UK-EU trade negotiations: post-Brexit clarity emerges

The UK and EU have both now ruled out any extension to the Brexit transition period so – barring the unlikeliest of U-turns - we now know that a new post-Brexit landscape will take effect on 1 January 2021. We know that both sides consider October as the latest point that a deal could be done to allow implementation and ratification before the end of the year. And it seems that the 'deal' and 'no deal' scenarios for January 2021 are now converging as the UK's position now focuses on a less ambitious deal involving checks on at least some goods at the UK-EU border.

After UK prime minister Boris Johnson and EU Commission president Ursula Van Der Leyen met this week to take stock of the negotiations, the prospects of an October deal appear to hang on the crucial issues of trade tariffs and 'level playing field' regulatory commitments. For businesses, grappling with the challenges of an unprecedented global recession, clarity over the post-Brexit landscape is needed now more than ever.

Phase 1 of the negotiations

Although there have naturally been disagreements during 'Phase 1' of the negotiations over the last three months, that does not mean there has been no progress. Along with trade in goods, the negotiations have touched on a wide range of issues including services, visa-free travel, aviation, road haulage, energy, fisheries and security cooperation. In some areas, discussions have barely got off the ground, but there also seems to be a number of areas where the gap between negotiating positions is not great.

Ultimately, as with any trade negotiation, nothing is agreed until everything is agreed. As each side seeks to maximise its leverage, the political trade-offs in the negotiations will inevitably be saved for the endgame and will range across a wide range of issues. Never before have the fates of the UK's fishing and banking industries been so closely linked.

A major sticking point in Phase 1 has been the UK asking for full tariff-free access to the EU single market, but without the substantive and strict 'level playing field' guarantees envisaged by the EU on issues like state aid, environmental protection and employment rights.

As the shadow-boxing around each side's opening negotiating position has continued, red lines have become more entrenched on both sides. For the UK government, a deal tying it into the EU's own laws and enforcement by the Court of Justice of the EU (CJEU) is political poison. For the EU, the notion of allowing its closest neighbour the freedom to undercut EU businesses through state subsidies, or lower environmental or labour standards, would be economic folly.

The challenges in Phase 2 of the negotiations

At first glance, the prospects for compromise in Phase 2 of the negotiations look promising. The UK government has indicated its willingness to reduce its demands for full single market access, and to accept some tariffs and quotas on UK goods. For its part, the EU has confirmed there is sufficient flexibility within its existing negotiating mandate to compromise.

As the UK limits its demands on market access, this is likely to lead to the EU moving away from its strict opening position on level playing field commitments. On the vexed issue of the CJEU's jurisdiction in particular, that is not an explicit requirement of the EU mandate and EU case law suggests it should only be required by the EU's own Treaty rulebook if any dispute settlement mechanism involves questions on the interpretation of EU law.

The greatest obstacle to a deal in Phase 2 is time. With an extension to the Brexit transition period ruled out, time is running out to put a deal in place before the UK-EU trade relationship defaults to WTO terms at the end of the year. The UK negotiators have spoken of September as the key moment for the talks to be resolved, though the experience of 2019 suggests they will continue talks into October if necessary rather than risk accusations of walking away from the table prematurely. EU negotiators have made it clear that any deal must be done before the end of October to allow time to ratify it.

Both sides seem to agree that it would not be possible for a deal to be implemented and ratified in less than two months if that deadline is missed. Indeed, if there was any such thing as a 'normal' scenario for a deal anymore, then anything less than 12 months might be viewed as an extremely challenging time frame for the legislative processes and the operational planning, resourcing and preparation that public authorities and businesses require to put any deal into practice.

The reason that time is now a bigger problem than ever for the negotiations is because Phase 2 involves more than finding a compromise based on one trade deal precedent or another. With tariffs and quotas now on the table, hundreds of pages of detail must be haggled over to set the terms for each of thousands of goods - a process usually taking several years in international trade negotiations.

No doubt we will see herculean efforts from negotiators on both sides as they promise to up the pace in search of an agreement. But in the condensed space of the next three or four months, it seems inevitable that a large part of this negotiating strand will boil down to a choice between 'take it or leave it' offers from either side.

Deal or no deal?

The prospects of an October deal hang on these crucial issues of tariffs and the level regulatory playing field. If these can be resolved, there is every reason to think that the trade-offs needed for many of the less politically fraught elements of the negotiations will fall into place more easily, so that a deal can be done on sectors such as energy, aviation, road transport and cooperation between civil courts. A deal is certainly there for the making, if compromises can be made by both sides.

However, we can be in no doubt that both the UK and the EU are prepared to walk away without a deal. Neither will take a deal at all costs.

The EU has repeated its intention to do everything it can to achieve a deal, but has remained steadfast and united in its insistence that it will not sacrifice its economic interests for the sake of a deal with its closest neighbour. The EU accepts that a 'no deal' scenario is in neither side's interest, but it also takes the view that ultimately the UK has more to lose than the EU. The UK represents only 7% of the EU's exporting market, while the EU makes up almost 50% of the UK's.

The UK government has been even clearer: the UK is completing its withdrawal from the EU at the end of this year, deal or no deal. The CBI and other business leaders have complained vociferously that 'no deal' will represent a serious economic blow that UK businesses will struggle to cope with on the back of the coronavirus pandemic. For its part, the UK government has explained that it considers itself duty bound to deliver Brexit and ensure that the transition period ends this year, in line with the commitments it gave in its December 2019 election manifesto.

Deal and no deal positions converge

As negotiating positions and no deal preparations have developed in parallel it has been striking to see the deal and no deal scenarios converge, eroding a number of the stark contrasts between the two positions that we have become accustomed to over the last three years.

A significant area of commonality to both scenarios is the introduction of customs paperwork and inspections at the UK-EU border, and a regime that will involve tariffs on at least some goods crossing the border, even if a deal is done. The UK government has announced that it will defer the introduction of full checks at the border for the first six months of a no deal exit, and we can expect a similar approach to new checks if a deal is agreed. However, although this may help to mitigate the disruption to traffic flow in Kent, it will not remove the new burden of customs paperwork that businesses will need to complete and submit.

There have as yet been no promises to soften the disruption of new border checks on the EU side of the border, but there is some hope that the EU will be prepared to defer some checks, just as it was when the possibility of a no deal Brexit first loomed in 2019.

With each week that passes, deal and no deal are also looking increasingly similar for the decisions that the UK is seeking from the EU on market access in the fields of financial services and data protection. These are parallel processes separate from, though politically linked to, the negotiations on terms of any trade deal, and could mean the UK faces no deal on these two crucial issues even if an overarching trade deal is agreed.

That risk is growing week by week in light of the EU's go-slow approach on the UK's financial services and data protection priorities, holding up progress on discussions so as not to give up prematurely two key areas of leverage in the wider trade negotiations. Consequently, the brinkmanship pushing trade negotiations right up to an October deadline poses a real danger of time running out to move on to completing the discussions and assurances needed to pave the way for EU decisions on these two UK priorities before the end of the year.

However, even if there is no trade deal in place by the end of the year, there are still grounds for optimism that the UK and EU may adopt mitigation measures which preserve some of the benefits of a deal for UK businesses even in a no deal scenario. There are a number of areas where UK and EU interests in mitigating disruption align, such as aviation and road transport, as we saw when the EU first introduced mitigation measures for a potential no deal Brexit in 2019. Only the most acrimonious of collapses in negotiations would seem likely to prevent a repetition of at least some of these pragmatic working arrangements, allowing continued EU market access for UK businesses in some sectors for a further limited period.