Brexit Manoeuvres: Brexit 2020 – The Year Ahead

January 09, 2020

Following the UK General Election on 12 December, the government now has the parliamentary majority it needs to enact its Brexit policy: an orderly exit from the EU on 31 January followed by a transition period until 31 December 2020, during which a new UK-EU free trade agreement can be concluded. But if the prospect of an imminent disorderly ‘No Deal’ end to UK membership of the EU has now gone, the threat of a “No Trade Deal” future relationship at the end of the year remains. The 541 page Withdrawal Agreement1 which governs the terms of the UK’s departure from the EU was accompanied by a 31 page non-legally binding Political Declaration which sets out the framework for the UK’s future relationship with the EU; it is this document that provides the parameters for this new phase of negotiations.

There are two main possible outcomes to the forthcoming negotiations: that an agreement on trade is not concluded before the end of the transition period, causing all UK-EU trade to default to basic WTO terms; or – more likely – that at least an interim arrangement emerges, but of limited scope. Either way there is the prospect of new frictions in some sectors, with no prospect of the ‘near frictionless’ trading relationship once targeted. While the Withdrawal Agreement allows for an extension of the transition period, the UK government has excluded this possibility, setting the stage for another episode of brinksmanship later this year. Since the outcome is unlikely to be clear until close to the deadline, businesses should be prepared for both scenarios.

The UK Prime Minister Boris Johnson and Commission President Ursula von der Leyen met in London on 8 January, their first meeting since assuming their respective roles. The spirit was reportedly positive, stressing common values and close co-operation. But initial red lines were already apparent: the UK wants a broad agreement on both goods and services, freedom to diverge from EU regulations and no extension of the transition period; the EU wants the closest possible partnership but will not compromise the integrity of the single market and the Customs Union. The President made clear that “the more divergence there is, the more distant the partnership has to be” and “without an extension of the transition period beyond 2020, you cannot expect to agree on every single aspect of our new partnership. We will have to prioritise.”2

In this brief, we look ahead at the prospects for UK/EU negotiations this year: the timetable, the negotiating positions and the main issues.

Timetable

The likely timetable for 2020 looks broadly as follows.

January
The European Union (Withdrawal Agreement) Bill3 will be adopted by the UK Parliament:

  • The Bill ratifies the Withdrawal Agreement agreed between the UK and the EU and implements it (together with parallel Agreements with the EEA EFTA countries and Switzerland) in UK domestic law;
  • the Bill works in conjunction with the European Union (Withdrawal) Act 20184, which provides for citizens’ rights and the settlement of the UK’s financial commitments to the EU. The Bill will amend that Act to provide, in particular, for an ‘implementation’ (i.e. transition) period until 31 December 2020;
  • during that transition period, EU law will continue to apply to the UK. New EU laws adopted during the transition period will apply automatically within the UK, or be implemented domestically as needed, even though the UK has had no say in their adoption.

The European Parliament must also ratify the Withdrawal Agreement, and at 11.00 p.m. London time on 31 January, midnight in Brussels, the UK will leave the EU and begin the 11-month transition period.

February
While initial scoping talks begin, the EU27 Member States need to agree on a mandate for the European Commission to negotiate a free trade agreement with the UK.

Having left the EU, the UK will be free to open trade negotiations with non-EU countries, although needing to await the end of the transition period before these can be concluded. The UK has stated that its priorities will be the U.S., Australia, New Zealand and Japan. The previously preliminary talks with the U.S. look likely to be rapidly set on a formal footing and to proceed apace. At the same time, the UK government is continuing to work on new agreements to replace existing EU trade agreements after the end of the transition period, notably with Canada, Japan and Turkey.

March/April
UK-EU negotiations will commence, based on a to-be-agreed full negotiating schedule. A key issue to be decided is whether to combine most, or even all, of the agreements (covering not only trade but also security, political co-operation, etc.) into a single Association Agreement, or to run a series of smaller negotiations in parallel for a number of separate agreements.

June
The negotiating schedule will provide for progress to be assessed mid-June, in particular to enable the UK to decide whether to request an extension to the transition period (the Withdrawal Agreement requires that any request be made before 30 June). Many commentators consider that the current timetable will be too short including, as quoted above, the President of the European Commission. (By way of comparison, recent EU trade agreements, from the adoption of negotiating directives to conclusion, have taken from 6 to 20 years: Japan 2012-2018; Singapore 2007-2018; Canada 2009-2017; Vietnam 2007-2019; Mexico 1999-2018; MERCOSUR 1999-2019).

