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Beyond Brexit: The End of the Beginning

Andrew Hood
15/01/2020

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United Kingdom

Given the UK Government’s policies and large parliamentary majority, there is no longer any realistic scenario in which the UK either remains in the EU or agrees on ‘near frictionless’ trade with the EU. The UK is set to leave the EU at the end of the month. There will follow a transition period that will maintain the status quo until the end of the year.

There are then three main possible scenarios:
  • a limited EU/UK free trade agreement with no tariffs but significant trade friction;
  • ‘No Deal’ and a default to WTO terms, with tariffs and only basic trade access; or
  • an extension of the 31 December deadline (although the UK is ruling this out).

Given the UK Government’s policies and large parliamentary majority, there is no longer any realistic scenario in which the UK either remains in the EU or agrees on ‘near frictionless’ trade with the EU.

The EU-UK Withdrawal Agreement runs to some 535 pages setting out the terms of the UK's departure from the EU.  The Political Declaration sets the framework for the future EU-UK trading relationship and runs to a mere 27 pages – leaving a lot of blanks to be filled on what the agreement will cover; what position the UK will take on important points of detail; and how business can feed in to the UK (and EU) position.

What is clear is that there will be significant frictions: it remains to be seen how significant and in what sectors. The negotiations will be challenging, to put it mildly. Here’s a brief overview.
 

  1. Negotiating Timetable

Once a negotiating schedule has been agreed and the EU has adopted a negotiating mandate, the formal negotiations will start probably in early March. They will need to conclude at the latest by November if a new agreement is to be in place on 1 January 2021.

The EU wants to sequence the talks, to neutralise early those issues where the UK has a negotiating advantage such as fisheries. UK interests may be better suited by negotiating on all the issues in parallel.
Both sides can agree before July to extend the transition period beyond 2020 to allow up to two more years for negotiations. The UK is currently ruling out any extension. But the EU has made clear[i] its view that the less time that is available, the narrower the agreement will be. (The EU-Canada deal took 7 years to negotiate, runs to some 1600 pages and is still relatively limited, for example on services.) And the EU might seek to wring concessions from the UK by running down the clock and wielding the threat of a ‘No Deal’ cliff-edge.

 

  1. Regulations

Probably the greatest threat the EU sees in Brexit is that the UK sets itself up as a ‘Singapore-on-Thames’, with more lightly regulated UK companies ‘dumping’ cheap goods and services on the EU market. To prevent this, the EU is insisting on a ‘level playing field’ as a condition for access, arguing that “the more divergence there is, the more distant the partnership has to be”.[ii]

Nonetheless, the UK continues to stress its determination to break free from alignment with EU regulations, seen as a key prize of Brexit by the current Government. While the Government has committed to maintaining high standards of workers’ rights, environmental protection and consumer rights it has not given a similar commitment in other areas such as competition rules, state aid and procurement, and financial and goods regulations.[iii] Some argue that while divergence might be costly to the UK in the short term, in the longer term it will enable the UK to seize opportunities, for example from new technologies, more rapidly than a less nimble EU, hobbled by red tape.

 

  1. Trade in Goods

Both sides want an ambitious deal on goods, without tariffs or quotas.[iv] Tariffs would damage EU interests since it enjoys a significant trade surplus with the UK. Nonetheless, the EU is signalling that agreeing even to this most basic element of a trade deal will depend on some assurances of a level playing field. If these are limited to labour, environmental and consumer rights then, as noted above, the UK may feel able to oblige. But if the EU insists on going further, they could hit an impasse.

Both sides also want customs co-operation and ‘regulatory approaches that are transparent, efficient, promote avoidance of unnecessary barriers to trade in goods and are compatible to the extent possible’[v] for example through UK co-operation with EU agencies such as in medicines, chemicals and aviation. Yet again, how far this goes will come down to where the balance between alignment and divergence is struck.  Even without insisting on close alignment, the EU has previously agreed (e.g. with Canada and Japan) to mutual recognition of conformity assessments, which substantially eases trade by removing the need for some products to be officially certified in the importing country, so there should be scope for some form agreement on this.

