Did They Get Brexit Done?
The UK Government has promised that if elected, their deal will “Get Brexit Done and End The Uncertainty.” But does it? If they are elected and their deal is passed, what will the UK know on Brexit day? What will they not know?
Getting Brexit “done” and “ending uncertainty” means different things to different people.
To decide where you fit on the “Johnson Deal Gets Brexit Donezo Spectrum”, this blog lays out a selection of what the UK public and UK businesses would and wouldn’t know the day after Boris Johnson’s deal was passed.
In each category, the explanation and analysis paragraphs are hidden to avoid this blog post becoming longer than a Bercow intervention. I have tried to be maximally fair and neutral, and would preemptively note that something being in the ‘don’t know’ category doesn’t mean it’s unsolvable or will never find clarity. Feel free to yell at me anyway.
Formal EU Membership and Transition Period
What will be known:
The day and time the UK will formally cease to be Member of the European Union; and
The day the treaties that constitute EU Membership will cease applying to the UK (Brexit day);
One of the two days when the trade related aspects of EU Membership will cease applying to the UK (end of the transition period in either 2020 or 2022);
Prime Minister Johnson has offered repeated assurances the transition period will end on the earlier date (December 2020)
What won't be known:
Which elements of the EU treaties the UK will adopt its own versions of within UK legislation;
Which EU treaties and obligations the UK will agree to be part of, participate in or align with as part of negotiations on the future relationship;
How the UK Government and the UK Parliament plan to use the additional policy flexibility they'll have once they are no longer bound by the EU treaties; and
Whether the transition period might be extended despite Prime Minister Johnson’s assurances if no trade agreement is in place at the end of 2020.
Explanation and Analysis (click to expand):
The formal departure of the United Kingdom from the EU would clearly be a significant symbolic step. It would also mean the UK is no longer bound by the EU's treaties, though many of the trade related elements of EU law would continue to apply throughout the transition period.
It will also be unclear just how much sovereignty the UK can exercise with two huge trade negotiations pending. Massive regulatory shifts in almost any direction could have implications for getting a deal with the US, EU or both. A Conservative Government may hold fire on doing anything too drastic, especially as it hasn't laid out any kind of specific regulatory agenda in its campaign that it would otherwise be held to.
The transition period envisaged by the Withdrawal Agreement lasts until the end of 2020, with the option in June of that year to mutually agree an additional two year extension. Prime Minister Johnson has offered repeated assurances he will not seek such an extension.
However, it is clear that should a trade agreement with the European Union be in progress but not ready for implementation by 2020, both the UK and EU will face considerable pressure to extend the transition period to avoid the EU and UK taking what will be described as a "needless" financial hit by briefly reverting to WTO terms only to then potentially conclude trade negotiations soon after.
Events surrounding the missed October 31st exit day leave some ambiguity about even the strongestly stated pledge not to extend a transition period, if the alternative is WTO terms.
EU/UK Goods Trade - Tariffs
What will be known:
That until the end of the transition period, goods trade with the EU can continue as normal; and
That at the end of the transition period, there may be a Free Trade Agreement in place allowing goods traders the option of submitting paperwork to prove their goods are sufficiently UK/EU made to avoid some or all tariffs.
What won't be known:
If a Free Trade Agreement providing the option of not paying tariffs will be negotiated, ratified and implemented in time, or even at all;
Whether such a Free Trade Agreement will cover all products or merely most;
On the products it covers, whether a Free Trade Agreement will eliminate tariffs or merely reduce them; and
Whether the UK and EU will retain the right to apply 'safeguards' and 'anti-dumping' measures to impose additional tariffs on one another's exports in special circumstances.
Explanation and Analysis (click to expand):
The Political Declaration pledges both sides to working toward an "ambitious" free trade agreement including the elimination of all tariffs. Ordinarily this would be a fantasy, because the EU like most major economies never eliminates all tariffs in a Free Trade Agreement, leaving itself the option of protecting sensitive sectors. However, because uniquely the UK and EU are working backward from a Customs Union that already does so, there's a reasonable degree of hope this might succeed.
