Brexit: Any Light at the End of the Tunnel?

The Brexit theatrics appear to be reaching their conclusion, but not without huge uncertainty persisting until the very end.

To summarise, the Brexit negotiations appear to have reached a stalemate. The 8th Round, which took place between 8th-10th September 2020, led to little progress; a general characteristic of the negotiations to date.

This Round was further animated by a domestic legislative initiative brought forward by the British Government: the UK Internal Market Bill. The Bill, adopted by Parliament on 29th September, 2020, and pending ratification by the House of Lords, would allow UK Ministers to decide two important elements already covered in the EU-UK Withdrawal Agreement, signed on 17th October, 2019: State Aid and Customs Procedures, both with respect to Northern Ireland. Specifically, the UK Internal Market Bill – Article 45 – states that:

(1) The Secretary of State may by regulations make provision for the purposes of domestic law in connection with Article 10 of the Northern Ireland Protocol [of the EU-UK Withdrawal Agreement] (State Aid).

(2) Regulations [referred to above] may […] make provision— (a) about the interpretation of Article 10; (b) disapplying, or modifying the effect of, Article 10.

In a similar fashion, Article 44 states that “[a] Minister of the Crown may by regulations make provision about the application of exit procedures to goods, or a description of goods, when moving from Northern Ireland to Great Britain.”

Whilst the controversial Bill does not directly break the Withdrawal Agreement, it does give the power to the UK Government to do so should they wish in the coming years. The controversy is particularly unhelpful for companies operating between the two territories, adding to the already-high uncertainty levels surrounding trade post exit in January 2021. The EU’s response came swiftly, with the European Commission launching a legal offensive against the Bill through a letter of formal notice submitted to the UK on the 1st of October.. However, the Bill appears to have created a circular problem. Whilst the UK argues that the Bill is necessary to ensure the integrity of the UK market if the negotiations fail, EU officials have stated that an EU-UK Free Trade Agreement (FTA) would not be ratified by the EU until the controversial clauses are dropped.

Meanwhile, the Brexit negotiations continue. The 9th Round of Negotiations (and the last on the agenda) began on 28th September and are instrumental for narrowing down the key areas of divergence between the two sides. The main sticking points appear to be:

  • Fisheries negotiations, with the UK wishing to control access to its exclusive economic zone;
  • State Aid, with the EU pushing to secure a “level playing field” in the agreement to protect against unfair trading practices or reduced standards in labour or environmental conditions; and
  • Financial Services, with the UK aiming to secure as much market access for its financial services providers as possible.

These issues are relatively large challenges, particularly on fisheries, where the EU wants to ensure access to a bountiful sea, whilst the UK wants to limit it and hold annual negotiations to decide the amount of fish to be caught by EU vessels. Financial services negotiations are also going to be a major challenge, with the EU requesting regulatory equivalence to grant access to its financial market to non-EU firms, and the UK unwilling to continue following EU rules. On the state aid discussions, the issue appears to be somewhat less controversial, with the UK having agreed to stricter rules in the UK-Japan FTA than to those proposed with the EU.

October is a critical month to get some answers. The parties appear to be playing with two different deadlines. The UK is aiming to have the deal finalised by 15th of October in time for the next EU Summit, whilst the EU is aiming for the end of October. Regardless of the final date, it is certain that the on-going Round of Negotiations, will be crucial in shedding some light over whether the EU and the UK will be able to reach an Agreement before the end of the year, or if the 45-year-long (former) partners will see their commercial ties cut and resort to trade on a Most-Favoured Nation (MFN) basis, or an Australian-style agreement as the UK Prime Minister puts it, which would consist in having sectoral agreements covering areas such as passenger name records, mutual recognition agreements of conformity assessments, geographical indications, etc.

What will be the impact of Brexit? The UK Government, back in 2018, forecasted that a “no-deal” Brexit would reduce the UK’s GDP by 7.6% by 2035, while reaching an agreement would lead to a 4.9% reduction. A recent study by the London School of Economics foresees that the “no-deal” path would lead to a 5.7% contraction of the UK’s GDP, whilst reaching an Agreement with the EU would reduce the UK’s GDP by 3.7%.

Uncertainty is key. The existing policy environment, with contradicting norms and obligations, affects the private sector’s ability to plan ahead. International Economics has set up a dedicated team devoted to helping governments and private sector organisations to plan ahead. If you are an exporter to the UK and would like to better understand how Brexit might affect you, including exploration of other markets that could be of interest, do not hesitate to get in touch.

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