But ultimately there may have to be trade-offs between some sectors, for example the UK potentially making concessions on fisheries in order to secure gains on industrial goods or financial services.

And in any event, there will be new frictions  - customs declarations and rules of origin paperwork, some regulatory requirements, possible border delays. Although with good will on both sides the impact of these might be lightened to some extent, these will inevitably affect integrated supply chains and will impose unavoidable new costs on EU-UK trade.

 

  1. Trade in Services

The UK wants services included in the negotiations: they account for some 80 per cent of the UK economy, the UK has a surplus in its services’ trade with the EU and the two sides start from a position of relatively deep integration.

On the other hand, no previous trade agreement anywhere has succeeded in addressing a wide range of services and even the EU Single Market still has notable gaps; the time for negotiations will be short; some aspects depend on free movement of labour, which the UK has definitively ruled out; and still others require some degree of regulatory alignment, which the UK is reluctant to concede.

Some form of limited agreement may nevertheless be possible within 2020, while talks on further liberalisation could continue in the years ahead. The EU-Canada deal provides a potential model, with coverage including some aspects of financial services, transport and telecommunications. It should also be possible to agree on visa-free short-term travel and there will be strong pressure to ensure mutual ‘adequacy decisions’ are in place to maintain the free flow of data.

In the UK’s key strength of financial services, outside EU membership the current passporting arrangements will no longer be available. The EU has offered the next best option - ‘equivalence’. But this has to be granted (and can be withdrawn) by the EU and depends upon its judgement that UK regulations meet EU standards. Even the departing Governor of the Bank of England, who has not hesitated to highlight the costs of Brexit, nonetheless considers that the UK should be free of alignment with Brussels. This could call into question whether even equivalence will be available.[vi]

 

  1. Trade with the Rest of the World

Upon leaving the EU, the UK will be free to open trade negotiations with non-EU countries. Its priorities are the U.S., Australia and New Zealand, at the same time as working to carry over existing EU trade agreements, notably with Canada, Japan and Turkey. The UK’s aim is to have 80 per cent of its trade covered by free trade agreements within three years.[vii]
 
Particularly in negotiations with the US (about 15% of UK exports), the UK will face trade-offs vis-à-vis its negotiations with the EU (about 45% of UK exports). Closer alignment with one may come at the expense of freer trade with the other. Typical examples include the US aims of greater access to the UK for their agricultural products and pharmaceuticals. The UK clearly wants a strong deal with the US but has also clearly stated that ‘we will not compromise on our high environmental protection, animal welfare and food standards’ and that ‘the price the NHS pays for drugs is not on the table. The services the NHS provides are not on the table.’[viii] How this circle is squared will be a key indicator of the future political and economic positioning of the UK between the US and the EU.

 

  1. Northern Ireland

Finally, the controversial “Backstop” to ensure an open border between the Republic of Ireland and Northern Ireland has been replaced by a complex agreement that maintains that objective while at the same time also aiming to ensure unfettered access between Northern Ireland and the rest of the UK. Since the two goals appear to be mutually exclusive, how this will be achieved in practice remains to be worked through. There may be a risk that if the transition period is not extended, arrangements that avoid all forms of friction on both axes may not be fully in place by the end of 2020.

 

Implications
 
Many uncertainties remain, including a continuing risk of a ‘No Deal’ cliff-edge at the end of the year.  Whatever the sector and whether based in the UK or simply trading with the UK, nearly every company will be affected.  Some technical preparations will be necessary ahead of 1 February 2020 and other more significant contingency plans should be in place in preparation for the new 31 December deadline.  Companies would be well-advised not to unwind their contingency plans until the outcome of the negotiations is clear, which is unlikely before the autumn.
 
For those businesses and sectors that are ahead of the game, now is the time to be engaging with governments to make clear what is needed for the future UK-EU relationship and future agreements between the UK and the rest of the world. 
 
One thing that is clear: even if agreement is secured, at least some new frictions on UK-EU and wider UK trade relationships are inevitable; businesses should be prepared for these in any event.   




[ii] ibid
[v] ibid
[viii] ibid
 

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