But the UK government has explicitly ruled out extending the December deadline, even writing this into the Withdrawal Agreement Bill. Requesting more time would be politically contentious in the UK, not least since it would require the UK to contribute to the next (2021-2027) EU budget. Whether the UK government's position will hold later in the year remains to be seen: on the one hand, good progress might open the way to somehow allowing more time to ratify and implement an agreement, once concluded; on the other hand, mutual concern at a looming No Trade Deal cliff edge might focus minds on the advantages of more time. But whereas previously the UK parliament fettered the government’s approach in such matters, and was able to compel the government to seek an extension to the Article 50 exit period, the government's new parliamentary majority gives it a de facto free hand. It is for now projecting the firm determination not to allow extra time, no doubt as part of its wider stance in the difficult negotiations ahead.

November
The likely deadline for completing the negotiations, allowing sufficient time for the negotiators’ text to be polished and translated if it is to be applied, if necessarily provisionally, before the transition period expires at the end of December. While ratification of the deal in the UK is likely to be straightforward, the process in the EU will depend on the nature of the deal:

  • if the deal covers only areas under the EU’s exclusive competence, the EU Council and European Parliament could ratify it within a few weeks. Such issues include goods and services market access; public procurement; direct foreign investment protections; and competition rules; but
  • if the deal also includes areas outside the EU’s exclusive competence (a ‘mixed’ agreement covering areas such as non-direct foreign investment; the regime governing dispute settlement between investors and states; and some aspects of the movement of persons) it would require unanimous assent in the European Council and ratification by all EU27 member states (including votes by national, and sometimes regional, parliaments). Member states can also decide to impose the process for a mixed agreement regardless of its content.

11.00 p.m. London time, 31 December
Unless extended, the transition period will expire. EU law will cease to apply in the UK but most will be translated immediately into UK law through the operation of the EU (Withdrawal) Act 2018. Either the terms of the new free trade agreement will be applied (provisionally, if necessary) or, if that is for any reason not ready, UK-EU trade will revert to basic World Trade Organisation terms – another form of ‘No Deal’ Brexit. Depending on the circumstance, further UK-EU negotiations could continue in order to complete an agreement or, if one has already been reached, to address issues that have not been fully covered. UK negotiations with non-EU countries are likely to intensify since clarity on the future UK-EU relationship will be a key factor in those negotiations.

Provisional Application

We have referred earlier to 'provisional application'. If the UK-EU free trade agreement covers only areas under the EU’s exclusive competence, it could be rapidly ratified by both sides and be applied in full (‘enter into force’) immediately following the end of the transition period.

But if it is a ‘mixed’ agreement, it is unlikely that ratification by each EU Member State would be completed by that time. In this case, the EU Council could agree (by qualified majority) that the parts of the agreement that are within the EU’s competence, or (by unanimity) that the full agreement, should be applied on a provisional basis. If any EU Member State subsequently declined to ratify it, (as occurred in 2016 when the Walloon Parliament in Belgium objected to the EU-Canada trade agreement, CETA) negotiations would be re-opened to try to resolve the outstanding issue(s), prolonging uncertainty about the final outcome.

Northern Ireland

It is worth noting that the so-called “Backstop” arrangement — which was a contentious part of Theresa May’s earlier proposed deal — no longer has any currency. This was an arrangement which would have locked into place at the end of transition period, if there had been no agreement on other arrangements to ensure the maintenance of an open border between the Republic of Ireland and Northern Ireland. It involved the UK remaining – de facto – part of the EU customs union. Instead the new agreement foresees a long-term regime which seeks to square the circle – to ensure that there are no checks or controls conducted at or near the border between Northern Ireland and the Republic of Ireland, despite the UK (including Northern Ireland) having exited the customs union with the EU. The practicalities involved have been much debated. The arrangement is subject to periodic democratic consent in Northern Ireland.

Negotiating Positions

For the UK side, the Conservative Party Election Manifesto5 set out a number of priorities including:

  • a new relationship with the EU based on free trade and friendly cooperation, not on the EU’s treaties or EU law. We will keep the UK out of the single market, out of any form of customs union, and end the role of the European Court of Justice;
  • we will legislate to ensure high standards of workers’ rights, environmental protection and consumer rights;
  • we aim to have 80 per cent of UK trade covered by free trade agreements within the next three years, starting with the USA, Australia, New Zealand and Japan. These will be negotiated in parallel with our EU deal;
  • just as we led the way in opening up trade in manufactured goods in the last two centuries, we should open up trade in services;
  • we will create up to ten freeports around the UK, benefiting some of our most deprived communities; and
  • we will drive a hard bargain with all of our trading partners – and, as with all negotiations, we will be prepared to walk away if that is in the national interest… In all of our trade negotiations, we will not compromise on our high environmental protection, animal welfare and food standards.

