(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. When the U.K. rescued Flybe two weeks ago, alarm bells rang not only at the regional airline’s rivals but also atop the European Union.One of the EU’s biggest roles is limiting the subsidies member states can give companies to prevent them getting an unfair advantage over competitors. After Brexit, the EU wants the U.K. to go on playing by these rules. Flybe showed the
British may not be so keen.That’s just one potential flashpoint as the EU and U.K. prepare to negotiate a landmark trade deal this year. For Europe, the trade-off is clear: The further
Britain strays from the bloc’s rulebook, the more its access to the single market will be curtailed. This is essential to avoid undercutting the bloc’s economy. For Prime Minister
Boris Johnson, Brussels’s price for a deal may be too onerous.The European Commission, which will negotiate on behalf of the 27 remaining national governments, will on Wednesday ask them for a mandate setting out the details of the broad accord that the bloc wants to strike with the U.K. Member states plan to give their green light on Feb. 25, paving the way for the first round of talks at the start of March.That will trigger 10 months of tricky negotiations, with potential clashes everywhere you look. Here are five:Keeping Close or Moving Away?The EU insists on a level playing field, meaning that it wants the U.K. to stick to the same rules on tax, state aid, workers’ rights, and environmental protection as it did when it was a member. The U.K. doesn’t want to, as the whole point of leaving the EU in the first place was to break away from the diktat of Brussels.“There will not be alignment, we will not be a rule-taker,” Chancellor of the Exchequer Sajid Javid told the Financial Times this month.This quarrel is likely to hang over the entire negotiation. The EU wants both over-arching level playing field commitments as well as sector-specific ones. It says it’s ready to give the U.K. a free-trade deal without
tariffs and quotas, and one that’s as least as comprehensive as its agreement with
Canada, but Britain’s size and proximity means the bloc wants greater safeguards than in previous agreements.But how negotiators square the EU’s demand for alignment with the U.K.’s desire to leave the clutches of
Brussels rule-making isn’t immediately apparent.Fish Versus Finance“You may have to make concessions in areas like fishing in order to get concessions from us in areas like financial services,”
Irish Prime Minister Leo Varadkar told the
BBC this week.These are the two big bargaining chips. The U.K. wants to take back control of its waters, but knows
France and
Spain are desperate to go on fishing them; the EU thinks Britain wants its financial services industry to have as extensive a level of access to its single market as possible. In the
Brexit divorce agreement, the two sides set themselves a June deadline to reach a deal on both.It’s why the EU is determined to negotiate simultaneously on as many of the matters in the future relationship as possible: It thinks it holds most of the cards -- as long as it can play them all in one go.“All this needs to be coordinated so that we maximize our negotiating leverage, because that is what each side tries to do in a negotiation,” Sabine Weyand, the commission’s director general for trade, said on Dec. 17.Geopolitical CloutThe U.K. has potential leverage in other areas, such as defense. Britain has
nuclear weapons, Europe’s biggest defense budget, a permanent seat on the
United Nations Security Council, and an extensive intelligence network. All these make the country a key partner for the EU. Even as they argue about other things, both sides will want to continue co-operating on
sanctions policy and combating terrorism.But the EU is wary about giving the U.K. access to some of its most sensitive data. That includes the Schengen Information System which
police and border guards (including at the moment, those in the U.K.) use to check the whereabouts of suspicious people.With Britain and the EU sharing similar objectives, this shouldn’t become the biggest sticking point. But that’s exactly what many people said about the Irish border before the first set of negotiations. And remember how that turned out.Who’s In Charge?Central to any agreement will be how it is governed. Breaking away from the European Court of Justice was a key plank of the pro-Brexit campaign, yet the EU insists that only the ECJ can arbitrate on anything that relates its own laws -- in particular how any level playing field commitments are applied.If the British government hands out state aid, will the
European Commission continue to have a say over whether it is lawful? Can
London view a European court as a disinterested referee?This isn’t the most obvious bone of contention, but the issue wasn’t fully addressed in the U.K.’s withdrawal agreement and could return to haunt negotiators.EU UnityAside from the obvious U.K.-EU tensions, it’s possible that the remaining EU member states won’t always see eye-to-eye on what their common position should be. Will governments that have no interest in fishing in British waters jeopardize a trade deal that would greatly benefit their economies?The transition period following Britain’s exit from the EU is due to expire at the end of this year, making a new EU-U.K. trade accord essential to avoid an economically disruptive separation.The British have already signaled they will try to exploit any splits among EU members. They tried to do so during the withdrawal negotiations to little effect; but, with different countries having different priorities across the bloc, they hope that, this time, the strategy could prove to be a little more fruitful.\--With assistance from Samuel Dodge.To contact the reporters on this story: Ian Wishart in Brussels at iwishart@bloomberg.net;Jonathan Stearns in Brussels at jstearns2@bloomberg.netTo contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Edward EvansFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.