Five Pointers for Business after Brexit
As the UK leaves the EU, what certainty can we expect this year on their future trading relationship? Here are five points businesses need to keep in mind.
- The two sides will start very far apart
After the virtual chimes of Big Ben sound in 10 Downing Street at 11pm on Friday, the real work of trade talks with the UK outside the EU begins. We should have a good idea of both sides’ starting positions by next week; Michel Barnier is due to publish a draft EU negotiating postion on Monday 3 February, and Boris Johnson plans to give speech soon afterwards outlining the UK’s aims.
From our contacts with Barnier’s team, the EU position – which the EU 27 must sign off, but which they are likely only to toughen – will be very far apart from the the UK’s red lines. ‘Level playing field’ (LPF) commitments (to maintain EU standards on environmental and labour market rules, tax, State aid and competition) will be one flashpoint, access to UK fishing waters another; the EU will want both as the minimum price for a zero tariff, zero quota deal – or in fact any deal at all. Boris Johnson has ruled out both. Barnier’s team have also put governance, oversight (including by the European Court of Justice) and tough dispute resolution systems front and centre of the talks.
- A crisis in June
All of this makes an early crisis likely. Talks are scheduled to start on 3 March, but these wide differences in basic approach will probably come to a head by June, when fish quotas are supposed to be sorted out. The UK’s exit deal builds in a review in June, and if there is not outline agreement on LPF, governance and fish by the time of the EU summit on 18-19 June, we can expect EU leaders to step up the pressure by delaying further talks.
- But a deal this year is likely, on goods at least
The big picture remains, however, that a deal this year is in both sides’ interest, and Johnson showed in the first phase of Brexit that he understands the political value of being a deal-maker, not a no-dealer.
In fact, the two sides are not so far apart on LPF; Johnson says that the UK will maintain high standards – at least as high as the EU’s – in areas like environment and labour standards, and Sajid Javid’s recent clarification of what seemed a hard-line position on divergence suggests that the government wants to reassure business. The problem on LPF may be largely cosmetic, finding language which gives certainty to the EU that the UK will not become a regulatory competitor on basic standards, while allowing Johnson to claim that the UK is not an automatic rule-taker. Fisheries, as a binary, totemic issue is harder – and politically toxic.
If the two sides can agree on these EU preconditions, however, and talks progress, the bigger question is whether Johnson is prepared to be a rule-taker for goods. That could preserve much of UK manufacturing access to the EU Single Market, but would require the government to shift back to Theresa May’s Chequers position – which Johnson resigned over on his way to the Tory leadership and has firmly ruled out since the general election. Sticking to his current red lines, on the other hand, would cause severe disruption to UK manufacturers, including large-scale job losses during this Parliament, many in newly-won seats which make up the Conservatives’ majority.
We should know the answer by the Autumn, but any move back towards Chequers would be a major shift by Boris Johnson, who will perhaps believe the economic effects are manageable, and could be partly mitigated by government spending and incentives for businesses to stay.
- A formal extension of the transition is unlikely – but a range of areas may only be settled after 2021
Johnson’s commitment to leave the standstill transition period by the end of December is now enshrined in law. Temperamentally, as well as politically, he will believe that a deal can be done in that time. He is right; a goods-only deal is possible this year, but only an off the shelf deal. In practice that means WTO terms, or a close-alignment, Chequers-type deal.
But that still leaves a lot to do – services, transport, security, and especially customs.
Businesses need to know – and engage on – what interim access Johnson may seek here, while the future relationship in these areas is negotiated from 2021 onwards.
- Business needs to be ready for WTO terms, and push the government to seek more
Businesses know that, from January 2021, WTO trade terms are the default. Even if a deal is done for goods, it won’t be much more than WTO terms without ongoing rule-taking by the UK. That would be the outcome even if the UK only said it wanted to diverge, whether or not it ever did.
Businesses should be thinking now about what they want the government to ask for in EU trade talks this year, beyond a core goods deal. What matters to business? A standstill transition on customs? Ongoing mutual recognition of professional qualifications? Ongoing transport rights beyond the EU’s ‘no deal’ planning minimum? Any such ‘extras’ beyond WTO terms will have to be sought and prioritised by the UK; there will be very little time. Everything not covered in a deal this year increases EU negotiating leverage from next January onwards, so the onus lies in London.
This year will be all about the EU deal, and Johnson’s choice of a political u-turn or a potentially severe, slow bleed of jobs away from manufacturing heartlands, many of which sustain his current majority.
June and Autumn are the likely key moments, when negotiating positions, especially in London, may start to shift. There is a huge amount at stake for business, whether on the degree of UK alignment/disruption, or what extras could be negotiated beyond WTO terms for the areas not covered in a deal this year. Business should be engaging now to get their priorities understood before the trade-offs are made, at speed, and at the top of government, later this year.