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:
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:
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.
Partner, PwC United Kingdom
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