Gerard Fox and Martin Smith are Council and Executive Committee Members of the Conservative Group for Europe. They are the authors of Reset To Sunset: a proposal to break the impasse in the UK-EU trade talks. Martin is a management consultant and former lobbyist and think tank researcher. Gerard is an East Sussex Conservative County Councillor, a Director of the Regulatory Policy Institute, and a former Managing Director of Credit Suisse.
Predictably, the negotiations between the UK and the EU have descended into the last-minute game of chicken that so many feared. Neither side wants the blame for No Deal, but neither wants to compromise if it thinks that the other will back down. We find ourselves at one minute to midnight.
It seems that we must endure this waiting game for a while longer. Stephen Booth of Policy Exchange, though, picked up on ConservativeHome a recent development from the talks that could pick the lock. He referred to it as a “review clause.” When we first suggested it, we called it a sunset clause. Either way, it appears to be circling at the highest levels in the negotiations.
We agree with Booth that a sunset is the solution. No trade agreement obtains in perpetuity: the replacement of NAFTA with the United States-Mexico-Canada-Agreement and the current renegotiation of some EU-Swiss agreements provide examples. In the case of the UK and the EU, a sunset, done right, avoids the short-term No Deal cliff-edge, sets us up for a better long-term relationship, and provides the autonomy the UK seeks while addressing the EU’s concerns.
In the Prisoner’s Dilemma in Game Theory, uncertainty around the other party’s intentions causes both parties to lose out. In this negotiation, irreconcilable red lines may result in both accepting less market access as a trade-off against the risks of caving into the other’s demands.
But, with a period of experimentation, followed by periodic reviews, allowing each party to assess the other’s actions, a better outcome for both may be achieved, based on elevated consideration of the prospects for retaliation, reward and trust.
Initially, the UK said that it wanted a Canada-style free trade agreement. However, its detailed asks resembled the privileged level of access to the Single Market commensurate with the obligations placed on neighbouring countries like Norway. Essentially, Norwegian privileges with Canadian obligations.
However, the negotiations have whittled these asks down, and now the UK is at risk of agreeing to Canadian access with Norwegian obligations. This has been driven materially by EU fears about what the UK might do with its regulatory autonomy.
Equally, the UK has been very nervous around commitments to regulatory alignment with the EU and has focused substantially on tariffs as the main barrier to trade. Whereas, in fact Non-Tariff barriers (NTB’s) are in fact the principal disadvantage of exiting the Single Market.
But what’s wrong with No Deal?
The most well-articulated case against No Deal comes from Norway fans The Leave Alliance.
As Conservatives who favour a close relationship with the EU, but not unreserved fans of Brussels, we believe that both sides need to address each other’s concerns to find a compromise. Our proposal comprises a number of elements.
We recommend an initial range-finding arrangement with a sunset in 2024. This will permit a consensus to emerge on the balance between market access and regulatory autonomy. A long-term agreement would then be easier.
After 2024, ongoing sunsets every seven to ten years would balance the need to afford sufficient business certainty, with the reality that trade and regulatory circumstances change, while removing the fear that one party or the other might seek to adversely exploit the terms of the original deal.
Until 2024, the UK’s access would be calibrated according to its regulatory standards, in a mechanism working with reference to precedent from other EU FTAs and set out in a Memorandum of Understanding (MoU) in an amended Political Declaration (PD).
We propose, rather than tariffs, the use of non-tariff barriers (NTBs), the absence of which is the primary benefit of the internal market. NTBs are better at protecting the market from non-compliant products. The EU wants tariffs in the divergence scenario. However, we still maintain that, in the continuing alignment scenario, the UK should benefit from the absence of NTBs enjoyed by Norway, which aligns its regulations with the EU.
The talks appear to have picked up the idea, described here as an “evolution mechanism”. A short period of experimentation should not cause too much fear for the EU. The short time until sunset limits the UK’s divergence; the EU can decide not to pursue a long-term trade agreement then if the UK uses its autonomy to engage in regulatory competition. “Friction” in the relationship caused by repeated reference to an access-alignment framework would be limited by the sunset and by recourse to dispute resolution.
Our proposed mechanism resolves the objections of each side to the other’s proposals. Addressing the EU’s concerns, we propose that all LPF issues be included. Addressing the UK’s concerns over neutrality, we recommend that disputes be arbitrated by representatives of neutral countries that have experience of trading with the EU under different arrangements. Both sides can trust the fairness and proportionality of the mechanism.
While the above three elements define our proposal, the Government should not let a deal founder on a UK State Aid framework that it has yet to define and over which no debate has taken place either in the Conservative Party or in Parliament. The EU state aid regime is a materially British Conservative invention; without a better one, the government should keep it until sunset.
Joint and Independently Governed Divergence
The EU is no longer proposing to lock the UK into mimicking all of its future regulatory changes as a precondition of any agreement. It is, however, proposing to impose tariffs on the UK if it elects not to follow. In many respects this proposition recognises sovereignty. Such a mechanism exists because the UK might choose to diverge. What it does not do is allow the UK to keep all the same benefits regardless of what it does with its sovereignty. Nevertheless, it is a significant ask beyond the non-regression clauses to which the UK has already committed.
Regardless, for it to be acceptable, this principle must embody proportionality, clarity, symmetry and good governance. It should be governed by a standing and independent joint UK-EU Regulatory Committee which monitors and assesses divergence and suggests proportionate barriers or possible mitigations. In recent days, the EU seem to be more accepting of symmetry. Hopefully, the rest will follow.
The proposals allow for:
- The UK to compare the advantages of diverging from EU regulations to the costs of reduced access to the EU market and decide what it wants.
- The EU to judge the extent to which the UK intends to change its regulatory standards and to develop its negotiating stance for the long-term trade agreement accordingly.
- The UK government to develop a state aid framework.
- Trust to be rebuilt. · Furthermore, it meets the most important red lines of Brexiteers set out on Conservative Home by Alexander Stafford, namely –
The UK passes laws and UK courts will enforce them.
Under dynamic adjustment, the EU would adjust access to its market accordingly and the independent dispute resolution mechanism would decide whether it has acted proportionately.
This also assuages the EU’s concerns. There is nothing inherently wrong with Stafford’s red lines, but they say nothing about what the EU should be expected to agree to given the UK’s market access demands, the EU’s other trade agreements, and the EU’s concerns following years of talk of Singapore-On-Thames.
Crucially, if both sides commit before the end of December to this arrangement, nothing will change on New Year’s Day on regulatory borders. It uses the fact cited by the Alternative Arrangements Commission and others that “on day one we are 100 per cent aligned”. If nothing changes, then nothing changes. Both sides could then adjust gradually to the new relationship.
Businesses don’t want a “day one cliff-edge”. But extending the transition would be another exercise in “can-kicking”.
Let’s walk down from the cliff to the beach and test the waters. Let’s have a period of experimentation to find out what we both need. Brexit is a process rather than an event.