UK-EU relations after Brexit Contents

Chapter 3: The benefits and costs of the new relationship

No ‘free lunch’

25.Underlying the development of the Government’s position is a growing acknowledgement that, in the words of the economist Milton Friedman, “there ain’t no such thing as a free lunch”: the benefits that the UK seeks from its new relationship with the EU will come at a cost, whether financial or political.

26.So rather than focusing on red lines, a more fruitful approach to the negotiations might be for the Government to start by identifying the benefits that could accrue to the UK by virtue of a new relationship with the EU, and then to make a credible assessment of the costs and compromises that will be needed to achieve them. This could also be expressed in a graph, but one which, unlike the Commission’s ‘Stairway to Brexit’, has an upward trajectory (see Figure 2).

27.Figure 2 over-simplifies the UK’s position, and excludes the EU’s position altogether. Nevertheless, it illustrates a middle ground, where, if pragmatic compromises are made on both sides, agreement may be possible. That middle ground is a continuum, not a series of abrupt steps, so while it incorporates existing models for the EU’s relations with third countries, such as the EFTA/EEA ‘Norway model’, other models could in principle be proposed. The figure also demonstrates the opposite extremes of what Joe Owen, drawing on the Prime Minister’s Mansion House speech, characterised as “Norway-style access with Canada-style obligations” (the UK’s initial objective) and “Norway style obligations but with Canada-style access” (the EU’s riposte).21 Both fall well outside the area where compromise is feasible.

Figure 2: The future UK-EU relationship: benefits and compromises

Graphic showing future relationship benefits and compromises as a continuum

Uncontested benefits

28.The most obvious and least contested benefits that both sides could achieve as part of the new relationship can be summarised under four broad headings.

Free trade in goods

29.As we noted in our report on Brexit: trade in goods, trade in goods still makes up the majority of UK trade, accounting for 56% of total trade in 2015. The EU is the largest single export market for UK goods, accounting for 47% of total goods exports, though this proportion has decreased somewhat in recent years. In return, the EU supplies some 54% of all goods imported into the UK—UK imports of goods from the EU exceeded UK exports to the EU by approximately £90 billion in 2015.22

30.An agreement to enable continuing free trade in goods is thus highly desirable for both sides. In the absence of a free trade agreement, World Trade Organization rules would require the imposition of ‘Most Favoured Nation’ tariffs upon goods, leading to higher prices for consumers and disrupting supply chains. UK exports to the EU would become less competitive, and inward investment could be undermined, damaging the whole economy.

Free trade in services

31.While goods still represent the bulk of UK trade, the services sector now makes up some 80% of the UK economy as a whole. The UK is a world leader in trade in services, second only to the United States. Services account for some 44% of total UK exports, of which 72% are non-financial services, and 28% financial services. The UK generates an annual global trade surplus of some £33 billion in non-financial services (though, once tourism is taken into account, it runs a small deficit in trade with the EU), and some £55 billion in financial services. The EU is the market for around 39% of UK non-financial services exports, and a similar proportion of financial services.23

32.There is general acceptance that the EU’s Single Market in services lags behind that in goods: barriers to free movement of services remain in many sectors. Nevertheless, the UK’s export of services, including financial services, to the EU, not only generates employment and revenue domestically, but, by facilitating access to capital, drives investment across the EU. A relationship that preserves the freest possible trade in services, financial and non-financial, would deliver substantial benefits to both sides.

Internal security cooperation

33.As we noted in our December 2017 report on Brexit: future UK-EU security and police cooperation:

“Protecting the lives of its citizens is the first duty of Government, and in fulfilling this duty the UK Government currently benefits greatly from close and interdependent police and security cooperation with EU institutions and member states. The common threats facing the UK and its neighbours require the closest possible police and security cooperation to be sustained into the future, after the UK leaves the EU.”24

34.That cooperation takes many forms: a range of criminal justice tools, including the European Arrest Warrant; the sharing of data and intelligence between police and security forces; and membership of key EU agencies such as Europol and Eurojust. Finding ways to continue such cooperation post-Brexit will be essential if the UK’s and the EU’s ability to combat cross-border crime and terrorism is not to be curtailed.

