MARCH 2017

HOW TO (BR)EXIT: A GUIDE FOR DECISION-MAKERSTHE KEYS TO AN AGREEMENT BETWEEN THE EU AND THE UK

POLICY BRIEFING by Mogens Peter Carl

Image credits:

Cover: studio4a/bigstockphoto.com,

p 4 : CC/Flickr freestocks.org, p 7: hadrian/bigstockphoto.com, p 9: CC/Flickr Jay Allen, p 10: CC/Flickr Garon S,

p 12: teamjackson/bigstockphoto.com, p 18: redpixel.pl/bigstockphoto.com, p 19: kamira/bigstockphoto.com,

p 21: CC/Flickr John O’Nolan, p 23: CC/Flickr Tom Evans, p 25: CC/Flickr davebs,

CONTENTS

OVERVIEW 5

“Brexit means Brexit”: the art of the possible 5

Bridging the gap between perceptions and reality 5

A negotiation like no other 6

A question of time 7

In summary: the art of the possible 9

THE MAIN ELEMENTS OF THE BREXIT EQUATION 11 Part 1: An agreement on trade in goods 12 Solution 1: A free trade area agreement between the EU and the UK 13 Solution 2: A customs union between the UK and the EU 14 Solution 3: Free trade sector agreements for certain industries 14 Issues common to both the free trade and the customs union scenarios 15 Part 2: An agreement on trade in services 18Issue 1: Services other than financial services 18Issue 2: Financial services 20 Part 3: Free movement of people 21 Issue 1: EU citizens already residing in the UK on a given date 21 Issue 2: The future movement of people 22 Conclusion 22 Part 4: Trade issues of particular importance to the UK 23 Issue 1: Existing free trade agreements 23 Issue 2: New trade agreements 24 Issue 3: Other trade agreements or decisions 24 Part 5: Other issues: a non-exhaustive list 25

3

If it were done when ‘tis done, then ‘twere well

It were done quickly

(Macbeth, Scene VII)

ABOUT THE AUTHOR

Mogens Peter Carl is a former director-general of the European Commission’s Directorate-General for Trade and Directorate-General for the Environment. He was previously a senior official at the World Bank and the OECD.

4

5

OVERVIEW

“BREXIT MEANS BREXIT”: THE ART OF THE POSSIBLE

This paper is written without any political bias or preference. It is not for or against Brexit. It is a description, for the benefit of decision-makers on both sides of the English Channel, of what is likely to serve common interests, what is possible and what is impossible, what can be done quickly, what will take more than two years to settle, and what may have to be left floating in the air.

I cannot insist too strongly on the non-political character of this paper. Some in the United Kingdom and the European Union – many, perhaps – are still hoping that Brexit will not take place. EU ‘anti-Brexiters’ and UK ‘Remainers’ argue that the majority in favour of Brexit was slim. They hope that Brexit will not take place and ignore the fact that the results of the referendum represent a significant level of opposition to the EU.

This opposition and dissatisfaction must be taken at face value, whatever the underlying motivations of individual votes. Shrugging it off as a manifestation of ‘populism’ is another way of suggesting that those who hold different views are persuaded by irrational rhetoric. To paraphrase philosopher Jean-Paul Sartre, “le populiste, c’est l’autre”.

The UK will soon make its exit request under Article 50 of the Treaty on European Union. This is its sovereign right. The purpose of this paper is to help make what follows an optimum outcome for the EU-27 and for the UK.

BRIDGING THE GAP BETWEEN PERCEPTIONS AND REALITY

There is another reason for writing this paper. There seems to be an ever-widening perception gap between London and Brussels. Having been a negotiator for the EU in its relations with third countries for more than 30 years, I recognise what I would call ‘negotiators’ illusions’. As a negotiator, you reach a point where you perceive the ‘real’ positions of the other party how you would like to see them, or what they should be if the others were ‘rational’ like you. The problem is that they are only very rarely ‘like you’.

Another facet of this phenomenon is cultural myopia. For example, in continental Europe there is a tendency to shrug off British concerns over immigration as xenophobic; as the result of the anti-EU campaign of the British popular press, and therefore of little importance. In London the EU is seen as weak and divided, in need of the expertise of the City, and therefore a pushover in future negotiations. Someone needs to tell some unpalatable truths to both London and Brussels. This paper tries to do that.

The following is based on the assumption that the ‘red lines’ traced by politicians on both sides reflect their real positions. In particular, the writer takes at face value:

Major British red lines:

• an end to the free movement of people between the EU and the UK

• no direct applicability in the UK of decisions of the European Court of Justice, or of EU legislation

• the recovery of UK sovereignty in all areas, such as international trade policy (so the right to conclude trade agreements with third countries)

6

Major EU red lines:

• not really known, except for the mantra that all four ‘freedoms’ – the free movement of people, goods, services and capital – come or go together

These red lines may, at first sight, appear to be mutually exclusive or antagonistic. In substance, and putting aside tactics, this need not be the case. Indeed, this paper is not about tactics, only about substance. It is, of course, illusory to expect that either party will start negotiations by putting all its cards on the table, and one should expect that much time will be wasted on the usual tactical manoeuvres.

When you look at the enormous stakes for both, this is inevitable. It will provide good copy for the newspapers, but when deciding on tactics both sides would be well advised to always bear in mind what could, would and should be a mutually-satisfactory outcome. This paper tries to tackle these questions.

A NEGOTIATION LIKE NO OTHER

This is not a classical (trade) negotiation that starts from a situation where barriers exist and the objective is to bring them down (and whether this is done quickly or not is rarely of much importance). With Brexit the situation is the reverse: we start with a situation of totally free trade and movement of people and capital, with the purpose of… doing what? Restricting one or the other, or both – and if so, to what extent? This uncertainty is likely to continue for many months. The consequences therefore go far beyond the uncertainty of if and when a completely new contractual relationship, like an EU-United States or an EU-Japan free trade agreement, will happen. With Brexit the objective is a break-up, partial or total, not the opening of new opportunities. This explains the feeling of uncertainty and incomprehension experienced by many.

The main elements of a mutually satisfactory agreement between the EU and the UK should, however, be reasonably clear. They are described below. It is urgent to inform workers, migrants, investors and traders, not to speak of public officials and politicians, of what is feasible and likely, when considering the red lines of the other party. The present situation of near-total uncertainty is taking its toll. Of course it is up to the UK to make a first proposal, following the transmission of its formal request to leave the EU.