In giving up their ability to apply tariffs to one another, both sides lose the option to protect their markets against what could become 'unfair' competition. The more tariffs they foreswear, the more likely they are to seek either commitments on a level playing field (see below) or the ability to put those tariffs back in selected areas if 'unfair' competition skews the market. This could be a really difficult (and thus time consuming) negotiating point.
The 11 months between a potential January 31 Brexit Day and the end of the transition period would be record time to negotiate a trade agreement. Especially a potentially very complex one. However, no previous trade agreement has ever occurred on such a doomsday clock. Ordinarily trade negotiations are about creating opportunities for the future. The post-Brexit FTA will be a race against time to preserve elements of the present.
Both sides can be expected to put a significant amount of time and negotiating resources into getting an agreement done. Whereas most trade negotiations might have monthly ‘rounds’, the two sides might agree to vastly accelerate that process. However, in most trade negotiations the limiting factor for swift conclusion isn’t a lack of negotiator time or effort, but the emergence of difficult issues or contradictory red lines.
The more complex the relationship, ambitious the negotiation (in terms of how much it wants to improve over WTO terms) and stubborn the two sides are about their positions, the greater the likelihood an issue emerges to grind progress in at least one area to a halt.
EU/UK Goods Trade - Regulations, Paperwork and Procedures
What will be known:
After the end of the transition period, there will be significantly more paperwork to move goods to and from the European Union;
The type of trading agreement the UK and EU are seeking does not significantly reduce paperwork, and even increases it;
What the 'No-Deal Preparedness Notices' say will be required in terms of paperwork and certifications to trade after the transition period, unless something changes; and
The two sides have pledged to work together to try to improve trade administration;
What won't be known:
To what extent a Free Trade Agreement or regulator-to-regulator decisions will mutually align or recognize the standards in each country;
What customs cooperation or facilitation arrangements will be in place by the end of the transition;
What percentage of local content goods produced in the UK/EU will need to benefit from any potential trade agreement with the EU/UK, and the types of proof required; and
To what extend the EU will accept UK certificates in areas like plant and animal health or pharmaceuticals, and vice versa.
Explanation and Analysis (click to expand):
As has been exhaustively established through the Northern Ireland Border debate, the only way to ensure frictionless trade across a goods border is through a combination of a customs union with multiple regulatory elements of a Single Market. If the Johnson deal is passed, this is not what the two sides will have agreed to negotiate as the basis of their future relationship. Therefore, at the end of the transition period goods traders will face significantly increased paperwork requirements because moving products between the EU and UK will become an export movement (like London – Beijing, instead of a domestic movement like London – Hull).
Unlike Customs Unions which reduce somewhat the level of paperwork requirement to move goods across their internal borders, Free Trade Agreements can add to the paperwork load. In addition to declaring everything your carrying and its value for customs purposes, taking advantage of a Free Trade Agreement's lower tariffs also means proving the goods were sufficiently made in your country to benefit.
This is to avoid, for example, US cars being imported into the UK duty-free under a US-UK deal and then into the EU via a UK-EU deal, thus avoiding the 10% tariff the EU has on US cars. To prevent this kind of abuse, trade agreements include ‘Rules of Origin’ chapters that establish exactly how ‘locally produced’ something has to be to qualify for its lower tariffs. Meeting that threshold can be a challenge for a global supply chain and proving compliance a paperwork headache.
In addition to customs and tariff duties, goods traders would also after the end of the transition period have to deal with border regulations. This consists of two challenges: meeting the regulations and second demonstrating compliance to the satisfaction of border authorities.
With No-Deal looming, both the EU and UK issued extensive guidance on how they would treat one another's goods immediately after Brexit. This included rules about which regulations would apply, and which certifications (and issued by whom) would be needed for goods to cross the border.
