Brexit: the Withdrawal Agreement and declaration on the future relationship provide some clarity, but little certainty

Phil Brown Senior Trade Adviser, PwC United Kingdom 28/11/18

On 25 November 2018, EU leaders approved the terms of the UK’s exit from the EU. The Withdrawal Agreement (WA) was published on 14 November with an accompanying ‘Outline Political Declaration’ (ODP) and, on 22 November, the full Political Declaration was published. These documents and their subsequent acceptance by the UK Cabinet, and approval by the EU leaders, mark a significant step in the Brexit process. But, there's still much work to be done, particularly to get the deal approved by the UK Parliament.  

What do these terms refer to?

Withdrawal agreement

An agreement in November 2018 between the UK and EU (but not yet ratified and therefore legally binding) on how the UK will exit the EU and what will happen during the transition period (to December 2020, with a possible extension of 1 or 2 years) and beyond that in some areas.

 

Political declaration on the future relationship between the EU and UK

A statement, agreed by the EU and UK negotiators in November 2018 (but legally binding even when ratified) on the outline for the final relationship between the EU and UK. This would take effect after the transition (so 2020-2022) or the end of ‘backstop’ (no time limit - would kick-in after the transition if still no deal).

 

Transition Period

From March 2019 to December 2020. Time for the necessary trade negotiations to happen; systems and processes to be put in place for the new ways the relationship between the UK and EU will work; and for details of how that relationship is structured to be finalised and agreed. The Withdrawal Agreement also allows for a one-off extension of the transition period to be agreed in Summer 2020 and extend it until December 2022.

 

The Withdrawal Agreement provides some clarity about what would happen if there is a deal - in particular, what would happen at the end of the already agreed ‘status quo’ transition which runs out at the end of 2020.  But, when it comes to the terms of the final deal set out in the Political Declaration on the Framework for the Future Relationship, the situation is much more mixed: clear in some places, but opaque and open for interpretation in many.

So what do we know about the transition and backstop from the withdrawal agreement?

Most importantly perhaps, if this deal goes on to be ratified, we know there's no longer a risk of reverting to World Trade Organisation (WTO) rules for goods trade if the transition period runs out at the end of 2020 without a new deal in place. There will now be the option of a one-off further ‘status quo’ transition of one or two years. This will give businesses confidence that there will probably be little material change until the end of 2021 at the earliest.

This is not certain however, as the UK and EU could agree instead to move to the ‘backstop’ at the end of 2020 instead. The ‘backstop’ will also automatically kick-in if there's no deal at the end of the extended transition, which is a real risk.  With the quickest recent EU Free Trade Agreement (FTA) negotiations with a major economy (South Korea) taking four years from launch to implementation, even the end of 2022 looks tight.

In essence, the ‘backstop’ would mean the UK staying in a customs union with the EU and, logically – to minimise other checks - following the EU’s rules for all goods trade, at least in the short-term.  The situation is slightly different for Northern Ireland which would stay fully aligned on relevant rules, without any scope for divergence. The ‘backstop’ could mean limited short-term change for most goods trade, but only if the UK and EU reach some agreement on regulations for goods trade, and it wouldn't be business as usual.

For services companies and those trading in highly regulated goods, the backstop provides little security. These businesses potentially face the cliff-edge of moving to WTO rules and, in some cases, not being able to sell their goods or services to the EU market on current terms.  Side deals could ameliorate the impact in some areas, but only partially so.

So some certainty, but still a mixed picture on the transition and backstop.  What about the final deal?

Starting with trade and customs, we know that the aim is to apply no tariffs or quotas, except perhaps for fish. It looks probable that there will be some form of customs union to avoid rules of origin checks at the border. But also that technology and facilitations will have a big part to play: essential if the UK is to have a credible independent trade policy. The section concludes that there's a ‘spectrum of different outcomes for administrative processes, as well as checks and controls’. So the direction of travel is towards minimising barriers for goods trade over freedom to strike new deals, but this remains far from certain at this stage.

For services and regulations, we know that the intention is for data to move freely; that there will be concerted efforts towards an equivalence arrangement on financial services; that the UK may continue to participate in agencies covering aviation, chemicals and pharmaceuticals; and, that there will be some arrangement on recognising qualifications.  We also know that the provisions will cover most services sectors, although there will be some exceptions. It is likely that provisions for services would fall well short of single market membership, but we don’t have enough detail to know yet what this would mean in practice.

Of the remaining areas covered in the declaration, such as procurement, transport, energy, and intellectual property, the provisions on the movement of people will probably be of most interest to the largest number of companies. Perhaps unsurprisingly given the sensitivity of the subject, the declaration is very light in this area.  There are a number of clauses outlining where there will be discussions, including on the temporary entry and stay of business people, and short-term visa free travel is confirmed. There's no reference to quotas or highly preferential arrangements, although these are not ruled out.

In summary, the political declaration provides businesses with a sense of the parameters and direction of travel, but unfortunately little more than that at this time.

What should you be doing now?

Right now, the imperative remains to focus on ‘no deal’ planning, taking decisions where necessary in the absence of certainty.  The UK parliamentary vote will be key.

We don’t have enough detail yet about the final deal to make firm plans.  But we can expect more clarity in the New Year when negotiating mandates are agreed.

While the final outcome is uncertain, there are also a few ‘no regret’ actions you can take now, such as knowing your supply chain and engaging your employees. These will help you prepare for all eventualities.

Contact us

Phil Brown

Senior Trade Adviser, PwC United Kingdom

Tel: +44 (0)7432 340 942

Follow us