On July 11, the Chamber hosted the EU’s lead Brexit negotiator, Michel Barnier, for a public address and an open Q&A session. Though Barnier revealed relatively few new insights as he talked about the state of Brexit negotiations, he used the opportunity to urge U.S. companies and investors to prepare for all possible contingencies.
Barnier also used the Chamber platform to underscore the need to deepen U.S.-EU commercial ties, and to move beyond the current transatlantic trade tensions. As he underlined, “our companies and our citizens benefit tremendously when we work better together.” He reminded the audience that the EU has either concluded or is actively negotiating an FTA with essentially every major market except the United States (or China).
Barnier’s Key Messages
- The UK and EU have agreed on 80% of the legal text for the withdrawal agreement, but the remaining 20% will be far more difficult. The Irish border issue is still the thorniest issue, along with the mechanism for settling future legal disputes (an issue because the UK wants to avoid European Court of Justice oversight). Recall that the “status quo” transition period (from Brexit Day March 29, 2019 to the end of 2020) is contingent on a final withdrawal agreement. Absent that, companies will face substantial costs and disruptions as the UK crashes out of the EU.
- Businesses should prepare now for all possible Brexit outcomes, including a potential (disastrous) “no deal” scenario. The Europeans will carefully consider the latest UK proposals on an Irish border solution and the outlines of a future relationship. But Brussels will not accept UK proposals wholesale (indeed, they’ve already rejected the latest Irish border proposal), and it’s not clear there is a compromise deal that Theresa May can sell back home.
- The EU does not want to punish the UK, but cannot accept a deal that leaves the UK in a more favorable position once it exits the EU. Brussels wants a robust FTA with the UK, coupled with robust security and defense cooperation. They will not allow the UK to retain the benefits of remaining in the Single Market (for goods or services) without accepting the responsibilities, including free movement of labor (a red line for the UK).
- The U.S. and EU are stronger together and need to find a way back to a positive trade agenda. Even post-Brexit, the EU will remain our largest trading partner and source of FDI. Barnier pushed back on the Trump Administration’s singular focus on the $151 billion bilateral deficit in goods trade, noting the $50 billion U.S. surplus in services and the 100 billion euro surplus on income earned by American companies invested in the EU.
Last week, London released a 100+ page White Paper outlining its specific proposals for the future UK-EU commercial relationship. As anticipated, the package will be a very difficult sell in the EU.
For example, the White Paper includes the controversial and complicated “Customs Partnership” proposal by which companies would pay both EU and UK tariffs at the border, and request a refund depending on the final destination of the product. The EU, several businesses, and even parts of the UK government have acknowledged the tracking and tracing requirements involved are highly complicated and perhaps even technologically impossible.
The UK also wants to be considered on relatively equal footing when it comes to reviewing new EU regulatory rules for goods, and to be allowed to selectively diverge in the future. There is no way the EU would be willing to countenance any third country to have that sort of oversight over Single Market rules and regulations.
The question is whether Brussels will reject the proposals outright or acknowledge the good faith effort that the UK has put forward. That would indicate a willingness to use the British proposal as a starting point for discussion. Thus far, they have defaulted to the former approach, but recognizing the perilous political situation in London, they may opt to demonstrate more flexibility at this crucial juncture. May’s political future may depend on that flexibility.
Barring any unforeseen breakthroughs, the target for “political agreement” on the withdrawal terms and the framework for the future relationship remains the European Council summit in October. That would still provide enough time, for both the British and European Parliaments to ratify the withdrawal agreement ahead of the March 2019 deadline.