EU Prepares to Discuss a Long-Delayed Trade Deal With Britain -- Update

By Emre Peker in Brussels and Jason Douglas and Stephen Fidler in LondonFeaturesDow Jones Newswires

The biggest economic question posed by Brexit -- trade -- hangs unresolved almost 18 months after Britain voted to leave the European Union.

At the EU's insistence, negotiations have until now focused on the terms of separation. But the two sides progressed on that last week.

Continue Reading Below

At a summit this week, EU leaders may finally authorize negotiations on the next steps: a temporary transitional arrangement that will immediately follow Brexit in March 2019 and the outlines of a future trade deal.

That remains a crucial unknown for exporters across the U.K. and the European Union, the destination for almost half of British trade.

The delay has allowed the British government to sidestep its own divisions between those who want to hug the EU close and those who want to push it away to allow the U.K. to forge stronger ties with the rest of the world. In the coming week, Prime Minister Theresa May's cabinet will formally hold its first in-depth discussions on the "end state," her spokesman said.

Mrs. May has said the U.K. will leave the EU's single market -- its common zone of regulation -- and its customs union, which sets uniform external tariffs for imports to the bloc.

Membership of both allows trade between EU members to carry on almost free of border checks. If the U.K. leaves either one without replicating the same arrangements from outside the EU, the likelihood is that a whole new raft of border bureaucracy will be required, creating delays at ports and disrupting international supply chains.

For the EU, Mrs. May's vision has raised as many questions as they answer. "We need more clarity on how the U.K. sees our future relations, after it has left the single market and customs union," European Council President Donald Tusk said after meeting Mrs. May last week.

Mrs. May has also said she wants trade with the EU to be free of tariffs and "as frictionless as possible."

She has ruled out as insufficient a preferential-trade deal on the lines the EU struck with Canada in 2016. That eliminates tariffs on most goods. But it still leaves the need for significant border checks on goods imports to ensure they meet the required standards and provides only limited access to trade in services -- hugely important to the British economy.

She has also rejected the so-called Norway model. For most purposes, Norway is part of the EU's single -- or internal -- market. But the price is big financial contributions to the EU, acceptance of EU rules without a say in the legislation and swallowing the judgments of the EU courts, all of which Mrs. May has ruled out. Even with all this, Norway has a customs border with neighboring Sweden, an EU member, because Norway isn't part of the EU's customs union.

In last week's deal, both sides agreed that to avoid the re-creation of a customs border between EU member Ireland and Northern Ireland -- which is part of the U.K. -- the U.K. would, if necessary, "maintain full alignment with those rules of the internal market and the customs union."

To explain the apparent contradiction with Mrs. May's statements, Brexit Secretary David Davis said on Sunday that full alignment doesn't mean the U.K. plans to accept EU regulation post-Brexit. Instead, it aims to create its own regulation that will meet equivalent standards to the EU's.

"We'll meet the outcomes, but not do it by just copying or doing what the European Union does," he told the British Broadcasting Corp.

But trade experts say the EU isn't ready to accept such a halfway house, except perhaps in some limited areas -- particularly since the U.K. has also said a central aim of leaving the bloc is to diverge from EU regulations. From the EU standpoint, frictionless trade is only possible if the U.K. becomes, like Norway, a regulatory satellite of the bloc.

"We want as much as possible [from a trade deal], but there needs to be a balance," an EU official said. "The U.K. cannot have the rights of Norway but only the obligations of Canada."

European Trade Commissioner Cecilia Malmstrom said last week that even with a comprehensive trade deal, EU trade with the U.K. will suffer from Brexit. "It cannot be totally frictionless because they are not in the internal market," she said.

Fredrik Erixon, director of Brussels-based European Centre for International Political Economy, said there won't be a big debate in Europe about cutting tariffs. "It's the other part about regulations that will be difficult," he said.

Mr. Erixon said the U.K. could achieve a closer deal than Canada -- one that will look more like the Trans-Atlantic Trade and Investment Partnership that the EU and the U.S. were negotiating until President Donald Trump halted talks. That agreement would have gone further than Canada's by allowing some limited EU recognition of U.S. regulation, and vice versa.

Such an outcome would mean highly restricted access for U.K. financial-services firms to the EU market and a lot more bureaucracy for exporters. It also would leave unresolved the question of how to avoid a new customs border in Ireland.

Write to Emre Peker at emre.peker@wsj.com, Jason Douglas at jason.douglas@wsj.com and Stephen Fidler at stephen.fidler@wsj.com

(END) Dow Jones Newswires

December 12, 2017 13:14 ET (18:14 GMT)