The progress of the UK’s negotiations on EU withdrawal (June to September 2018) Contents

Conclusions and recommendations

Introduction

1.We welcome the fact that the Government has published a White Paper that sets out a more detailed vision of the future EU-UK relationship. However, we note that this came 26 months after the EU Referendum and 17 months after the Government triggered Article 50, and we regret that the White Paper was not published sooner. We have heard from all sides that the Political Declaration on the Framework for the Future Relationship, which will be informed by the Government’s White Paper, should be detailed, but there are not many weeks remaining for negotiators to address the detail of the Government’s proposals. We note that Michel Barnier said he was ready to negotiate the Political Declaration. (Paragraph 8)

2.The White Paper includes the Government’s objectives for the future EU-UK internal and external security relationships. These include the UK’s participation in cross-border data sharing agreements, continued cooperation with the EU’s law enforcement and criminal justice agencies, and the UK’s place in Europe’s foreign policy and defence architecture. We were encouraged to hear from Michel Barnier that there is a great deal of convergence and agreement between the two sides on the White Paper’s chapters on security. These matters are of paramount importance to the safety and security of the people of the UK and the European Union. We note that in recent months, the Home Affairs Select Committee and the House of Lords’ EU Select Committee have considered these issues in wide ranging reports. (Paragraph 9)

Withdrawal Agreement and remaining issues

3.Negotiators have agreed that there must be a backstop option in the Withdrawal Agreement to protect an open trade border on the island of Ireland, otherwise there can be no deal. We welcome the fact that the European Commission has said that it has no objection to a UK-wide backstop “in principle”. This is the only approach that will prevent an economic border from being drawn in the Irish Sea which would not be acceptable. However, time is running out and therefore the European Commission must show more flexibility and a willingness to work with the Government to find a practical solution. (Paragraph 23)

4.In the Joint Report of December 2017, the Government accepted responsibility for proposing specific solutions to address the unique circumstances of the island of Ireland, and while we welcome the Government’s publication of its own backstop proposal it is becoming a matter of serious concern to us that it is not complete. It does not explain how regulatory checks—which are more onerous than those that relate to VAT, excise or tariffs—would be eliminated, and it does not explain fully how a backstop, which must meet the objectives in the December 2017 Joint Report, can be “time limited”. Without a workable backstop proposal to solve the Irish border question there will be no Withdrawal Agreement. As a matter of urgency, the Government must set out clearly how it intends to eliminate regulatory checks at the border and how the backstop might be time limited when, by definition, it would need to remain in place until such time as an alternative arrangement that would achieve the same outcome could be implemented. (Paragraph 24)

5.The Government has not set out the full extent of the rules that are necessary to maintain North-South cooperation on the island of Ireland, which have been scoped in a joint mapping exercise between the Government and the European Commission. We note that the exercise is subject to ongoing negotiations, but we were told in April that the Government was hopeful that these would be concluded “soon”. We call on both sides to conclude these negotiations and to provide the results of the mapping exercise to us as soon as possible. (Paragraph 25)

6.We think it is essential that the joint commitment to avoid a hard border in the Withdrawal Agreement is reflected in the Political Declaration and ensured in the future relationship. (Paragraph 26)

7.Since our last report on the progress of the negotiations in May 2018, we have not seen any progress between the two sides on agreeing how disputes over the provisions in the Withdrawal Agreement should be settled. We acknowledge that the European Union will wish to preserve the autonomy of the CJEU to interpret EU law, but it should recognise that the Withdrawal Agreement is a deal between two sides. In August 2017, the Government set out a range of possible dispute settlement mechanisms and models of arbitration that are common in international agreements, but it did not declare which one it preferred. We repeat our recommendation from our May 2018 report that the Government set out its preferred arrangement for dispute resolution. (Paragraph 33)

8.There has been renewed debate in the UK on the prospect of the UK leaving the European Union without a Withdrawal Agreement. It is in the interests of both sides to successfully conclude negotiations on the Withdrawal Agreement, so that the 21-month transition/implementation period is secured, and that certainty is provided for citizens and businesses in the European Union and the UK. It is clear that there would be significant consequences for the UK and the European Union from a no deal outcome. We remain of the view that this would be chaotic and damaging for the UK economy and would leave many businesses facing huge uncertainty. (Paragraph 44)

9.In many areas, the Government’s no deal contingency planning rests on the European Union taking reciprocal action to minimise harm. This assumes that, if no deal is reached, there would be sufficient goodwill between the two sides that specific sectoral agreements could still be reached to minimise damage to the UK and EU economies. When we met Michel Barnier, he ruled this out and we would ask the Government to respond to his statement. Furthermore, even if both sides wanted to work together to find ways to mitigate the worst effects, it is far from clear that there would be enough time to negotiate, agree and implement any sectoral deals before the UK leaves the European Union at the end of March 2019. The Government has said that further technical notices will be published throughout September. We will take further evidence on these and the effects of a potential no deal exit from the European Union. We think it particularly important that there should be a notice covering the Irish border issue. We also call upon the Government to publish the country by country assessments on EU member states’ economic interests that the Department has undertaken. (Paragraph 45)