Given what is already known of the principles informing the EU position, the negotiations are likely to hinge on a number of key trade-offs:

  • Greater UK access to the EU market at the price of closer alignment to EU regulations on a ‘level playing field’ (e.g. labour, environmental, state aid and competition rules). The UK government is committed both to maintain high standards of regulation in these fields but also to ensure freedom to diverge from EU rules, leaving it unclear where the balance will be found on this point, which is crucial for the EU;
  • Greater access for some sectors at the price of less access for others (e.g. very broadly, goods v. services, agricultural v. industrial goods). Some EU countries may have specific ‘sticking points’ (e.g. ensuring their fishermen’s access to UK fishing waters), for which they may be prepared to hold the whole agreement hostage;
  • Greater UK access to the EU market at the price of less ambitious agreements with non-EU countries, notably the U.S., due to significant divergences in product regulations and food standards; and
  • Greater UK access to the EU market at the price of extending the transition period: the less time available for negotiations, the narrower the agreement is likely to be.
Issues for Negotiation
 
The main indicator for the shape of the future UK-EU relationship is the Political Declaration agreed between them in October 2019. This will set the direction of the negotiations but it is not legally binding and either side could choose to depart from parts or all of the text. Nonetheless, on the basis of this, the main aims for the future trade relationship are as follows (note that the negotiations will also cover security co-operation, energy, aviation and transport, science, etc. which are not addressed in this brief).

Goods
The UK will be outside the EU Customs Union and Single Market, so trade will not be frictionless. Nevertheless, the Political Declaration envisages an "ambitious" trading relationship with no tariffs or quotas, “modern accompanying rules of origin,” deep regulatory and customs co-operation, and the possibility of UK co-operation with EU agencies such as in medicines, chemicals and aviation. “While preserving regulatory autonomy, the Parties will put in place provisions to promote regulatory approaches that are transparent, efficient, promote avoidance of unnecessary barriers to trade in goods and are compatible to the extent possible” – how this objective is translated into practice will be a key element of the negotiations. Ideally this would include some mutual recognition of conformity assessments (such as is already provided in the EU-Canada and Japan agreements for certain sectors), but this will depend on agreement around the alignment of rules and how the UK’s regulations will develop.

Services
The aim is for liberalisation “well beyond WTO” standards and building on recent EU free trade agreements, with voluntary regulatory cooperation and “appropriate arrangements” for mutual recognition of professional qualifications. Individual services chapters would be negotiated but within a commitment to preserve the regulatory autonomy of both sides. Ambitious demands for services could push the negotiations into territory rarely covered by free trade agreements and would be likely to require more time than the currently contemplated transition period.

Financial services
The future relationship will be based on equivalence decisions (albeit these do not cover all forms of financial services), which it is hoped to have in place by the end of June 2020. While the Political Declaration does not close off the possibility of further enhancement, nor does it offer it and this could require UK commitments to align with EU rules that it is not prepared, on principle, to make. While many businesses have by now prepared alternative authorisation and passporting structures that would side-step the equivalence challenge, this issue may loom larger as the time approaches.

Movement of People
Freedom of movement would end but both sides aim to provide visa-free travel for short-term visits and basic provisions to allow the movement of people to provide services via streamlined visa processes.

Level playing field
Both parties aim to uphold standards applicable at the end of the transition period in the areas of state aid, competition, social and environmental standards, climate change and tax, with the establishment of mechanisms to ensure effective domestic implementation, enforcement and dispute settlement. But in place of the “dynamic alignment” suggested previously, the UK government now looks closer to agreeing only to “non-regression.”

Implications for Business
 
As we warned in our previous brief in October on the prospect of a series of Brexit cliff-edges, such risks remain, though they have evolved into two main scenarios:
  • no UK-EU agreement in place when the transition period expires. This would amount to a form of ‘No Deal’ Brexit, with UK-EU trade reverting to basic WTO rules; or
  • a UK-EU agreement is in place but with a narrow scope, placing significant areas of the UK-EU relationship on a less secure and more restrictive basis than currently applies.
Given the hardening of the UK position, there is no longer any realistic prospect of a third option: a comprehensive agreement ensuring ‘near frictionless’ trade in goods and services.

Businesses that do not already have contingency plans in place should consider whether they can afford to wait until the key points of the proposed UK-EU trade deal become clearer or in the hope that the transition period will be extended. For many, operational changes will be necessary whether or not an agreement is struck, given the likely limited character of any agreement.

Footnotes

1) New Withdrawal Agreement and Political Declaration.
2) Speech by President von der Leyen at the London School of Economics, 8 January 2020.
3) EU (Withdrawal Agreement) Bill.
4) European Union (Withdrawal) Act 2018.
5) Conservative Party Manifesto 2019.