America is focused on the outcome of the presidential election, a key negotiation is taking place in Europe to determine what Britain’s long-term relationship with the European Union will look like. The United Kingdom finally left the EU this year, but it continued to outsource its regulatory and trade policies to Brussels in return for full and unrestricted market access to the EU’s lucrative market. That arrangement is coming to an end on January 1, by which date the two sides will need to agree to an alternative. It is also the deadline for avoiding a hard border in Northern Ireland, which is part of the UK but will enjoy unrestricted access to the European Union under the provisions of the “exit agreement,” meaning selective checks will need to take place inside the UK, between Great Britain and Northern Ireland.

Amid renewed COVID-19 worries, European leaders met in Brussels this month and urged the UK to make “the necessary moves” to come to a deal on the future relationship. In response, British prime minister Boris Johnson declared that absent a “fundamental change of approach,” the UK would prepare for “no deal,” which would mean continuing to trade on “World Trade Organization terms” — an arrangement that would include costly tariffs.

After some back and forth, the EU Commission declared that “movement would be needed from both sides,” at least according to the British government, which agreed to continue talks, which are reportedly promising

Following Johnson’s earlier statement, Dutch prime minister Mark Rutte, a key player in negotiations due to the high volumes of trade between the UK and the Netherlands, had already declared that, based on his talks with fellow European leaders, the EU was now “ready to compromise.” German chancellor Angela Merkel also signaled that there is room for compromise, stating, “If we recognize the UK wants to strike out on its own path, we need mechanisms to ensure we have fair trade relations. We can’t mutually rule out that each of us has different rules.” Meanwhile, as always, France has been playing the bad cop, with its president pontificating that the Brits “are much more dependent on us than we are on them.” Let’s see how that argument holds up if French fishermen start rioting in Paris.

In any case, we have finally entered the decisive stage of the Brexit drama. What is really the sticking point now? It is not fisheries: Though access to fisheries is a topic that lends itself to political posturing, it is one where compromise can be found, under which European fishermen continue to enjoy access to UK waters. Such an arrangement is in the interest of the UK, given the importance of the EU’s consumer market as a destination for British fish.

Even the degree of market access to the EU that the UK will enjoy after Brexit is not something that should make the negotiations fail. The UK realizes that due to its justified desire to make its own rules and conduct its own trade policy from 2021 on, the EU will restrict market access for UK companies. Sure, EU business partners and consumers will be hit by this, but EU companies wouldn’t accept facing competition from UK companies that do not need to comply with often cumbersome EU regulations. One way to resolve this could be to agree that the UK continues to align with EU regulations after January 1, in return for unrestricted market access, and that both sides should then notify each other when they intend to issue diverging rules, which would then trigger a negotiation over the extent to which new regulatory proposals affect each side’s access to the other’s markets.

The trickiest remaining point of contention is how to establish a mechanism to resolve any disputes arising out of the implementation of a future EU–UK deal. This is dubbed “governance” in Brexit lingo, and serious talks on the issue haven’t begun in earnest.

In the trade deal between the EU and Canada, a so-called Investment Court has been made responsible for sorting out such matters such as this, but its jurisdiction — concerning the relationship between investors and the host country — is narrow and specific.

The level of trade between Canada and the EU is also relatively low when compared with EU–UK trade, which is on par with the EU’s trade with both the U.S. and China. Much of the EU–UK trade has been facilitated by the fact that the UK and the EU have operated under the same regulatory regime, something set to come to an end December 31. After that point, the UK will no longer operate under the EU’s legal regime, and the two sides will need an arbiter to police the working of the agreement on future trade. The EU’s relationship with Switzerland, negotiated during the 1990s, lacks an arbiter. While this works fairly smoothly, it has inhibited any further opening up of Swiss–EU trade.

For almost a decade now, the EU has been trying to convince the Swiss to accept an arbiter. Even if the Swiss are open to that in theory, they refuse to accept the EU’s proposal: an arbitration court all but controlled by the EU’s top court, the European Court of Justice (ECJ), which the Swiss do not see as independent. Ukraine, Moldova, and Georgia did accept this sort of arrangement, but then these are small, poor economies on Europe’s periphery that have a lot to gain from better access to the giant markets of the EU.

But despite the refusal by the Swiss to accept such a sovereignty-eroding arbiter, that is what the EU seems set on trying to sell to the British.

The reason is quite simple. Even if EU member states would like to offer the UK a more flexible arrangement, akin to traditional arbitration machinery, without a major role for the top court of either of the two contracting parties, they may not be legally able to, because the ECJ would in all likelihood strike such a deal down as threatening the “autonomy of the EU legal order” and therefore a breach of the EU Treaties. The ECJ’s argument would be that from the moment the EU agrees proper market access to any “third country,” any arbiter would always need to interpret elements of EU law, but the ECJ thinks that this should be done only by one single institution — itself — to make sure that the law is interpreted consistently.

Nevertheless, just as Americans would be very unlikely to accept a key role for the EU’s top court in resolving disputes arising under any EU–US trade deal, the British are very unlikely to concede this point. Yet one should not underestimate the importance of the EU’s regulatory power. The tendency for companies and countries across the globe to unilaterally adopt EU standards and regulations, a result of the EU’s market size, has been dubbed the “Brussels effect.” As much as the UK is right to question the wisdom of many of these regulations, it would be doing a lot of damage to itself if it did not at least try to come to an arrangement facilitating the treatment of its own UK regulations as “equivalent” to Brussels’ standards, to keep trade with the EU as open as possible.

One way out, which I support, might be to entrust the resolution of disputes arising out of any EU–UK agreement to the only non-EU court that has been cleared by the ECJ to interpret elements of EU law. This is the “EFTA Court,” which has been given the task of adjudicating disputes between the EU and the three non-EU member states — Norway, Iceland, and Liechtenstein — who are part of the “European Economic Area,” whereby they enjoy almost complete market access to the EU in return for regulatory alignment in relevant areas. This solution, to use the jargon, would involve the UK’s “docking” (i.e., delegating judges) at this court. Interestingly, the EU’s top negotiator has also floated this idea, and even if the UK government dismissed it in 2018, it may well come back as the only option to avoid serious trouble on January 1, when much of the trade between the EU and the UK will become legally unsustainable, if no deal has been agreed, something that industrial leaders in both Europe and Britain do not want to see.

What to expect now? In the end, Boris Johnson may simply fold and accept that the UK judiciary, like its counterpart in Ukraine, subjects itself in this respect to the ECJ. An alternative is that, as with the EU–Swiss relationship, no governance arrangement is agreed to between the EU and the UK, and that, as a result, the EU does not grant as much market access to the UK as it would have otherwise, resulting in quite a lot of economic damage. And that would be on top of all the mayhem that the COVID-19 crisis has caused. Neither this nor the “Ukrainian” outcome would be sustainable for long. Trade between the EU and the UK is too important for that, and the UK would not accept being bound to the EU’s top court for long. My best guess is that both sides would quickly return to the negotiating table in an effort to restore trade to something closer to the old status quo.

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