Whatever the outcome of Thursday’s UK general election, the new government will soon have to commence formal negotiations with the EU about the terms for Brexit. These are likely to be difficult talks that last until the end of next year.
The UK does not start the negotiations from a position of strength. Brexit will have a bigger impact on the UK economy than the EU. The agenda and timeline for the talks is being set by the EU and the UK does not have a veto on the final terms of any deal. Prime minister Theresa May has stated that no deal is better than a bad deal.
However, two-thirds of UK trade is with the EU or countries that have free-trade deals with the EU. It is hard to envisage a worse outcome for the UK than if it leaves the EU with no deal.
The consequences for the UK are likely to include the introduction of tariffs as well as burdensome customs checks, slowing down trade, increasing costs, and disrupting supply chains. The EU’s chief negotiator, Michel Barnier, has also pointed to the risk of serious disruption to air traffic, as well as to extreme uncertainty for more than 4m citizens — UK citizens living in the EU and EU citizens living in the UK.
The EU will also be affected by Brexit, in particular Ireland. Mr Barnier has indicated that no deal is not the EU’s “scenario”. The EU has set out a clear framework and timeline for the talks, as well as some key conditions to reach an agreement.
It envisages three stages to the negotiations, which it says must be carried out in the right order. The EU insists the first stage of the negotiations must deal with removing uncertainty created by the UK’s decision to leave the EU. It has three issues in mind: Guaranteeing the rights of EU citizens living in the UK and UK citizens living in the EU; agreeing on the divorce bill the UK will pay to cover its outstanding liabilities; and the issue of the new borders of the EU, specifically in the North.
Once an agreement in principle is reached on these issues, the negotiations can move on to stage two, covering a new partnership between the EU and the UK.
A key part of this partnership will be a free-trade agreement. Unlike other free-trade deals, this is likely to involve regulatory divergence rather than convergence, as the UK is leaving the single market.
The EU is insisting that divergence does not turn into “regulatory dumping”. Thus, guaranteeing a level playing field for trade, with common rules and regulations that are legally enforceable, is a key condition for the EU of any trade deal, something that may not appeal to the UK. It will take a number of years to negotiate a comprehensive free trade deal. However, if the broad outlines of a deal can be agreed, then the EU has indicated that the talks can move to stage three. This covers the transitional arrangements that will need to be put in place in the period between when the UK leaves the EU in March 2019 and a full trade deal is agreed.
The EU has indicated that any transitional arrangements must be subject to EU law and respect the single market, which again may not appeal to the UK, but would minimise disruption to trade. It is clear a long, hard road has to be travelled in the Brexit talks, with many hurdles to be cleared, if a deal is to be done.
Oliver Mangan is chief economist at AIB
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