Future EU-UK economic relationship

10.The Government’s proposal for a Facilitated Customs Arrangement, and its associated common rulebook for goods, is integral to its vision for the future EU-UK economic relationship. However, the European Commission has made it clear that they regard the proposal as unworkable, saying that it would create legal problems, involve unacceptable cost and bureaucracy and call into question the integrity of the Single Market. (Paragraph 54)

11.The European Commission has now indicated that the Chequers proposals for a Facilitated Customs Arrangement and a common rulebook are not viable and if this remains the position then the Government will need to adapt its approach to the future EU-UK economic relationship. The Commission is proposing a CETA-style Free Trade Agreement, but we note that this would not, on its own, ensure the type of friction-free trade that many companies with just-in-time supply chains need. Moreover, the Government has not yet set out how it would maintain an open border between the Republic of Ireland and Northern Ireland in this scenario without imposing customs and regulatory checks. (Paragraph 63)

12.Achieving the Government’s stated objectives of maintaining friction free trade in goods and keeping an open border on the island of Ireland will require a much greater degree of customs and regulatory co-operation than that which is contained in CETA. We note that Michel Barnier has said that customs and regulatory cooperation would be possible in the context of a ‘CETA-like’ arrangement, but work to show whether this could in fact achieve frictionless trade would need to begin immediately rather than continuing with the Chequers proposals. The alternative ways for the UK to retain friction free trade with the European Union and to solve issues relating to the Northern Ireland/Republic of Ireland border would be either in an EU-UK Customs Union, combined with continued alignment on relevant EU rules, or through EEA membership together with a customs union. We note that neither of these options are Government policy. (Paragraph 64)

13.The Government has said that there will be significant opportunities for the UK’s service sector from the UK securing trade deals with non-EU countries. However, any increase in trade that is gained outside the European Union will need to compensate for any reduction in trade caused by the new barriers to Single Market access for UK businesses. We note that the effect of diverging from EU regulations and standards will have different effects on different sectors, and that it will be up to a future Parliament to decide on whether to deviate. Witnesses from some of the UK’s most successful service sectors, for example broadcasting, told us that they were sceptical that opportunities to trade elsewhere would make up for the significant loss that they believed the Government’s proposals would entail. (Paragraph 65)

14.Reaching a Withdrawal Agreement must be linked to obtaining a satisfactory Political Declaration on the framework for future EU-UK relations. The Secretary of State has indicated that the financial settlement should depend on achieving this outcome. He said that there are different ways “to give effect to the principle of conditionality”, including by making “explicit reference in the withdrawal agreement to the political declaration.” We note that Michel Barnier has also said that “there might be a link between the Withdrawal Agreement and the Political Declaration” and call on the Government to include any such link, if agreed, in the Withdrawal Agreement and Implementation Bill. (Paragraph 66)

15.The White Paper sets out a model for the future EU-UK financial services relationship that is based on an enhanced version of the EU’s third country equivalency regime. Michel Barnier has said that there are already improvements underway to the European Union’s equivalency regime. The UK Government’s use of the term enhanced equivalence may not be too distant from the European Union’s suggestion of improved equivalence. However the existing equivalence regime clearly has its limitations, as it does not cover all parts of the financial services sector, would require the UK to be a rule taker, and can be withdrawn unilaterally by the European Union at any time. While we note that enhanced equivalence is an ambitious goal, we agree with the Government that it is a pragmatic negotiating objective, given the contribution that the financial services sector makes to the UK economy and its importance to the economies of our trading partners in the European Union. (Paragraph 73)

Conclusion

16.While the European Union has stressed that the Government’s White Paper contained a number of areas of convergence between the UK and the European Union, it has stated that the main components of the Government’s vision for the future EU-UK economic relationship are not acceptable. We do not see how the Government’s proposals on the common rulebook for goods and the Facilitated Customs Arrangements can remain as currently proposed given the European Union’s fundamental objections. Nevertheless, the Secretary of State has said that discussions on these will continue. If, however, agreement cannot be reached on the basis of the current proposals, the Government will have to find an alternative approach to the future EU-UK economic relationship. (Paragraph 74)

17.The differences between the two sides on the future economic relationship are significant but formal negotiations on the future EU-UK relationship will not start until after the UK has withdrawn from the European Union on 29 March 2019. While Parliament will want to see a detailed Political Declaration, with clarity on the shape of the future economic relationship including customs, trade and services, the Government’s urgent priority must be to secure a Withdrawal Agreement. This would provide much needed certainty to citizens and businesses in the UK and the European Union, including the transition/implementation period up to the end of December 2020. We welcome commitments from both sides to negotiate “continuously” to meet this objective. Agreeing the terms of the “backstop” to prevent a hard border in Ireland remains the biggest obstacle to securing a Withdrawal Agreement. (Paragraph 75)





Published: 18 September 2018