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December 15, 2020


UK/EU: Why in Brussels, arbitration must not be called arbitration

BY Carsten Nickel

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As the negotiations about a post-Brexit trade agreement continue, level playing field provisions and their enforcement remain the central stumbling block. However, the EU’s position has continued to shift away from earlier ideas of “dynamic alignment” and its upfront enforcement through independent regulatory authorities in the UK (akin to the European Commission). This should bode well for a deal, both because it is in line with the UK’s insistence on greater sovereignty after Brexit and because the EU’s factual movement on these questions may allow PM Boris Johnson to point to some very specific wins once it is time to sell any deal at home.

The challenge now is to agree on the exact shape of what the EU side is referring to as a “mechanism” that would kick in if one side deemed the other to be deviating too strongly from mutually agreed rules for fair competition. Work on such a consultation process has become necessary after the EU’s position shifted from upfront regulatory enforcement to ex-post retaliation. This – principally positive – evolution, however, gave rise to new tensions, as the UK squarely rejected the idea of any “automatic” imposition of retaliatory tariffs. Indeed, plans for automatic retaliation seem to have motivated the UK side to claim several days ago that the EU was coming up with “new demands” at the last minute.

For the EU, in contrast, strict ex-post retaliation was the logical result of moving away from upfront regulatory supervision. Among commentators, this situation triggered plenty of talk about the “philosophical” differences between both sides last week, as Johnson reiterated his insistence on sovereignty. Since then, the public debate has moved on, but this week’s apparent focus on the “mechanism” still reflects the circle both sides have to square given their different interpretations of sovereignty.

In practical terms, the purpose of the envisaged mechanism is to introduce a new layer of consultations between the two steps of, first, identifying regulatory divergence and, second, imposing retaliatory tariffs. For the UK, this intermediate step needs to be as substantial as possible, because its understanding of sovereignty is focused on giving democratically responsive governments the ability to balance politically between market access and regulatory change. The greater the room for political negotiation with the EU about the trade-offs between regulatory convergence and market integration, the greater the UK’s sovereignty.

For the EU, in contrast, the consultation mechanism must not be too substantial. Most importantly, it must not be called arbitration. This is because the EU’s understanding of sovereignty mainly means the integrity of its legal order – and only then democratic responsiveness. Under the EU’s legal order, the ultimate arbiter is the Court of Justice of the EU. Whatever the EU may agree with the UK under a new mechanism cannot override or bind the bloc’s highest court. Therefore, arbitration can exist in the EU’s customs union with Turkey, because Ankara accepts the EU’s top court as the ultimate arbiter, but any agreement with a UK outside that customs union must be limited to political consultations.

While designing the new mechanism, balancing between these two views on sovereignty is the (only seemingly legal, in fact highly political) challenge both sides are facing right now.

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