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.

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’.

Wishful thinking dominates Brexit debate as the UK heads towards No Deal on 31 October

One of the best things I learned at school was the simple mnemonic:

“To ASSUME can make an ASS of U and ME”

Unfortunately, most of those involved in the UK’s Brexit debate have failed to remember it.  As a result, it seems likely that the UK will end up leaving the European Union on 31 October with No Deal.

The problem comes down to the set of false assumptions summarised in the slide above:

  • Don’t worry, history shows the UK won both the Battle of Waterloo and World War 2 by small margins – the Prussians arrived just in time to help win the Battle of Waterloo in 1815, and Hitler called off the Battle of Britain just before the RAF ran out of aircraft and pilots in 1940
  • The terms of the Withdrawal Agreement were only a bluff. German auto manufacturers will never allow their UK sales to be jeopardised.  And countries such as France, Italy and Spain will soon reverse course once they realise they might lose their UK tourist income
  • Everybody knows that Parliament would never allow a No Deal Brexit to take place, and so there’s no need to actually make the case for why it might be a disaster. After all, the Speaker said last week that he would probably allow an emergency debate if it ever looked likely
  • Company chiefs in favour of Leave have been prominent in the Brexit debate, but bosses who favour Remain would risk upsetting Leave customers if they did the same.  And anyway, everybody knows that in the end, someone will appear with a magic wand to make everything end happily

These are all arguments that have been heard everyday for the past 3 years.  The problem is that they are simply wishful thinking, and yet are never challenged.

The success of the Brexit Party in the European elections makes it almost certain that the next Tory leader will be a hard-line Brexiter.  As the chart shows from YouGov polling, most Conservative Party members (who will make the final decision) actually voted for the Brexit Party rather than the Conservatives in the election.

Similarly, it seems highly likely that No Deal will be the base case for most Tory leadership hopefuls.  And the position of Boris Johnson as front-runner is very clear, as the Leave.UK poster confirms.

Given that the leadership election is already underway, we also know how events will likely play out:

  • The new Tory leader will be elected in July, ahead of everyone’s summer holidays in August
  • Brussels will quickly refuse their demand to renegotiate the Withdrawal Agreement
  • The new premier will dismiss this as bluff during September and at the Party Conference
  • The UK will then leave the EU without a deal on 31 October

After that, either the new EU Commission will make a hurried phone call, saying it is all a terrible mistake.  Or the UK will find that 31 October was just “the end of the beginning”, and will instead start the lengthy process of negotiating a free trade agreement – whilst the EU implements their Preparations for a No Deal Brexit..

THE TIMETABLE FOR AVOIDING NO DEAL IS VERY SHORT
The key issue, as the independent Institute for Government (IfG) has noted, is that:

“A new prime minister intent on No Deal Brexit can’t be stopped by MPs.”

It is also clear from recent statements from Labour leader, Jeremy Corbyn, that he continues to regard a second referendum as very much a last resort, as The Guardian reported last week:

“Speaking in Dublin, the Labour leader said the only way to break the deadlock would be a general election or a second referendum after negotiating a softer Brexit deal with Brussels.”

Corbyn knows very well that a new Tory premier is most unlikely to seek a “softer Brexit deal”, and he also knows that it would be impossible to negotiate a new deal before 31 October.  It would be almost impossible even to organise a General Election before 31 October, as the IfG have also explained:

  • The election would have to be held by 24 October, as  the UK will otherwise leave by default on 31 October under the terms of the extension agreed under last June’s Withdrawal Act
  • The Fixed Term Parliament Act (FTPA) means the government would have to lose a second vote of confidence by 16 September to allow 25 days for campaigning, and 2 days for “wash-up” (deciding which bills can become law before dissolution)
  • The FTPA also mandates 2 separate votes of confidence, with a 14 day gap – so the 1st vote has to be held by 2 September ie the day that Parliament probably returns from its summer holidays

This tight timetable also raises an unanswered question as to when the vote of confidence would actually be tabled, if parliament is in recess?

