Trade

London weaponizes Trump for Brexit talks

LONDON — Britain thinks it has a secret weapon in the Brexit negotiations: Donald Trump.

The U.S. presidents increasingly outspoken attacks on the European Union, coupled with the threat of a looming trade war, may work in Londons favor in the final Brexit shakedown, senior U.K. officials and negotiators believe.

London and Brussels are currently locked in a stalemate with — according to the EUs chief Brexit negotiator Michel Barnier — “huge and serious” differences remaining over the state of the final withdrawal agreement and the framework for what the future relationship will look like.

But some in the U.K. government believe the geopolitical winds are blowing in their favor, which could see the EU compromise rather than force a political crisis on the U.K. with unpredictable consequences for London — and Brussels.

Donald Trumps tariffs on European steel and aluminum may have been absorbable for the EU. His threatened 20 percent tariff on all European cars would be of a different order — and the U.K. knows it.

U.S. President Donald Trumps (right) increasing trade threats may work out well for the U.K. | Brendan Smialowski/AFP via Getty Images

“At a time when Donald Trump is looking at a 20 percent tariff on European cars, the Germans may look favorably on a deal that avoids trade barriers with their biggest export market for cars,” said one senior U.K. government official.

“Go back to the G7 summit,” said a second senior figure. “The U.K. prime minister was the closest ally of the German chancellor and French president. Now, set that against the renewed tensions in the EU. Ultimately, is Brexit something they want to get done and move on from? Or do they want to create another crisis and keep it alive as an issue?”

Cabinet decision time

British diplomats have been struck in recent weeks by the sharpening lines of division between the U.S. and the EU, exemplified by European Council President Donald Tusks solemn welcome letter to Junes summit: “Despite our tireless efforts to keep the unity of the West, transatlantic relations are under immense pressure due to the policies of President Trump.”

According to senior U.K. officials directly involved in the negotiations, London believes that when push comes to shove, the EU will drop its hard-line stance that the U.K. must choose between full membership of the single market and customs union or nothing more than a Canada-style trade deal but with Northern Ireland hived off to protect the open border with the Republic of Ireland.

For the U.K., both options are unacceptable, because the latter would create an economic border within the United Kingdom, and the former would fail to deliver on the governments central promise to voters of being able to control EU immigration, leave the jurisdiction of the European Court of Justice and strike independent trade deals with other countries.

The EU has repeatedly warned that it will not allow “cherry-picking,” ruling out the prospect of the U.K. remaining in a “single market for goods.”

Ultimately, because neither scenario is politically acceptable, the U.K. would likely tip into a political crisis if it is forced to choose or face a no-deal Brexit. At this point, all options would be back on the table, from a fresh general election to a new, harder-line Conservative prime minister, officials say in private.

“Its very difficult to envisage a world where the outcomes they envisage actually happen,” one senior U.K. official at the center of the negotiations said. “If the EU thinks the U.K. will accept single market plus customs union, youre talking about second referendum territory. The EU pays very close attention to U.K. politics but it doesnt seem to understand it.”

Theresa May is due to hold a Cabinet away day at her country residence, Chequers, on Friday to find common ground on what kind of relationship the U.K. wants with the EU after Brexit.

At the heart of the dilemma is how close to tie Britains manufacturing industry to the EUs in a bid to protect supply lines and, crucially, avoid the need for border checks between Northern Ireland and the Republic — a prerequisite for any deal.

Although the away day may not produce a final settled position, both officials accepted that the U.K. is heading toward an offer of alignment with the EU on goods.

British Prime Minister Theresa May (center) with other European leaders on June 28, 2018 at the European Council summit | Ludovic Marin/AFP via Getty Images

However, the EU has repeatedly warned that it will not allow “cherry-picking,” ruling out the prospect of the U.K. remaining in a “single market for goods” with the EU. U.K. officials, for their part, reject this label.

“I dont like calling it single market for goods,” the first official said. “Its a customs arrangement where we stay aligned on goods.”

Brussels decision time?

The offer on the table, keeping the U.K. aligned with EU standards on goods but not services, while formally exiting the single market and customs union, is, British officials accept, potentially a very good offer for Brussels, which has a surplus with the U.K. on goods. Under normal circumstances it does not look like a particularly attractive deal for Britain, which has a surplus with the EU in services. The calculation that has been made is that its a better option than no deal, the first official indicated.

Such a deal would protect German and French manufacturers market in the U.K. while, potentially, accepting barriers for Britains giant services sector.

“The EUs interest lies in the integrity of the single market, not in a deal that would start unraveling it” — EU official

The first official said that while nothing has been decided, there is a debate within government and within the City of London over whether the U.K. should be prepared to give up on the unprecedented third-country “mutual recognition” model that Chancellor Philip Hammond wants for financial services.

That would mean settling for the EUs standard third-country equivalence model, which would limit the Citys ability to continue as Europes premier financial center, but would allow a greater degree of regulatory autonomy, freeing London to make inroads into markets further afield, operating under different regulatory regimes.

“There is a mix of views in the City,” the second official said. “If we cant get mutual recognition then there is an interesting debate about whether we want to try and live with enhanced equivalence. At least we wouldnt be rule-takers. And does rule-taking on financial services really suit us?”

While the EU has shown little sign of shifting from its stance that there is no legal middle way between the Canada and Norway models — “The EUs interest lies in the integrity of the single market, not in a deal that would start unraveling it,” one EU official said curtly when asked about the alignment in goods plan — London has long hoped that the political considerations of the EU27s leaders might override the Commissions technical barriers. And they are convinced the Trump factor will cast a middle-way Brexit deal in a new light for the EU.

“They will have a choice at this point,” said the second official. “And there are some definite incentives for them. If they go down [their current] path and cause a political crisis in the U.K., they wont be able to move on as they profess to want to do.”

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