We really are entering the last chance saloon for a post-Brexit trade deal with the EU, with time rapidly running out, and a President-Elect in the US who has already stated that doing a trade deal with the UK will not be top of his priorities – and won’t happen at all if it endangers the Northern Ireland Peace Agreement.
While events on the other side of the Atlantic may be concentrating the UK negotiators’ minds, there is one huge issue which stands in the way of a deal with the EU. It’s not fishing, which is a political hot potato but probably not an economic deal-breaker. No the real issue is that of state aid and the ‘level playing field’.
European Commission president Ursula von der Leyen said at the start of this year, “Without a level playing field on environment, labour, taxation and state aid, you cannot have the highest quality access to the world's largest single market."
Given that this could be the thing which decides the UK’s trading future with its biggest export customer, it is important to understand why it is so important.
The level playing field refers to a
series of agreed rules and standards that stop businesses in one part of the
single market gaining an unfair competitive advantage over businesses in other
countries. The EU’s position is that
these rules, relating to things like workers’ rights, environmental protection
and especially state aid – government subsidies for business – must be
maintained as part of any trade agreement.
The UK, meanwhile, is taking the view that Brexit is all about the ability to make our own rules – including on state aid. This may seem strange given that the UK has never been that keen on state subsidies for business, but the government view is that developing a strong tech sector in particular may need more flexibility in this area.
A compromise could be reached whereby both the EU and the UK agree not to water down the current rules, in effect locking the existing level playing field in place. But, of course, that will not help should the EU (or, less likely, the UK) decide to impose stricter rules at some stage in the future. To accommodate this would require so-called ‘dynamic alignment’, where the UK would agree to adopt any future EU rule changes. For both political and pragmatic reasons, that solution is unlikely to be accepted by the UK negotiating team.
Ultimately whether a trade deal is done could come down to a straight choice for the UK government on what they are prepared to sacrifice: tariff- and quota- free trade (although not frictionless trade, as we have demonstrated in previous blogs); or the flexibility to tilt the level playing field and provide state support to fledgling tech businesses. Because at the moment the level playing field is one red line that the EU will not contemplate crossing.