MNI INSIGHT: Brexit Headed For Canada-Dry With Inducements

--Ireland Remains Key Stumbling Block, But Look To Avoid Showdown

By Kevin Woodfield

     LONDON (MNI) - Brexit negotiators are likely to emerge from next month's

European Union Leaders' summit with a so-called 'Canada-dry' future UK-EU

trading arrangement on the table -- but one which could have potential bells and

whistles attached to help buy time and keep both sides talking into a transition

period, MNI understands.

     The EU-27 may use their leverage on whether to grant the UK a transitional

arrangement after EU departure next March to tie London down over the Irish

border question. But more likely is that Brussels will insist on status quo

terms for the transition period, scheduled for agreement at the March 22-23

European Council, and leave the hard bargaining over the 'end-state' trading

relationship to a later date.

     Politics continue to motivate both sets of negotiators and they remain far

apart, defending their respective rules of the game. But they also recognise the

need to give a chance for mutual economic self-interest to develop in the talks.

Some 43% of UK trade is with the rest of the EU and, for the EU-27, the 10% of

its trade that is with the UK is a material factor.

     --ECJ STUMBLING BLOCK

     MNI therefore understands that Brussels may well offer a 'Canada-dry' trade

arrangement with what are being termed 'hooks'.

     The inducements would potentially provide the UK wider EU single market

access -- and could extend to financial services as well as other crucial areas

such as mutual recognition in the aerospace and pharmaceutical sectors --

provided the UK in return largely dismantles its red lines in two critical

areas: jurisdiction and paying into the EU budget.

     The former concession would amount to recognising the European Court of

Justice or a body that largely replicates the ECJ, which Norway is seen as

having accepted with the European Free Trade Association (EFTA) court.

     While the Brexiteers in Prime Minister Theresa May's government would still

see such an outcome as a betrayal of the June 2016 referendum result, EU

negotiators believe they can play for time, MNI is hearing. The more the clock

ticks, including in a transition period, the closer the UK would be to a cliff

edge and the more likely it would move towards an arrangement that would be a

customs union in all but name.

     --IRISH SOLUTION

     Under this line of reasoning, the Irish border issue could be resolved

without resort to UK technological solutions to borders, solutions the EU-27

choose to dismiss as fanciful.

     A customs union as the basis for the future trading relationship has been

mooted at several stages - in 2016 by UK civil servants in London and Brussels

and more recently by Ollie Robbins, May's Brexit advisor.

     However, the UK is seen on the Continent, with much apparent gnashing of

teeth, as having gone backwards again with May's reiteration this week that she

does not favour a customs union.

     Brussels, Berlin and Paris have let it be known that UK ideas about narrow

or differing levels of regulatory alignment (or the 'three buckets') will not

sit with EU rules, and MNI understands that they now accept PM May might not say

anything substantive at all on the future trading relationship ahead of the

March summit.

     Nor is anything substantive expected from this week's sherpa meetings in

Brussels or the UK Cabinet committee discussions in London.

     The Netherlands and Sweden are understood to be more accepting of the UK

government's position but not expected to countermand these larger member

states. Brussels still holds out hope that a more sober assessment in the UK of

its national economic interests could yet bring a customs union back into the

picture.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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