U.K., EU Leaders Extend Marathon Brexit Talks

With time running short—a deal has to be in place by Jan. 1 to prevent huge disruption to trade and security cooperation—officials on both sides said negotiators appeared to be finding some common ground though they cautioned much work needed to be done.

The two sides had set Sunday as the day to decide whether it was worth keeping the negotiations going. Following a midday phone call between Mr. Johnson and Ursula von der Leyen, the president of the European Commission, the two leaders said they would try to seal a post-Brexit economic and security deal by Dec. 31.

“Despite the exhaustion after almost a year of negotiations, despite the fact that deadlines have been missed over and over we think it is responsible at this point to go the extra mile,” the joint statement said.

“We have accordingly mandated our negotiators to continue the talks and to see whether an agreement can even at this late stage be reached.”

The agreement must be completed and ratified by Dec. 31 to go into effect at the start of the new year. Failure to reach a deal would mean from Jan. 1 tariffs would be applied for the first time in almost a half-century on some trade between the U.K. and the EU, to which it sends 43% of its exports.

Mr. Johnson’s government won an election a year ago promising to use Brexit to free the U.K. from EU rules, standards and oversight, restoring full sovereignty to U.K. decision makers.

The EU on its side offered a zero-tariff, zero-quota trade agreement, but made it contingent on what European officials describe as fair competition, ensuring the U.K. doesn’t undercut the bloc on social, environmental and labor conditions and doesn’t use government subsidies to generate unfair advantages for its firms.

Some EU member states, including France and the Netherlands, have ratcheted up pressure on the bloc’s negotiating team in recent days to ensure its red lines on this “level playing field” are respected.

While the two sides have fixed most of the text of an agreement, officials say, they continue to spar over how far the U.K. must stay broadly in line with EU standards and separately, over the question of how much future access EU fishing fleets will have to British waters.

Last week, the two sides acknowledged wide gaps on the remaining critical issues and the mood turned grim, with threats of British navy ships being sent to challenge French fishing vessels in British waters after Jan 1.

Yet with talks on the brink of failing, people involved in the negotiations say there has been movement on both sides which at least opens the possibility of a deal even though fixing the details could prove cumbersome. Mr. Johnson told British media on Sunday he still thinks a deal is less likely than no agreement.

On the level playing field, the U.K. has bowed to EU pressure to agree to an independent domestic regulator to oversee the British government’s decisions on government support for private companies, mirroring the EU’s competition authorities in Brussels, officials on both sides said. There are important disagreements over the powers the body would have and how it would enforce its rulings but if those issues are settled, it would be a significant step toward a deal.

Meanwhile, EU officials have stressed that on other level-playing-field issues, it is flexible on the mechanism for maintaining broadly equivalent standards, including ensuring fair arbitration if the U.K. wants to challenge EU decisions on the issue. On the British side, officials have said they could live with an agreement that allowed the EU to take punitive action, like imposing some tariffs, if U.K. standards fell far below EU ones so long as these were narrowly targeted.

On fish, the two sides remain at loggerheads. The EU is demanding a 10-year transition period to shift to new rules which would give British fishermen a far higher quota of stocks caught in U.K. waters. The U.K. has rejected that but said it is open to a short transition.

French President Emmanuel Macron has insisted his country’s 7,000 fishermen won’t be made to pay the cost of Britain’s position to exit from the bloc, and officials say Paris could veto a deal which leaves its fishing sector worse off. However, many EU countries, including Germany, have pointed to the tiny economic stakes at play over the fishing industry, which accounts for a small proportion of economic activity for both sides.

“There is definitely a way out, it’s just whether there is the political will on the EU side to accept that we will not be treated differently from any self-respecting independent economy in the world,” U.K. Foreign Secretary Dominic Raab told Sky News.

Spain’s foreign minister, Arancha González, said on Sunday that she couldn’t see why a deal to manage the two sides’ interdependence couldn’t be settled, saying failure to reach a deal during the Covid-19 pandemic would create a “double whammy” for both sides, with the U.K. being hit the hardest.

Hanging over the negotiating teams is the ever-dwindling time left to finish an agreement, have it approved by EU member states, backed by the U.K. and EU parliament and translated into EU languages by Jan. 1.

European lawmakers are warning that the time left to do this is almost out. EU governments also are pressing to make sure that if an agreement is reached, they have enough time to properly analyze the text. However, officials close to the negotiations believe a way can be found, if necessary by provisionally applying the deal from Jan. 1, leaving formal ratification until later.

An agreement would reduce, though not eliminate, significant border disruption on Jan. 1, affecting trade and personal and business travel. Long lines of trucks already have built up at some English Channel ports, in part because businesses are stockpiling ahead of the new year.

Write to Laurence Norman at laurence.norman@wsj.com and Stephen Fidler at stephen.fidler@wsj.com