Written Statement: Assessment of the Withdrawal Agreement and the UK’s proposed future relationship with the EU

As Members will be aware, at the meeting of the European Council on Sunday 25 November, the UK and the EU signed off the Withdrawal Agreement and the linked Political Declaration on the future relationship between the UK and the EU27. 

This Written Statement provides the Welsh Government’s assessment of the deal reached. It is intended to inform Assembly Members about the implications for Wales in advance of the debate and vote in the National Assembly next week.

As I set out in my Oral Statement to the National Assembly on 20 November, it is important to distinguish between the Withdrawal Agreement and the Political Declaration.

The Withdrawal Agreement establishes the terms of the UK's withdrawal from the EU and offers legal certainty once the Treaties and EU law cease to apply to the UK.

A Withdrawal Agreement is desperately needed. Securing the transition period is essential to avoid a cliff edge in just four months’ time. The Withdrawal Agreement also includes a mechanism for extending the transition period – something we have been calling for, although the one-off extension option it allows is more limited than we would wish.

The Withdrawal Agreement also sets out the protection of citizens’ rights, which will secure the status of the EU citizens who have made their lives here and of UK nationals, who have chosen to live and work or retire elsewhere in Europe.

It includes the legal text to provide the ‘backstop’ mechanism to ensure there is no hard border on the island of Ireland, a necessity in protecting the Good Friday Agreement.

Some elements of the Withdrawal Agreement are problematic, notably some of those related to the so-called backstop – for example, the failure to commit the UK to  progressive alignment, rather than just a non-regressive arrangement, with EU standards and rights in terms of the environment and labour market. Those elements are derived from the inadequacies of the UK Government’s position, which shapes the Political Declaration. But we recognise the importance of the main building blocks of the agreement.  

The Political Declaration sets out a framework for the UK’s future relationship with the EU27, including the economic and security partnerships and the institutional arrangements required to negotiate the future relationship and its governance thereafter.

Although this document has been developed since an outline was published on 14 November, it remains the case that it fails to provide clear guarantees about a future relationship with the EU27 that would protect the interests of Wales and the UK as a whole. It remains inadequate and, as set out below, does not provide the right basis for the UK’s future relationship with the EU. 

The Welsh Government’s position

In January 2017, the Welsh Government, together with Plaid Cymru, published Securing Wales’ Future. Our White Paper set out the least damaging form of Brexit. As we took an evidence-based approach, it is little surprise that the position of the business community, trade unions and prominent independent think tanks is closely aligned to ours.

The Welsh Government has been clear and consistent in its six priorities, which are:

• Participation in the Single Market and a customs union.

• A new migration system that links migration more closely to employment while protecting employees from exploitation.

• Maintaining social and environmental protections, including workers’ rights.

• The vital importance of a transition period to avoid a ‘cliff edge’.

• Wales not to lose a penny of funding due to Brexit, as promised during the referendum.

• A fundamentally different constitutional relationship between the devolved governments and the UK Government – based on mutual respect and no claw back of devolved powers to Whitehall.

Welsh Government Ministers have used every opportunity to influence the UK’s position by providing evidence from our White Paper – and the series of detailed policy documents, which have followed it – and by providing practical examples of the damage the UK Government’s approach would create to our economy and society. 

At each iteration of the UK Government’s position, we have seen movement towards the views we set out in our White Paper. This is reflective of the UK Government’s many red line positions being undeliverable; unacceptable to the majority and totally incompatible with independent evidence.

This is most evident in relation to customs arrangements, where the UK Government has moved towards a short to medium-term position of remaining in a customs union in all but name. It remains our view that the UK Government has not gone far enough.

The following evaluates the position reached in the Political Declaration against the priorities we set out that are covered in the declaration. The vital issue of replacing EU funding is not covered in the Withdrawal Agreement or Political Declaration and the Welsh Government continues to make the case to the UK Government, in line with our policy set out in Regional Investment in Wales after Brexit and Reforming UK Funding and Fiscal Arrangements after Brexit.

We also continue to seek new constitutional arrangements in line with our policy paper Brexit and Devolution, although we were successful in protecting our devolution settlement through securing fundamental changes to the EU Withdrawal Act and agreeing the associated Intergovernmental Agreement, and we continue to make good progress on framework agreements.