This paper does not dare to suggest that what follows is the only approach. But it is a realistic approach that would maximise the advantages and minimise the pain for both parties. In other words, the definition of the best outcome of a negotiation. Its purpose is also to demonstrate how relatively easy it will be to succeed, with a minimum of mutual goodwill and realism on both sides. It outlines what is possible within a short period of time; cases where (much) more time will be required; and where agreement is likely to be impossible. Lastly, this paper seeks to set in motion a public debate, leading perhaps to the definition of even better options and approaches.

7

A QUESTION OF TIME

The issues examined in this paper obviously do not constitute an exhaustive list of all matters to be resolved. It is partly arbitrary and personal, because I have been actively involved in most of these questions during my career. But it does include a good part of the important issues to be resolved. Fortunately, the most important of these are relatively easy to define and to resolve, within a short time span, once agreement has been found on the basic objectives.

Some of these questions, and others not examined here, will take more time. This is due to their technical, legal or financial complexity, but also because of the temptation for either side to engage in brinkmanship on certain issues. A relatively simple solution will be available: to leave unresolved issues as they are. For example, no one is likely to wish to wreak havoc with ongoing EU development aid programmes, which may mean continued British involvement and financial contributions for a limited period. Other examples regarding the Emission Trading System (ETS) and intellectual property law are provided below; but although they are very important issues, none is of central importance, and none is a deal-breaker.

Nevertheless, time has often been a friend of negotiators. Many problems have a tendency to disappear over time, either because they have been resolved by other means, or because they have been found not to be problems after all. ‘Transitional periods’ have saved many a negotiation.

8

But in some respects transitional, temporary arrangements may be easier to suggest than to do. There are likely to be problems with decision-making and the role of the European Court of Justice during any such transition period – a good reason not to kick too many issues into the proverbial long grass.

Let us try to pull together the main time-related aspects:

1. The most important problems can be resolved within a short period of time. They include the question of the future status of EU citizens in the UK and British citizens in the EU; the creation of a free trade area in goods; rules of origin; and government procurement. The question of future movement of people has to be resolved within this brief time period. For practical reasons, most budgetary and institutional issues also have to be resolved within the next two years.

2. Certain other issues will require more time, and could be covered by a ‘continuation clause’ that would essentially allow the status quo to persist for a limited period, until full agreement has been reached. They include financial services, fisheries, climate change/ETS, transport, development aid, and research and development programmes.

3. The resolution of a host of issues will depend on whether the British government is prepared to envisage the kind of approach to ‘equivalence’ suggested below on issues such as product standards, non-financial services, energy and intellectual property. If it agrees to do so, much is doable within a short period of time. If it does not, much more time will be needed to carry out the ‘divorce’ without too much hurt, and a temporary continuation clause could or should be envisaged for such issues.

9

IN SUMMARY: THE ART OF THE POSSIBLE

Brexit does not spell disaster. Far from it. It is the responsibility of governments to make these negotiations succeed, and quickly. They can do so only if they understand and accept the existence of legitimate concerns on the other side, of which as many as possible are spelled out in this paper.

They will find solutions optimal to both parties in a free trade area between the EU and the UK. It is entirely possible to negotiate and conclude – quickly – an agreement that will preserve most aspects of current EU-UK relations concerning trade in goods. This will need to be accompanied by a formal, legally-binding, unqualified recognition by the UK and the EU of continued ‘national treatment’ and non-discrimination regarding UK and EU nationals already legally residing in the other party, on the same terms as those afforded by present EU rights and obligations.

Agreement to maintain the current level of free, mutual access for non-financial services is possible if the UK continues to comply with all relevant aspects of EU legislation in this area. Agreement on financial services would be subject to an agreement regarding future movement of people. If the latter proves impossible, there will be no agreement on financial services.

Agreements on the most important parts of the puzzle are identifiable and doable within the two years laid down in Article 50. Other issues, more technically or legally complicated, or requiring expert staff currently not in place, could be made subject to agreements on basic principles and transitional arrangements.

10

11

THE MAIN ELEMENTS OF THE BREXIT EQUATION

The main elements of an agreement are clear. The respective interests and concerns of both the United Kingdom and the European Union are well known, and the means of satisfying both to the greatest extent possible are obvious to those who know the main elements of the equation from direct, practical experience. These elements are:

1. Shared interests, economic and human, based on a high degree of economic integration and migration, developed over the past 44 years;

2. The legal framework, constraints and context – including EU law and international law (such as World Trade Organization rules);

3. The political constraints – for the UK, ‘red lines’ on free movement of people and legal and commercial sovereignty suggested in the overview at the beginning of this paper; for the EU, a rejection of a ‘free ride’ and of any attempt to undo the EU’s body of law (the ‘acquis communautaire’) – the plank to which the remaining 27 member states will want to cling.

The method employed in this paper is to try to maximise the advantages for both parties within these constraints, and to minimise the drawbacks. This paper does not take sides in favour of one or the other party. Its purpose is to demonstrate what could work for both. The only political purpose or bias of this paper is to facilitate Brexit, for both parties, following the basic principle espoused by William Shakespeare’s Macbeth:

“If it were done when ‘tis done, then ‘twere well It were done quickly”

This paper will not address the question of tactical games, which are certain to complicate the process. There is no negotiation, national or international, without a certain degree of gamesmanship. One can only hope that those in charge will quickly understand that it would be in their own best interest to focus on the essentials, bearing in mind the interests of the other party and their respective constraints. And, perhaps, to follow some of the recommendations of this paper.

A final word on what not to do. Many commentators and self-appointed experts have wasted their and our time with analyses of the ‘precedents’: agreements linking the EU to Norway, Switzerland, Turkey, Iceland and elsewhere. But to constitute a precedent, things need to be comparable. They are obviously not. The UK is a major economic and political force; Iceland or Norway are not. So there are no useful precedents.

Each of these agreements has been tailor-made to cover a very specific situation; none is perfect. Indeed, all are subject to heavy criticism by one party – or sometimes both. An example: to suggest that the UK and the EU agree on a EU-Norway/European Economic Area-type relationship is ludicrous. It would lead to a result diametrically opposed to the wishes expressed by most British voters, and would subject the UK to all EU legislation without having more than a token say in its elaboration and adoption. The very fact that this has ever been seriously suggested is a striking example of the degree of ignorance surrounding the question.

By definition, the future EU-UK agreement will be sui generis; tailor-made to our respective interests and constraints that are kilometres and miles away from those of the countries mentioned above.

Here is a description of the main elements of the future agreement, accompanied by comments directed at either the EU or the UK, or sometimes at both, to remind them of the other party’s constraints.

12

PART 1: AN AGREEMENT ON TRADE IN GOODS

There is great economic interdependence between the EU and the UK. Millions of workers on both sides of the English Channel depend on selling their goods to the other party. What matters here are not outdated issues such as ‘export surpluses’. For example, the EU has a large ‘export surplus’ of cars to the UK, but the British car industry exports three-quarters of its production to the EU. This is the very definition of the notion of ‘interdependence’, to which you could add the fact that nearly all of the British car industry belongs to European and other non-British companies.

