FAQ: What happens in Brexit Phase 2?

Have they reached sufficient progress?

Despite all the hubbub about the deal reached Friday between European Commission President Jean-Claude Juncker and U.K. Prime Minister Theresa May, the official declaration of “sufficient progress” and the authorization to proceed to Phase 2 of the negotiations can only be made by the EU27 leaders. For now, the leaders are set to take that step in a vote Friday at their December summit in Brussels.

Brexit doesn’t feature on the summit agenda until near the end of the two-day leaders’ gathering. May and the 27 leaders will arrive in Brussels Thursday and engage in the usual ritual of “doorstep” public commentary, answering reporters’ questions as they enter the Council’s Europa building. A key player to watch is Irish Prime Minister Leo Varadkar. The language on Ireland ultimately included in the Phase 1 agreement is little more than a choose-your-own-adventure sequence with three potential outcomes. In other words, the can that everyone said couldn’t be kicked down the road has been punted down the street instead. A disconnect in expectations for Phase 2 has also started to come into focus. The language in Article 50 says negotiators must take into account the “framework of a future relationship.” The EU has focused on “framework;” the U.K. on “future relationship.”

When can a transitional deal be done?

In her Florence speech back in September, Theresa May indicated that she wants a transitional period (or implementation period, as the British government prefers to call it) of around two years. And under pressure from business, her negotiators have pushed for a quick transition deal. The “joint report” agreed by May and Commission President Jean-Claude Juncker last week calls for “an agreement as early as possible in 2018 on transitional arrangements.”

But that timetable may prove to be ambitious. Assuming there are no hitches at the European Council summit, negotiations on a transition should begin in February before a mandate for negotiations on a future trade framework is signed off in late March. But a document prepared by EU negotiator Michel Barnier last month set a date of October next year to formalize talks on a transition — much later than would be comfortable for U.K. businesses, who are desperate for clarity on post-Brexit trading rules and regulations. And as with the rest of the withdrawal agreement, an accord on a transition also requires the approval of the European Parliament. The leader of its largest political group, the European People’s Party, Manfred Weber, has said that he doesn’t think the EU should do a transition deal until it has seen more progress in the second phase of talks.

Does a transitional deal present any problems with the World Trade Organization (WTO)?

Probably not, but there is an outside risk of a legal battle.

The problem all boils down to WTO rules that you should not give sweetheart trade arrangements to one partner that you don’t then offer to the whole world. China, Russia and Brazil could well question why they aren’t getting the same sort of free and easy access offered by the EU-U.K. transitional deal.

The big defense for the U.K. and EU is Article 24 of the WTO’s General Agreement on Tariffs and Trade. This allows countries to take a “reasonable” length of time to sort out a trade arrangement without other WTO members challenging them.

Then trade talks come next, right?

Not quite, and not yet. Only in late March will detailed negotiations on a framework for future EU-U.K. trade commence, according to the latest draft of guidelines for the EU27’s approach to the Brexit talks being prepared for approval by EU leaders later this week. And that word “framework” is important. These won’t be trade talks in the traditional sense.

Rumblings have already begun in Brussels about how fast trade talks should advance in the coming months. Michael Roth, the German Europe minister, expressed dismay Tuesday about noise out of the U.K. that it will only pay the final Brexit bill to the EU if there is a full deal on a trade agreement. The EU has stated that an accord on the final exit bill will appear inside a legally binding document, which is 100 percent independent of any potential trade agreement. Barnier has said he believes striking a full trade deal is impossible by the U.K.’s exit date of March 2019. According to him, only a “political declaration” on the framework for future trade would be feasible. That’s in stark contrast to Brexit Secretary David Davis, who believes that negotiating a “substantive trade deal” is possible in the time available.

So what kind of trade talks?

The U.K. wants to get on with full trade talks as soon as possible, but there is still no clarity over what kind of negotiations will take place in the coming months. Two EU diplomats following Brexit talks in Brussels said there was resistance among the EU27 to launching concrete trade talks with the U.K. in the same way it deals with other third countries such as Canada and the U.S. The main reason is that, until March 2019, the U.K. will still remain a full member of the EU. “We cannot officially negotiate with the U.K. on a trade deal as long as they are a member state,” said one senior official working on Brexit. Only then in a transitional period would concrete trade talks begin.

It all comes down to the provisions in different parts of the Lisbon Treaty. The now well-known Article 50 is in the process of getting the U.K. out the door, but experts on EU law say an agreement on the future relationship between the U.K. and the EU can only be brokered under Article 218, once Britain returns to third-country status. That sets out the procedures by which the EU can make all sorts of agreements, including trade deals, strategic-political accords or environmental agreements. Indeed, when it comes to negotiating a withdrawal agreement for the U.K., Article 50 mostly kicks the action to Article 218 Section 3, which describes how the EU should go about authorizing talks and appointing a chief negotiator. For the EU27 to delay real trade talks when so much is at stake might seem an overly legalistic interpretation or even a negotiating ploy, but the danger is that any withdrawal deal with the U.K. that violates the terms of the EU treaties would be subject to invalidation by the European Court of Justice.

What sort of trade relationship will the EU and UK have post Brexit?

The big question. The EU’s chief Brexit negotiator Michel Barnier views the recently concluded free-trade agreement with Canada as a realistic model for post-Brexit trade with the U.K. (a closer relationship like Norway’s is out, according to Barnier, because Britain has ruled itself out of the EU single market). The U.K. on the other hand wants a deal that would go way beyond the Comprehensive Economic and Trade Agreement (CETA) with Canada. Brexit Secretary David Davis told the BBC over the weekend that he wants “an overarching trade deal which has no tariffs” as well as a deal on services. He called it “Canada, plus, plus, plus.” Bear in mind, however, that Brussels has also floated the idea that the U.K. could temporarily become a member of the European Free Trade Association (EFTA) while both sides transition into their future relationship.

What impact will the agreement on the first phase have on trade talks?

May and Juncker announced last week that Brexit talks could move on to Phase 2 after an agreement on three key issues — citizens’ rights, the Brexit bill and the border between Ireland and Northern Ireland. Key to the agreement on the Northern Irish border was a declaration that the U.K. would maintain “regulatory alignment” with the Republic of Ireland in some sectors, so as to negate the need for border checks.

That leaves a big question, however. How does the U.K. keep regulations aligned while simultaneously insisting that Britain will leave the single market and make bespoke trade deals with other countries? By remaining in step with EU regulations in some sectors, it will limit the U.K.’s room for maneuver in future trade negotiations.

Any curveballs?

EU officials have said Brussels could be defensive about “most favored nation” (MFN) clauses in existing trade deals, such as the agreement the EU has with South Korea. These clauses mean that Seoul could claim the same concessions as granted to Britain. When negotiating with London, Brussels will have one eye on the MFN clauses in its existing deals around the world.

Original Article


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