Participation in the Single Market and a customs union

The Welsh economy is closely integrated with the EU Single Market and some 60% of identifiable Welsh goods exports go to EU countries. Independent analysis shows that any significant friction or reduction in access to the Single Market will be damaging and the greater the reduction, the worse the consequences will be in terms of reduced or negative growth for the economy as a whole and for specific sectors.

There is strong consensus among mainstream economists that replacing Single Market participation with World Trade Organisation (WTO) rules – as the case would be without a replacement trade deal – could result in a UK economy up to 8% to 10% smaller than would otherwise be the case. This would devastate trade across a number of sectors, including food, automotive and a wide range of manufacturing sectors in Wales.

A free trade agreement with the EU along similar lines to the recent agreement with Canada could result in the economy being some 6% smaller. Analysis also shows that even close alignment to the EU in the form of EEA membership could result in the economy being some 2% to 4% smaller than would otherwise have been the case.

As set out in Securing Wales’ Future, all the credible evidence shows the imposition of tariffs or non-tariff barriers, such as product certification between the UK and the EU, will be damaging to businesses in Wales and the UK and most economists recognise that non-tariff barriers have a more significant economic impact than tariffs. This is why – alongside a customs union – our White Paper advocated continuing to ensure the domestic regulatory regimes for goods and services within the UK are compatible with those of the EU.

The combination of the dynamic alignment of regulatory standards and a customs union would help towards ensuring the UK retains full participation in the Single Market.

The UK Government has moved a long way from its initial ill-advised red line positions, which were set out in the Prime Minister’s Lancaster House speech of January 2017. By failing to be clear about the difficult trade-offs needed in the negotiations, and its unwillingness to embrace a solution which ensures the closest possible relationship between the UK as a whole and the EU, short of membership, the UK Government has lost the negotiating advantage, which could have been gained.

The UK Government has finally recognised the importance of customs alignment with the EU, and the Political Declaration sets out an ambition to deliver tariff-free trade between the UK and the EU27. A single UK customs territory forms the basis of the ‘backstop’ arrangements, which, in all but name, is a customs union.

However, while the Political Declaration sets out the intention to “build and improve on the single customs territory provided for in the Withdrawal Agreement” this falls short of a clear commitment that the UK will look to agree a permanent customs union with the EU.    

By failing to provide clarity on the future customs arrangements, this will only create continued uncertainty for businesses on the future trading relationship with Wales’ most important trading partner. This uncertainty will inevitably continue to impact on investment decisions and increase the incentives for businesses to focus their investment on EU27 countries to secure the guarantee of tariff-free trade with other EU countries.

While the UK Government has recognised the importance of regulatory alignment for goods, it has decided services sectors should not be aligned in the same way – the Political Declaration reflects this choice, offering market access based only on ‘equivalence’, which is likely to involve increased regulatory friction. This will inevitably affect the £700m of services sector exports from Wales to EU countries. We see no evidence to support the position that the benefits of regulatory flexibility for the service sector could outweigh the costs that reductions in market access will inevitably bring. The UK Government’s position on the services sector will negatively impact trade and damage the manufacturing sector, which provides services and traded goods.

The future economic relationship set out in the Political Declaration does not therefore set out a long-term relationship which provides for participation in the Single Market and a customs union that is needed to ensure stability and certainty for the long term.

A migration system linked to employment while protecting employees from exploitation

While on many aspects of the further economic relationship we have seen the UK Government move towards our position, in relation to mobility and migration, the UK Government remains intent on restricting the supply of labour from the EU and – more recently – has called into question the contribution of EU citizens who have moved to the UK to the benefit of businesses, public services, communities and society as a whole.

The Political Declaration does not include a detailed migration and mobility framework and is based on the assumption of very-limited rights for people to move between the UK and the EU27 for purposes other than short-term visits. This will deprive UK citizens of opportunities to move to live and work in other EU countries and is likely to pose fundamental problems of labour supply for businesses and public services. 

The UK Government’s position is underpinned by the report by the Migration Advisory Committee, ahead of a forthcoming White Paper on migration expected later this year. In its reaction to the committee, the UK Government has begun to signal its intention to move to  a migration system which no longer provides preferential access for EU nationals and a visa system that selects certain skills and occupations, as well as a salary threshold of £30,000 for any jobs filled by incoming non-UK nationals.

In our policy paper, Brexit and Fair Movement of People, we set out a future migration policy consistent with achieving the overriding goal of securing continued full and unfettered access to the Single Market. We believe future migration from Europe to the UK should be more closely linked to employment – either the offer of a job or the ability to find one quickly as a number of other countries in Europe already require.

