The path to an EU-UK trade deal: what will business know by October?

Brexit is back. Boris Johnson’s confirmation in his video call with Commission President Ursula von der Leyen that the UK will not extend the standstill transition period sets an effective deadline of end October to agree a trade deal with the EU, or face an overnight shift to WTO terms on 31 December. Both sides have agreed to intensify talks over the summer – suggesting a willingness to get to grips with the most difficult issues. Is this timetable realistic, and what can businesses expect to know about the new terms of trade with the EU by October? 

What are the possible outcomes?

Johnson’s decision not to take the extension option effectively makes future EU-UK trade into a binary choice between deal or no deal, this year. Although some lawyers argue that ‘where there’s a will there’s a way’ if both sides later wish to extend, the EU has no obvious power to simply roll over the transition while talks continue. The UK has left the EU, so the Article 50 powers on which the transition is based are (most EU legal experts agree) now exhausted. Legally, the EU can only deal with the UK like any other ‘third country’; in other words, a new trade agreement is needed to avoid WTO terms coming into force automatically on 31 December.  

Even if the EU were ready to risk a legally-dodgy transition extension in the Autumn, all Member States and the European Parliament would have to support this – in other words, the EU would need to be close to securing all its main negotiating objectives. In that case, a deal would be close anyway, and it is hard to see why the UK government would want to prolong scrutiny of what would inevitably include a long list of UK compromises.  

What will it take for a deal?

The good news is that the landing zone for a deal is there. Progress has been made on many of the technical issues around trade in goods, and on the basics of a services deal. The three most difficult outstanding issues are level playing-field (LPF), fisheries and governance (the EU’s desire for an overarching dispute resolution mechanism to avoid endless, Swiss-style stand-offs over the rules). Not only are there obvious compromises in each of these areas, but Barnier team has hinted strongly that he will try to stretch his negotiating mandate on State aid and fisheries to secure a deal – if the UK government are willing to compromise here too. Serious talking about compromises here has barely begun, and needs to – perhaps why the communiqué from today’s video meeting stresses the importance of “if possible, finding an early understanding on the principles underlying any agreement”.

Boris Johnson is instinctively a deal-maker; a no deal, imposing crippling tariffs on UK farmers and car-makers overnight, together with disruption at ports, would be a personal failure. Experience from the exit talks last October, and from the gradual easing of the Covid 19 lockdown, suggests that he is less gung-ho than his key advisers when confronting real political pain. He will believe that a deal can be done – though this is likely to depend on his being willing to dress up several UK compromises as wins. Some, of course, would argue that is exactly what he did last time. And he is using up political capital with his generally hard Brexiteer backbenchers very quickly.

When will we know?

The government is ‘threatening’ the EU that a deal must be done by the Autumn. But strip away the backbench-pleasing rhetoric, and that’s….exactly what the EU is saying too. Michel Barnier has publicly set a deadline of end October (to allow time for ratification, probably from all 27 Member States). If we don’t have a deal by then, it will suggest that both sides have seriously miscalculated the other’s willingness to compromise, and that we are heading for no deal on 31 December.

What will business know – and not know – by end October? 

A deal by end October will necessarily provide clarity on:

·        Zero tariffs, zero quotas (although Michael Gove has said that the government would accept some tariffs rather than the EU’s LPF demands, there simply isn’t time to negotiate individual tariff lines, so any deal will, by definition, be tariff-free for goods);

·        Rules of Origin, where the best that the UK can hope for is that the EU agrees ‘bilateral cumulation’ (EU inputs count as ‘British’ goods, and vice versa). Even this is not a given, and ‘diagonal cumulation’ (bringing in inputs from other countries with which both the EU and UK have trade deals) looks like a very long shot. The EU wants hard incentives for business to move operations and people from the UK to the Single Market;

·        For the same reason, the EU has already rejected the UK’s ambitious asks on Mutual Recognition of Assessments (MRA). While some of this might still be negotiable, many EU Member States want to avoid the ‘Swiss deal’ outcome, which has allowed much testing, and wider pharma business, for example, to stay in Switzerland. Chemicals and car-making would also be affected;

·        The level of checks on agri-food – the EU is very unlikely to accept the UK’s proposal that each side treat each other’s food regulations as ‘equivalent’, especially with the UK hinting that it might accept US food;

·        Customs cooperation – though the starting point for checks will almost certainly be the EU’s standard rules for third countries;

·        Basic rules on providing services, where, again, the EU is very unlikely to agree to the UK request for ongoing freedom to sell financial services, default recognition of UK professional qualifications, or 5 year visa-free travel for business purposes;

·        The exclusion of audio-visual services from the trade deal;

·        The likely quick recognition of UK data protection rules as ‘equivalent’ to the GDPR, allowing a continued flow of data;

·        Air services and road transport, where the two sides are not far apart.

However, If we don’t see movement on the big three outstanding issues soon, there may not be time to get into much detail on services, transport and energy (where the EU worries that the UK has not seriously engaged on linking with the EU Emissions Trading Scheme), leaving these areas particularly vulnerable to a last-minute, rushed deal.

If there isn’t a deal….

…Ultimately, no deal is unlikely to be an end state – it could be the continuation of negotiations by other, more brutal means. Talks would likely resume early in 2021, though the political hostility on both sides would be a huge, unpredictable factor. As before, while a deal is the likelier outcome, businesses can only safely prepare for no deal – and for public spats with the government over their responsibility to fix the mess if it does go wrong.

Could the changes to trading rules be phased in?  

In terms of EU rules, only if the UK asks for this. Unless the terms of a deal meet the EU’s main demands, it is not in their interests to let the UK have a long adjustment period, as that reduces the pressure on businesses to relocate people and assets. The EU can legislate unilaterally where necessary for continued recognition of UK rules (for example in financial services), as they did for no deal. More likely, the UK will seek to phase in some of the most obviously disruptive changes where it can, unilaterally. We already know that this is the government’s plan on customs checks, to begin with an open border with the EU, gradually introducing import checks by July 2021 – and that date may well slip.  But business will certainly face EU customs checks on goods, and the uncertain disruption to just in time supply chains that will cause, from 1 January.