If the UK leaves the EU without a viable agreement, this mutual trade will be immediately subject to the common external tariff applied by the EU and, until further notice, to an identical tariff applied by the UK to imports from the EU . This would have a disrupting effect on trade flows in several key areas. Although tariffs on manufactured goods are generally low, there are several sectors in which they are, if not prohibitive, at least costly – between five and ten percent. This is the case in particular on motor vehicles, textiles and clothing, footwear, some machinery, paper and chemicals. Even low tariffs may have a distorting effect. Agriculture and fisheries are special cases where high tariffs persist in several sectors.

Complex supply chains have been created, involving literally tens of thousands of suppliers, and the disruption of these chains would wreak havoc in many sectors. Whether this would lead to a fall in gross national product (GNP) of x% or y% is not the main issue. In the absence of a reliable econometric analysis, common sense recognises that the economic cost would be considerable (but not the kind of Armageddon promised by some). Above all, it would be completely unnecessary. The disruption of this high degree of economic interdependence can quite easily be avoided.

There has been much uninformed discussion about British access to the EU’s internal (or ‘single’) market. The confusion arises because of the word ‘access’. It goes without saying that the UK will continue to have access to the internal EU market as long as its exports continue to comply with all relevant EU legislation (such as on product standards and safety). The UK will therefore find itself in the same situation as any other third country. The only difference is that, in the absence of an agreement with the EU, it will have to pay the EU external tariff and, coincidentally, have no say in the elaboration of future EU product-relevant legislation.

There are, in terms of what is feasible under international trade rules, two solutions to this: a free trade area or a customs union between the UK and the EU. The customs union would be optimal in terms of maintaining the economic essentials of the current situation, but a free trade area is not far behind. Both are described below, but the conclusion is clear: a free trade area would save the essentials of the current situation of interdependence while handing the UK the freedom to negotiate trade agreements with other countries.

A third approach has been floated by some in the UK: the conclusion of free trade agreements in selected sectors. For the reasons explained below, this is a red herring, since it would be a non-starter in terms of World Trade Organization rules. But let’s examine all three.

13

SOLUTION 1: A FREE TRADE AREA AGREEMENT BETWEEN THE EU AND THE UK

Definition: A free trade area agreement consists of abolishing tariffs on most or all goods traded between the parties to the agreement, leaving both parties free to conclude free trade agreements with other countries.

The main advantage for both parties of a broad free trade agreement between the UK and the EU would be to avoid most of the problems associated with the creation of tariff barriers between the UK and the EU-27. It should cover all trade in goods. There is no reason to exclude any sector, since all sectors of the economies have been completely open to the other party for the past 44 years.

A free trade agreement would leave the UK at liberty to pursue other free trade agreements, something it could not do if it were to enter into a customs union with the EU (see below). A free trade agreement is therefore the optimal political outcome for the UK, and very useful for both the EU and the UK from the economic perspective. An early announcement of the desire to reach such an agreement would do much to restore confidence in the business community and avoid a negative impact on expectations.

From an EU perspective this would not be the preferred option. The EU-27 would have a greater advantage with a regime of continued preferential access to the UK market through a customs union that would maintain tariffs against third countries at their current (EU) level. This would preserve a high level of protection of the British market for agriculture and a few manufacturing sectors subject to relatively high tariffs. In terms of negotiating ping-pong the UK would then insist on continued full access to the EU market for services and demand a say with respect to future EU legislation (‘you cannot have your cake and eat it’ is, after all, an English expression).

Both sides’ requests will be rejected, and so we return to the free trade area scenario. But should this loss of privileged access to a somewhat protected UK market be of very great importance from an EU perspective? The main question is that of agriculture, where EU exports to the UK are significant, without being vital. But even if it were important for EU-27 agriculture, is it all that important?

It is, for example, unlikely that the UK will open its agricultural market to third countries to more than a limited extent, for the simple reason that full-fledged market opening (for example, to imports of meat and dairy products from New Zealand, Australia and South America) would lead to the disappearance of UK agriculture. This means that a free trade area would still be likely to maintain a substantial part of the current protection of the UK agricultural market, which is favourable to the EU even under a free trade agreement.

The main disadvantage from a UK perspective would be the likely rejection by the EU-27 of a deal covering services in general and financial services in particular. But this question is put in perspective and further examined below. Nothing in WTO rules prohibits the conclusion of free trade agreements limited to goods. Below, this paper examines an approach to services that is different and far easier to negotiate than the laborious and time-consuming approach inherent in their inclusion in a free trade agreement.

Conclusion: A free trade agreement could preserve most or even all current trade flows, avoiding economic disruption and allowing the UK to pursue its stated objective of opening the UK market to other third countries. It is unlikely to include services, which would be subject to a separate agreement (see below).

Such a free trade agreement could be negotiated within a short period, given that there would be no reason for either party to ask for any exclusions.

The complications are technical, especially those relating to rules of origin. This will be more acute in the case of a free trade area agreement than in the case of a customs union. These questions are further addressed below.

14

SOLUTION 2: A CUSTOMS UNION BETWEEN THE UK AND THE EU

Definition: The main difference between a free trade area and a customs union is that the members of a customs union apply the same external tariff to third countries. In reality the more powerful ‘senior’ member can still conclude free trade agreements with third countries, whereas the ‘junior’ member cannot.

The main advantage for both parties, as in the free trade area scenario, would be to preserve the current level of trade between the two. From an EU perspective it would provide continued access to a UK market and maintain a high level of protection in certain sectors (including agriculture, fisheries and some industrial sectors). It would create predictability for investors, but no more so than under the free trade area scenario. It would, in most respects, allow current trade relations to continue as before. This scenario could include an agreement on non-financial services and (in part?) financial services, but probably in a self-standing, sui generis deal.

The main disadvantage for the UK would be the loss of its right to autonomous action in key areas. For example, the UK would not be able to conclude free trade agreements with third countries because this would break the basic principle of a customs union – a common external tariff. So the UK would, in practical terms, remain subject to the EU common commercial policy. The EU (in apparent contradiction with what was stated immediately above) would conduct and conclude free trade negotiations with third countries, paying only lip-service to consultation with the UK and without such free trade agreements being applicable to the UK.

Conclusion: The customs union option does not appear to be viable from a UK perspective.

SOLUTION 3: FREE TRADE SECTOR AGREEMENT FOR CERTAIN INDUSTRIES

Definition: The degree of economic integration is very high in certain sectors, so the negative impact of the imposition of tariffs at the border would be significant in those sectors where tariffs are relatively high – such as the car sector. The idea of creating sectoral free trade agreements has therefore been put forward in the UK.