Wishful thinking and wrong assumptions have dominated the Brexit debate. So there is little reason to assume anything will now stop the UK leaving on 31 October, in time for Halloween celebrations.

Afterwards, of course, everyone will be free to blame everyone else for “not making it clear what would happen”.  But that is always the result when wishful thinking is involved.

Companies and investors have just 30 working days left to prepare for a No Deal Brexit

Companies across the UK and EU27 are suddenly realising there are now just 30 working days until the UK will likely abandon its 45-year trading relationship with the EU, and start to trade on WTO terms.

If this happens, every supply chain involving a movement between the UK and EU27 will change. And all those supply chains governed by EU deals outside the EU will also change. A large number of industries are already being impacted:

  • Scotch whisky exports to Korea worth £71m ($90m) a year, risk a 20% tariff after 29 March if the EU’s Free Trade Agreement is replaced by WTO rules. It is now too late to export by boat, causing some exporters to use expensive air freight to beat the deadline. But capacity is already almost full.
  • Many banks, insurance companies and asset managers have already moved staff from London into the EU27.  They cannot risk waking up on 30 March to find they can no longer serve customers from London, because they have lost the essential EU “passport”.
  • “CE Marks” issued in the UK will no longer be valid in the EU27 after No Deal  – making it difficult to sell any goods that need safety, health or environmental approval.
  • And last week, BASF’s UK MD, Richard Carter, told Ready for Brexit that for the world’s largest chemical company: “The thought of having to re-register with a UK REACH equivalent if there is no deal and if there is no recognition equivalence is a huge concern”.

THE UK REMAINS ON COURSE TO LEAVE THE EU WITH NO DEAL ON 29 MARCH
But surely, you say, “this cannot happen”.  After all the UK’s main business organisation, the Confederation of British Industry, has already warned that No Deal would create “a situation of national emergency“.

But the leading Tory Brexiters don’t believe this.  Their 111 votes, combined with the 10 votes from the Democratic Unionist Party, meant premier May’s Withdrawal Agreement was defeated by 230 votes last month.  It would have provided a Transition Agreement until the end of 2020.

However, their votes then swung behind her to defeat the motion of No Confidence in the government, which would have led to a general election.  Why did they do this, you might ask, given they had just voted against her key policy?

The answer is that the Brexiters have a completely different view of the Brexit negotiations, as I noted in The pH Report last year.

They simply don’t accept the CBI argument. Instead they believe the EU27 will be the main losers from No Deal as they argue the financial outcome will be:

“Plus £651 billion ($875bn) for the UK versus minus £507bn for the EU: it could not be more open and shut who least wants a breakdown.“

In their view, the best way to force the EU27 to offer a better deal is simply to leave on 29 March.

They also, as I noted here in December, will be quite happy to see the end of key industries such as autos, as the leading Brexiter economist Prof Patrick Minford told the Treasury Committee in October:

You are going to have to run it down … in the same way we ran down the coal industry and steel industry. These things happen.”

The alternatives to No Deal are now also extremely limited.  The Caroline Spelman/Jack Dromey resolution to block No Deal was passed last month by 8 votes. But it was only a resolution and has no legal force.

Of course, Parliament might change its mind and decide to vote for May’s Agreement.  Or the government might revoke its Article 50 notification before the UK leaves on 29 March. But both would split the Tory and Labour Parties and are unlikely to happen.

The government could also decide to hold a second referendum. But again, this would split both parties and is unlikely.

It is therefore hard to disagree with the independent Institute for Government, who concluded: “Britain’s politicians are unwilling to put jobs and the economy above party politics.

The only other option is for MPs to effectively take over the government by demanding that it stops No Deal.  It is not clear how this could happen, but presumably they could pass legislation demanding that May asks Brussels for a lengthy extension to Article 50.

But such a move by Parliament has never happened before. It would need key Ministers such as Chancellor Philip Hammond to vote against their own government. It would also need support from enough Opposition MPs to overcome Brexiter resistance.