The Withdrawal Agreement delays the onset of these new rules for the duration of the transition period, but businesses won't know which of them may be eliminated or changed either unilaterally or as part of any trade agreement.
The two sides have agreed they'll work closely together to try to make border procedures as painless as possible for business, but rolling out brand new border infrastructure and cooperation arrangements takes time. Often a lot of it. Moreover, even borders between highly advanced and very friendly neighbours like Switzerland and Germany or Sweden and Norway can see delays of many hours for freight vehicles.
EU/UK - Services Trade
What would be known:
Services firms could continue to import and export services as before for the duration of the transition period; and
The two sides would be aiming for a trade agreement cover services "well beyond WTO terms."
What wouldn't be known:
What services sectors and commitments a trade agreement might actually cover; and
In areas where a free trade agreement doesn’t make commitments, to what extent and how quickly will regulators impose new obstacles?
Explanation and Analysis (click to expand):
Services exports are a great and growing part of the UK's trade mix, but the complexity and sensitivity of services in trade has relegated them to the margins of the national conversation.
In a free trade agreement negotiation on services, the two sides are effectively discussing regulation. They are talking about to what extent their rules will allow one another's businesses to sell services remotely, to foreign nations travelling, through branch or subsidiary offices in the other country or by sending their staff over on assignment. They are also discussing how much scrutiny and administration such sales will be subject too compared to locals, and whether their qualifications will be recognized.
These are all hugely sensitive areas, touching on health, safety, immigration and consumer protection. Traditionally, trade agreements have done almost nothing on services, which is why "well beyond WTO terms" is not a high bar to clear.
In most free trade agreements, the United Kingdom as a services powerhouse with a lot of wealthy consumers would be looking to trade access to its market in goods (lower tariffs) for better services access. In this case, with complete tariff elimination as the potential starting point for both sides, this would be more difficult.
What's likely to make the negotiation more painful still is that unlike tariffs (which the European Commission's DG Trade looks after), a lot of what goes on in services trade is decided individually by each EU Member State. That makes it more challenging for the EU as a trading bloc to offer commitments.
Without meaning to pile on, there's another stumbling block. In the Political Declaration, both sides would be committing to negotiating on services while retaining "regulatory autonomy." Given services commitments are literally just mutually agreed limits on regulatory freedom, a too literal interpretation of this by one or both sides could relegate the deal to being nearly meaningless.
In the EU Single Market, and in its relationship with the EFTA countries, there are complex arrangements to allow each country to regulate independently on some issues and collaboratively on others without any one country’s independent regulation becoming a barrier to services trade for the others. Negotiating anything like the legal arrangements and instruments to make this work could be very difficult and thus, time consuming.
A bare bones agreement with the EU that (like almost all trade agreements in the past) includes virtually no meaningful commitments on services access doesn't mean UK firms immediately lose their ability to sell in Europe. Rather, it retains for EU regulators the freedom to limit and put conditions on such sales. The extent and speed regulators in the EU 27 will take advantage of such flexibility is unknown. They will have to balance the potential to lure high paying jobs with the disruption too abrupt a decoupling could spell for an already wobbly EU economy.
UK/Non-EU Trade
What would be known:
The EU would be asking all its FTA partners to continue applying their trade agreements to the UK for the duration of a transition period;
If any of the EU's partners refused that request;
The UK has successfully negotiated the partial or complete rollover of some of the EU's trade agreements;
The UK has indicated it will continue providing market access to Least Developed Countries and some Developing Countries through its own variations of the Everything But Arms and GSP+ programs; and
The tariffs the UK planned to apply on all WTO Members without trade agreements in the event of a No-Deal.
What wouldn't be known:
Whether and under what conditions the UK will successfully negotiate any additional rollover agreements during the transition period;
Whether more limited rollovers like Switzerland can be successfully expanded;
Whether temporary elements like cumulation in agreements like the South Korean rollover will be expanded;
Whether, how quickly and under what conditions trade agreements with others can be negotiated; and
Whether the UK will modify its No-Deal tariffs before the end of the transition period.
