British Prime Minister Boris Johnson waves as he arrives at Downing Street.

Leon Neal | Getty Images News | Getty Images

LONDON — The British government has opted to press on with a controversial bill that could ultimately undermine a Brexit divorce deal it signed last year, despite an ultimatum and the threat of legal action from the EU.

The stakes are getting higher between both sides after the U.K. government published plans that, if legislated, could alter legally-binding Brexit agreements with Brussels.

The U.K.’s Internal Market Bill would grant the British government powers to not consult the EU in state aid cases involving the trade of goods between Northern Ireland and the rest of the EU. The U.K. had agreed to do the opposite when signing its divorce deal with the EU in January. The bill would also potentially change requirements that Northern Irish firms complete export summary declarations when shipping goods to the mainland.

The shock move from Westminster could break international law and jeopardize not only a trade deal with the EU, but also with the U.S.

In an emergency meeting Thursday in London, European officials told the U.K. government to amend its plans “in the shortest time possible and in any case by the end of the month.”

“By putting forward this Bill, the U.K. has seriously damaged trust between the EU and the U.K. It is now up to the U.K. government to re-establish that trust,” the EU said in a statement after the meeting. 

It is a precondition for the EU that the U.K. respects previously legislated deals before concluding any trade agreement with the U.K.

Michael Gove, who represented the U.K. government in that meeting, said the British Cabinet “would not be withdrawing” the new legislation plans.

He added that the Internal Markel Bill does not override previous commitments.

The EU disagrees and said it “will not be shy in using” all the available legal means if the U.K. goes ahead with the bill in its current form.

Nobody knows whether this is posturing or if it is setting up for a no deal.

Thomas Pugh

U.K. economist at Capital Economics

In the meantime, there will be further meetings between both sides next week.

They have been negotiating a new trade arrangement, to be applied from Jan. 2021, since March.  But the coronavirus pandemic prevented meetings between the two sides for some time. Even after a promise to speed up talks during the summer, there has been no significant progress.

They remain stuck over state aid and fisheries.

Some analysts believe the latest escalation over the bill could be a negotiating tactic, aiming to bridge those differences. Others have changed their forecasts, predicting that a failure in trade talks would be the most likely outcome.

“Nobody knows whether this is posturing or if it is setting up for a no deal,” Thomas Pugh, U.K. economist at Capital Economics, told CNBC’s “Squawk Box Europe” Friday.

Without a trade agreement before the end of the year, trade between the EU and the U.K. would be done under World Trade Organization rules. This would mean higher costs and barriers for businesses on both sides of the English Channel, in comparison to the current regime.

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