It would also risk a constitutional crisis, as it would replace an elected government.  And in terms of practicalities, it would presumably also mean that the UK would take part in the EU Parliament elections, as it would still be a full EU member in May. The whole process would take the UK into completely uncharted water.

THERE ARE JUST 30 WORKING DAYS LEFT TO PREPARE FOR A NO DEAL BREXIT

Anticipating this risk led me to co-found Ready for Brexit last year, to help businesses navigate the challenges and opportunities created by Brexit.

It is effectively the one-stop shop requested recently by the CBI.  It provides curated links to all the areas where you may need to urgently prepare for Brexit.

The video explains what WTO rules could mean for your business. Please watch it now, and then decide if you need to start planning today for whatever may happen on 29 March.

Your ‘A-Z Guide’ to the Brexit Negotiations

The UK is now facing a national crisis”, according to Margaret Thatcher’s former Defence Secretary, Michael Portillo, speaking to a dinner in London on Thursday night.  Brexit continues to tear the UK apart, and places the economy at greater and greater risk.

On Thursday, premier Theresa May had unveiled her draft Withdrawal Agreement with the EU27.  Within a few hours, another 5 Ministers had resigned including her Brexit Secretary.  Over the summer, she had already lost her previous Brexit Secretary and her Foreign Secretary, plus other Ministers.  And 5 Ministers – including Michael Gove and Trade Secretary Liam Fox – are now planning to produce their own revised deal on the Irish question, in opposition to the draft agreement

Businesses are far too complacent about the risks of a No Deal Brexit, as I told BBC News on Thursday:

“If the deal went through Parliament, then we could be reassured that we had until the end of 2020 before anything happened. But looking at what’s happened this morning, it seems less likely that’s going to happen, and therefore the default position is that we leave without a deal on 29 March.  And that, I think, panics SMEs, small businesses, because if you don’t know what’s happening that’s worse than almost anything else. “

If you, or a colleague, now need to get up to speed with Brexit developments – and what they may mean for your business and your investments, here is my ‘A – Z Guide to the Brexit Negotiations’:

Article 50 of the Lisbon Treaty sets 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.  But the UK Cabinet was split on the key issues, and so the 2 year’s notice was given on 29 March 2017 without any firm proposals being made for the future UK-EU27 relationship beyond 7 “negotiating principles and “the desire for a “close partnership”.

Brexit means Brexit“, has been the UK’s core statement since Article 50 was tabled.  But as I noted back in September 2016, Brexit can actually mean a variety of different outcomes – and they have very different implications as the chart 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’ is simply a free trade agreement offering some access to the Single Market (qv) for goods, but less access for services (which are 80% of the UK economy).  A ‘No Deal Brexit’ (qv) means working under WTO rules with arbitrary tariffs and regulations.

The European Commission manages the day-to-day business of the European Union (qv) on behalf of the European Council, and is effectively its civil service.  Its president is Jean-Claude Juncker and he appointed Michel Barnier to lead the Brexit negotiations.   Barnier’s first step, as mandated by the Council, was to agree within the EU 27 “the overall positions and principles that the EU will pursue“.  He understood that in any negotiation, the team that writes the drafts and controls the timescale usually has the upper hand. The UK’s failure to finalise its own detailed objectives before tabling Article 50 meant it gave up this critical advantage.

The Default date for Brexit is 29 March 2019.  It has also been agreed that if a Withdrawal Agreement (qv) is finalised, then a Transition Agreement (qv) could operate until 31 December 2020.  Unfortunately, many people have therefore assumed they can wait until 2020 before starting to plan for Brexit.  But as the Commission warned in its ‘Guidelines for Brexit Negotiations on 29 April 2017, “nothing is agreed until everything is agreed“. So No Deal also means no Transition Agreement.

