Likely not much of a surprise to many readers, but the Brexit posturing continued from both sides this week – meaning any possible Deal will now be struck at the ‘eleventh hour’. With the prospect of a blockbuster end to the year, a lot of discussion is being had about fishing rights and state aid, but not enough is being said about the ‘dynamic’ standards impasse.
Alan Farkas, Partner at Dorsey & Whitney – a law firm specialised in advising companies on the Brexit transition – spoke to the UK Investor Magazine about the sense of “deep gloom” that now presides over the issue of standards alignment, despite potential for compromise on the fishing and state aid issues.
Fishing rights and ‘value of catch’ proposition
Speaking back in October, a French source told the Express that President Macron occupies an unenviable position, with fisherman in Northern France likely to blame him for a loss of business incurred either by concessions being made or a No-Deal scenario. The source said that: “If there is no deal, he will be made responsible – and it’s even worse for French fishermen.”
European affairs minister, Clement Beaune, added that: “Our fishermen will not be a bargaining chip for Brexit, they will not have to pay the price for Britain’s choices.”
“A bad deal would be the worst outcome. And so we are ready for a no-deal scenario, and we will not accept a bad compromise.” He continued.
The seeming intractability of the fishing rights stalemate seems to have been reinforced by a lack of progress during this week’s talks, and the UK’s decision to send four naval vessels out to defend its fishing waters. However, Mr Farkas notes that the situation is ‘potentially soluble’ with a 5-7-year transition period, and quotas based on ‘value of catch’ and allocated between individual fish stocks.
“Britain is believed to be prepared to allow European trawlers to retain up to 47% of the value of certain fish stocks from 1 January,” Farkas says.
State Aid and the COVID bail-out
In short, the EU’s definition of state aid covers all spending which potentially distorts trade between countries, such as tax advantages offered to only a small subset or sector of business. While initially broad-reaching, the practical restrictions on state aid feature a lot of exemptions.
For instance, the General Block Exemption Regulation means that spending on regional aid, training, SME subsidies, R&D, environmental aid and public infrastructure aid are all permissible. Further, the ‘de minimus’ rule means subsidies under €200,000, over three consecutive years and to one company, do not require sign-off by the European Commission.
While these considerations may take some of the initial sting out of the state aid impasse, any worthwhile Brexit deal would shoot down the EU’s current demand. That being: the EU wants the UK to agree to limits on its ability to directly subsidise British industries, while exempting the EC from all state aid provisions. In essence, this framework would allow the EU to subsidise industries at its leisure, while the UK doing the same thing would mean it breaches international law.
This issue is particularly important given our current context, which finds many sectors of the UK economy disproportionately impacted by the COVID-Brexit double-edged sword – and thus in acute need of public support. Issuing a glimmer of hope, Mr Farkas continues: “Possible compromises have been discussed, allowing the UK Government to provide State subsidies of an equivalent proportion to the amount of the [EU Coronavirus] recovery fund.”
Dynamic regulation and intractable Brexit philosophies
The most intractable issue, and one that has not received enough coverage, is the discussion over forward-looking changes to trading, work and goods standards. The debate over the ‘dynamic’ alignment of standards centres around the EU position that any future adjustments to EU regulations ought to be mirrored by UK regulations.
For proponents of the UK sovereignty argument, and those alive long enough to remember the series of Factortame cases, the upshot of ‘dynamic’ standards is rather predictable. Under such as system, the UK would either have to comply with EU policy, or find itself back in a European court, once again scolded by EU lawmakers, and with the possibility of further tariffs being imposed for non-compliance.
Farkas said that: “In an effort to make progress, the UK have conceded that there should be no reduction in existing rules and regulations. These “non-regression clauses” on standards will be part of any trade deal and should there be future disputes between the UK and EU, procedures to adjudicate such disputes will be included in any treaty based on objective measures of actual disruption to trade. This is however as far as the UK Government are prepared to compromise.”
“The latest EU request for dynamic alignment impinges on what the UK Government sees as the fundamental reason for leaving the EU, allowing the UK sovereignty over its own laws.”
He continued by saying that it seems “almost unconscionable” that an agreement reportedly so close to completion, should collapse on disagreements over regulations – on which the UK currently remains a “leading force”. Unfortunately, both sides have deep-seated and valid philosophical justifications for their positions. On one side, we have the Brexit raison d’être – UK sovereignty – and on the other – granting access to the world’s largest, high-standards single market.
Unfortunately, Farkas says that while small compromises might occur between Christmas and New Year, he believes we are now in the “blame game” territory – with neither side wanting to be seen as walking away from what might in hindsight be seen as the basis for a potential deal. Should a No-Deal transpire, the recent exodus from UK equity funds would suggest that the near-term prognosis for FTSE blue chips is not positive, while private investors remain positive about the prospects of domestically-focused SMEs in the New Year.