UK: A customized post-Brexit agreement or a dead end?

The British public and many across the world who wish well for the Island nation are becoming more confused by the day at the pace of Brexit negotiations and what has or has not been agreed with the EU. For something as important as the decision to exit the European family with huge implications for the UK’s foreign and domestic economy for generations to come, the decisions made are no laughing matters. British Prime Minister Theresa May has presented her updated vision for Brexit to her ever more divided cabinet colleagues in which some of the major internal Brexit-related knots came to the front but left us no wiser on whether her colleagues stood shoulder to shoulder in the negotiations with Brussels.

May publicly acknowledged that the UK is seeking a transition period, in order to avoid a "cliff edge." While the British government seemed to be aiming for a two-year transition, some believe that May prefers a longer hiatus of three years, which would give her enough time to prepare for elections, to be held on their scheduled date, in 2022 and if this is the case then the UK is aiming for a final deal that will look like an Association Agreement (i.e. EU/Ukraine) but that will not be called so for obvious political reasons. The EU usually operates with “models” for international agreement, but the UK government is determined to have its own unique relationship. And then there was the ‘Macron’ effect.

French President Macron met Prime Minister May to discuss bilateral issues unrelated to the UK exit from the EU such as military, security and cultural cooperation. But Macron used a press conference to insist that continued full access to the EU’s single market required accepting the bloc’s rules. Macron may have also raised hopes for Britain’s post-Brexit relations with the European Union, saying the U.K. will likely end up with something “between full access and a trade agreement. However in a pointed reference, Macron said access for financial-service companies also required accepting the obligations, but said he didn’t want to “unplug” London’s financial sector from the EU. ‘It doesn’t make sense, because it’s part of the whole financing of our European Union’. This is sweet language for the UK with the economy so much dependent on the financial sector and also for Gulf financial institutions with links to London.

Businesses and Brexit realists like Philip Hammond want in, for the sake of the economy and a solution to the Irish border; Brexiteers want out. Some want a deal that might cover goods but not services. Some want a trade deal that would include the EU’s best part of the agreements with Japan , Canada and South Korea along with financial services not covered by these agreements . What the government wants is now anyone’s guess. For a good measure enter Nigel Farage, the UKIP champion of Brexit who has now said that maybe the British public need to have another referendum to once again express their willingness to exit the EU but few are willing to go this way again and face public anger.

Divorce talks

On the plus side, concerns about EU citizens’ net migration to the UK have vastly subsided with numbers falling dramatically from 327,000 to 246,000 a year, which has lifted some of the pressure on May to fully “close the borders.” Third countries, with which the EU has trade deals, are overwhelmingly in favour of keeping the status quo during a transition period, which the British government seems oriented now to request. That would also give the UK more time to negotiate FTAs with such third countries later on, a task that itself will not be easy. During May’s visit to India, for instance, President Narendra Modi made it clear the Indian government would request a further 40,000 immigration visas for Indian citizens to the UK as a price for a bilateral FTA.

Both the EU and the UK are well aware that a simple Free Trade Agreement would not be broad enough to cover all the desired fields of future cooperation between the two parties. May has – while offering up an opening 20 billion Euro bid to the EU - given instructions to UK negotiators to stick to their guns in refusing concessions on at least part of the so-called “Brexit bill.”

Despite the press focus on the perceived lack of any progress in negotiations, some progress has been achieved in the main chapters of the so-called “divorce talks,” the ones the EU sees as key conditions for future trade negotiations. For one, both sides are closer to settling the status of EU citizens in Britain, and UK citizens in the EU, with some progress made specifically on social security coordination and healthcare. One of the remaining sticking points is the UK demand that the approximately 3 million EU citizen living in the UK apply for residency on an individual basis (even when members of the same family), while the EU side advocates a collective approach whereby EU citizens with rights in the UK are identified and their rights are recognized. And a suggestion has finally been made by the EU for solving the Northern Ireland issue, namely the extension of a customs union and the single market to Northern Ireland in order to avoid a hard border on land. EU officials acknowledge this is politically unacceptable for the UK side, but at least it is a start.

All in all, while negotiations will be complex and exhausting, chances that any of the two parties will walk away are minimal, despite a war of words between Britain’s Brexit Secretary Davis and EU Chief negotiator Barnier, and many believe chances of a disruptive cliff edge - a gap between the end of the transition period and the entry into force of the FTA - are very slim. The key for Brexit watchers is what is taking place amongst UK politicians, especially the ruling Conservative party. Party rebels Anna Soubry and Ken Clarke reiterated their position to keep Britain in while Amber Rudd weighed in that a customs arrangement was “an alternative”. Finally, the besieged Prime Ministers office said that the UK would not be a member of either “the” or “a” customs union, but would seek a “highly streamlined customs arrangement” or a “new customs partnership”. So, is a custom-made Brexit on the way?

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Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co-author of ‘OPEC in a Post Shale world – where to next?’. His latest book is on Saudi Aramco 2030: Post IPO challenges.