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 6 members (Belgium, France, Germany, Italy, Luxembourg and the Netherlands) in 1973, along with Ireland (qv) and Denmark. Further expansions took place, especially after the end of the Cold War between the West and Russia.  At the suggestion of then UK premier Margaret Thatcher, it was agreed to establish a Single Market (qv) and Customs Union based on 4 key freedoms – free movement of goods, services, people and money – and this transformed trading relationships across the continent.

The Financial Settlement or ‘divorce bill’ 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 calculates this to be between £36bn – £39bn (€40bn – €44bn), depending on the assumptions used.

The Labour Party want a General Election if the government fails to get Parliament’s approval for its proposed Withdrawal Agreement.  But there is considerable uncertainty about what might happen next, if Labour won the election.  Some suggest Labour could renegotiate the deal, others that there could be a second referendum. Either option would mean a new government asking the EU to ‘stop the clock’ on Article 50. As a result, support is rising for the idea of a ‘People’s Vote’, or second referendum, as this might be more able to achieve all-party support. The European Parliament elections in May also complicate the picture as a referendum would apparently take 22 weeks to organise.

A Hostile No-Deal would be the worst of all possible outcomes. But Theresa May has warned Parliament that “without a deal the position changes” on the £39bn Financial Settlement, contradicting her Chancellor, Philip Hammond.  We do not know what would happen if the UK refused to pay, but one fears it could lead to a Hostile No-Deal if the EU then reacted very negatively in terms of future co-operation.

Ireland has proved to be a key sticking-point in the negotiations, as nobody wants to disturb the peace created by the Good Friday Agreement in 1998.  The issue is the potential need to reintroduce a border between Ireland and the North to secure the Single Market.  The draft Withdrawal Agreement devotes a full section to this issue, which remains a potential deal-breaker due to Brexiter concerns about N Ireland remaining in the Single Market and the UK remaining in the Customs Union. This expert Explainer from the impartial Institute for Government highlights the key issues.

June 2016 was the date of the referendum that voted to take the UK out of the EU.

Keeping the UK in “a single customs territory” with the EU after Brexit is a key feature of the so-called “temporary backstop arrangement” designed to avoid a hard border with Ireland.  It is intended to operate until a full free trade agreement is finalised between the UK and EU.  It was the most difficult part of the negotiations, and has provoked the most resistance from Brexiters.

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 the UK wants to “take back control” to its own courts.  However, the Withdrawal Agreement confirms that the ECJ will have a continuing role under the Transition Agreement and potentially afterwards if the “backstop” is activated.

Tariffs on Materials and goods would be introduced between the UK and EU27 if there is a No-Deal Brexit.  Less well understood is that the UK’s trading terms would also change with countries outside the EU27, as the UK 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.

No Deal means that the UK would have to operate under WTO rules after 29 March.  This short Ready for Brexit video explains the complications this would create.  The WTO has also warned that the number of Technical Barriers to Trade “has grown significantly” in recent years, and these can often severely restrict trading opportunities. And 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, for example, 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.

Preparing for Brexit.  My colleagues and I have set up Ready for Brexit. This is a subscription-based ‘one-stop shop’ and provides a curated Directory to the key areas associated with Brexit – Customs & Tariffs, Finance, Legal, Services & Employment, 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; Brexplainer video on WTO Rules; plus news & interviews with companies about their preparations for Brexit.

Regulations can often be 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 are now relocating relevant parts of their operations into the EU27 so they can remain authorised to trade.

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.

The Transition Agreement covers the period after 29 March, and would allow the UK to operate as if it were still in the EU until 31 December 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 21 months isn’t very long, as trade deals are very hard to do and generally take 5 – 7 years. The problem is that they create Winners and Losers whenever a market (large or small) is opened up to new foreign competition – and the incumbents usually complain.  The Transition Agreement will only operate if there is a Withdrawal Agreement and so would not happen with a No-Deal Brexit.

Unblocked, or frictionless trade, is a key aim of the negotiators.  Nobody really wants to 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 the summer (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 June, “Over the past 20 years, warehouses have become trucks rolling on the road“.

