Will there be a post-Brexit EU-UK trade deal?

Soft Deadlines

The 11-month negotiation period in which the UK and EU need to make a post-Brexit deal runs out in December. 

Numerous soft deadlines posed by UK prime minister Boris Johnson and the EU have come gone like rain goes down the gutter.

Failed EU Summit

Last week there was a Failed Summit in which EU leaders called on the UK to "make the necessary moves" towards a deal.

That "deadline" came and went but the sides are still talking.

Sticking Points

The BBC discusses the Outstanding Issues.

First of all, there is what is known as the level playing field. That means measures to ensure businesses on one side don't have an unfair advantage over their competitors on the other.

All trade agreements have such measures, but the EU wants the UK to stick particularly closely to EU rules on things like workers' rights, environmental regulations and particularly state aid (financial assistance given by government to businesses). 

The UK, on the other hand, says the whole point of Brexit was to break free from following common rules.

Then there is fishing: the UK would like full access to the EU market to sell its fish there, but in return the EU wants full access for its boats to fish in UK waters. British negotiators say that's not possible because the UK is now an independent coastal state.

A third area of disagreement is what is described as the governance of any future agreement. That is partly about the overall structure of any deal, but it is also about how any new agreements would be enforced and about the role of the European Court of Justice.

Another issue which will remain extremely sensitive is the way the UK proposes to implement the agreement it made with the EU before Brexit, on keeping the land border in Ireland (which is now the border between the UK and the EU) as open as it is at the moment.

The EU has been concerned that the UK may not live up to all of the commitments it has made here; the UK strongly disagrees.

No Progress Since January

There has been no progress on any of these points since January. 

When dealing with the EU, there never is. Progress only comes at the last second. 

This time however, the EU made such absurd demands that the UK is discussing not honoring the withdrawal agreement.

Whom is to Blame?

Eurointelligence, a very pro-EU newsletter, accurately blames the EU in its October 20 free edition, Barnier's Overtures Rejected.

Michel Barnier [the EU's top negotiator] tried to undo some of the damage done last week by the European Council, by offering a genuine concession: the EU is now willing to discuss legal texts. This is exactly what the UK had been demanding for some time now. But that concession was not enough. A UK government spokesman noted politely that Barnier's offer to intensify the talks was welcome, but that there is no basis for discussions unless there is a fundamental shift in the EU's approach. In other words, the UK is expecting nothing less than a reversal of the council declaration, which boldly stated that all movement in the negotiations would have to come from the UK side. We think the declaration last week was an unnecessary provocation that has actually weakened the EU's position.

We think the European Council made its third tactical error during these negotiations. The first was to bet on an extension, and the second to insist on sequencing. The combined result of all of these mistakes is that the deal will ultimately require more concessions in a shorter period of time than would have been necessary otherwise.

The EU relented also on another UK request. Instead of a permanent office in Belfast, it is now happy with a team of border officials in Northern Ireland.

The probability of a deal remains impossible to calculate because it will depend on whether Boris Johnson wants one or not, and whether he is ready is to compromise on the level playing field. He would need to do this. Another necessary condition is for Emmanuel Macron to drop his extremism on fisheries. Our hunch remains that this will happen, but we can't be sure.The big danger we see is that Macron will make it easy for Johnson to pull the plug. The process will not survive another accident of the kind we had last week.

Doubling Down

In "Doubling down - EU/UK edition" on October 21, Eurointelligence had additional comments.

One of the mistakes some EU officials have been making in the last few years is to draw their intelligence about UK politics from their usual, mostly pro-European, sources. Tony Blair's personal interventions in Brussels had a disproportionately strong effect on opinion, and were instrumental in the EU's fateful decision to play along with the opposition in the House of Commons by forcing several deadline extensions last year. 

Reliance on poor intelligence leads to poor judgement. This problem persists today. Judging by some of the comments we have read over the last week, everybody seems to be doubling down on the mistakes they made before. The issue is not what we think about Johnson as a prime minister, on which there seems to be a consensus in Brussels and national EU capitals. It is about what he will actually do.

In this context, we noted a report this morning that the EU's strategy was now based on giving Johnson bragging rights. Letting him decide when to return to the table and declare victory, and then force him to concede on all the substantive issues. The EU should prepare itself for the possibility that this might not be the trajectory in the next four weeks. We think the UK may well return to the negotiating table. We think a deal is possible, but it will have to include a readiness by the EU to compromise as well. Judging by the discussion in the European Council last week, that has yet to happen.

We do not claim to have any special insights into the ever-changing mind of the British prime minister, but we do know that he is surrounded by advisers who accept a no-deal outcome, and some who advocate it. It would be another mistake to rely on the idea that Johnson will fold because of economics.

Another Last Second Deal?

I have long learned not to bet against EU deals at 1 second to midnight. 

In that regard, a No-Deal Brexit (not to be confused with the deal-or-no-deal post-Brexit discussion now) was nearly a miracle. 

Brexit happened because the negotiation was not totally internal. Had the EU thrown the UK a bone at any stage of the Brexit game, there would not have been a Brexit.

EU stubbornness and arrogance is why we are here now. A basic deal should have been easy but the EU again foolishly thought it held all the cards.

The EU is great at last second deals, but only internally. 

Will Macron bend? Johnson? 

Both have to and it is not at all clear if they want to.

Moreover, if the EU makes another mistake, there will not be a deal, even if both sides want one.

If there is no deal, both sides will suffer, with Germany taking the biggest hit to exports.

This material is based upon information that Sitka Pacific Capital Management considers reliable and endeavors to keep current, Sitka Pacific Capital Management does not assure that this material is accurate, current or complete, and it should not be relied upon as such.

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