External security cooperation

35.The UK and the other 27 EU Member States share common strategic foreign policy and defence interests, and there is general agreement that joint or coordinated action enhances their collective global influence. Such cooperation takes place in a range of fora, from international organisations such as the United Nations and NATO, to bilateral structures such as those established under the Anglo-French Defence and Security Cooperation Treaty of 2010. But, as the Government’s future partnership paper on foreign policy, defence and development acknowledged: “The shared threats we face mean continued close cooperation is vital to both UK and EU interests.”25

Contested benefits

36.The benefits of free trade in goods and services, and of cooperation in both internal and external security, are generally acknowledged, though even these benefits come at a cost. Some other potential benefits for the UK are more contested.

Trade policy

37.For many who campaigned to leave the EU, the ability to pursue an independent trade policy was one of the great prizes of Brexit, and this was reflected in the Prime Minister’s fourth ‘red line’, departure from the EU’s customs union. In other words, this is a benefit that will be achieved not by establishing a new relationship with the EU, but by bringing the existing relationship to an end.

38.For Daniel Hannan MEP, the UK’s membership of the customs union “locks us into a trade policy that until now has … been focused disproportionately on the agrarian and industrial interests of the continent rather than on a service economy like ours”. In contrast, citing the agreement between Australia and New Zealand as an example, he anticipated “immense gains” for the UK’s services-based economy from trade agreements that would start with “a presumption of reciprocity” or “mutual recognition”.26

39.Jude Kirton-Darling MEP, on the other hand, saw the balance of benefit in the UK remaining within the EU’s customs union, and argued that an offer to do so would “open up the negotiations regarding the key offensive interest of the UK around services”.27 Carolyn Fairbairn, of the CBI, also emphasised the importance of “retaining a customs union possibility on the table”. She warned in particular of the impact of leaving the customs union on SMEs: “There are 150,000 businesses in the UK that only export to the European Union. They have no ability to create systems to be able to deal with border controls.”28

40.Dr Meredith Crowley, Lecturer in Economics at Cambridge University, considered the UK’s prospects, once outside the EU customs union, for negotiating beneficial trade agreements with third countries. She believed that “productive negotiations with the United States” were “very unlikely” until at least the next US presidential election. More broadly, she argued that “approaching individual countries to negotiate a bilateral trade agreement … [does] not yield much in the way of concrete benefits”—instead her preference was for the UK to “join large regional trading groups”, such as the North American Free Trade Agreement. She also questioned the likelihood of the UK securing free access to overseas markets for services, noting that “in many countries around the world, financial services are provided inefficiently, and the providers of those services get huge monopoly profits … So the question is: why would that country want to open up to importing financial services from the UK?”29

41.We note also that the UK currently benefits from being party to some 57 trade agreements negotiated by the EU. While these agreements may, as Daniel Hannan argued, not be tailored to the UK economy, their loss would undoubtedly be disruptive. Continuing UK participation in these agreements post-Brexit is not guaranteed.30

Regulatory divergence and the ‘level playing field’

42.There have been complaints about EU-derived ‘red tape’ for as long as the UK has been a Member State, and some have seen the opportunity to reduce the regulatory burden on businesses as a key benefit of Brexit. Dr Crowley, however, noted that for many products, the scope for regulatory divergence was limited, “because many multinational manufacturers produce a product to the highest standard in the world”.31 Economist Ruth Lea expressed similar views to us in late 2017, when she described product regulations as “increasingly internationalised”. However, she distinguished between product standards and “all sorts of other regulations, like labour market regulations. It is arguable … that you … might do something about the working time directive or the parental leave directive or whatever. Those are political decisions.”32

43.Attempts to deregulate the labour market—or to lower environmental standards or relax State aid rules—could well cut costs for UK businesses, but would fall foul of the EU’s ‘red line’ that the UK should accept a ‘level playing field’. This is spelled out in the European Parliament’s March 2018 resolution, which called for:

“The United Kingdom’s continued adherence to the standards laid down by international obligations and the Union’s legislation and policies in the fields of fair and rules-based competition, including state aid, social and workers’ rights, and especially equivalent levels of social protection and safeguards against social dumping, the environment, climate change, consumer protection, public health, sanitary and phytosanitary measures, animal health and welfare, taxation, including the fight against tax evasion and avoidance, money laundering, and data protection and privacy, together with a clear enforcement mechanism to ensure compliance.”

