Your A to Z Guide to the Brexit trade negotiations


A. Article 50 of the Lisbon Treaty set out the rules for leaving the European Union. As with most negotiations, it assumed the leaving country would present its proposals for the post-withdrawal period – which would then be finalised with the other members. The UK government, however, has still not yet set out its post-Brexit trade objectives.  So the UK left the EU on Friday and entered the Transition period without anyone knowing what might happen at the end of the year.
B. ‘Brexit means Brexit’, has been the UK’s core statement since Article 50 was tabled. But as I noted in September 2016, Brexit can actually mean a variety of different outcomes – and they have very different implications as the chart above shows. At one extreme, the ‘Norway model’ is very similar to full EU membership, but with no say on EU decisions. Whereas the ‘Canada model’ – which seems to be the UK’s objective – is simply a free-trade agreement. It would offer some access to the Single Market for goods, but less access for services (which are 80% of the UK economy). A ‘No Deal Brexit’ – which is the likely alternative outcome – means working under WTO rules with arbitrary tariffs and regulations.
C. The European Commission manages the day-to-day business of the European Union on behalf of the European Council, and is effectively its civil service. Its president is Ursula von der Leyen and she re-appointed Michel Barnier to lead the post-Brexit negotiations. As with Brexit itself, the UK’s failure to agree its objectives has allowed Barnier to gain “first mover advantage”, and effectively control the scope of the negotiation, by finalising and publishing the EU’s own negotiating objectives.
D. The Default date for the UK to exit the Transition period is 31 December 2020. It has also been agreed that this can be extended for a further 2 years, if the UK requests this before the end of June – but the UK government has said it will refuse to do this. The UK stance gives the EU a very strong negotiating position, as it means they effectively control the timetable as well as the scope of the negotiations.
Barnier has suggested they have “3 goals for 2020: to maintain a capacity to cooperate closely at the global level; to forge a strong security partnership; and to negotiate a new economic agreement (which, most likely, will have to be expanded in the years to come).” Given the EU’s focus on its proposed EU Green Deal, and the need to ensure a positive outcome for the UN Climate Change Conference in Glasgow in November, there may not be much time left for trade talks, given that security is their second priority. This view is reinforced by Barnier’s suggestion that the new economic agreement will have to be expanded after December.
E. The European Union is a treaty-based organisation of 28 countries. As its website notes, it was ‘set up with the aim of ending the frequent and bloody wars between neighbours, which culminated in the Second World War.’ The UK joined the original six members (Belgium, France, Germany, Italy, Luxembourg and the Netherlands) in 1973, along with Ireland and Denmark. Further expansions took place, especially after the end of the Cold War between the West and the Soviet Union. At the suggestion of then UK Prime Minister Margaret Thatcher in 1986, it was agreed to establish a Single Market and Customs Union in 1993, based on four key freedoms – free movement of goods, services, people and money – and this transformed trading relationships across the continent.
F. The Financial Settlement or ‘divorce bill’ is part of the Withdrawal Agreement and covers the costs of the programmes that the UK agreed to support during the period of its EU membership. Like most organisations, the EU operates on a pay-as-you-go basis and only charges member countries as and when bills actually come due. The UK calculated this to be between £36 billion-£39 billion (€40 billion-€44 billion), depending on the assumptions used.
G. The UK held 2 General Elections whilst finalising the Withdrawal Agreement. The first, in 2017, forced premier Theresa May to rely on the Ulster Unionists in order to gain a working majority in Parliament. The second, in 2019, gave Boris Johnson a comfortable 80 seat majority on the basis that he would “Get Brexit Done”. In reality, however, the only bit of Brexit that has been “done” is the exit from the EU. The process of replacing all the arrangements built up over the past 47 years, since the UK joined the then European Economic Community, has yet to begin.
H. A Hostile No-Deal at the end of December would be the worst of all possible outcomes, as it would mean the UK had to trade on WTO terms. Unfortunately, this is a significant risk, given the range of areas that could cause friction – fisheries policy, financial services, immigration and EU citizen rights etc. The underlying issue is that the UK has now become a “Third Country“, and lost all its veto rights in Brussels as well as the ability to help determine policy. Trade negotiations always cause Winners and Losers to emerge, as they are based on the negotiators conceding something of value to the other side in one area, in order to get back something of value for themselves. And potential Losers generally complain very loudly.
I. Ireland proved to be a key sticking-point in the negotiations, as nobody wanted to disturb the peace created by the Good Friday Agreement in 1998. The Withdrawal Agreement means that Northern Ireland will remain in the UK customs territory and, at the same time, benefit from access to the Single Market without tariffs, quotas, checks or controls. In turn, this means the end of frictionless trade between it and Great Britain. The border will effectively run down the Irish Sea, as the EU will need sanitary and phyto-sanitary checks on food products and live animals entering from GB. The EU will also be able to assess risks on any product coming into its market and, if necessary, activate physical controls.
J. June 2016 was the date of the referendum that voted to take the UK out of the EU by a 52%: 48% majority.
K. Keeping the UK aligned with EU standards is a key concern for many UK businesses. They rely on complex supply chains, and would face major expense if they have to operate to 2 different standards. However, the Chancellor of the Exchequer, Sajid Javid, told the Financial Times last month that “There will not be alignment, we will not be a ruletaker, we will not be in the single market and we will not be in the customs union — and we will do this by the end of the year.”
L. Legal issues are, of course, a critical area in the negotiations as the UK currently operates under the jurisdiction of the European Court of Justice (ECJ), and now intends to ‘take back control’ to its own courts. The ECJ role will continue during the Transition Agreement, but seems unlikely to continue after the Transition period ends.
M. Tariffs on Materials and goods will be introduced between the UK and EU27 unless a comprehensive trade deal can be finalised by the end of the year. The EU’s terms for this depend on continued UK alignment with Europe’s societal and regulatory model. If the UK refuses to agree to this, then its trading terms will likely also change with countries outside the EU27. It currently operates under more than 750 free-trade and trade-related agreements negotiated by the EU – and it is unlikely that the UK could continue to benefit from them