We also believe our future relationship with Europe should include a differentiated and preferential approach to immigration for EEA and Swiss nationals. Migration policy needs to recognise that migration is not just about individuals, but about their families too. People who come here to work should access the safety net of the benefits system and public services in broadly the same way as they do now.

In our view, migration policy and the future mobility framework needs to be responsive to the needs of the economy and society, rather than constrained by arbitrary quotas, salary thresholds and politically-driven migration targets.

EU citizens make a hugely-positive contribution to life in Wales. Wales will continue to need migration from EU countries to help sustain our private and public sectors.

Nearly 80,000 people from other EU countries currently live in Wales, of whom the majority are in employment. The UK Government’s approach would restrict labour supply in Wales and could lead to the insolvency of many businesses reliant on the flow of labour from EU countries.

Wales has particular vulnerabilities in certain key sectors.  For instance, we have high numbers of EU workers in the food-processing sector and virtually all of our vets working in the food hygiene sector are EU nationals. This makes the entire food supply chain particularly vulnerable to a loss of EU labour. We are reliant on EU workers in health and social care; in higher education, tourism and hospitality and manufacturing.

We continue to press the UK Government for a future approach to migration based on having a job offer, or a realistic chance of finding a job, rather than one based on arbitrary cap on migration. A salary threshold almost £4,000 higher than the average salary in Wales will only make it harder for businesses to recruit the labour they need. 

But the UK Government’s approach, as reflected in the Political Declaration, rules out the Welsh Government’s preferred approach to migration.

Maintaining social and environmental protections, including workers’ rights.

Since the UK joined the EU there has been significant and sustained progress in developing minimum standards for vital quality-of-life issues, such as the environmental, rights at work and equalities.

We have again seen the UK Government move from its initial position as it has recognised the importance of protections and rights in these areas. While the Withdrawal Agreement includes a commitment that both the UK and EU will prevent any reduction in the levels of environment and labour protections as they stand, we believe strongly that the UK should commit to a dynamic relationship rather than simply non-regression.

The UK has benefitted from the high levels of environmental protection and protections for workers’ rights as members of the EU and we would support continued alignment in the future.

The vital importance of a transition period to avoid a ‘cliff edge’

Since the referendum vote, we have consistently called for a transition period, recognising the need for sufficient time to conclude negotiations about the UK’s future relationship with the EU.

Despite initial claims from the UK Government that the negotiations could be concluded swiftly, a transition period has been set for 21 months from the date we leave the EU.  

We have lobbied both the UK Government and the EU27 about the need to enable an extension to the transition period. Given the complexity of the negotiations and the UK Government’s track record to date, the option to extend the transition period to agree a future deal which safeguards jobs and the economy is essential. It makes no sense to face yet another cliff edge in December 2020, or indeed December 2022. 

While the Withdrawal Agreement includes a mechanism to extend the transition period, we do not think the option to extend should apply only to the circumstance where the UK Government wishes to avoid invoking the Northern Ireland ‘backstop’. There are likely to be a number of areas where the negotiations may require additional time to ensure the right deal is agreed beyond those matters important for our future trading relationship.

We also believe the length of the transition period should reflect the needs of businesses and public bodies and not be restricted by an arbitrary timeframe – the Withdrawal Agreement agreed on 25 November refers only to the possibility of an extension of ‘one to two years’.

Conclusion

Independent analysis by the National Institute of Economic and Social Research (NIESR) estimates that under the “Chequers scenario”, which forms the basis for the Political Declaration, the UK economy will be 4% smaller than it would have otherwise been. It is estimated that half of this reduction would be due to the loss of services trade with the EU and there are significant negative impacts on the economy from the impact of reductions in migration. This assessment is consistent with the consensus view summarised in Securing Wales’ Future.

The debate on the Withdrawal Agreement and Political Declaration will be an opportunity for the National Assembly to send a clear message to the UK Government about the priorities for Wales and the way forward.

In the Welsh Government’s view, based on the analysis set out in this Written Statement, the outline of the UK’s future relationship with the EU in the Political Declaration does not protect or reflect the interests of Wales and the rest of the UK.

We welcome the moves the UK Government has made towards our position, but the Political Declaration falls far short of providing the stability and certainty needed for the long term.

The UK Government must embrace the future relationship with the EU set out in Securing Wales’ Future. If this is adopted then the Withdrawal Agreement, which the EU is reluctant to reopen, could remain largely unchanged.