44.UK Ministers have repeatedly denied any intention of undercutting EU Single Market rules. In her Mansion House speech, the Prime Minister stated:

“We share the same set of fundamental beliefs; a belief in free trade, rigorous and fair competition, strong consumer rights, and that trying to beat other countries’ industries by unfairly subsidising one’s own is a serious mistake. And in other areas like workers’ rights or the environment, the EU should be confident that we will not engage in a race to the bottom in the standards and protections we set. There is no serious political constituency in the UK which would support this—quite the opposite.”33

45.The Government has also made it clear that the purpose of the European Union (Withdrawal) Bill is to create a working statute book post-Brexit, and that it will not be used to lower standards. For instance, the Solicitor General, Robert Buckland MP, told the House of Commons on 15 November 2017 that “the Brexit process will in no way whatever be used to undermine or curtail the rights of workers”.34 But notwithstanding such statements by Ministers, Frances O’Grady told us of her continuing concern “about livelihoods and what will happen to wages and prices”. The TUC sought “a level playing field on workers’ rights. That means not just protecting rights but keeping pace with that safety net for the future.”35 We note that the Government’s slides on the ‘Framework for the UK-EU economic partnership’, published on 24 May 2018, refer only to “Legal protection for workers that keeps pace with the changing labour market”, wording that falls some way short of the TUC’s demand for a UK-EU ‘level playing field’.36

Agriculture and fisheries

46.There is agreement across the political spectrum that following Brexit the UK will no longer be part of either the Common Agricultural Policy or the Common Fisheries Policy. This reflects a widely-held view that both policies have been costly and inefficient (notwithstanding some progress in recent years), and that they were not designed with the UK’s interests in mind. As the Environment Secretary, Rt Hon Michael Gove MP, said in a speech to farmers in February 2018: “For the first time in almost half a century, we are free to design policies from first principles that put British farmers, and consumers, first.”37

47.This Committee has largely endorsed the prevailing consensus that Brexit creates new opportunities for the UK farming and fisheries sectors. In our report on Brexit: agriculture we concluded: “In the long term the UK has an opportunity to review and improve its agriculture, environment, and food policy, better meeting the needs of the agriculture sector, the environment and consumers.”38 In our report on Brexit: fisheries we concluded that leaving the Common Fisheries Policy would present an opportunity “for the UK to address concerns regarding the current fisheries management regime and to reflect the needs and interests of coastal communities, the wider marine environment and the industry”.39

48.Certain benefits to UK farming, food and fisheries policies are thus inherent in leaving the EU, rather than having to be negotiated as part of the new UK-EU relationship. But the terms of the new relationship will nonetheless be crucial for both sectors.

49.In farming and food, the EU is the UK’s main trading partner, the source of over 30% of the food consumed in the UK. Moreover, as we stated in our report on Brexit: food prices and availability, the Government’s welcome commitment to maintain current animal welfare standards (a component of the European Parliament’s ‘level playing field’, and a likely precondition for continuing free trade in food with the EU) will be “difficult to reconcile … with a desire to become a global leader in free trade”.40

50.In fisheries, the UK’s geographical proximity to the EU, the mobility of fish stocks, and international law, all necessitate what in December 2016 we called “an effective and immediate co-operative relationship in fisheries management with the EU and other neighbouring states”.41 Moreover, UK consumers do not eat the fish that the UK produces: of some 666,000 tonnes of fish produced in the UK in 2014, 499,000 tonnes were exported, of which 66% were exported to the EU.42

51.Thus both farming and fisheries will feature in the future relationship, which, directly or indirectly, will help to determine the benefits that the UK can achieve in these sectors from Brexit.

Weighing costs against benefits

52.All the benefits we have described, even those that are uncontested, will come at a cost. As Professor Derrick Wyatt QC told us in September 2016, negotiations on free trade agreements “used to be mainly about tariffs, but now they are relatively little about tariffs. They are about non-tariff barriers and harmonisation of regulatory standards. They reach deep into the domestic policy-making sphere.”43 So even the simplest model for future UK-EU economic relations, a Free Trade Agreement, will require acceptance of a degree of regulatory alignment.

53.More developed benefits may require more far-reaching compromises. Free trade in services is closely linked to free movement of persons, and in our report on Brexit: trade in non-financial services we concluded that the Government had “under-estimated the reliance of the services sector on the free movement of persons”. We continued: “Moreover, there is a risk that the EU will take the view that comprehensive access to the Single Market in services is dependent upon some degree of movement of persons.”44 That risk has materialised in the EU’s insistence on ‘no cherry-picking’.