N. No Deal means that the UK would have to operate under WTO rules after 31 December 2020. This short Ready for Brexit video explains the complications this would create. The WTO has also warned that the number of Technical Barriers to Tradehas grown significantly‘ in recent years, and these can often severely restrict trading opportunities. Plus, EU laws would still have a role under WTO rules for all UK products sold into the EU27 under No Deal. The EU Preparedness Notices also suggest there could be a ban on UK banks providing financial services, as well as a whole host of other restrictions including on travel.
O. The Operation of the Transition Agreement will be in the hands of a new UK-EU Joint Committee. This will replace all the formal and informal interactions that the UK used to have with other member states and EU officials. It may well also become the body through which the UK and EU manage new treaties on global co-operation and security, as well as any future trade agreement.
P. Preparing for Brexit. The Ready for Brexit team has over 250 years’ combined experience of importing and exporting, and we wanted to share this knowledge. Ready for Brexit is a subscription-based ‘one-stop shop’. It provides a curated Directory to the key areas associated with Brexit – Customs and Tariffs, Finance, Legal, Services and Employment, and Supply Chain. It includes Brexit Checklists; a BrexSure self-audit tool to highlight key risks; a Brexit Negotiation Update section linking to all the key official UK and EU websites; a Brexplainer video on WTO Rules; plus news and interviews with companies about their preparations for Brexit.
R. Regulations are usually a much greater barrier to trade than tariffs, as they set out the rules that apply when products and services are sold in an individual country. The EU never aimed to harmonise regulations across its member countries, as that would be an impossible task. Instead, it has focused on creating a Single Market via mutual recognition of each other’s standards, along with harmonised rules on cross-border areas, such as safety, health, and the environment. Regulations are particularly important in the financial services industry, and many businesses have already relocated relevant parts of their operations into the EU27 so that they can remain authorised to trade.
S. The Single Market seeks to guarantee the free movement of goods, services, people and money across the EU without any internal borders or other regulatory obstacles. It includes a Customs Union, as this short BBC video explains, which seeks to ensure that there are no Customs checks or charges when goods move across individual country borders. With a No-Deal Brexit, however, the UK will become a Third Country and no longer benefit from these arrangements.
T. The Transition period began after the UK left on 31 January 2020. It allows the UK to operate as if it were still in the EU until 31 December 2020 (or possibly December 2022 if the UK government requests an extension by the end of June 2020). The aim is to give negotiators more time to agree how future EU-UK trade in goods and services will operate, and provide guidance for businesses on how the new deal(s) will operate. But major trade deals are very hard to do and generally take at least 5-7 years.
U. Unblocked, or frictionless trade, is a key aim of the negotiators. But the government has already accepted that the UK may well go back to the pre-1993 world, before the Single Market arrived, when vast numbers of forms had to be filled in and lorries/ships sometimes stopped for hours for border checks. As Honda explained in June 2018 (see chart) it could easily take between 2-9 days to move goods between the EU27 and UK without a Customs Union, compared to between 5-24 hours today. The cost in terms of time and money would be enormous given that, as Eurotunnel told the Commons Treasury Committee in the month, ‘Over the past 20 years, warehouses have become trucks rolling on the road’.
V. Ursula von der Leyen has taken over from Jean-Claude Juncker as EU Commission President. Her priorities are naturally different from his, with her key focus being to deliver the EU Green Deal. On Brexit, she noted last month in London that “The truth is that our partnership cannot and will not be the same as before. And it cannot and will not be as close as before – because with every choice comes a consequence. With every decision comes a trade-off. Without the free movement of people, you cannot have the free movement of capital, goods and services. Without a level playing field on environment, labour, taxation and state aid, you cannot have the highest quality access to the world’s largest single market. The more divergence there is, the more distant the partnership has to be.
W. WTO Terms are not actually “terms of trade” at all, but simply a reference to the basic rules set out by the World Trade Organisation. As our Brexplainer video explains, they mean that a tax, called “Tariffs”, would be reintroduced for trade in goods between the UK and the EU27. Services, including financial services, could also be impacted by restrictions on market access. Border controls and customs checks could add time to shipments and impact supply chains. This could be particularly important for highly regulated sectors such as chemicals. Documentation and paperwork will increase, as businesses will need to be able to prove the nature and origin of their goods, especially if they use parts or components from several different countries. As a result, no country currently trades on WTO terms, as this briefing from the independent academic group, The UK in a Changing Europe, explains.
Z. Zig-zag perhaps best describes the process that has led us to this point. It began long ago when Margaret Thatcher resigned in 1990, as the catalyst was partly her hostility to European Monetary Union. Fast forward through many zigs and zags by both main political parties, and we finally reached June 2016 and the Brexit referendum – and then, in turn, last month’s UK’s exit from the EU.

