London (CNN Business)Britain and the European Union have taken their first steps toward negotiating a new free trade deal, staking out sharply divergent positions Monday that point to more fraught negotiations and another year of uncertainty for businesses.
Speaking less than three days after Britain left the European Union, the bloc's chief Brexit negotiator, Michel Barnier, told reporters in Brussels that the United Kingdom can only avoid tariffs and quotas by agreeing to maintain open and fair competition with its largest export market.
"Will [Britain] continue to adhere to Europe's societal and regulatory model in the future, or will it seek to diverge? The UK answer to this question will be fundamental to the level of ambition of our future relationship and the UK must know this," he said.
The United Kingdom is now in a transition period until the end of 2020 during which it must agree to a trade deal with the European Union or risk subjecting British companies to new barriers that could snarl supply chains and make their products and services more expensive.
Yet Brussels and London are set to begin formal discussions next month with different visions. As the European Union was outlining its position, Prime Minister Boris Johnson was making clear he does not intend to follow the bloc's rules and regulations.
"There is no need for a free trade agreement to involve accepting EU rules on competition policy, subsidies, social protection, the environment, or anything similar any more than the EU should be obliged to accept UK rules," Johnson said during a speech in London.
According to a political declaration that accompanied the treaty governing Britain's exit from the European Union, both sides agreed that their future relationship must ensure "open and fair competition, encompassing robust commitments to ensure a level playing field" by upholding existing standards in the areas of competition, employment, government support for companies and climate change.
"These commitments should prevent distortions of trade and unfair competitive advantages," the declaration continued.
Signs that the two sides are already at odds over how to interpret that declaration sent the British pound down about 1% against the US dollar and the euro on Monday as traders worried about the implications for the UK economy of failing to reach a deal.
Battle lines being drawn
Whether Britain should be required to adhere to EU standards on the environment and safety is one of several areas where future clashes appear inevitable.
The European Union wants a deal that includes a role for the European Court of Justice in settling disputes, something that would likely be opposed by London. Barnier also said that EU fishing boats must be able to continue to operate in UK waters, a red line for many British supporters of Brexit.
Negotiations will need to proceed at break-neck pace if a deal is to be secured before the transition period expires. Johnson could ask to extend this deadline, but he has repeatedly promised not to do so. Failure to agree would result in the "hard Brexit" that has long terrified the business community, and prompted the CEOs of companies like Airbus (EADSF) and Nissan (NSANF) to warn of dire consequences.
On Monday, Johnson said that he wanted a comprehensive free trade deal with Europe similar to the one that the bloc has with Canada. But he also said that Britain must be free to strike agreements with countries such as the United States, Australia and New Zealand.
"We are ready for the great multi-dimensional game of chess in which we engage in more than one negotiation at once and we are limbering up to use nerves and muscles and instincts that this country has not had to use for half a century," he told attendees, including the US ambassador to the United Kingdom.
Analysts have warned that the United Kingdom must be realistic about what it can accomplish this year.
Comprehensive trade agreements are typically negotiated over the course of many years, not months, and experts say the best the United Kingdom can hope for this year is a deal with Europe that keeps tariffs at bay but leads to new administrative and regulatory barriers on exports of goods and services.
There are also obstacles to a US-UK deal. America, which already has a trade surplus with the United Kingdom, is not about to grant a deal that showers money on British companies without asking for a lot in return. US demands are anathema to big chunks of the UK population, because they could mean more expensive medicines or lower food standards.
Consequences for business
The path taken by the United Kingdom will have major consequences for companies that have already endured nearly four years of uncertainty.
The global automakers who have built factories in Britain are particularly vulnerable to changes that could disrupt their just-in-time supply chains and production, eroding profit margins that are already razor thin.
The Financial Times reported over the weekend that Nissan, which has a huge plant in England, is considering a plan under which it would shut down its factories in the European Union and focus on the UK market if trade barriers are erected. The Japanese carmaker denied Monday that such a contingency plan exists, saying instead that its "entire business in the UK and in Europe is not sustainable" in the event of tariffs.
"We want our UK team of more than 7,000 people to have the best possible chance of future success, which is why we continue to urge UK and EU negotiators to work collaboratively towards an orderly balanced Brexit that will continue to encourage mutually beneficial trade," Nissan said in a statement.
— Eoin McSweeney contributed reporting.
