What’s the plan for future trade relations between the UK and EU?


Do we finally have a plan for the future trade relations between the UK and the EU?

Michel Barnier’s initial reply to Theresa May’s Mansion House speech implied that its main quality is to have squarely put the Brexit deal in one of two boxes: a free trade area rather than the single market, or Canada rather than Norway.

The deal can be broader and deeper than Canada, is the message, but we now know that the UK understands the trade-off between access and control, and has chosen to emphasize the later. The draft guidelines prepared for the upcoming European Council on 23 March reemphasize this message.

Fair enough. But is this good enough?

If the two sides are to reach an agreement, the British side needs to see their aspiration through EU eyes and do justice to the EU’s concern for the integrity of the single market, as spelled out once again in the new guidelines.

And on their side, EU negotiators need to recognise the margins of freedom offered by the history of the single market which provides subtle guidelines rather than fixed rules for interpreting the contours of such integrity.

The history of the single market has two lessons for Mrs May and Mr Barnier. Lesson One is that the single market has been built over time in a piecemeal and pragmatic way around the principle of mutual recognition, underpinned by rigorous adjudication of disputes where they arise.

Countries of destination are asked to trust the home state with providing the right stamp for goods and services crossing borders.

But because trust is never blind between states, there is no such thing in the EU as pure mutual recognition. Instead, the EU single market has become complex and layered system of ‘managed mutual recognition’, a recognition which can be partial, conditional and reversible, and involve more or less ‘alignment’.

Even when more harmonisation is introduced – as in the Single Rule Book in finance, as Stefaan de Rynck, Barnier’s chief advisor, stressed in response to the Prime Minister – we still need mutual recognition of how the rules are enforced.

This is an ingenious dynamic process, involving trade-offs that may change over time. Ironically, it was devised to a great extent by Brits-in-Brussels precisely to avoid one size fits all standards and supervision, allowing for a high degree of national regulatory autonomy throughout the EU.

By constantly invoking mutual recognition out of context, Brexiteers fail to acknowledge that they have set out to reinvent the EU wheel but without the gears and spokes that make it work – otherwise known as institutions.

Lesson Two is that the EU has been seeking to export the single market model to the rest of the world for decades. It is fair to say that this ambition has worked better as an asymmetric (Norway) than symmetric exercise (United States). And that the so-called mutual recognition deals the EU did manage to strike with outside partners are but pale imitations of the original, involving the recognition that exporters certify to the importing country standards.

How does Brexit fit with this story? Can we agree that, even as a third country, the UK will not simply be a new exemplar of Story Two because it will have been an integral part of Story One?

If there is no precedent for such a state of affairs, we should not start with the pros and cons of Norway-vs-Canada, but invent a new paradigm consistent with the EU’s own history and principles.

I suggest we call it the ‘Compatibility Model’ which involves acknowledging on both sides that access to the EU’s single market is neither about ‘managing convergence’ (as in the enlargement model), nor about ‘managing divergence’, but about ‘managing differences’.

The compatibility paradigm suggests that it is wrong to decide a priori that potential future differences in regulatory approaches will necessarily overshoot the bounds of legitimate differences.

That the UK will formally have become a third country does not materially cancel out this logic even if legally Brexit involves a grand exercise in translation from EU law to third country law.

Can the EU grant this? Can it contemplate a UK both on the outer fringe of its own managed mutual recognition system – Story One – and as the new frontier of its external mutual recognition ambition – Story Two?

This would involve first agreeing that the UK should not be treated like any old third country. The European Council did pledge in its negotiating mandate “to take into account the specificities of the United Kingdom as a withdrawing member state.”

Presumably, negotiating with the unprecedented figure of a ‘withdrawing state’ will lead to an unprecedented outcome, the birth of a new animal in the international landscape: the ‘Former EU member state’, whose DNA will remain EU-compatible.

Second, it would involve applying this general presumption of compatibility to all UK sectors, for goods and services, even if the country is formally outside the single market. There would be no a priori ‘cherry picking’ of sectoral candidates for the alignment or divergence baskets.

Such proposed triage misses the essence of managed mutual recognition. Because Brexit bridges Stories One and Two, it will need to respect the spirit of internal EU law, which is not about accommodating ad hoc and idiosyncratic exceptions but about refining over time a principled approach.

Third, because things change over time, including levels of trust, the deal needs to involve a good dose of contingent contracting, predicated on accommodating different expectations.

Managed mutual recognition relies heavily on ex post conflict management, remedies in case of disagreement, and political decisions on whether to stick with incompatibilities that may arise and take the hit in terms of market access.

Because the UK will be only partially involved in the EU’s eco-system of recognition management, these technologies of conflict will need to be robust and operate in the shadow of the European Court of Justice.

The compatibility paradigm answers Gideon Rachman’s call to refrain from endorsing one-sided narratives that simply confirm our preexisting biases. However much many of us dislike the prospect of UK withdrawal, turning Brexit into an ambitious precedent for EU external relations will be a more appealing narrative than framing it as a disastrous precedent for EU internal dynamics.

The way the EU negotiates with the UK ought convince the rest of the world of its avowed commitment to free trade, cooperation and openness.

We owe this much to our children on both sides of the Channel whose projects and networks are deeply intertwined. In order not to let the dead tie the hand of the living a decade or two from now, those in charge today must imagine and negotiate a relationship between the EU and the UK which leaves open different future worlds, including eventually rejoining a transformed and differentiated EU.

“Different but compatible” is a motto fit for this purpose.

By Kalypso Nicolaidis, Professor at the University of Oxford and co-chair of the Oxford Working Group on Brexit. A longer version of this piece is available here.

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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