No Deal Brexit still a likely option if opposition parties fail to support a new referendum

Canada’s normally pro-UK ‘Globe and Mail’ summed up the prevailing external view of Brexit last week:

“We begin this editorial with an apology to you, our faithful readers. In March, we described the Brexit situation, then careening through its third year and nowhere close to resolution, as an “omnishambles.

“An omnishambles is a state of utter chaos, total disorder and perfect mismanagement – which brings us to our apology. If you’ve been paying any attention to British Prime Minister Boris Johnson, you know that, in declaring United Kingdom politics to have reached peak shambolic six months ago, we spoke too soon. Oh, did we ever.”

Within the UK, most people are totally confused by the mixed messaging surrounding Brexit.  Was it effectively postponed again when Parliament passed a law meant to stop No Deal? Or is it all still going to go ahead – deal or no deal – on 31 October, as the prime minister insists. Nobody knows.

There has also been no debate about what kind of policies should be pursued after Brexit. Instead, the media has often focused on the influence of  Johnson’s chief of staff, Dominic Cummings (pictured above, in casual dress).

Cummings led the Leave campaign under Johnson, and continues to carry out Johnson’s strategy today.  And whether by accident or design, his apparent fondness for tee-shirts also seems to be proving a useful tactic for diverting media attention away from discussion of potential food shortages.


Behind all the spin, Johnson’s strategy is simply responding to the opinion polls above.  He knows he has to win back Brexit Party voters if he wants to win a General Election.  Understandably, therefore,  he is going hard for the exit, declaring that he’d “rather die in a ditch” than leave after 31 October.

“Luckily” for him, he is up against Jeremy Corbyn – my local MP – who has completely failed to present a coherent policy on Brexit.  And Johnson has exploited this position by focusing on the Opposition’s continued failure to answer the critical question – “what would any extension be for?

It seems the Liberal Democrats will finally come off the fence under their new leader, Jo Swinson, and decide to campaign to remain in the EU. But we will have to wait to see if Labour’s Conference can force Corbyn to abandon his long-standing opposition to the EU.

If not, it is quite possible that the EU27 could refuse the extension request at next month’s Summit, if it doesn’t seem likely to lead to a second referendum or a new government.

Germany’s Chancellor Merkel has already set out her belief that Johnson wants to convert the UK to a form of Singapore-on-Thames. with a low tax, light-touch regulatory environment in direct opposition to the rules of the EU Single Market.

