1 October 2020

If we want a proper Brexit deal, the one-sided Withdrawal Agreement must go

By David Collins

The Brexit celebration I attended at the end of January was a rather sombre affair. While most were happy (and relieved) to get the formal part over with, the practical reality of what was coming was somewhat harder to take, even for the staunchest Brexit supporters. It was clear that the Withdrawal Agreement agreed last year could end up being very harmful to UK interests and it needs to be replaced by a comprehensive Free Trade Agreement (FTA), or else abandoned entirely.

As a new research paper from the Centre for Brexit Policy explains, the Withdrawal Agreement represents a serious encroachment into the integrity of the UK’s domestic market by potentially imposing significant trade barriers between Great Britain and Northern Ireland. Worse, the agreement also could expose the entirety of the UK to further rulemaking by Brussels and subsequent unfavourable interpretation by the European Court of Justice (ECJ) in the broad policy sphere of state aid. Even with the modifications of the Internal Market Bill, the Withdrawal Agreement could lead to indefinite control of the UK economy by the EU, undermining the spirit and purpose of Brexit.

There are a number of justifications that the UK could conceivably use to terminate the Withdrawal Agreement without breaching international law. These include the EU’s lack of good faith negotiation for an FTA, a fundamental change in circumstances, and the agreement’s manifest violation of a fundamental rule of the UK’s internal law. The Withdrawal Agreement also is arguably illegal under World Trade Organization (WTO) rules because, in contemplating no border controls between Ireland and Northern Ireland, the EU would be treating one WTO Member (the UK) better than other ones with which it shares land borders, such as Russia and Turkey. This is most likely a violation of the Most Favoured Nation (MFN) rule that says that you must treat all WTO Members equally.

The EU could plausibly justify ignoring the border in Ireland to prevent a return to violence in Northern Ireland – and this might fit within WTO law. But this would risk enflaming political tensions at the EU’s other sensitive borders, such as on Cyprus. The EU has accordingly said that it will not rely on the WTO’s national security clause for the Irish border. The UK does not have this problem and would be free to ignore the border to preserve peace since it has no other land borders, one of the reasons that a true ‘no deal’ would not be as damaging for Britain as it would for the EU.

Apart from national security, the only other way to legitimise a soft border on the island of Ireland would be via an FTA with the UK, which would also operate as an exemption from the MFN rule. This is one reason why the Withdrawal Agreement was intended to pave the way for an FTA, not as a permanent solution.

But the EU has bigger problems with WTO law lurking in the background which in some respects have little to do with Brexit or the Withdrawal Agreement, other than the fact that they could operate to grant the UK bargaining leverage in FTA negotiations. These relate to the euro, which is both undercapitalised and lacking sovereign backing, as required by international banking rules.

The illegitimacy of the euro is relevant for WTO law because, with a heavily undervalued currency, the EU is effectively subsidising manufacturers in the Eurozone, enabling them to sell their products cheaply on foreign markets – a practice known as dumping. The UK and a number of other WTO members, including the US, have a strong claim that Eurozone exports deserve the imposition of anti-dumping or anti-subsidy duties, meaning import tariffs. As a member of the EU, the UK was not able to take action against these trade-distorting practices because it did not have control over its trade policy. This will change next year, potentially exposing the EU to retaliation on a wide range of products.

Of course it would be unfortunate for a trade war to break out between the UK and the EU because any tariffs, even compensatory ones, are bad for consumers and harmful to the economy. An FTA between the parties could act as a balm to these tensions by enhancing transparency and promoting dialogue with regards to the trade effects of currency practices – another reason why the EU should relent on some of its hard-line demands on regulatory alignment and access to fisheries.

The Withdrawal Agreement was meant to operate as a lead-in to a full FTA, which would not only eliminate most tariffs and facilitate the cross-border delivery of services, but also minimise trade friction between both Ireland and Northern Ireland and Northern Ireland and Great Britain by recognising product standards and testing.

Such an FTA could also address state aid, as well as subsidies, dumping and currency using international rules as a baseline and promoting cooperation through committees and neutral international dispute settlement procedures, not the ECJ. Fishing also could be covered, allowing some access for EU boats on the same basis as those from other countries. The UK-EU FTA could cover a range of other important matters, like digital trade and investment protection. In short, it could be a world-leading gold standard accord between like-minded economic partners committed to free trade.

Time is running out to reach such an agreement and, contrary to what many think, if negotiations do fail, the default is not ‘no deal’ and the liberation many Brexit supporters believe will ensue. Unless it is dropped, no-deal means that the Withdrawal Agreement will take effect on terms that are not favourable to the UK. We can still hope for an FTA but until we get one, the one-sided Withdrawal Agreement must go. Otherwise, this year’s Brexit party will be an even sadder occasion than last year’s, never mind the social distancing.

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David Collins is Professor of International Economic Law at City, University of London.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.