Brexit – the Negotiations

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In his latest blog post, Jonathan Russell, Partner, at UK200Group member firm ReesRussell looks at some of the possible variables which need to be considered as part of Brexit negotiations.

The politicians and the markets were caught unawares by the vote for UK to leave the EU and a blame game has started but ultimately the vote will trigger a huge negotiation about the future of trading and movement within the EU. Many will say that the World is a very different place to the one that was in existence the 1950’s when the ECSC and then the EEC came into being ultimately giving us the EU and that a reappraisal was due if not overdue. But we are where we are and various Countries, factions and egos will now be fighting for position and it is going to be the skills of the negotiators which will be vital.

As an experienced commercial mediator who has been mediating commercial disagreements for over 15 years I take a look at some of the issues and some of the thought processes which might or should be taking place. The Brexit vote has to a large degree created a whole argument about Europe not just the relationship between UK and the EU so it is important to understand the difference between negotiation/mediation and litigation/confrontation.

When negotiating any agreement it is vital to understand what the end result is designed to achieve if you are negotiating something such as a house sale where any post deal relationship between the parties is unlikely then negotiating stances can be robust but it is different if the parties want to have a continued relationship. If there is to be a future relationship any agreement must be one which all sides can be happy with and not feeling they have been hard done to. I always suggest that a god negotiation/mediation is where everybody leaves equally unhappy!

In Europe we are talking about establishing agreements which will enable everyone to work together in the future to everyone’s advantage – therefore the approach is not about want individuals want or aim to get but more importantly focusing on what individual parties could lose – the worst case scenario. The technique is to get all parties to understand and acknowledge their worst case scenario and work to ensure they are better off than that – if all parties are doing better than their worst case then there is a high possibility of agreement.

So firstly what parties might be involved:-

1. UK
2. 27 other countries within the EU
3. 4 Countries within EFTA which includes the 3 inside the EEA
4. 4 countries within the Eurozone but outside of the EU and the other 2 countries outside of EU who also use the Euro.
5. Countries within the Schengen area

Within each of these factions the individual countries will also have individual desires and requirements.

So let’s just look at the EU and what might be the worst case scenario of the UK leaving the EU is relatively simple terms:-

1. UK loses ‘free trade’ access to the EU, has no trade deal negotiated which means that all trade would be done according to the terms of the World Trade Organisation (WTO) – services have still not been fully included in the free trade of the EU. It also means that other English speaking countries might look less favourably at UK as a place to use as an entry point to Europe.
2. UK no longer is part of the free movement of people as required by EU which could be detrimental to UK citizens living or working within EU countries – UK is not part of Schengen so travel controls would probably not change.
3. Reciprocal EU wide benefits would cease – so EU nationals might no longer qualify for UK benefits and UK nationals may no longer receive benefits in other EU countries. This is mostly an issue for UK nationals living/working and possibly studying in other EU countries.
4. Reciprocal security and defence agreements might no longer be in place.
5. There will be a stronger argument to move EU and Euro banking and clearing to a continuing EU country.

From the EU perspective what is their worst case scenario

1. They lose free trade access to the UK – approximately 17% on the EU market population.
2. They lose one of the partners who makes a net contribution to EU budgets which means they will either need to adjust budgets or raise more money elsewhere.
3. The financial sector in London might be less controlled than the EU which would be attractive to that sector.
4. UK might move its tax regime so it was even more attractive to business – the EU is already challenging some of the UK research and development tax breaks – patent box.

I appreciate there is a lot more detail in areas such as security, defence and general political positioning but let us look at what everyone might wish to achieve balance against what might be lost.

Business on both sides will be clamouring for the free trade to be maintained and the politicians will be clamouring about free movement of labour. OK let us be clear there is no such thing as free trade agreements there are always costs be they duties/levies or hidden costs and likewise there is no such thing as the free movement of labour either as that has costs. When speaking with others elsewhere in Europe many of the Northern European countries were complaining about the free movement of labour (or people in some areas) but the overwhelming complaint was not the people arriving but getting benefits in the country they had arrived in without ever having paid into the system. This is part was David Cameron’s success over in work benefits. So is there a compromise which might satisfy all parties – how about something along the lines of we have a free movement of people but until such time as those people have paid into the local system for an agreed period the benefit entitlement would be the lower of the country they were now living in or their country of origin. This would be a huge saving in Germany in unemployment benefits! Much of the issue over free trade is about consistent standards – though look at the difference in energy costs in the steel industry between UK and Germany – when is State assistance not State assistance. But maybe a simple starting point would be, and this could be across the whole WTO area, that to sell goods in any country you must comply with all the regulations of the country you wish to sell in or pay penalties. The Great Wall Chinese motor company importer, as have others, has been paying substantial levies to import vehicles with old Euro 4 and 5 engines. A bit like children you can’t play with my ball unless you play by my rules.

Sensible negotiations will probably never result in the Brexit that many in UK voted for – that was not achievable – and, in fairness, many who voted for Brexit did not want Brexit but wanted EU as it was even less. What sensible negotiations should result in with be a reformed Europe with two or maybe three areas:-

1. Those countries in the Eurozone will be one area because as a necessity a common currency can only work with a close political and more importantly economic structure – The United States of Europe.
2. Countries who do not want to be within the Euro but wish to be closely aligned with the European region – more akin to EFTA.
3. Countries who maybe want even less ties than 2 above to give more autonomy but whilst also having Europe specific agreements.

Many of the problems which some attributed to the EU are actually nothing or at least not solely to do with the EU and the main one is migration not within the EU but into the EU either as economic migrants or migrants as a result of political conflicts. And with the migrant issue also comes the security and peace issue be it ISAL or Russia. The solution is no more with Brexit than the problem and this is a World problem and in part that may be the Western world accepting that a Western style democracy is a universal panacea and in some cases the beneficial (we hope) dictator is a preferred option both internally and externally. In other words we need to realise we should not always judge by our own standards any more that we should impose our own standards on others or visa versa.

Tags: UK200

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