Brexit trade deal will contain financial services, but UK may not like it

Current AffairsJanuary 12, 2018

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PARIS — As Ella Fitzgerald used to sing, “T’ain’t what you do, it’s the way that you do it.”

That also applies to financial services and trade agreements.

And keeping the song in mind helps lift the veil of hypocrisy clouding the cross-arguments of the EU’s chief Brexit negotiator, Michel Barnier, and the U.K. government over what the yet-to-be-negotiated, long-term deal between the two sides will include after their separation.

Barnier has warned that it would be a trade agreement, period. The implication was that any deal would only cover goods and mimic the Comprehensive Economic and Trade Agreement, which Canada and the EU negotiated over a period of many years before it entered into force last September.

The U.K., on the other hand, is looking for a treaty that would encompass services, most notably financial services, to maintain the role of London as a global financial center. To which Barnier has sternly replied: “There is not a single trade agreement that is open to financial services. It doesn’t exist.”

What Barnier omitted to mention was that even the CETA deal has a section on financial services.

In a speech Tuesday, he reiterated that a post-Brexit trade deal could provide close regulatory cooperation, similar to existing agreements with Japan and the U.S., but nixed a deal that would allow the free flowing of financial services.

What Barnier said is not exactly true. But contrary to some hopes expressed in London, that doesn’t mean he is bluffing either.

The Canada option is the only one left on the table after all other existing possibilities have been ruled out, due to the U.K.’s own interpretation of what Brexit means. The narrowing down of possible scenarios is illustrated by the now-famous “Barnier slide” giving a graphical representation of the downgrading of the future relationship when options are weighed against stated British red lines.

What Barnier omitted to mention was that even the CETA deal has a section on financial services — and according to a European Parliament report on trade deals from 2014, it is even the only modern trade agreement to dedicate a special chapter to the matter.

A reflection of the Bank of England in the City of London | Daniel Leal-Olivas/AFP via Getty Images

So if it accepts the Canada model, the U.K. will have an agreement with some provisions on financial services. It, however, isn’t likely to like what it gets.

Most notably, the EU-Canada deal stops way short of allowing the so-called passporting that U.K. financial firms are so keen to retain to enable them to operate throughout the single market after having only registered in one member country.

Asymmetric negotiations

The diverging approaches of the U.K. and Barnier stem from the fundamental asymmetry of the negotiations, noted a French government adviser. “The U.K. wants to preserve as much as it can from the current situation. Their viewpoint is they’re in, and what’s being discussed is simply stripping away some components of the edifice.”

Barnier and the EU, on the other hand, start from the position that everything has to be built or rebuilt “from the bottom up” once the U.K. is legally out of the EU, the French official added. The aim of the talks is indeed to come to a compromise, and Barnier’s legal and even legalistic stance is the EU side’s starting point.

Anything the U.K. hopes to obtain on top of the minimal financial services component in the EU-Canadian deal will also be constrained by CETA’s “most favored nation” clause, which compels the EU to offer Ottawa the same terms it might concede with London.

And even though nothing prevents the EU from deciding it does want an ambitious agreement with the U.K. — which, contrary to the EU party line, will be as “bespoke” as most other trade deals concluded in recent years — London’s goals will be constrained by both time and EU politics.

First, it will take more than the two years of the planned transition to negotiate a deal that would encompass financial services.

The EU doesn’t have any reason to extend a sweet deal to the U.K.

“Trade is easy, you check stuff at the border,” a European official said. “Services, especially financial services, are a whole other game. You need common rules, and a common arbiter whenever there’s a legal disagreement.”

In other words, it all hinges on the degree of regulatory alignment the U.K. is ready to accept as a price for its access to the EU market.

“To take an extreme example, you don’t allow a Nigerian bank or investment fund to come to the EU and solicit investors,” he added. “But a Nigerian car, if it did exist, wouldn’t raise any question. You check it at the border, and it’s in.”

Then of course, there’s the politics of it all. The EU doesn’t have any reason to extend a sweet deal to the U.K., other than wanting to avoid reaching the level where intransigence would turn into self-harm.

“The only question is what our interests are, both collectively and of course for individual countries,” the European official noted.

“Once we’re clear among ourselves on this, there will be little the U.K. can do other than accept what we’re prepared to give it.”

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