EU offers only free trade deal to post-Brexit UK

At its core, the EU is offering an "ambitious" free trade agreement to the UK as the UK wants to pull out of the single market and the customs union as it leaves the EU.

"It should come as no surprise that the only remaining possible model is a free trade agreement. I hope that it will be ambitious and advanced – and we will do our best, as we did with other partners, such as Canada recently," EU Council chief Donald Tusk said, adding, "but anyway it will only be a trade agreement".

The EU-Canada trade deal took seven years.

Tusk said the EU and UK should also maintain close cooperation on fighting terrorism and international crime, defence and foreign affairs, research and education.

EU officials are arguing that the bloc cannot offer what seems to be the request from London, i.e. a "single market light" or a "customs union light", as one senior official described it.

"The EU cannot grant the rights of Norway, with the obligations of Canada," Tusk said, who described May's approach as "pick and mix".

Norway has access to the single market, and takes most of EU regulation over as part of the European Economic Area. Canada and the EU has singed a free trade agreement that entered into force last year.

EU officials however concede that May's speech last Friday on Brexit was "more realistic", but "important contradictions" remain.

"I fully understand, and of course I respect, Theresa May's political objective to demonstrate at any price that Brexit could be a success and was the right choice," Tusk told reporters in Luxembourg Wednesday. "Sorry, it's not our objective," he added.

Officials in Brussels argue that the single market only functions with one set of rules, and with one court overseeing those rules, which the UK ruled out as a post-Brexit scenario.

A free trade agreement can align two countries economically tightly close together, but it goes with the two retaining their own rules and regulations.

Officials warn that because of diverging rules between the EU and the UK, frictionless trade will not be possible, border checks will have to be installed.

The six-page guidelines published Wednesday will be subject to change as member states start debating them ahead of the summit of EU leaders at the end of March when they are expected to be adopted.

Based on the guidelines, UK and EU officials are expected to negotiate a political framework agreement on the future relationship that will be attached to the Brexit withdrawal agreement, but actual trade talks will only start once the UK is not an EU member.

Unlike the withdrawal agreement, the future trade deal or deals will have to be ratified by all the regional and national parliaments of the EU.

The devil in the details

The guidelines say that as in other free trade agreements, rules of origin will have to apply, aims for a continued reciprocal access to fisheries resources, and an agreement on aviation is needed to continue smooth air travel.

The EU also wants the UK to respect the 'level playing field', making sure that the UK will not undercut the EU in taxes, or massive state subsidies.

"The UK is big and is closer to us [EU], it is a competitive economy, therefore we believe this should be required in this particular case," one senior EU official said about demanding a level playing filed between the EU and the UK.

The EU would be able to use "remedies" if the UK attempts to unfairly undercut the bloc on competition or taxes.

On services, a key issue for the UK with London being a world financial centre, the EU says "host state rules" should apply. May last week proposed a "comprehensive system of mutual recognition" for financial services, which an EU official described as an unclear concept.

The draft guidelines also touch on dispute settlement, arguing that if EU legal concepts are used then the European Court of Justice (ECJ) needs to have a role, which is usually a red line for the UK.

EU ambassadors had their first discussion of the draft guidelines on Wednesday.

To set the mood, the former Polish prime minister did not skip the opportunity to put Brexit into historical context.

"[…] Because of Brexit we will be drifting apart. In fact, this will be the first FTA in history that loosens economic ties, instead of strengthening them," Tusk said on Wednesday.

"Our agreement will not make trade between the UK and the EU frictionless or smoother. It will make it more complicated and costly than today, for all of us. This is the essence of Brexit," the EU council head said.