From a practical, political perspective such an approach would most likely founder on the diversity of interests within both parties. For example, a continued high level of integration and trade in the car industry is of manifest interest to the UK, and to some in Germany and France, but hardly at the expense of all other sectors (in these countries and other member states) that will lobby their governments hard to have their own sector covered. Any attempt to ‘cherry-pick’ will be opposed by other ‘cherry-pickers’ and lead either to a stalemate or to the conclusion that one single comprehensive free trade agreement would be easier to negotiate than one single sectoral agreement, and more advantageous to all.

From a legal perspective, it is virtually certain that the conclusion of sectoral agreements would be found to be in violation of WTO rules, which allow for the creation of free trade agreements between two parties only if they cover substantially all trade (see, for example, the WTO’s condemnation of the US-Canada ‘automobile pact’ – at the request of the EU).

Conclusion: Such an approach would not be feasible for practical, political reasons, and it would most likely be in violation of WTO rules. In other words, it is a non-starter – but is examined here to try to dissuade (British) negotiators from wasting their time on this red herring.

15

ISSUES COMMON TO BOTH THE FREE TRADE AND THE CUSTOMS UNION SCENARIOS

a) Product standards and other legislation relevant to trade in goods

The big political objective for the UK is that it wants to recover its sovereign right to legislate for its own territory. Although it is a request to which the EU cannot reasonably object, it is a problem for the EU: if no solution is found, the EU runs the risk of its market access in the UK being negatively affected by future autonomous British legislation.2

All future British exports to the EU will be subject (as they are today) to compliance with EU legislation. The same will be true in reverse: EU exports to the UK will be subject to UK laws and regulations that may, over time, diverge from those of the EU. One may expect that some or most current EU laws and regulations will be carried over into UK law, at least in the short term.

British manufacturers and exporters will naturally prefer their products to be subject to identical requirements in the EU and the UK and they will try to persuade the British government to continue to apply current and future EU standards on an ‘autonomous’ basis. The UK may do so, but it may also decide to adopt different legislation, tightening or relaxing EU product standards for its own market. In the case of a tightening of standards, EU exports would be exposed to a barrier. This is a classical problem in international trade, giving rise to the creation of a ‘non-tariff barrier’. In the case of a lowering of standards, EU exports may also be at a disadvantage compared to those from other third-country exporters or British competitors.

Much imagination will be required to resolve this future potential problem. The accent is, however, on the words ‘future’ and ‘potential’. As suggested above, it is very likely that current EU legislation will be carried over into UK law for the foreseeable future, if for no other reason than because the modification of thousands of regulations will take much time and would, presumably, only be done for a specific purpose. The question would therefore not need to be resolved immediately and it could be part of a package of issues on which agreement should be reached after the expiration of the two-year period permitted by Article 50.

One solution to this would be the creation of an obligation, binding on both parties, to accept the principle of subjecting future regulatory developments to notification and ‘consultation’. But the weakness of consultation is it often becomes an empty ritual. This could be taken a step further through an agreement of both parties to notify each other of their intention to modify relevant legislation before its adoption and to accept that such modifications become the subject of ‘consultations’ (meaning negotiations). But it is hardly acceptable to the EU for the UK to have a back-door entrance to EU decision-making, nor would a unilateral clause applicable only to British legislation be acceptable to the UK. This issue is therefore not only technical, but also deeply political.

2 An example: the EU Directive on restrictions of hazardous substances (RoHS) lays down rules on the presence of dangerous substances in various types of equipment, such as a limit of 0.1% on lead. If the UK were, in the future, to decide to tighten this limit to, say, 0.01%, the consequence would be the creation of a barrier to exports to the UK from the EU at a level that had not been negotiated between the two parties.

16

Another approach must be invented. The two parties could, for example, envisage a provision that would allow them to make a unilateral decision to exclude a whole sector or sub-sector from the free trade or customs union agreement if the other party were to adopt legislation that would render access to its market significantly more difficult in that sector or sub-sector. If limited to a sector, or even better a sub-sector, such a threat would be politically and economically credible and very dissuasive, at least for the weaker party. But the risk will most often be theoretical rather than real: in view of the overwhelming interest of British manufacturers in selling their products in the UK according to the same standards as those applicable to their exports to the EU, the problem is likely to arise only in very limited, specific circumstances. This is true for the industrial sector, but a greater risk of future conflict may arise in agriculture (on issues such as genetically-modified organisms, animal welfare or pesticides).

There is a risk of negotiations becoming bogged down in this kind of question, where issues of sovereignty conflict with commercial interests. This risk underscores the need for an inventive approach. If this proves not to be possible, at least within the next two years, both parties could agree to disagree and go back to the matter later. As suggested above, problems caused by potentially divergent product legislation are not for the immediate future, and this potential problem arises between all trading nations. Another option would be – quite simply– to ignore it.

b) Rules of origin

Questions and problems always arise when needing to determine whether goods ‘originate’ in the other party, not least because both parties will be able to conclude free trade agreements with other countries.

For example, if the UK were to conclude a free trade agreement with Japan and the EU were not to do the same, UK-based Japanese car producers would be able to import duty-free auto parts from Japan and export the finished vehicles to the EU, putting EU-based manufacturers at a disadvantage. Once again, this is a classical trade problem, debated at length but always resolved in the context of free trade agreements. For instance, the (draft) EU-Canada agreement covers this issue at record length, over more than 100 pages, paying particular attention to those sectors where the problems are likely to arise, such as automobiles, agriculture and fish. This problem would not arise in the same manner in the case of a customs union, but an agreement on what constitutes ‘good originating’ in the other party would need to be reached (and this becomes indispensable in the case of a free trade area).

There is no reason why such an agreement should not be possible between the UK and the EU, possibly even using the EU-Canada agreement as a template (in the likely case of a free trade area being the preferred option). Another approach could consist of applying the (emerging) system of pan-European origin. In any event, since this is an experts’ paradise, both parties should agree at the outset on certain basic principles and objectives to be attained by the experts. One of these should be the maintenance of (at least) the current level of mutual trade.

17

c) Other sensitive issues

There are many other issues that are of great political sensitivity and economic importance to both parties and that may become a stumbling block for the free trade area negotiations. But they are unlikely to be resolved in the short term because of the gap between fundamental principles and attitudes. For example, should or would the EU accept a high level of (continued) economic integration with the UK without the latter agreeing to adopt EU legislation in certain areas that are considered to be vital to economic competitiveness?