54.Continuing security and police cooperation will also come at a cost. In our report on Brexit: future UK-EU security and police cooperation we concluded: “It seems inevitable that there will in practice be limits to how closely the UK and EU-27 can work together if they are no longer accountable to, and subject to oversight and adjudication by, the same supranational EU institutions, notably the CJEU.”45 The Prime Minister’s Munich speech of 17 February 2018 offered a new realism, when she acknowledged that “when participating in EU [law enforcement] agencies the UK will respect the remit of the European Court of Justice”.46

Ireland and Northern Ireland

55.This Committee has explored at length the implications of Brexit for Ireland and Northern Ireland, and for the many benefits that have flowed from the 1998 Belfast/Good Friday Agreement.47 Those benefits were achieved with the active support of the EU, and during a period when both the UK and Ireland were Member States of the EU. The UK and Ireland’s joint membership of the EU Single Market and customs union, alongside the ‘Common Travel Area’ (which pre-dates EU membership) have facilitated the creation of an open land border, with no visible infrastructure, which has in turn been a key element of the peace process, as well as supporting the development of an all-island economy, exemplified by the Single Electricity Market. A key challenge of Brexit is thus to preserve the achievements of the last 20 years, and in particular, given the UK’s stated aim of leaving the customs union, to preserve an open land border in Ireland, while avoiding the imposition of controls on traffic across the Irish Sea.

56.The question of the Irish border brings into sharp focus the interdependency of the ‘red lines’ and benefits that we have described in this report. Maintaining a fully open border requires:

57.The critical importance of the issues affecting Ireland and Northern Ireland is acknowledged by both sides, and for this reason they were addressed as a ‘Phase 1’ issue, alongside withdrawal negotiations, rather than waiting for formal negotiations on the future UK-EU relationship. That decision also reflected an acknowledgement that the problems facing Ireland and Northern Ireland are inherent in the act of UK withdrawal—in the fact that the UK and Ireland, which joined the EU at the same time, will for the first time have different status regarding the EU’s Single Market and customs union. Yet logic also suggests that decisions on customs controls, trade, free movement of people and security cooperation, will be fundamental to the future UK-EU relationship. Thus the question of the Irish border, uniquely, straddles negotiations on withdrawal and on future relations, and for that reason it is the crux of current debate.

58.Paragraph 49 of the Joint Report, agreed by the UK and EU negotiators in December 2017, tries to ‘have its cake and eat it’. It acknowledges the UK’s desire to protect North-South cooperation and to avoid a hard border, and its intention to achieve these objectives “through the overall EU-UK relationship”, or, failing that, through “specific solutions” such as new technology. But failing these solutions, it recorded the UK’s commitment to “maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement”.

59.At the time of writing, the Government’s understanding of this commitment was still unclear. The Commission, in publishing a draft ‘backstop’ agreement alongside the draft Withdrawal Agreement in late February, took the view that “full alignment”—interpreted as, in effect, permanent continuing membership of the Single Market and customs union—extended only to Northern Ireland. This would be tantamount to creating a border in the Irish Sea, and was rejected both by the Government and the unionist parties in Northern Ireland. Yet despite repeated questions from the Committee, the Government has not offered a consistent or satisfactory explanation of its understanding of the geographical scope of the “full alignment” referred to in paragraph 49.49 Press reports on 23 May suggested that the Government was proposing a time-limited alignment, covering the whole United Kingdom.50 As this report was being agreed, there were reports that the Government’s interpretation of the ‘backstop’ agreement was about to be published. However, there have also been reports that this interpretation has already been rejected by the EU.

Conclusions

60.The benefits that the UK and the EU could derive from a deep and durable partnership will come at a cost, and may entail trade-offs between economic and political considerations. There is no ‘free lunch’ for either side.

61.Now that the Article 50 Withdrawal Agreement has been in large part agreed, the starting point for negotiations on the future relationship must be that failure to reach agreement will, by default, result in ‘no deal’—of which we said, in our Report on Brexit: deal or no deal, “It is difficult, if not impossible, to envisage a worse outcome”. The negotiations will be about achieving benefits from a new relationship, rather than preserving aspects of the UK’s EU membership.

62.The two sides therefore need to start by identifying beneficial outcomes, associated costs, and areas of mutual interest. If they do this, and are prepared to compromise on their respective ‘red lines’, there is every reason to believe that agreements can be reached, and benefits realised.

63.We agree with the Government that North-South cooperation, and the avoidance of a hard border between Ireland and Northern Ireland, will be best secured within the framework of the overall UK-EU relationship, but we also understand why both sides have agreed to address them as part of the ‘Phase 1’ negotiations. The phasing of the negotiations thus means that the UK Government urgently needs to take key decisions of principle, on trade, customs, regulatory alignment and the movement of people.


