Transcript - Episode 13: What does the transition agreement mean for business?

Sally: Hello, and welcome to the next episode of Beyond Brexit. Today, we are discussing the Brexit transition agreement, and how this may impact business. I am Sally Cosgrove and I am joined by PwC’s Brexit Leader, Andrew Gray; and our Director of Political Relations, Anna Wallace. Welcome to you both. So, Anna, let’s start with you.  Can I ask that you provide our listeners with some context, and explain what has been announced recently in relation to transition?

Anna: Yeah, of course, as we approach the one year to go from Brexit, there has been a few important announcements.  First of all the announcements around transitions, and which is very important to businesses, but then also the indication from the European Council that we are able to move into the next phase and start those high-level trade discussions.

So, if I talk a little bit about what was agreed on transitions first of all, we now know that that transition period will run until the 31st of December 2020, so about 21 months in total. We know that to all intents and purposes, it will feel very much like being a member of the EU.  We will be staying inside the Customs Union, we will be staying inside the single market, and freedom of movement will continue during that time.

From a business point of view, nothing really changes.  The big change really is around the political influence that the UK will have during that period.  Because we won’t have MEPs in the European Parliament, and we won’t be, sort of, a member that’s able to influence the policy decisions of the European Union during that time.

As I said, from a business point of view, it will feel very much like where we are now.  Importantly, they also - the European 27 - said that the UK would be able to negotiate its own free-trade deals with other countries during that time, that was a quite a big concession.  They would also be able to ratify them, but we won’t be able to bring in those additional, those new trade agreements until after the end of the transition period.

In terms of other things that that means, they have also confirmed that we will roll over third country agreements, and perhaps we can come back to that later.  So, for countries like South Korea, where we currently have a free trade agreement through our EU membership that would also continue during the transition period.

Then in terms of the next trade agreements, that is the next phase; the next six months, probably to about October, November this year, the UK and the EU will be seeking to agree on high-level terms, what our trading relationship might look like before it’s ratified end of this year, and implemented hopefully by the time we get to 29th of March next year.

Sally: Indeed, so this is just a political agreement at this stage though?

Anna: That’s a very important point to note, yes.

Sally: Then in theory, this could all change?

Anna: In theory, it could change and Monsieur Barnier has been at pains to say that nothing is agreed until everything is agreed.  So, for some clients, the political agreement will be enough for them to slow down their Brexit planning.  But actually for a lot of businesses, only legal certainty will stop you taking the measures that you need to take in order to ensure day one readiness for Brexit.

As you said, I think, this an important milestone and slightly reduces the risk that it all goes wrong, but we simply can’t take that off the table, because these are fundamentally political negotiations, and any number of issues from, sort of, Northern island to Gibraltar, to what the deal is around citizens rights, still might scupper the overall deal.  Still people need to keep focusing on what actions they need to take to get their businesses ready for day one.

Andrew: I think it’s interesting to look at the way in which different, certainly regulatory bodies, are interpreting the current situation.  I mean, in the UK, where we’ve got in financial services, so The Bank of England, The Prudential Regulatory Authority, and The Financial Conduct Authority, are all seeking to ensure that the way they operate, enforces a transition period, so it allows that even though it’s not yet legally binding. Whereas, we have seen in Europe, a number of regulators be more cautious in that attitude, and effectively require firms to continue to plan for Brexit, as though Brexit was actually going to happen on the 29th of March 2019.

So a slight difference of opinion at the moment, but we also know that there is some work going on in the background to try and align those views at this stage.

Sally: Okay, helpful. So, how does this agreement differ from what the UK was hoping for, and have there been concessions on each side?

Anna: Yeah, I think, what you are seeing is, sort of, slight ratcheting down of the UK’s perspective in terms of its demands, I guess, of the EU 27, but also an acceptance from the EU’s point of view, in terms of the language that actually is going to make this politically achievable for a domestic audience here in the UK.