Explanation and Analysis (click to expand):
While the EU could apply a lot of diplomatic pressure, it cannot actually force any of their trade agreement partners to keep extending these to the UK for the duration of a transition period. Most analysts agree this is unlikely to be a problem, given the short time frame, but there is a remote possibility some may prove reluctant or pretend to be to try and extract concessions.
The Department of International Trade has been hard at work negotiating rollovers of the EU's trade agreements. They have had a couple of big successes, most notably Switzerland and South Korea. However, major partners like Japan and Canada have proven difficult. A failure to roll these over will mean some UK firms are disadvantaged or even completely locked out of these markets compared to their EU27 competitors.
Not all the FTA rollovers were comprehensive. For example, the Switzerland agreement represents a near total rollover in goods but puts virtually all services into a 'too be discussed later' basket. It's unclear how quickly these suspended elements can be renegotiated and how the access they may provide for the UK compares to that of the EU27.
Some of the UK's rollovers also contain temporary elements. For example, ordinarily to benefit from the lower tariffs in the Korean agreement, goods must arrive on a vessel which departed from the UK. However, the South Korean rollover provides a 3 year grace period during which it will also accept UK goods coming from EU ports as being compliant. Elements like this will need to be renegotiated.
A lot has already been written about the potential of a buccaneering UK doing free trade agreements all over the world with countries like the US, Australia, New Zealand and perhaps even India and China. On Brexit day, none of these trade agreements would have advanced beyond the scoping stage. There would still be a long road with many uncertain corners ahead.
In the interim, the UK will be obliged to apply a common set of tariffs to all WTO Members with whom it doesn't have an agreement (except those very poor countries to which it extends preferential access). In preparation for No-Deal Brexit, the UK released a list of tariffs on all products it planned to apply temporarily, pending a subsequent review.
Provided the UK stays within the limits it notified to the WTO (which are generally much higher), it can modify these at will. It is unknown whether No-Deal tariff list will still be the one the UK heads out of a transition with.
There are reasons it may be reconsidered. It was designed in part to avoid UK tariffs on EU products causing price-hikes in the event of a No-Deal. If the UK and EU reach a trade agreement eliminating most or all tariffs, this would be less of a concern. Further, the very generous tariff reductions in the list have put some (like Canada) off negotiating with the UK, and caused outrage from some domestic sectors (like egg producers).
The Level Playing Field
What would be known:
The UK and EU would have agreed not to regress in the future from where standards on climate change, subsidies, social and environmental standards and tax might be at the end of the transition.
What wouldn't be known:
What additional commitments the parties might make in this area as part of a trade agreement negotiation;
What dispute settlement and enforcement will be agreed in a future trade agreement;
To what extent the EU is likely to raise its standards in the future;
To what extent the UK would keep pace or exceed such increases; and
How such an agreement impacts other negotiations.
Explanation and Analysis (click to expand):
Unlike the Political Declaration negotiated by Theresa May which pledged to aim for 'dynamic alignment' with the EU's standards going forward, the Boris Johnson Declaration is limited to standstill. Essentially it establishes the standards and regulations of the EU at the end of the transition period as a 'floor' below which the UK agrees not to go, without necessarily pledging to keep up with the EU should the standards rise.
Level Playing Field provisions are included in trade agreements when one or both sides fear that in the absence of tariffs, their businesses might be undercut by a lowering of regulations or standards by the other party. The more tariffs are eliminated, the more this becomes a concern. Given the goal is to remove all tariffs and the UK’s recent rhetoric about regulatory divergence, it's reasonable to expect a strong push in this area from the European Union. This might be challenging for the UK, which has flagged regulatory autonomy from the EU as a key outcome from Brexit.