22 European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129)

23 European Union Committee, Brexit: trade in non-financial services (18th Report, Session 2016–17, HL Paper 135)

24 European Union Committee, Brexit: future UK-EU security and police cooperation (7th Report, Session 2016–17, HL Paper 77)

25 HM Government, Foreign policy, defence and development—a future partnership paper (12 September 2017), p 18: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/643924/Foreign_policy__defence_and_development_paper.pdf [accessed 24 May 2018], quoted in the European Union Committee, Brexit: Common Security and Defence Policy missions and operations (16th Report, Session 2017–19, HL Paper 32).

30 See European Union Committee, Brexit: deal or no deal (7th Report, Session 2017–19, HL Paper 46), para 102.

32 Oral evidence taken on 10 October 2017 (Session 2017–19), Q 4 (Ruth Lea and John Longworth)

33 Rt Hon Theresa May MP, speech on ‘our future economic partnership with the European Union’ (2 March 2018): https://www.gov.uk/government/speeches/pm-speech-on-our-future-economic-partnership-with-the-european-union [accessed 24 May 2018]

34 HC Deb, 15 November 2017, cols. 410–11

36 Department for Exiting the European Union, ‘Framework for the UK-EU economic partnership’, 24 May 2018: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/710817/ECONOMIC_PARTNERSHIP_-_FINAL.pdf [accessed 30 May 2018]

37 Michael Gove MP, speech on ‘A Brighter Future for Farming’ (20 February 2018): https://www.gov.uk/government/speeches/a-brighter-future-for-farming [accessed 24 May 2018]

38 European Union Committee, Brexit: agriculture (20th Report, Session 2016–17, HL Paper 169), para 21

39 European Union Committee, Brexit: fisheries (8th Report, Session 2016–17, HL Paper 78), para 67

40 European Union Committee, Brexit: food prices and availability (14th Report, Session 2017–19, HL  Paper 129), para 118

41 European Union Committee, Brexit: fisheries (8th Report, Session 2016–17, HL Paper 78), para 96

42 European Union Committee, Brexit: fisheries (8th Report, Session 2016–17, HL Paper 78), para 146

43 Oral evidence taken on 6 September 2016 (Session 2016–17), Q 5 (Jill Barrett, Lord Kerr of Kinlochard GCMG and Derrick Wyatt QC)

44 European Union Committee, Brexit: trade in non-financial services (18th Report, Session 2016–17, HL Paper 135), para 292

45 European Union Committee, Brexit: future UK-EU security and police cooperation (7th Report, Session 2016–17, HL Paper 77), para 38

46 Rt Hon Theresa May MP, speech at Munich Security Conference (17 February 2018): https://www.gov.uk/government/speeches/pm-speech-at-munich-security-conference-17-february-2018 [accessed 24 May 2018]

47 See European Union Committee, Brexit: UK-Irish relations (6th Report, Session 2016–17, HL Paper 76); a further inquiry in early 2018 gave rise to a comprehensive follow-up letter to the Government, published on 27 February 2018: see letter from Lord Boswell of Aynho to Rt Hon Karen Bradley MP, Secretary of State for Northern Ireland, 27 February 2018: https://www.parliament.uk/documents/lords-committees/eu-select/UK%20Irish%20relations/27-02-18-Lord-Boswell-letter-to-Secretary-of-State-for-Northern-Ireland.pdf [accessed 5 June 2018].

48 See the comments of the Chief Constable of the PSNI, George Hamilton QPM, cited in a letter from Lord Boswell of Aynho to Rt Hon Karen Bradley MP, Secretary of State for Northern Ireland, 27 February 2018, paras 32–33: https://www.parliament.uk/documents/lords-committees/eu-select/UK%20Irish%20relations/27-02-18-Lord-Boswell-letter-to-Secretary-of-State-for-Northern-Ireland.pdf [accessed 5 june 2018].

49 See for instance the letter from Rt Hon David Davis MP, Secretary of State for Exiting the EU, to Lord Boswell of Aynho, 16 May 2018: https://www.parliament.uk/documents/lords-committees/eu-select/david-davis-evidence-session-follow-up.pdf [accessed 25 May 2018].

50 See ‘How Britain’s departure from the EU stretches to mid-2020s’, Financial Times (23 May 2018): https://www.ft.com/content/12b54086-5da2-11e8-9334–2218e7146b04 [accessed 25 May 2018].




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