So as I said, a big important concession there around our ability to strike free trade deals during that transition period.  The slight caveat that I would add to that, is that you will probably, if I’m let’s say Australia negotiating with the UK, I’d probably want to know what the EU relationship is going to look like first. So, the UK Government might still find that there is a sequencing problem in terms of what it’s able to achieve before the EU deal is finalised.  Then on the UK side, obviously what you saw is the UK coming to the EU’s view on a number of areas; so on the timeframe, the UK wanted it to last until 2021. We have accepted the end of the current budget cycle, at the end of 2020; and the Government were keen to avoid freedom of movement with the same rights during the transition period, but ultimately that’s a part of being inside the single market.  So, it was a, kind of, accept it all or do without moment.

Sally: Indeed, okay.  So, we know there will be this 21 months transition period.  Andrew, in your view, what should businesses be doing now to really prepare and prioritise between now and the 29th of March?

Andrew: Yes, I mean, clearly a transition period, on the basis it’s all agreed, I think is a huge benefit to firms.  It does given an awful lot more time between now and when they actually need to implement the post Brexit model.

Firms still are, sort of, challenged by the fact that we don’t really know in detail how that future relationship between the UK and the EU would look like.  However, there are quite a lot of things that we do know about that.  So, we do know, based on current statements, that the UK would be outside the Customs Union. So that means that effectively all goods and services that pass between the UK and the EU and vice versa, will be subject to some sort of customs process.  We know that obviously the rights of citizens change, and the entitlement to work changes. So, around those two specific points, I think there is an awful lot of planning that firms really do need to think about doing.  We’ve seen already that some firms, particularly those which are heavily regulated, have taken quite a lot of steps to develop business models for a post Brexit world, but that still leaves an awful lot of organisations, which do have a very significant interaction with Europe, both in the UK, but also in the EU as well.  Their plans are fairly early, in very early stages, and in some cases haven’t yet really started.

I think when we have, sort of, worked with a number of firms, what we do find is that the complexity of the problem and the complexity of the changes that the business need to make is probably much greater than people first think.  Therefore I think, whilst the extra time is welcome, it still is going to be a reasonably tight timeframe for many firms to actually make the necessary adjustments.

Sally: So, do you think that business is actually doing enough planning at this point in time?

Andrew: I mean, there is a huge variety out there, and we’ve done a recent survey looking at some of our clients; and I think about a third of the firms that we’ve talked to have got robust plans, they are budgeted, they have got steering committees in place, and I think they are making quite a good progress.

About a third of the firms we are working with are just taking very specific piecemeal actions, which don’t really hang together as an overall programme.  They probably need to create a bit more formality about their programmes, but we are also aware of quite a few firms that simply haven’t really started much at all.  Even just preparing some analysis around, you know, getting some data around, the level of sales or purchases that you do on a cross-border basis, issues around the country of origin of those products, thinking about the logistics - so where are you going to store products? Does your supply chain need to be changed around? Will you need additional warehousing for perishable goods, either frozen or chill storage facilities may be required in ways which we don’t yet see.

So, I think, there is a huge amount of work to do and then couple that with the amount of systems changes that some firms will need to make; and that everybody else is going to need to make these changes at the same time or around the same time. So, I think, we’d certainly encourage firms to do more analysis of the problem and design what their future business will look like, and the requirements of that business in a post-Brexit world, where the UK sits outside of Customs Union. And they’re quite critical steps, which firms should really be planning for, irrespective of any transitional agreement.

Sally: Okay, so some basic first steps to take, but actually taking a very strategic look at this rather than a very tactical approach is what I’m hearing.

Andrew: Yes, I certainly think, looking at how the organisation is as a whole, getting board sponsorship, making sure that, particularly where you’ve got multiple divisions, that it’s being done on a common basis across each part of the organisation. Then thinking, in some cases, what sort of solutions might be out there, using technology in different ways, using your supplier network in different ways.  I mean, some firms will have to make some changes to their business, which will be quite significant.

Sally: Okay, so changing course a little bit.  We are moving on with the trade discussions, Government is being much more engaged with business and we have political agreement on the transition, so all that is good, all that sounds really positive. But what could really pose a threat to negotiations at this stage, Anna?

Anna: Yes, I think from a business point of view there’s one risk, which is that transitions just means that the cliff edge gets moved out.  This isn’t really an implementation period as has being talked about in the past.  This is a maintenance of the status quo, while negotiations continue. Unless those negotiations proceed at speed, there is still potentially a very small window at the end, the other end as it were, for businesses to implement the detail that you only get when you arrive at a full trade agreement.  As we outlined, there still might be intractable political problems, that mean we are facing another cliff edge as we approach 2020.

