Overview
For those who do not follow the ins and outs of the Brexit saga closely, it most closely resembles Groundhog Day. Successive rounds of negotiations end with the same refrain: some progress made but the two sides remain far apart on the three most difficult issues of fisheries, state aids and dispute settlement. Deadlines come and go. The UK left the EU legally at the end of January this year, with a transition period - during which the UK provisionally retains the benefits and obligations of EU membership - running until December 31, 2020; at the end of June, the British government declined the option of requesting an extension of this period, making the end of 2020 a hard deadline for the UK's de facto exit from the EU; PM Johnson set October 15, 2020, as his final date for deciding whether the negotiation of a future UK-EU relationship could succeed by the end of the transition period; the EU negotiator, Michel Barnier, says the absolute final deadline is the end of October. Most observers agree that the real crunch will be in the first half of November.
And yet, deal or no deal, January 1, 2021, will bring real changes to the trading relationship between the EU and the UK, with very tangible consequences for businesses. Frictionless trade will be replaced by the need for border compliance: proof of compliance with regulatory standards in the market of import, compliance with rules of origin to ensure tariff-free entry, and, multiple forms to be filled in in order to pass customs checks at a border which had previously been fully open. To give one example, the UK has had to accept that, even if there is a deal, the EU will not allow parts imported from Japan or Korea and used in products subsequently exported to the EU to count as "British." This raises the prospect of UK-based manufacturing, in particular automotive and electronics, being liable to pay EU tariffs, even if a zero tariffs/zero quota EU-UK trade deal is done. This in turn points to likely shorter or longer-term "repatriation" of such manufacturing capacity from the UK to the EU, to avoid these additional costs.
Companies operating out the UK will have to comply with a whole set of new UK-specific rules and procedures from chemicals to financial services and from transport to data transfer, while at the same time ensuring compliance with EU regulations if they wish to continue selling into that market (up to now, the target market for more than half of all UK exports). The same goes for EU-based businesses contemplating continued sales into the UK. The difference is the relative scale of these economies: the EU single market, even without the UK, remains the largest internal trading zone in the world.
The difference between having a UK-EU deal and not having one is not merely limited to tariffs but also to the intangible element of securing a more constructive atmosphere and institutional framework for the myriad of other issues that the two sides will have to address in the future. Failure to agree on a deal will undoubtedly result in a massive blame game by both sides and a serious deterioration in the overall political dynamic.
So, What is Really Going on?
The good news is the two sides have made a lot of progress and most agree that, aside from the most contentious issues, there is large agreement on what a deal could look like. Given that they were starting from the template of existing Free Trade Agreements (FTA) such as Canada-EU, there was no need to "reinvent the wheel." It remains that transitioning from Single Market membership to that of a mere FTA partner sees the UK substantially stepping back from its existing levels of EU market access and EU partnerships more generally.
Yet even in the context of a bare-bones "Canada-style" FTA, key contentious issues remain. The three that have continued to elude resolution (fisheries, state aids, and dispute settlement) are difficult. However, most commentators can see where a common landing ground for each could be found. The question is, which side is going to "move" to find a common landing-zone.
On the EU side, there is a genuine interest in having a deal. But the perception, echoed in Mr. Barnier's most recent declarations and the message of President Ursula von der Leyen to EU leaders at the summit last week, is that the key to a deal is more movement from the UK side. The EU believes that it has shown, at least informally, the ways in which it could contribute to a compromise. The starting point may have been the initial mandate but, in the course of his extensive contacts with the member states and the European Parliament, Mr. Barnier is constantly testing what forms of compromise could be acceptable so that he will be confident that the final package he presents as part of the deal will be approved.
As for the UK, nobody knows what the final political calculus of PM Johnson will be. Any deal he accepts will require him to make what many of his hardline MPs will consider as unacceptable compromises. On the other hand, no deal will bring significant additional hardship to a British economy already reeling from the pandemic recession and which will, in any event, face new difficulties once the transition ends on December 31.
To this has been added the new problem created by the introduction of the UK legislation known as the Internal Market Bill, which the UK government openly admits is in breach of the Withdrawal Agreement, signed and ratified by both sides only at the end of 2019. Signalling its determination to push back against the UK move, the EU Commission has initiated formal legal proceedings to challenge the legislation. But that will not deliver results anytime soon. What the EU really wants is for the offending clauses in the legislation to be withdrawn. The European Parliament has stated categorically that it will not ratify any trade deal unless the Bill is changed. The UK insists it will want to keep the legislation in its present form, even in the event of a deal, as a contingency.
The crux of the so-called Internal Market Bill is to signal a possible wavering of the UK's commitment to maintaining a frictionless border between Northern Ireland and the Republic of Ireland. The UK as part of the Withdrawal Agreement last year accepted that Northern Ireland effectively would remain in the EU regulatory and customs space for the foreseeable future. Yet the UK's commitment in this regard (in essence, a commitment to prioritizing peace in Northern Ireland) was fundamental to proceeding to the current phase of UK-EU negotiations.
A phone call between PM Johnson and President von der Leyen on Saturday, October 3, paved the way for UK-EU talks to continue for a further month, not in the super-restricted format (known as the tunnel) which the UK had hoped for, but "they instructed their chief negotiators to work intensively in order to try to bridge those gaps."
So, all is still to play for. Time is short and the clock really has started ticking. There still is room for a deal still be made - if the politics (mostly British) allow it.
The one thing which is certain is that the full impact of Brexit will be felt for the first time starting at one minute past midnight on December 31, 2020. Whether that impact will be cushioned by agreement on an FTA or amplified by a no deal exit will have to be decided in the next four weeks. Whether or not a deal is done, UK and EU businesses should be preparing now for the new and substantial border and regulatory barriers that will arise in their mutual trade in goods and services.
