BRUSSELS—More than two years after Britons voted to break from the European Union, U.K. Prime Minister Theresa May and the leaders of the remaining EU members approved a hard-fought, 585-page treaty setting out the terms of the U.K.’s divorce from the bloc.
Now the harder part begins.
First, Mrs. May faces the political fight of her life to win backing for the agreement in her own Parliament, which is expected to vote on the deal in early December.
Dozens of her fellow Conservative party members, as well as the opposition Labour Party, have threatened to reject the deal. If Mrs. May loses, she will be racing against the clock to renegotiate the pact—and secure its approval—before the U.K. is due to leave the bloc March 29.
EU leaders warned that if the British parliament votes down the agreement, better conditions won’t be offered.
Speaking Sunday morning, Dutch Prime Minister Mark Rutte said the deal was “very much balanced” with no winners or losers between the U.K. and the EU.
He warned that if the British parliament votes the deal down, London would struggle to negotiate further changes to the deal.
“This is the deal on the table. I don’t think there’s anything more, no,” Mr. Rutte said. “I don’t want to contemplate the no vote. I think it will be a yes vote. But…I think this is the max we can all do.”
Even if the Brexit deal wins parliamentary approval, the U.K. will next spring kick off negotiations—likely to last years—to hash out comprehensive new trade and security relations with the EU. That’s because when Britain voted to leave the EU, it effectively decided to unravel four decades of common decision making—on laws on regulations covering everything from sharing information on criminals and terrorists to food regulations to value-added taxes—that govern the U.K.’s relationship with its biggest trading partner.
As a result, less than four months from Britain’s departure from the EU, Brexit remains a leap into the unknown, with businesses, banks and households unsure how to prepare.
Already Mrs. May has started a political offensive to sell the deal to her reticent lawmakers. On Sunday Mrs. May published a “letter to the nation” in an effort to rally the British people behind her. U.K. government officials have meanwhile planned a public relations blitz in the coming days to warn of the economic blow to the U.K. economy leaving the bloc with no deal at all. Analysts expect Mrs. May to return to Brussels to seek further concessions if the Brexit agreement is voted down by Parliament in early December.
European officials privately say the possibility of fresh talks hasn’t been discarded and some believe the negotiation period could be extended beyond March.
On Sunday, British and EU leaders signed off on the so-called withdrawal agreement, which deals with a number of divorce terms surrounding the U.K.’s exit.
Britain has agreed to pay around $50 billion to the EU mainly to cover commitments it had made to the bloc’s budget. The U.K. will guarantee a broad swath of legal rights to the roughly 3 million EU citizens living in the U.K., and the EU will reciprocate with respect to an estimated 1.3 million U.K. citizens in its member states.
The agreement also seeks to ensure that no physical border will re-emerge between Northern Ireland, which is part of the U.K., and the Republic of Ireland—an EU member.
Along with the withdrawal agreement, which is legally binding, the leaders ratified a statement setting out the parameters of the future trading, economic and security relations between the EU and the U.K.
However, that nonbinding document, at just 36 pages, is little more than a statement of principles.
The two sides had hoped to kick off talks on future relations by setting out a clear framework for trade and security ties in the document. But with Mrs. May’s grip on power tenuous, the leaders chose to remain vague, leaving both sides facing another odyssey of negotiations ahead.
On March 30, the U.K. will enter a standstill transition period until December 2020 where EU rules will continue to apply. That period is meant to give both sides time to hammer out new trading and security ties. The agreement, recognizing the difficulties of securing accords in such a short space of time, includes the possibility of extending the transition until as late as December 2022.
The promise to avoid a hard border with Ireland could mean that after the transition, the U.K. will stay inside the EU’s customs area for an indefinite period, eliminating the need to collect tariffs on cross-border trade in goods. That would be good news for businesses, says Ross Denton, an EU trade expert at law firm Baker McKenzie. “Staying in a customs union is a no-brainer for business,” he said.
For the future, U.K. and EU officials must fill in enormous gaps across a broad swath of issues, covering matters such as trade but also issues such as British access to European criminal databases, whether a U.K. customer’s data can be shared in the EU and a London banker’s ability to market French government bonds.
At the heart of the talks will lie a trade-off: to what extent is the U.K. willing to cede sovereignty to the EU in return for access to customers in its 27 member states?
The closer Britain follows the EU’s rules, the fewer obstacles its firms will encounter in exporting to the country’s main trading partner.
Britain’s continued membership of the EU’s customs area and any future decisions to follow EU rules to ease trade with the bloc would complicate the U.K.’s desire to build a future outside the bloc,for example by striking its own trade deals with countries such as the U.S.—a priority of pro-Brexit campaigners.
The EU has ruled out “frictionless” access to the EU’s single market, which entails following the bloc’s rulebook in areas such as food safety, product standards and allowing free movement of labor from the EU, which will stop once the transition period has ended.
Indeed, Brussels has told the May government that while the U.K. remains inside the EU’s customs union—and if it wants a close future trade relationship—it must continue to follow the bloc’s rules on state aid, environmental, labor and social standards, something that is anathema to hard-line Brexiters.
“There are big areas of ambiguity,” says Stephen Adams, a trade expert at Global Counsel, a consulting firm.
In other areas, there is already agreement. The U.K. has agreed to protect the EU’s 3,000 geographical denominations on products like Champagne or Gorgonzola cheese.
In financial services, London-based bankers will no longer be able to sell products like loans to EU clients. However, the two must yet decide how much access to grant to each other’s markets. As much as 15% of the EU finance business currently flowing through London could be routed through Europe instead, according to U.K. Treasury officials.
Both sides want to continue deep cooperation over internal security.
London and the EU-27 expect a future agreement involving mutual exchange of passenger data, DNA, fingerprint and vehicle registration data, cooperation against terrorist financing and exchange of information on wanted persons and criminal records.
But real-time access of British law enforcement to some databases, including those at Europol, the EU’s police agency, could be jeopardized. The EU says the U.K. won’t have access to the European security database that issues alerts on missing persons, wanted criminals and terrorist suspects.
The depth of cooperation will rest on British willingness to accept EU courts’ interpretation of the bloc’s rules and laws in this field, something hard-line Brexiters oppose.
Even fishing, which accounts for 0.04% of the British economy, threatens to morph into fractious trade fight. Until now, EU fishing waters are effectively pooled, allowing boats from any EU country into another’s waters. After Brexit, British control of its territorial waters will be restored and it will control access to those waters.
The U.K. wants an annual agreement with the EU setting fishing quotas but has warned that will reduce EU fleets’ access.
Yet EU governments are challenging this with France and Spain pushing to make a future trade deal contingent on continued access to British waters along current lines. Britain’s fishing industry, while small, is politically vocal. Sunday’s agreement says the U.K. and EU should make best efforts to settle the issue by July 2020.
Write to Max Colchester at max.colchester@wsj.com and Laurence Norman at laurence.norman@wsj.com
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