Some obvious cases in point: trade defence (anti-dumping, anti-subsidy) legislation applicable to imports from third countries; levels of corporate taxation; working conditions; parts of environmental legislation; rules on competition. The members of the European Economic Area have had to accept some of this, but Switzerland has not; however, as suggested at the outset, these agreements concern small economies that are in a different situation. Also, largely (but not only) because of British resistance, the acquis communautaire on tax and social policy is relatively limited.

Social legislation: Although Switzerland is hardly a workers’ paradise, no-one would expect the Swiss to have recourse to ‘social dumping’ to improve their competitiveness. But the reluctance of the UK to accept obligations on working conditions is well known. With the notable exception of the recent introduction of a minimum wage in the UK, the UK and EU-27 have been drifting ever further apart on social issues: the Working Time Directive, limiting the working week to 48 hours, was on former British prime minister David Cameron’s initial list of EU legislation that is unacceptable to the UK. The distortion of competition arising out of a relaxation of UK social legislation after Brexit would be irrelevant in the case of hospitals (to use Cameron’s example), but could be significant in industry.

Taxation: Will it be acceptable to the EU that the UK uses its level of corporate taxation to attract investment and therefore production to the UK? Even more acutely, if there were to be an agreement on financial services, would the EU accept British levels of corporate taxation of 15%, which would inevitably attract much banking activity to London, or at least maintain it there?

Dumping: Will or should the EU insist on the application of its anti-dumping and anti-subsidy measures to the UK market? It has not done so in the context of the customs union agreement with Turkey, but Turkey is not the UK: Britain has much greater economic weight and a larger market. For example, if Chinese-dumped steel exports were to eliminate British and EU producers from the UK market, this would have a clear negative impact on significant EU export interests. The UK would, however, hardly agree to the application of EU anti-dumping or subsidy measures unless it could participate in EU decision-making and legislation – and this would be unacceptable to the EU.

These are non-exhaustive examples of issues of considerable importance on which the EU and the UK have often failed to agree over the past four decades. One may reasonably ask why they should agree now, in the context of a free trade area and with the UK being excluded from participation in internal EU decision-making. But these issues are of considerable importance and, from a negotiating perspective, the situation is radically different: in the current institutional set-up, the UK has the right to veto new legislation on taxation and social policy, areas that are largely subject to unanimity. Now, in the context of the divorce proceedings, the UK will be a supplicant on financial services, among other issues. This would allow the EU to insist on a quid pro quo – such as on taxation. Only its own dissensions, with some member states (like Ireland) playing the same game of fiscal dumping and others fearing for their own fiscal sovereignty, would prevent it from doing so.

I cannot pretend to have a solution to these problems other than, perhaps, a process of give-and-take. Does this mean that overall agreement should or would be made hostage to the resolution of these thorny questions? The answer will depend on the strength of the overall EU-27 negotiating position and on each side’s tactics.

18

PART 2: AN AGREEMENT ON TRADE IN SERVICES

This is another area in which the UK has a significant interest in maintaining, to the greatest extent possible, current access to the EU. The importance of financial services is considerable. It is a major part - approximately half - of British services exports to the EU, but still only part of the story. The other half - business services, including the accountancy, legal and professional services, architects and a host of other professions - have been successful on the EU market, sometimes because of their link to the provision of financial services (meaning that if financial services are made subject to restrictions in the EU, this will drag with it a reduction in exports of related services). From a regulatory perspective financial services are subject to different approaches and rules than those applicable to non-financial services, if for no other reason than because they are very different. They are addressed separately below.

ISSUE 1: SERVICES OTHER THAN FINANCIAL SERVICES

From a British perspective, it will be important to preserve trade in services to the greatest possible extent. The income generated by trade in services provides the livelihood of hundreds of thousands of people in the City of London and beyond. From an EU perspective there is unlikely to be much opposition in principle to continued ‘free trade’ in services other than financial services, on two conditions: first, that satisfactory agreement is reached on other important issues; second, that the UK continues to abide by the rules – the EU rules. This is, of course, where problems are likely to arise.

The present degree of intra-EU services sector liberalisation has been hard-won and relies on a high degree of convergence and harmonisation of EU and national legislation, essentially through the Services Directive and associated pieces of legislation, regulation and agreements (such as rules on recognition of professional qualifications). This is, incidentally, an extraordinary achievement when you consider the starting point: more than 20 different national approaches and traditions, each considered to be better than the neighbours’.

Two approaches are possible: either the UK accepts de facto the continued application of all relevant EU services legislation, by transposing it within its national legal system, or it tries to pick-and-choose, leading to an extremely difficult and protracted negotiation that is likely to fail (and certainly one that would take several years beyond the end of the negotiations foreseen under Article 50). The EU could afford this uncertainty and waste of time: there are enough lawyers, accountants and architects in Europe to fill the gaps left by the UK. The cost to the UK would be much higher.

19

Therefore, as in the case of trade in goods, the outcome is perfectly predictable: the continued application to and by the UK of current and future EU regulation of trade in non-financial services. The problem here is not one of substance: this body of law has been common to both parties for years and has been adopted by common consent in the Council and European Parliament. The problem is rather political, legal and practical, and even more so with respect to the application to and by the UK of future changes to EU regulation. But this is the pill that the UK must swallow if it wants continued free trade in non-financial services – more poetically, it is ‘the cost of independence’.

How can this be done in practice, without appearing to put the UK in a Norway/EEA-type situation and without it appearing to be a humiliating defeat for the British government? One approach could be to include in a future EU-UK treaty the principle of continued ‘free trade’ in non-financial services, subject to an obligation for both parties to abide by rules identical in substance to those of the acquis communautaire (such as the Services Directive). This would be presented as a sovereign decision by the UK, which would undertake to apply such rules through its domestic legislation.

It would be more difficult to present an obligation for the UK to apply future changes to EU legislation since it would have no say in their elaboration and because the continued application of the principle of free movement of services would apply to the whole acquis – present and future. But this could be done in a manner comparable to the approach suggested above for legislation on goods: if either party were to change its rules in such a way as to modify the right to provide such services in a significant manner, the other party should consider aligning its own rules to those of its partner. If it did not, either party would be free to put an end to ‘free trade’ services imports in the services (sub-)sector concerned.

Let us translate this into practical terms: if the EU were to change the basic requirements regarding the profession of architects, and the UK did not do the same, either or both could stop applying the various ‘services freedoms’ to architects of the other party. Such a deterrent should suffice. Such a requirement would also include the application of future decisions by the European Court of Justice.

20

ISSUE 2: FINANCIAL SERVICES

UK exports of financial services to the EU have been presented as the main issue and potential problem. From a purely economic perspective, this exaggerates the importance of financial services exports as compared to other UK exports to the EU. It also exaggerates, in sometimes apocalyptic tones, the impact of Brexit – as if the UK’s departure would bring all exports of financial services to a halt. Of course, this is not the case.

