A return of ‘deal or no deal’? The possible outcomes of the EU-UK trade negotiations

28/05/20

The UK’s withdrawal from the EU on 31 January 2020 was a milestone moment, but actually only represented the end of the first stage of the Brexit process, with two more critical stages to be achieved before the end of 2020. These are the implementation of the Withdrawal Agreement, and the negotiations to agree the future economic partnership (FEP), another name for  a ‘trade deal’, between the UK and the EU which began in early March.

These negotiations were never going to be straightforward, but the impact of Coronavirus (COVID-19) has made them even more complex, raising new questions about how Brexit will progress over the next few months, whilst the response to COVID-19 is rightly the priority for both sides.  Both the UK and EU have reaffirmed their commitment to achieving a trade deal, and the UK Government has suggested that the pandemic should focus the collective mind of the EU on this outcome, but what really is achievable?

The third round of negotiations were completed in mid May, with little progress being reported, and negative statements made by both sides. With the end of June fast approaching, Caroline Turnbull-Hall considers the possible outcomes of the negotiations to agree a deal with the EU.

The transition period and the start of the negotiations

Under the terms of the Withdrawal Agreement (WA), the transition period started at 11pm on 31 January, and during this time the UK remains subject to EU rules. The Withdrawal Agreement states that this period ends on 31 December 2020, but it is possible for this period to be extended for up to two further years by mutual agreement (so long as that is agreed by 30 June 2020). However, the Prime Minister wants the negotiations completed by end of 2020, and an act of Parliament in the UK (the EU (Withdrawal Agreement) Act 2020) makes it illegal to make use of that extension - so unless there is a change of position, and law, no extension will be agreed.

The future economic partnership negotiations (aka the trade negotiations) began at the start of March, with a three weekly cycle of negotiations planned up until the end of May. With the second and third rounds cancelled due to COVID-19, virtual negotiations started in April, with three rounds planned up until the start of June.

How has COVID-19 impacted the Brexit planning process for businesses?

Whilst COVID-19 has created unexpected and unwelcome disruption to businesses, the experiences organisations have had during the crisis may help inform planning for the end of the transition period.

COVID-19 has tested the ability and agility of almost all businesses to adapt at pace to rapidly changing conditions, including ensuring staff are able to work from home safely, effectively and efficiently, which brings into question the need for extensive business travel, and mobility, in the future. The crisis has highlighted to businesses, especially those in food manufacture and retail, the critical importance of understanding their supply chains and the risks of over dependence on a limited number of markets. The need to ensure that all staff are able to work remotely has also raised the question of vulnerabilities to cyber attacks and the importance of data protection.

The rapid adaptations that businesses have made because of COVID-19 should, in addition to highlighting an organisation’s agility, focus the collective business mind on Brexit plans and encourage organisations to revisit these in the light of recent lessons learned.

Dates for the diary: June and September 2020

The Withdrawal Agreement gives the end of June as the deadline by which any request for an extension of the transition period must be made, and negotiated. However, as UK law includes a specific prohibition against extending the transition period, any extension would require an amendment to UK law, something that the Government is not contemplating.

Both sides have also committed via the Political Declaration to complete unilateral equivalence assessments (of which there are around 44, mainly relating to financial services) by the end of June, and indications are that both sides are progressing this work.

The June deadline is particularly important for determining, from a UK perspective at least, the future of the negotiations, and the likelihood of an agreement being reached at all. The UK’s approach to the negotiations indicated that a ‘sufficient progress’ review would be made in June to determine whether it was likely that an agreement could be reached by September. If it is decided that this cannot be achieved, the UK will refocus efforts to domestic preparations for ending the transition period without a trade deal being reached with the EU.

Might the transition period be extended?

There have been calls for the transition period to be extended, but the Government is holding firm to its intention for Brexit to be completed by 31 December, with either a ‘Canada style’ trade deal (i.e. a narrow goods only trade deal) or no trade deal as the outcome. Despite calls for an extension from the EU and other parties, the UK Government continues to hold its position and, whilst things may change, particularly in light of the time lost to COVID-19, at this stage an extension seems unlikely.

What are the positions of the two sides?

It is difficult to be clear about the precise differences, as whilst both sides published their negotiation mandates, only the EU has made its draft Free Trade Agreement (FTA) public. However, the approaches to the negotiations published earlier in the year, as well as the limited commentary following negotiations to date give some insight.

Some of the areas that have been highlighted as being problematic after the initial rounds of talks, include Northern Ireland and the implementation of the Withdrawal Agreement, regulatory alignment (the level playing field requirements), the continuing role of the Court of Justice of the EU and fisheries. However, there are also likely to be differences of perspective across other areas, including mutual recognition of professional qualifications, and intellectual property. 

The UK is adopting a precedent based approach, looking to other EU agreements, whilst the EU is basing its approach on agreements (or agreements in progress) with Canada (CETA), Japan and Australia. It is also important to note that financial services and data are being dealt with separately, with unilateral equivalence based assessments to be completed by the end of June. However, it is expected that these technical areas will be linked to the negotiations and become increasingly political, so it is unlikely that there will be any clarity in these areas in the near future.

So, what are the potential outcomes?

No extension to transition and no trade deal

This is the most likely outcome if the UK Government does not ask for, or agree to, an extension by the end of June 2020, and the progress made in the negotiations by that time does not indicate that there will be a deal in September. This would mean that, from 1 January 2021, the UK and the EU trade on World Trade Organisation (WTO) terms. There would be tariffs on goods passing between the EU and the UK, and there would be no preferential access to markets in the absence of agreements on equivalence.  

No extension and a basic trade deal

It is possible that a basic deal could be reached between the UK and the EU by the end of the year. However, such a deal would probably cover little more than tariffs and quotas, a dispute mechanism, and standard FTA chapters confirming adherence to WTO principles. There might also be some limited provisions on services. Effectively this would be equivalent to a light Canada style FTA.

A short extension

In the light of the disruption to the negotiations caused by COVID-19, the UK Government could consider a short extension. However, it is hard to see that a short extension, possibly of only a few months, would result in more than a basic deal and, of course, any second wave of COVID-19 could negate any benefit from such an extension. 

A longer extension and a trade deal

Were the UK Government to change its position, and agree to an extension of up to two years (as is permitted in the WA), the EU has already indicated its willingness to extend, subject to appropriate conditions being met. These conditions, which include financial liabilities, would need to be carefully negotiated, as the UK would be reluctant to increase its contributions to assist in the EU recovery from COVID-19. But a longer extension is the best and most realistic route to securing a comprehensive trade deal. 

What to expect

Despite the UK negotiating team confirming that a comprehensive free trade deal with the EU is ‘within reach’, the Government is moving forward with no trade deal planning, as well as preparing for the fourth and final planned round of negotiations at the start of June. Some of the no trade deal legislation is back in the House of Commons, for example the Trade and Agriculture Bills, as well as the Immigration and Social Security Coordination Bill. We have also seen the publication of the new UK tariffs schedule that will apply from 1 January 2021, so some clarity is emerging from the UK Government.

In my opinion the most likely scenario is that there will be no extension to the transition period. So companies should be planning for there to be no trade deal at the end of the transition period, and the UK and the EU will trade on WTO terms from 1 January 2021. 

Whilst the situation may well develop rapidly, what is clear is that there is much hard work and uncertainty ahead and businesses must be prepared for significant changes at the end of this year whatever the outcome.

Contact us

Caroline Turnbull-Hall

Caroline Turnbull-Hall

Director Regulation and Legal Issues, PwC United Kingdom

Tel: +44 (0)7718 966482

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