Level Playing Field provisions don't necessarily oblige you to have the exact same regulations. Instead, they commit you to having equivalent levels of protection, so that businesses in your country don't get a competitive advantage over businesses in the other. To make this work, you need a mechanism whereby one party can challenge a regulation in the other it thinks isn't equivalent. Within the EU, the European Court of Justice plays this role. The UK and EU will need to negotiate some other way of keeping each other honest. The less trust there is between them, the more binding and legalistic this mechanism will need to be.
Northern Ireland and Trade
What would be known:
Northern Ireland would be part of the UK’s customs territory but would be treated administratively as if it were part of the EU;
Goods entering Northern Ireland from anywhere except Ireland would be subject to EU tariffs and EU regulations unless they fall into a category determined not to be of risk of subsequently entering the single market;
There will be a system to provide tariff rebates to some goods entering Northern Ireland that can prove they ended up staying there; and
The entire Island of Ireland would be a single zone for animal and plant health, aligned with EU standards;
What we don’t know:
How this will work in practice;
What goods will be considered ‘low risk’;
How providing the destination of your goods will work for the purposes of getting a tariff rebate;
How sending goods from Northern Ireland to Great Britain will work;
How much the government will subsidize firms impacted by all this; and
Whether Northern Ireland will exercise its authority under the Withdrawal Agreement to cancel these arrangements.
Explanation and Analysis (click to expand):
The Withdrawal Agreement negotiated by Boris Johnson with the European Union attempts to address the challenge of the Northern Irish border with an administrative solution in the Irish Sea. I've written a much more detailed examination of it here. In short, it avoids the need for customs checks on the border between Ireland and Northern Ireland by instead having all the EU checks and tariff fees collected when something arrives in Northern Ireland by ship.
The Withdrawal Agreement outlines the general shape of how this arrangement is envisioned, but all the practical details are to be decided by a Joint Committee which will meet during the transition period. What that Committee will arrive at is entirely unknown.
In principle, the Committee will be looking to minimize friction for businesses conducting trade with or through Northern Ireland. In practice, the European Union may err on the side of caution so as to avoid Northern Ireland becoming a back door into the Single Market.
For example, the two sides have indicated that certain categories of goods (entire tariff lines, likely) will not be subject to EU tariffs or checks as they will be considered low risk. However, a recent paper by Professor Alan Winters of the UK Trade Policy Observatory indicated the percentage of goods falling into such a category may be as low as 15-20%.
It also remains to be determined what kind of proof of final destination the authorities will require in order to authorise a tariff rebate. The UK will want to be vigilant for fraud, and the EU will be equally concerned that UK tax dollars might be used to offset EU tariff barriers. This could mean the proofs and accompanying paperwork may ultimately prove onerous.
In terms of goods entering from Northern Ireland into Great Britain, things are even murkier. On the receiving end, the UK has full control and may well choose to err on the side of internal frictionless trade over protecting its borders from smuggling or sub-regulation products. On the sending end, it seems likely the EU may require at least some documentation for goods leaving its customs territory.
The UK government has indicated willingness to use the power of the Treasury to help businesses meet any costs resulting from increased administration. As yet, it is entirely unclear how much money will be available, how it will be apportioned, what the application procedure will be, how quickly firms can expect to receive rebates, and for how long.
Finally, it is also worth remembering that the Withdrawal Agreement provides for Northern Ireland the ability to vote to cancel the arrangements. This seems a remote possibility, but if it were to occur it would trigger a 2-year negotiated process to try and replace them, followed by either the results of the talks or a reversion to 'No-Deal' borders.
Thank you for reading yet another of my attempts to shine the flickering torch of clarity into the depth-less abyss of Brexit’s trade complexities. If you feel like your organization would benefit from knowing a bit more about trade, check out our trade policy training offerings.
Big thanks go to Joe Owen and his Brexit team at Institute for Government, on whose brilliant work I relied to produce the above. Any mistakes are entirely my own.