The Brexit game of chicken over three red lines

The present round of trade negotiations between the UK and EU ended today and a framework for a future relationship deal does not seem much closer. With talks now suspended until August 17, it is now impossible for the end-of-July deadline for agreeing the basis of a deal to be met.

Although the EU’s chief negotiator, Michel Barnier, complemented his opposite number David Frost’s “professional” approach, the language surrounding the prospect of the talks collapsing is the most severe it has been to date. Barnier went so far as to say that an agreement is now “unlikely”, while Frost, the Prime Minister’s EU Sherpa, said UK businesses must “face the possibility” that there will be no future relationship agreed by the end of the year.

Although progress had been made in discussions on goods and services, the conceptual approaches of either side remain worlds apart. Of particular difficulty to Brussels are Boris Johnson’s three red lines – no role for the European Court of Justice (ECJ), the right for the UK to determine all its own laws without constraint, and a meaningful change on fishing.

The first two of these are viewed in Downing Street as absolutely fundamental to “taking back control” of Britain’s laws – the ECJ was a chief target of the Vote Leave campaign, and polling showed that “sovereignty” was the most important motivating issue for Leave voters. The third – fishing – is a hugely charged subject in Scotland, where EU vessels fishing in British waters has been a decades-long bugbear. However, securing generous access to UK waters forms a core part of Barnier’s mandate, given to him by the EU27.

Barnier spoke with candour when he said that his primary goal is to “limit the negative consequences of Brexit”. This statement refers to the interests of Brussels and of the Single Market as an economic and political bloc as much as to mitigating disruption for Britain.

Frost, in contrast, was clear in his articulation of what is at stake: “we continue to look for a deal with, at its core, a free trade agreement similar to the one the EU already has with Canada – that is, an agreement based on existing precedents.”

He went on to remark: “we remain unclear why this is so difficult for the EU”.

The simple answer is that a precedent-based Free Trade Agreement (FTA) is not in the EU’s interests. To grant this to the UK would be to concede the principle that tariff-free access to the Single Market with minimal friction is achievable without remaining a part of the legal regime that governs the Single Market, with the ECJ as the supreme arbitrator of commercial and regulatory law.

In a press conference today, Barnier identified the two stand-out areas of dispute in need of resolution as fisheries (as one would expect), and the so-called “Level Playing Field” (in other words, regulatory standards and competition rules designed to prevent anti-competitive practices and market distortion within the European Economic Area).

On fishing, the two sides are approaching the issue with entirely different philosophies. For the UK, the baseline is the UN Convention on the Law of the Sea (UNCLOS), which would give Britain absolute control of its waters up to two miles from the shore. Any access granted to EU vessels into this space would be thought of as a concession.

Brussels, however, is presuming that the present customs union on fisheries, in which there is collective access to EU waters with quotas centrally assigned, should be the starting point. If the British want an alteration to this, the best they can hope for would be a shift of quota. That is unlikely to go down well with the pro-Brexit British media, for whom regaining control over fishing has always been a key symbolic gain of leaving the EU.

On the Level Playing Field, including state aid rules, there is a huge difference between what Barnier says he is trying to achieve and his real objective. He has continually invoked the Political Declaration, accusing the UK of backtracking on it, despite the fact that EU negotiators spent two years insisting that the Declaration is non-binding. In particular, Barnier insists that the UK made commitments on state aid and competition which it is now reneging on. Under Article 184 of the Withdrawal Agreement (the argument goes), the UK is committed to negotiating within the parameters of the Political Declaration using best endeavours, and in good faith – Barnier says it isn’t doing so.

The problem is, the Declaration does not say what Barnier wants it to. The relevant paragraph says: “The Parties should in particular maintain a robust and comprehensive framework for competition and state aid control that prevents undue distortion of trade and competition”.

But it is simply not necessary to be subject to the EU’s state aid regime in order to avoid distortion and guarantee competition. In fact, the rest of the world manages it perfectly well – it just seems that Barnier’s interpretation of “a robust and comprehensive framework” is “OUR robust and comprehensive framework”.

The World Trade Organisation operates a Subsidies and Countervailing Measures (SCM) regime, which allows states who feel they have been prejudiced because of subsidies or dumping by another WTO member to impose retaliatory tariffs.

Moreover, pretty much every other FTA in the world – including the ones the EU has with Canada and Japan – regulate market distortions by means of a common commercial chapter in the agreement, policed by an independent arbitrator. There is no need for each country’s laws to be the same, so long as the broad outcome of protecting competition is achieved. For one country to submit to the competition law regime of the other would be completely unprecedented.

In truth, the EU’s state aid system is archaic, and is widely known to be so – it would not be designed in its present form today. It gives extraordinary executive power to the Commission over member states: all instances of state aid – however small – are presumed to be illegal unless the Commission’s approval is granted. There are many and much better ways of ensuring fair competition.

A much more sensible approach – commonplace throughout the world – would be for state aid decisions to be determined by the government of the day according to domestic law. If a private sector party felt they had lost out due to a government subsidising a competitor, they could then bring an action. This would be more efficient, more rational and would guarantee sovereignty, without prejudicing EU-based businesses, who would be protected by the rules of the WTO or (hopefully) by the rules set out in a UK-EU FTA. It’s how the rest of the world operates.

When Barnier says the Single Market must be protected, he has a double meaning. Clearly the EU believes European businesses are protected well enough by WTO rules from the rest of the world and by outcome-based FTA rules with the likes of Canada and Japan. Brussels’s phobia of potential market distortion does not seem to bother it when it comes to China, on whom Germany relies for exports – in spite of its flagrant disregard for its WTO commitments.

In truth, Barnier’s goal is political, rather than a pure concern for “protecting” the EU’s internal market. The EU cannot be seen to be offering the benefits of a Canada or Japan-style agreement to a country that used to be in the Single Market – otherwise the whole thing might start to unravel.

In an attempt to justify this, EU negotiators have argued for the need for unique levels of harmonisation between the UK and EU due to its physical proximity. In the May years, Britain was told it could not have a “bespoke” arrangement. Now it wants something off the shelf, Brussels is saying the deal must reflect Britain and the EU’s unique prior relationship.

Brussels is clearly erecting fishing and the Level Playing Field as stumbling-blocks to progressing onto other issues – such as financial services, where the UK has important interests to secure – weaponising sequencing as they always so adroitly do. But with a Brussels mandate that cannot compromise on these red lines, and a Number 10 seemingly sanguine about No Deal, it’s now a question of who blinks first.