Blog Post by Pieter Cleppe, non-resident fellow of the Property Rights Alliance

In order to avoid a detrimental cliff-edge at the end of the year, the EU and the UK should step up their efforts to achieve a compromise.

A key question to be sorted is the extent to which UK companies will continue to enjoy their current market access to the EU. For the EU, this matter largely depends on the UK signing up to a so-called “level playing field” arrangement, which basically means that the UK respects certain minimum standards, not only when it comes to regulation, but also when it comes to granting state aid. The UK government is strongly opposed to this, also because the EU Commission has a habit of extending the meaning of state aid, for example by reinterpreting tax breaks as subsidies, something on which it recently lost a court case against Apple.

Given that there isn’t much time to agree the extent of market access granted to UK companies, the focus could be to agree a negotiation mechanism in case the UK intends to issue divergent rules. That would mean that everything will simply remain the same after 1 January 2021: British chemical companies and car manufacturers would continue to enjoy full market access as long as the UK doesn’t change regulations covering these sectors. From the moment the UK intends to change regulations, it would be obliged to notify the EU, so both sides can then agree to what extent the regulatory changes will impact market access. In a similar fashion, the EU would need to notify the UK when it considers legislative action, so the impact of market access for EU exporters to the UK can be negotiated as well.

Something like this would truly be a win-win arrangement, not only because it avoids a cliff-edge, but also because it enables the UK to tailor its regulatory divergence to maximizing access to the EU market, and because it enables the EU to impact new UK regulations.

Some in the EU may claim that agreeing to this would “fragment” the four freedoms, as it would mean that not every economic sector would necessarily enjoy the same degree of free movement between the EU and the UK, as this would depend on the nature of UK or EU regulations. Then, the fact that there are differences in market access for the services sector and goods trade hasn’t posed any major problem for EU-Swiss trade in the last twenty years. Moreover, the degree to which services trade has been opened up within the EU is not on par with the liberalization of intra-EU goods trade.

Apart from sorting out fisheries access, which is a politically sensitive sector in every country, a remaining major question would be to determine which institution should serve as the arbiter to sort out disputes. The EU has pushed for its own top court, the Court of Justice of the EU (CJEU) in Luxembourg, to take up that role, but surely the EU side should reflect on whether this is reasonable. In case of a US-EU trade deal, the EU would definitely refuse to agree that the U.S. Supreme Court becomes the arbiter in case of disputes, even if the U.S. side would claim that this is necessary to protect the unified interpretation of U.S. law, similar to how the EU side has claimed the EU’s top court needs to have the last word over EU-UK disputes.

Relentless EU attempts to push the CJEU forward as the arbiter in EU-Swiss relations are also an important reason why no progress has been made in further opening up trade between the EU and Switzerland. No judicial arbiter is currently foreseen in case of a dispute between the EU and Switzerland, and the EU is right to ask for a system to work out differences of opinion. The natural compromise here is of course to work with the trusted system of international arbitration. This could be done both for trade disputes with Switzerland and with the UK.

A leak reported by Reuters suggests the EU would be moving towards this, as it would be open to a dispute-settling mechanism on state aid-related disputes, only obliging the UK to follow general principles and not specific EU rules.  Also UK negotiator David Frost has claimed that “the EU has listened to the UK on some of the issues most important to us, notably on the role of the Court of Justice, and we welcome this more pragmatic approach.” Of course, the UK will always want decent market access in return, but there’s hope for a deal.