3 alternative and quite different scenarios therefore exist for the Brexit endgame:

  • No Deal. Johnson finds a way round Parliament and the No Deal Act, and leaves without a deal on 31 October. He then campaigns on the theme of ‘The People v Parliament’ and blames Parliament for blocking his hopes of getting a deal
  • 2nd referendum. The opposition parties threaten to install an interim government that would replace Johnson, and ask the Summit for an extension to allow an election and 2nd referendum.
  • ‘Plan B’.  Johnson understands the value of contingency planning.  Given his key policy is to leave on 31 October, he is already exploring the opportunity for a deal on the basis of accepting the EU’s proposed N Ireland-only backstop option.  He could then still campaign having (a) achieved a deal and (b) left as promised.

At the moment, Johnson clearly sees No Deal as his best option, as it means he doesn’t have to compromise.  So it is no surprise that the Foreign Secretary has warned they will “test (the No Deal Act) to the limit”, in order to leave on 31 October without a deal.

The compromise of a Plan B would clearly lose him DUP and Brexit Party votes.  But it might offer Johnson his best chance of staying in office, if the Opposition did agree to push for a new referendum. It would be humiliating, to say the least, if his term in office proved the shortest in history.

The next few weeks may therefore compel the ‘Globe and Mail’ to issue yet another apology to its readers.

 

UK, EU27 and EEA businesses need to start planning for a No Deal Brexit on 31 October

New UK premier, Boris Johnson, said last week that the UK must leave the EU by 31 October, “do or die, come what may”.

This means UK, EU27 and EEA companies now have less than 100 days to prepare for a UK No Deal Brexit. That’s less than 70 working days – and even less if you plan to take a holiday over the summer.

If the UK leaves without a deal, it will also leave the Single Market and the Customs Union. So everything will change overnight – 400 million Customs Declarations will likely be needed each year, plus compliance with Rules of Origin and thousands of other major/minor regulatory changes.

Of course, it is still just possible that the UK might change its mind. Or that the new UK government might persuade the EU27 to give up the so-called “Irish backstop”. This aims to avoid the need for border controls between Northern Ireland and the Republic of Ireland.

But neither outcome looks very likely today.

THE AUTO INDUSTRY IS ALREADY WARNING OF THE RISKS AHEAD 
Businesses therefore now need to prepare for a No Deal Brexit on 31 October.

What does this mean?  It means that companies have to assume there will be no transition period. Instead, the UK will operate under WTO rules.   The UK car industry has highlighted the risks this creates in a letter to the new premier:

“We are highly integrated with Europe, and a no-deal Brexit would result in huge tariff costs and disruption that would threaten production, as well as further undermining international investors’ confidence in the UK. We need a deal with the EU that secures frictionless and tariff free trade.

“A no-deal Brexit presents an existential threat to our industry.  Above all, we must ensure the sector continues to enjoy — without interruption — preferential trade with critical markets around the world, including the EU”.

The chart above highlights the potential impact on the Nissan car factory in NE England.

THE NEW UK GOVERNMENT IS NOW PREPARING A MAJOR COMMUNICATIONS CAMPAIGN

Cabinet Office minister, Michael Gove, has been put in charge of No Deal preparations. And the aim is to quickly launch a major communications campaign to help the public and businesses get ready for leaving the EU without an agreement. As Boris Johnson said last week:

“What we will do, is we will encourage people in a very positive way. From the get-go, we start saying, ‘Look, what do you need, what help do you need, what reassurances do you need?’”

This will add to the information already available by clicking on the Gov.uk website:

READY FOR BREXIT PROVIDES PLANNING AND AUDIT TOOLS, PLUS DETAILED LINKS  

A No Deal Brexit will impact companies and supply chains.  This is why I co-founded Ready for Brexit a year ago, with a number of highly-experienced industry colleagues. It is subscription-based, and features detailed Brexit checklists, a No Deal Brexit planning tool and a BrexSure audit tool to check your suppliers and customers are also fully prepared.

It focuses on the key areas for business, as our Brexit Directory above shows:

  • Customs & Tariffs: Export/Import Registration, Labelling, Testing, VAT
  • Finance: Payment Terms, Tax & VAT, Transfer Pricing
  • Legal: Contracts, Free Trade Agreements, Intellectual Property
  • Services & Employment: Banking, Insurance, Investment, Property
  • Supply Chain: Documentation, Regulation, Transport

We can all hope that Johnson’s renegotiation with the EU27 is successful. But hope is not a strategy.

With the new government committed to the 31 October deadline, businesses really are taking an enormous risk if they don’t focus all their energies on planning for ‘No Deal’.