09 February 2020

Financial Times: Britain and the EU are negotiating at cross purposes

Wolfgang Münchau warns that the danger is that the EU may be insufficiently flexible because its member states have different interests, while the UK has less pressure to compromise because it already accepted trade friction.

It is worth savouring this passage from the EU’s draft for its Brexit negotiation goals: “The envisaged partnership should ensure the application of Union state aid rules to and in the United Kingdom . . . [T]he United Kingdom should set up an independent and adequately resourced enforcement authority . . . which should work in close co-operation with the Commission.”

This is the famous “dynamic alignment” — the UK is asked to mirror whatever the EU does, whenever the EU does it, or shortly thereafter.

And now consider a letter written last week by the economic affairs ministers of Germany, France, Italy and Poland to Margrethe Vestager, the EU competition commissioner. It addresses a different aspect of competition policy: merger control. The ministers ask Ms Vestager to bring proposals to protect EU companies against abusive behaviour by foreigners for the purpose of “strengthening the competitiveness of EU industry and European value chains”.

The four ministers had China in mind, but have unwittingly given the UK a reason to reject the request for dynamic alignment: because EU competition policy is becoming more political. By agreeing to dynamic alignment on state aid, the UK would give the EU a tool to scupper any post-Brexit industrial strategy. The UK government, for example, may wish to subsidise manufacturing industries in northern England or help a fledgling artificial intelligence sector, which might be deemed illegal state aid by Brussels. [...]

The overarching problem with the EU and UK negotiating drafts lies not in the technical detail, but in their diverging goals. The EU’s proposal does not seek to maximise the flow of trade, but to prevent the UK from exploiting regulatory divergence. The 33 pages read like the small print of an insurance contract. In setting conditions for a level playing field, the EU uses its own laws and standards as a benchmark. Since the European Court of Justice rules on EU law, it would retain an indirect influence on the UK.

A fairer way to deal with level playing field aspirations would be to use international benchmarks, like the Paris climate targets or employment standards set by the International Labour Organization, and then let an independent arbitration committee settle disputes.

Likewise, the UK’s negotiating draft is also not motivated by a desire to maximise trade, but to seek the fullest amount of regulatory independence.

The problem with the two drafts is thus not that they disagree on fish, say, but that they disagree on what they are negotiating. The EU wants to keep the UK in. The UK wants to keep the EU out.[...]

The biggest mistake either side could make in the forthcoming negotiations is to assume that the other will fold. [...]

Most commentators assume the EU has the advantage because it is bigger. I disagree. The UK’s acceptance of trade friction has changed everything.

One should never bet against an EU-level deal if everybody wants one. But the danger is that the EU may be insufficiently flexible because its member states have different interests, while the UK has less pressure to compromise because it already accepted trade friction. The gap between the proposed deal and no deal is not that large.

Full article on Financial Times (subscription required)

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