Beyond Brexit - Time to act: Scenario planning for the future

Andrew Gray Partner, PwC United Kingdom 08/05/18

In our recent series of blogs we gave you some ‘no regrets’ decisions to consider now, to be ready for Brexit.  I was then, and remain, firmly of the view that we have enough certainty of the potential scenarios for our future relationship with the EU to put in place meaningful plans.

So, let’s start with transition.  The details have now been agreed between the UK and the EU, which provide a clear plan up to the end of December 2020. (You can hear our analysis of the agreement in our most recent Beyond Brexit podcast).  But, here are three important things to bear in mind:

First - to use a trite phrase, nothing is agreed until everything is agreed.  So, while there was good progress at the most recent EU summit, and we perceive a deal being reached as the more likely of the potential outcomes to the Article 50 negotiations, there are still some complex areas in the negotiations to be resolved, such as the future of the Irish border.

Second - even if the agreement holds, what’s agreed isn’t legally enforceable yet.  It still needs to be ratified - or approved - along with the other elements of the withdrawal agreement, by the EU Parliament, the EU27, and our own parliament.  Only once that process is complete will we have complete certainty on transition, expected early in 2019.

Finally - there is still the possibility that the transition period will be extended. Whilse there's no ‘extension clause’ in the draft text, it’s been acknowledged by the Prime Minister and others that it may take longer to negotiate the full free trade agreement (FTA).

Moving on to the scope of a future trade deal.  Whilst at the moment this element of the Article 50 negotiations contains the most ‘unknowns’, with many only to be resolved during the transition period, there is much that we do know about the potential ‘landing zone’ for a deal.  

Firstly, the current position from the UK Government is that the UK is not part of the EU Customs Union.  Both the UK and the EU have landed on the CETA agreement between Canada and the EU as a potential starting point for the UK-EU relationship.  This type of deal would mean no tariffs on manufactured products and most, if not all, agricultural products. Although rules of origin would mean that only products substantially manufactured in the UK or EU would benefit from the reduction.  Customs will be introduced on a similar basis to other third countries, with increased costs, system changes and bureaucracy, even if things are highly streamlined. And companies in highly regulated and sensitive sectors risk losing access to the EU market on current terms.

Second, we know what CETA does not contain, and where it is likely that the UK will want to go further in these negotiations:

  • Innovative approach to regulatory alignment on goods and services - so, rather than ongoing acceptance of EU regulations by the UK in all areas, a system where both parties recognise the outcomes achieved are comparable, even if the way they are brought about is different.
  • Tariff free access for all goods, with customs streamlining measures.
  • Access for services based on significant regulatory alignment and/or mutual recognition.
  • Quasi-free movement of workers with priority skills, generous agreed quotas and/or triggers for controlled movement.

It’s important to remember that, as with any negotiation, achieving these ambitious inclusions will require concessions by the UK in other areas - for instance, on ongoing financial contributions, the Irish border and jurisdiction of the ECJ.

And finally the “no deal” scenario.  We believe that the most likely outcome of the future relationship negotiation process is that the UK and EU will agree an FTA, but there is still a plausible scenario where no agreement is reached that warrants attention.  In this situation, UK trade with the EU would continue on the basis of WTO rules, plus anything each side chooses to do unilaterally either from the end of the Article 50 negotiation period or, less likely, at the end of the transition period.

There are six fundamental characteristics of a “no deal” scenario which would present material challenges  to UK businesses and how they operate:

  1. Loss of market access in some areas, particularly heavily regulated sectors and the service sector.
  2. Introduction of tariffs on manufactured and agricultural goods at WTO rates.
  3. Non tariff barriers as there will be no preferential clearance programmes or other streamlining in place at the border, creating potential for delays and costs.
  4. No agreed regulatory cooperation and potential for future divergence – restricting market access, data sharing, innovation and IP protection.
  5. Loss of access to all EU funding.
  6. No agreed facilitation of free movement between UK-EU and potential for more restrictive visa regimes to be introduced by either party now or in the future.

So even if we do think this is the less likely of the two outcomes to the negotiations, the potential impact is sufficient to mean businesses should assess the risks and options to mitigate those risks.

I know from the conversations I’m having with colleagues and clients that the agreement at the March EU Summit on transition is leaving many people with the impression that we can afford to wait to develop plans for Brexit.  I’m strongly of the view that what’s been agreed so far means a change from “not enough time to get ready” to “still not quite enough time to get ready”, as in some cases the changes required are major changes to supply chains, systems and processes. Whether there’s one year to get ready, or almost three, it's still time to act.

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Andrew Gray

Partner, PwC United Kingdom

Tel: +44 (0)7753 928 494

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