The draft 585-page Withdrawal Agreement was published on Thursday and sets out the basis for the future UK – EU relationship after Brexit.  The impartial Institute for Government has produced a expert summary of its key points.  But as the resignations have shown, the deal is contentious, with observers suggesting that MPs may vote it down in Parliament next month.

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 her position over European monetary union.  Her supporters ignored the key fact that the party needed a new leader if it was to have a chance of winning the next election,  and instead blamed Europe for their loss – soon styling themselves as Eurosceptics in her honour.  Fast forward through many zigs and zags  and as I warned in March 2016, – “Slowly and surely, a Brexit win is becoming more likely“.  We can doubtless expect many more in coming months and years.

G7 Summit shows leaders are forgetting the lesson of the 1930s

G7 May17G7 Summits began in the crisis years of the mid-1970s, bringing Western leaders together to tackle the big issues of the day – oil price crises, the Cold War with the Soviet Union and many others.  Then, as stability returned in the 1980s with the BabyBoomer-led economic SuperCycle, they became forward-looking.  The agenda moved to boosting trade and globalisation, supporting the rise of China and India, and the IT revolution.

This weekend’s 43rd Summit in Italy suggested we may be going back to earlier days.  As the picture confirms, the leaders did all meet in the Italian city of Taormina in Sicily.  But they clearly found it difficult to meet the challenge set by their hosts of “Building the Foundations of Renewed Trust”.  One very worrying sign was that both the USA and the UK seem to have become semi-detached from the process. :

□  UK premier Theresa May left early, to “hold urgent talks with her election campaign chiefs” after new polls showed her lead dropping to single figure levels
□  President Trump refused to endorse the Paris Agreement, causing German Chancellor, Angela Merkel, to comment:
“The entire discussion about climate was very difficult, if not to say very dissatisfying. There are no indications whether the United States will stay in the Paris Agreement or not.”

There was some good news, with a compromise seemingly being agreed with US President Trump over his desire to dismantle the world’s open trading system, as the final statement noted:

“We reiterate our commitment to keep our markets open and to fight protectionism, while standing firm against all unfair trade practices. At the same time, we acknowledge trade has not always worked to the benefit of everyone.”

But it was a relatively weak statement, and nothing was said about the President’s withdrawal from the Trans-Pacific Partnership, or his decision to demand a formal review of the North American Free Trade Agreement. The change is even clearer by contrast with last year’s Summit in Japan, when the leaders committed:

To fight all forms of protectionism ….(and) encourage trade liberalization efforts through regional trade agreements including the Trans-Pacific Partnership, the Japan-EU Economic Partnership Agreement, the Transatlantic Trade and Investment Partnership and the Comprehensive Economic and Trade Agreement.”

Sadly, the same lack of unity had been seen just before the Summit, when President Trump failed to endorse Article 5 (the fundamental principle of the NATO Alliance), which declares that an attack on one member state is an attack on all, and requires a mutual response.  As the Financial Times noted:

This was particularly galling given that he was attending a memorial for the September 11 terror attacks — the only time Article 5 has been triggered. It remains unclear why he equivocated.”

Even the Summit dinner saw a lack of unity, with US National Economic Council director Gary Cohn suggesting:

There was a lot of what I would call pushing and prodding.”

This lack of a common purpose amongst Western leaders is deeply worrying.  Of course, they were able to agree on strong words about terrorism and the role of social media.  But their key role is to be pro-active, not reactive.

Collectively, their countries are responsible for nearly two-thirds of the global economy.  Individually, none of them – not even the USA – can hope to successfully tackle today’s challenges.  This was the rationale for the formation of the G7 in 1975, and it has since played a critical role in helping to spread peace and prosperity around the world.

Today’s G7 leaders seem to be in danger of forgetting their core purpose.  They need to re-open their history books and focus on the lesson of the 1930′s, when “beggar-my neighbour” trade policies led directly to World War II.