There is no denying the positive impact of Britain’s EU membership on financial institutions in the City (with the notable exception of Lloyd’s, most large City ‘exporters’ are, incidentally and paradoxically, European, Asian or American). Nor should one underestimate their influence on the UK government. The prospects of losing more than a small part of the benefits of membership have been presented in terms of a looming disaster by some and played down by other ‘experts’, perhaps for political reasons linked to their respective positions on Brexit.

Admittedly, the issue is complex and the consequences of losing the famous ‘passport’ to provide financial services across EU borders are not clear. However, seen from a UK perspective, there clearly is a risk of losing large amounts of financial services exports. From an EU perspective, the services of the City have been useful for those who have reason to ask for them, but the EU has ample competent financial institutions and could do without the City. Indeed, some would like to see financial services providers leave the City to establish themselves in the EU.

If the British government reaches the conclusion that it must obtain an ambitious agreement on financial services with the EU, this provides the EU with a significant negotiating edge. Tactics and substance will come together, because this is the important area where interests are not shared. The EU can do without the City and, if need be, without its own exports of banking services to the UK. The reverse is not the case to the same extent, although the importance of this is often exaggerated.

From an EU perspective, any agreement on financial services could therefore be predicated on a satisfactory solution to the future free movement of people and would, in any event, not include certain activities such as euro clearing.

If agreement on the future free movement of people was reached, the UK would still have to accept the full application of EU rules to the provision of cross-border financial services without having any say in their elaboration. If this were, at least in part, to be based on the adoption of identical rules in UK law, a similar approach could be followed as the one described under non-financial services. In such a case the ultimate sanction for non-appliance of or non-compliance with EU law would be the withdrawal of export privileges to, respectively, the sector or companies concerned.

This logically leads us to the question of the free movement of people.

21

PART 3: FREE MOVEMENT OF PEOPLE

The migration question should be divided in two parts: a distinction should be made between the status of EU and UK citizens who have legally established themselves on either side of the English Channel, and those who have not (yet) done so.

ISSUE 1: EU CITIZENS ALREADY RESIDING IN THE UK ON A GIVEN DATE (SUCH AS THE DATE OF THE ARTICLE 50 NOTIFICATION)

The outcome of the negotiations on this question will, paradoxically to some, be the easiest of all. It will either be an unqualified ‘yes’ to the preservation of existing rights for those who have already moved, or, if it is ‘no’, the negotiations on other issues will come to a halt. It is therefore not a ‘negotiating card’ as suggested by some in the UK. Far from it, it is rather like the proverbial albatross around the neck of the British government. It can satisfy the wishes of the xenophobes (but do they really want to deport EU citizens? If so, which ones? German doctors? Polish plumbers? French financial traders? Are we really back in a 1940s-type atmosphere?) or it can accept that this is not a question for negotiation, that only one outcome is possible, and that the very notion of deporting legally-established citizens is beyond the pale.

There can therefore be no doubt about what will constitute the basic principles of an agreement acceptable to the EU-27 with respect to its citizens already resident in the UK: a formal, legally-binding, unqualified recognition of their continued ‘national treatment’ in and by the UK, as afforded by present EU rights and obligations. The same would, of course, apply to UK citizens resident in the EU-27.

This will be a precondition. In the absence of such an agreement, no other important issue can be resolved: it is a potential deal-breaker. The British government needs to explain this ‘blindingly obvious’ fact to its citizens. If this is not understood and accepted, one would be better off without an agreement on anything else.

One or the other party can, of course, decide to play a tactical game on this point, but this would be counterproductive. It would sour the atmosphere, for no reason, since the ultimate outcome is inevitable unless the UK decides to strike out on its own without an agreement on the other issues addressed in this paper.

Since the UK would wish to preserve the interests of around a million British citizens resident in the EU-27 (and retain the EU-27 citizens in the UK who have become essential to the functioning of whole sectors), a strong case can be made for early statements by the UK and the EU-27 that they will aim for an agreement on existing migrants as suggested above.

Such a move would clear the atmosphere and take some of the sting out of anti-Brexit reactions in the EU-27. It would also open the possibility of successfully negotiating other important issues. Last, and most importantly, it would be a merited relief for the millions of migrants who have settled in good faith on both sides of the English Channel, expecting the respective government to continue to abide by the law (in this case, the EU treaties and national implementing legislation).

22

ISSUE 2: THE FUTURE MOVEMENT OF PEOPLE

It is worth repeating and insisting that free movement of people is one of the cornerstones of the EU and one of its main achievements. Its importance is both highly symbolic and practical. It goes hand-in-hand with the prohibition of all forms of discrimination between EU citizens based on nationality. It is therefore perfectly normal for the EU to insist on Britain maintaining free movement and the principle of non-discrimination regarding EU citizens. On the other hand it is fear and dislike of foreigners that has been a driving force behind the Brexit vote. The British government cannot ignore this. It has the choice between giving in to such feelings, and paying the consequences, or playing for time and finding a way out that would be satisfactory to the EU without alienating part of its own population. This is, incidentally, what the Swiss government has just done, apparently with success, with respect to future migration.

If the British government chose to pursue such an approach, time will be needed to find a solution to the question of future freedom of movement. The ball is in the British government’s court. From an EU-27 perspective, should continued free movement be made a prerequisite? Should the EU insist on its citizens being allowed to move freely to a country where many do not want them, or where the government would discriminate by welcoming French nuclear experts but rejecting Polish waiters?

Here are some options that could be envisaged:

A. In the absence of future free movement of people the EU refuses any accommodation on financial services, and perhaps even on all services. The UK then imposes some form of immigration and establishment control on EU citizens for future movement. The EU adopts similar measures by way of retaliation. After a certain time, the nonsensical nature of this situation becomes apparent to all but the most die-hard xenophobes and an agreement is reached which brings us back, in substance, to free movement.

B. The UK decides to follow Switzerland and play with words, proposing a safeguard system that would be triggered only if movements of people were to take place suddenly at a genuinely high level. This could perhaps be satisfactory to the EU in terms of substance, but not symbolically: the EU would limit any concessions on financial services to a minimum. From a British perspective, it is also possible that such a safeguard system would not satisfy Europhobes inside or outside the government.

CONCLUSION

First, the most important issue has been resolved – the future full ‘national treatment’ for the five million people who have already settled on either side of the English Channel. This is because such a deal is a precondition for agreement on anything else.

