European Funds Comment: The UK’s Employers’ Federation Sets Out Businesses’ Brexit Priorities

28 February 2020

What do garden shed builders, game designers, lamb farmers and lawyers have in common? Apparently, they all contributed to the Brexit recommendations included in a document published this week by the CBI, the UK employers’ federation, which says that it speaks for 190,000 businesses. The CBI is certainly an important voice – and its views on the future UK-EU economic relationship should be taken seriously by the UK negotiators – but the extent to which it will influence the direction of travel is an open question.

Considerable uncertainty remains over whether the UK and the EU will be able to agree a trade deal this year, before the transition period ends on 31 December 2020. That was always a tall order and is, perhaps, looking slightly less likely now that the UK and the EU have published their negotiating objectives. Those objectives would seem to be in conflict: the UK wants a comprehensive free trade agreement with minimal loss of sovereignty, while the EU is willing to sign a fulsome deal but, in return, wants to bind the UK to EU rules in some key areas. These positions may yet be reconciled: a comprehensive deal on trade in goods remains in the interests of both sides, and they will strive to achieve it. But businesses would do well to plan for a less positive outcome.

The bulk of this week’s CBI document is focused on ways to reduce frictions when goods are traded. The CBI recognises that, given the UK’s decision to leave the customs union and the single market, some frictions are inevitable, but it makes a number of suggestions to reduce “red tape” for exporters. The CBI says that these suggestions respect the parameters for the deal that have been set out by the negotiators, and there is considerable detail – much of it highly technical – for the UK team to digest.

However, the first eight of the CBI’s 22 recommendations relate to trade in services. As the CBI points out, the UK is the world’s second-largest exporter of services, and 40% of those exports are to the EU. At the same time, even the EU’s most comprehensive free trade agreement – the EU/Canada deal – has only “patchy” coverage of services, with many sectors not covered at all. Furthermore, services are not fully harmonised across the EU, making future access for UK businesses particularly challenging. For these reasons, the CBI argues that services should be covered by the future trade deal.

As well as recommending “the widest possible” coverage of services, UK businesses would also like to see a deal that allows business travel and the provision of services in person across all EU member states (“fly in, fly out”) without the need to navigate 27 different immigration and visa systems. They also want mutual recognition of professional qualifications and professional standards, agreements on road and air transportation and, crucially, an agreement on data adequacy that allows free transfer of data from the beginning of next year.

The CBI recommends that regulated services – including energy and financial services – should be dealt with by separate chapters in the proposed Free Trade Agreement. On financial services, it says that mutual market access is in the interests of both sides, but acknowledges that each side will need to retain autonomy. The EU’s mandate makes it clear that decisions on equivalence will be “unilateral”, but agrees that transparency and appropriate consultation are important.

Whether the CBI’s helpful contribution will have a significant impact on the course of the negotiations remains to be seen. When formal negotiations begin next week, it seems clear that the UK government will be prioritising national sovereignty over trade barriers. The EU is insistent that even a relatively thin Canada-style deal is only on offer if the UK signs up to some minimum EU rules; the EU wants “robust” commitments to maintain a “level playing field” to avoid the threat of what it would regard as unfair competition. The EU is not insisting on the exact same rules, but “common high standards, and corresponding high standards over time” in areas that include state aid; competition; social, employment and environmental regulation; climate change; and certain tax matters. While the UK is currently showing no great appetite for deregulation, the government says that it would not be “taking back control” of its laws if it were to tie its hands in this way. It is particularly clear in the financial services sector that the UK will not agree to become a “rule-taker”, but a similar theme runs throughout its negotiating stance on these level playing field requirements.

The stage is set for a tough set of negotiations, and the CBI’s wish list may not feature heavily in Round 1. Businesses, including those that rely on trade in services, should be prepared for significant disruption.