For me, the biggest thing really that might create that moment is still the Northern Ireland, Republic of Ireland issue.  There was a, as many commentators have described, a ‘fudge’ in December, to make sure that we could progress from that first phase around exit discussions into the conversations about transitions, which was very important.

But ultimately, Teresa May has still got to square quite a difficult circle, between how she maintains her commitment to not have a hard border between the Republic and Northern Ireland; how she has a whole UK approach, and which doesn’t mean that you have a customs control between Northern Ireland and the Mainland UK; whilst making sure that the UK leaves the Customs Union, which is one of their key red lines.  Of course, leaving the Customs Union means that we can strike free trade deals with other nations.  They are important part of the global Britain agenda that the government has, but those three things are very, very difficult to square.

Of course, as Andrew alluded, technology will probably play a part in mitigating border controls between the two parts of the island of Ireland, but that probably only takes you so far.  The Prime Minister also said in her Mansion House speech, that we would seek to align closely on manufacturing and agriculture, which we know makes up, I think, about 80% of the traffic of goods across the border. So again, that’s a positive step in the right direction, but ultimately when you are transporting things like live animals across frontiers, as they are called in the EU, in Union Law, you have to have an infrastructure to check that at the border to make sure that things comply with phytosanitary standards. It’s very difficult to envisage that you don’t have some type of infrastructure on the border, unless you have a very, sort of, what seemed at the moment difficult political volte-face to say that the UK or the Northern Ireland will somehow stay inside the Customs Union.

Importantly though, sort of in good news, I guess, is that negotiators are behind the scenes doing a lot of work on this; and probably April, June of this year, is when they will really start getting into the detail about what a solution might look like, and what can be agreed between now and October.

Andrew: But I think there is also real possibility that the agreements in October, assuming that’s when they do come, are going to be still relatively high level and conceptual in nature - which means that some of the detailed trade negotiations will only happen during the implementation period, and may only be agreed actually towards the end of that period then.

So, we are still in a situation where the political timeline for discussions and agreements, and enable to legislate on those agreements, and then the timeline that businesses need to respond to plan their businesses, change their business models, simply don’t work together.

Businesses are going to have to move forward based on key assumptions, around what we do know, and move forward on that basis, because they will simply not have time after all the agreements have been signed to then implement the changes.

Sally: Okay, so the key message for business being, you can’t wait for the political agenda to move on as it needs to, you just need to get on and really start planning.

Anna: Exactly.

Andrew: I think that’s right.

Anna: Get comfortable with making decisions with a bit of ambiguity, I’d say.

Andrew: Yes, and I think it does allow you to time the implementation with a degree of certainty now, and a degree more control.  So you can, perhaps be a little more strategic than if we were simply continuing to adopt the 29th of March 2019, which clearly isn’t going to be enough time for many firms.

Sally: Sure, conscious of time, and I think we are almost out of it.  So, any final thoughts from either of you?

Anna: I think for the next 6 months it might be a little bit quiet on the Brexit front, and that might be disconcerting for some businesses, but as we were just saying, I think that it is really important to get comfortable with making decisions when you perhaps don’t have all of the facts at your disposal.

The next big milestone that I probably say business should look out for is the June Council Summit, and that’s where we might get a sense of what’s happening with Northern Ireland and The Republic of Ireland discussions, but also we might get a sense of how much detail the article 50 agreement will have contained in it.

So, to Andrew’s point, from a governance point of view, you might have a sense of actually well, we can put off that decision until September, because we know there will be more detail by then, or conversely of course, we know that we won’t have that detail then, so we better get on with it.

Sally: Okay, Andrew?

Andrew: No, I think it’s just a repeat of the points.  If you are a regulated industry then talk to your regulators.  For all other firms, it’s really trying to understand what the future impact of a Customs Union would be, or the UK sitting outside the Customs Union, and really take some measured steps as soon as possible.

Sally: Okay, well thank you Andrew and Anna for sharing your insights, and thanks to everyone for listening. We hope you’ll join us for the next instalment of Beyond Brexit. Please do subscribe to keep up to date with all of our latest episodes. You can also find all of our Brexit related content at  www.pwc.co.uk/brexit

 

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