Second, once the UK is no longer a member of the EU the highly symbolic character and value of free movement of people no longer applies to the sheep that has decided to leave the EU flock. After all, there is no free movement of people between the EU and Turkey, who have been part of a customs union for many years. It is true that there is free movement of people between the EU, Switzerland and the EEA, but these are countries whose citizens’ ‘European character’ has never been in doubt. This is not the case for some or even many UK citizens (while others are as European in outlook as any in the EU). At the moment, more insular forces are winning. But the wheel of history is constantly turning. To paraphrase Churchill, common sense will prevail once all other options have been exhausted. But this is likely to take some time.

23

PART 4: TRADE ISSUES OF PARTICULAR IMPORTANCE TO

THE UK

The following questions are part of current discussions in the UK, and so an attempt is made to present them from a British perspective and on the assumption that the EU would have no objection to any of the approaches outlined below.

ISSUE 1: EXISTING FREE TRADE AGREEMENTS

What follows is predicated on the assumption that the UK will wish to conclude a free trade area agreement with the EU. Only in that case, or if it ‘leaves completely’, will the UK be at liberty to negotiate and conclude free trade agreements with other countries.

Once the UK has left, it will no longer be party to the various free trade agreements concluded by the EU. This will be the case whether the future relations between the two are based on a free trade area agreement or a customs union. Since the prevailing philosophy in London is currently to seek the greatest market opening possible, much discussion has taken place regarding the possibility of the UK ‘taking over’ existing free trade agreements. The issue has been over-simplified by Brexiteers and over-complicated by Remainers.

On this issue the Brexiteers are closer to reality, while missing a key point: they argue that since EU member states, including the UK, are co-signatories to EU trade agreements, this means that these agreements would continue to apply to the UK and the third country concerned after Brexit. Reality is a little more complicated, but not excessively so. In each case the UK would need to obtain the consent of the third country concerned to leave the EU-based agreement and to enter into a new agreement – essentially identical in substance – between the UK and the third country. It is difficult to imagine why a third country would object for reasons of substance (although the Norwegian government has already stated its opposition to the UK joining the European Free Trade Association, as Britain would carry too much weight).

Practical problems will arise where such agreements contain quotas on agricultural products or other quantitative limitations, such as in the context of rules of origin. If common sense were to apply, such quotas would be divided between the EU and the UK based on current trade flows. This approach should satisfy the third country concerned. From a formal perspective this would lead to a new free trade agreement being concluded between the UK and the third country concerned, which would then be notified to the WTO. Since this would take more time than suggested in this brief paragraph, it would be necessary to conclude an agreement on the temporary application of the status quo between the two parties.

One particular problem will exist with respect to Turkey, a country with which the EU has an incomplete customs union. It is difficult to see the UK wishing to enter into a customs union with Turkey. A simple alternative would be to transform its main provisions into a free trade area agreement, but this would take some time.

In the short term it will be necessary to foresee a number of temporary agreements, but this is perfectly possible and well known in terms of international trade relations.

24

ISSUE 2: NEW TRADE AGREEMENTS

The EU-Canada agreement may be ratified before the UK leaves the EU, in which case the simple procedure outlined above could apply. If it is not ratified in time, it would be perfectly possible for the UK and Canada to use it as a template and essentially create a copy-paste bilateral agreement between the two.

Brexiteers argue that the UK will be much more successful in negotiating international agreements because the EU is held back by various sectoral interests – whether defensive or offensive. In the real world the UK, now on its own, will have its own constraints and defensive and offensive interests. It will discover that ‘free trade’ is easier to say than to do. For example, it is true that the EU has been, and remains, reluctant to open its market in ‘sensitive’ agricultural sectors. This is likely also to dawn on the British government once the impact on British agriculture of free trade with certain third countries had been understood.

In the ‘newly-independent’ UK, the farming sector depends, as in France, on EU subsidies for 30% to 40% of its income and to a substantial extent (more than 25%) on the high level of EU tariffs on meat and dairy. The British government has promised to take over the payment of EU subsidies until 2020, but what happens beyond that point? In any event, if the livestock and dairy sectors are exposed through full free trade agreements to international competition from New Zealand and Australia, the first two countries on the Brexiteers’ wish list, not to speak of South America (Mercosur) and the US, those sectors are likely to disappear. This will be a difficult political decision unless, of course, the UK decides to be less generous with its market opening in those sectors. This, in turn, raises the question of the future shape of British agricultural policy: a new regime will have to be invented since the much-derided common agricultural policy will no longer apply; it will also have to be negotiated internally, since Scotland, Wales and Northern Ireland have significant devolved powers over agriculture.

The mirage of multiple trade agreements will be less easy to achieve than expected by some – and this is without mentioning the shortage of experienced negotiators.

ISSUE 3: OTHER TRADE AGREEMENTS OR DECISIONS

The EU has unilaterally adopted preferential arrangements in favour of developing countries such as the Generalised System of Preferences (GSP) and ‘Everything but Arms’ (totally free imports from the least developed countries). These agreements or decisions would presumably be taken over by the UK on an autonomous basis.

This will be quite simple to do with respect to the elimination of tariffs and quotas on imports from the least developed countries under the ‘Everything but Arms’ decision. The UK could simply decide to make an identical commitment and apply it. But the question of the GSP is a little more complicated. The UK would presumably decide to ‘take it over’ in terms of future British trade policy, and nobody could object. But the GSP requires expert staff for its often-difficult administration.

Some existing EU trade agreements with developing countries are quite straightforward and therefore potentially easy to take over. Others, including existing EU agreements with the countries of Africa, the Caribbean and the Pacific (ACP), present more problems because of their complexity and the controversy that has surrounded them. The UK would also have to decide whether to take over all such agreements, or to limit them to former British colonies.

25

PART 5: OTHER ISSUES: A NON-EXHAUSTIVE LIST

There is, of course, a host of other issues that will need to be addressed and resolved. What they have in common is that they can be made subject to interim, provisional agreements until more complex issues have been resolved.

Fisheries: The UK will leave the common fisheries policy but fish do not respect maritime borders. There would be a mutual interest in pursuing cooperation and common rules on the management of fish stocks to avoid their disappearance. British fishermen share with their colleagues in the EU a strong dislike of the common fisheries policy. They blame it, and in particular foreign access to British waters, for the disappearance of fish stocks. (Interestingly, the same argument is used in other member states, following the well-worn principle of ‘blame the foreigner’.)

Britain has only 13% of the EU’s total sea area but is allocated 30% of the total quota. British trawlers fish in Irish, German, French and Dutch waters with significant success, much to the chagrin of fishermen from those countries. The UK exports large quantities of fish and fish products that could be put in danger if tariffs were to be re-established at the relatively high level applicable to fish. Would either of the two parties wish to revert to former restrictions on mutual access to fishing waters? This would presumably lead to the exclusion of fish from any free trade area agreement.

To maintain free trade, there would need to be a bilateral agreement on mutual access to fishing waters and on the conservation of stocks. If not, the clock would be rolled back to 1973.

Public procurement: There will be mutual interest in preserving free access to public procurement procedures and contracts, without discrimination. This is one of several examples where the UK would have to adopt national legislation identical to that of the EU. As in the case of services, either party would be free to withdraw from the agreement if the other party did not live up to its obligations in terms of implementation, or modified its legislation in a manner judged to be restrictive.

Environment: There are two categories of issues regarding the environment: EU legislation on the protection of the environment as such; and product-specific legislation. On the former, a substantial body of law has been adopted over the years, often with the purpose of circumventing national opposition by adopting difficult decisions at the European level. Examples include the quality of air, water and soil, and marine pollution. Maintaining some of this would be of future, mutual interest, or at least to the EU, including the question of trans-border air and maritime pollution, where the UK has had to reduce the levels of emissions of pollutants from coal-fired power stations. Such issues, of a trans-border character, would presumably be part of the EU-27’s demands. This would leave the UK free to decide on the remainder and it would need to decide (as it would in many other areas) which parts of the acquis it would wish to maintain through its continued application in UK law.

26

The second category concerns environment legislation that is product-specific, for example the Directives on restrictions of hazardous substances (RoHS) and on waste electrical and electronic equipment (WEEE), and the REACH chemicals legislation. Another example is that of car emissions and safety standards. All product-specific obligations would continue to apply to UK exports to the EU. It would, in theory, be up to the UK to decide whether it wants to adopt similar or identical legislation at a national level. Manufacturers are likely to want to comply with EU legislation even for the sales in the UK, preferring to work to one single product standard. But problems would arise if the UK were to adopt different standards (see the sections on trade, above).

Climate change, Emissions Trading System (ETS) and CO2 objectives: The UK will remain bound by current objectives and by the Emission Trading System (ETS) up to the point of exit. The question of the ETS is, in part, quite easy: the current ETS will expire in 2020 but it will be necessary to find a solution to the question of rights and obligations regarding CO2 certificates during what is likely to be a transitional period. This is potentially very complicated, but manageable. Less obvious is the question of the strong desire of many in the UK and the EU-27 to establish predictable, binding obligations to reach certain CO2 reduction targets by 2030. The UK will have to do so on an autonomous basis, and a start has already been made with the creation of a gradually-rising CO2 levy.

Energy: EU energy policy is based on a series of directives that have opened up the EU market to competition. There are also rules and guidelines on public support. The results are controversial and, in any event, not those that were expected. The basic question will be whether the two parties will wish to preserve the free flow of electricity and gas and on what conditions. From an EU-27 perspective, this would hardly be acceptable without the UK applying the EU acquis in this area. The UK may wish to leave the common energy policy. This would, at least in theory, expose it to the risk of obstacles being created to exports of electricity to the EU. A further factor to be borne in mind is that a significant part of electricity produced in the UK is made by EU-27 companies, which will have their own objectives.

Transport: The main problems will be the question of continued mutual free access for land and air transport carriers, the latter arguably more in the interest of the UK than of the EU-27. Once again, a solution may be found based on bilateral agreements, by virtue of which the UK would, as in other cases mentioned above, apply the EU acquis on an autonomous basis. But the EU is likely to seize this opportunity to insist on a solution to its concerns about social and tax ‘dumping’ by UK carriers.

Competition policy: The UK would be less directly subject to the common competition policy, but it should be noted that EU competition policy is applied with extraterritorial effect whenever a restraint on or distortion of competition occurs with a significant effect on the EU market. This will continue. The main question is what will happen to existing EU decisions on competition and their application to the UK after Brexit?

Telecommunications: The UK would no longer be subject to the EU acquis on issues such as free competition and the abolition of roaming fees. It would presumably wish to negotiate a reciprocal access agreement but the EU would insist on the application of its high level of competition on the UK market (once again putting in question the idea of British autonomy).

27

Development aid: A significant part of total European development aid is financed through of the EU budget and administered by the Commission. This is based on multiannual commitments and development aid projects. If the date of UK departure were not to coincide with the end of current programming, this would presumably lead to an agreement on time-limited continued participation in the financing of such programmes. The more important issue concerns the question of what happens next, once the UK had completely left. The UK could, for example, decide that its own development aid programmes take over what would no longer be done by the EU. If the UK were to give preference to its former colonies, it would lead to a reorientation of the geographical distribution of total European aid and it would require a substantial increase in human resources in the UK and in the beneficiary countries to manage such aid.

Intellectual property: This heading covers a multitude of very different intellectual property rights, which in turn are protected by a variety of EU and member state laws.

For example, the European trade mark legislation and Office provides pan-European protection for trademark owners. Would current rights cease to apply to the UK market after Brexit? If so, what could be done to fill the gap? If current rights were to continue to apply, would the European Court of Justice still have jurisdiction over the UK market? Under the Unified Patent Convention (UPC) patent conflicts will be judged by specialised judicial bodies established in three member states. The UK was meant to receive one of these bodies to adjudicate on pharmaceutical patent conflicts. The UK could, pragmatically, decide to continue to be a member of the UPC and to abide by decisions made in Paris and other parts of the EU. The EU Directive on the enforcement of intellectual property rights, and its future revision, is of major importance to the unified implementation of IP rights across the EU. Will or should the UK continue to apply the provisions of this Directive, including its future revision, which will presumably be concluded after its departure?

This is an experts’ paradise. Even worse, each IP right has its own experts, so negotiators need to agree on general principles and general objectives. For example, would it not make sense to aim for the continued highest level of convergence between our respective IP regimes, across the board?

Budgetary questions: Budgetary questions will always be difficult. Pending the presentation of a first British proposal on all Brexit issues, this seems to have become the issue on which the EU-27, for want of anything better, have been spending their time. This is somewhat paradoxical, since budgetary issues are by far the least important: They only concern a tiny fraction of respective national incomes but they, inevitably, become a matter of conflict between ministers of finance. They should be left to the ministers of finance to fight over on the understanding that no agreement will be reached until the last moment of the negotiations, and that money matters should not be allowed to hold up the negotiations on the far more important issues analysed above. In practice, the negotiators would be well advised to focus on the search for mutually-acceptable principles and methods of calculating the budgetary aspects of the divorce proceedings, leaving their quantification to the end.

28

Rue de la Science 4, 1000 Brussels, Belgium

Tel: +32 2 300 28 16 Fax: +32 2 893 9829

info@friendsofeurope.org friendsofeurope.org