Overview
As we explained some weeks ago, in mid-June, the EU and the UK entered in a second phase of negotiations on the future of their relationship. Following a virtual high-level meeting on June 15, Prime Minister Boris Johnson, President of the European Commission Ursula von der Leyen and President of the European Council Charles Michel took stock of the limited results of the first months of negotiations which took place from March to early June. They committed to "a new momentum" for upcoming talks.
At the same time, the UK confirmed that it did not want to prolong the transition period following the UK's formal withdrawal from the European Union in January 2020. The so-called "Withdrawal Agreement" period (during with the UK continues to enjoy de facto most benefits of EU membership), therefore will end on December 31, 2020. EU Chief Negotiator Michel Barnier has made clear that the UK's position implies that EU-UK negotiations should be concluded at the latest on October 31, 2020, to allow enough time for ratification. It was in this context that talks resumed at the end of June with meetings in person in Brussels and London, alternating formal rounds with more limited intersessional exchanges.
Despite formal refusal of an extension, and with only three months now left to agree on a deal, EU-UK negotiations continue to produce limited results. Following a round which took place in London on Thursday, July 23, 2020, EU Chief Negotiator Michel Barnier informed that some progress had been achieved (i.e., on social security cooperation and on the UK participation in EU programs) and openings had appeared in challenging areas such as the structure of the agreement or cooperation in criminal matters. He reiterated however that without an important UK move on two key issues, the level playing field and fisheries, a trade agreement will be "unlikely." Using a similar tone in a public statement, UK Chief Negotiator David Frost emphasized that "considerable gaps" remain, adding that the UK should "face the possibility" that a deal will not be reached.
Unsurprisingly, both sides are actively speculating about the likelihood of "no deal."
In July, both the EU and the UK released documents to prepare citizens and businesses to the end of the Withdrawal Agreement transition period. The Commission's communication on "getting ready for change" and the UK campaign on preparing for the end of the transition period highlight the fact that major changes will take place on January 1, 2021, with or without a deal. The UK will at that point formally leave the EU Customs Union, which implies customs procedures for goods crossing the border. The end of the transition period will also have a direct impact on the mobility of individuals, introducing border checks and possible visa requirements for EU citizens wishing to work, study or live in the UK and for UK citizens wishing to do the same in the EU (the Withdrawal Agreement protects the right of EU and UK citizens already residing in each other's territory). Equally, UK individuals and businesses operating in the EU and EU individuals and businesses operating in the UK will no longer benefit freedom of establishment and freedom to provide services enjoyed within the EU Single Market. A significant number of other areas will be impacted, including the energy sector, intellectual property rights and data protection.
An agreement between the EU and the UK would ease these consequences. However, given the limited ambitions of the parameters set out by the UK from the outset (i.e., pursuit of a classic Free Trade Agreement, significantly more limited than provisions for the Single Market), even if a deal were struck in the next three months the consequences for UK-EU trade in an event would be severe. For example, a deal could eliminate tariffs and quotas on goods, which would significantly facilitate trade between the EU and the UK. However, this would not exclude border checks (for regulatory conformity or controls on the origin of goods), administrative formalities and corresponding delays in the supply chain. Given current deep integration of UK manufacturing with European value chains, and reliance in key sectors such as automobiles on just-in-time delivery, substantial disruptions are anticipated. While some types of services (e.g., transport) could benefit from continuing enhanced access provisions in a potential EU-UK agreement, other services (e.g., audiovisual or financial services) are not explicitly included in the negotiations for the time being. This suggests a difficult transition for many services sectors and a lack of clarity in the long-term. Finally, a deal could provide some certainty for the future of the bilateral relationship, notably by including a governance system and a dispute resolution mechanism. This would make the management of future disputes easier and facilitate possible additional negotiations, as in any case much will remain to be achieved after the end of the transition period. However, given the compressed time-period of the current negotiations, and the complications arising out of unwinding a 45-year relationship between the UK and its EU Member State partners, we anticipate that the dispute resolution mechanism under any future agreement will come under significant stress. If no deal is struck, management of future EU-UK pressure points will likely proceed ad hoc, and on the basis of realpolitik considerations rather than through institutional dispute resolution applying agreed principles and standards.
The general view is that the contours of such a limited deal are emerging but that the UK government has yet to decide whether it wants to make some politically difficult compromises to get there or whether it prefers to blame the collapse of the talks on EU intransigence. It is widely assumed that the UK government will only decide on this at the very last minute.
Time is, therefore, running short. The possibility of a no-deal situation at the end of the year is far from excluded. The EU currently considers that the ball is in the UK court. The UK government for its part is not giving any signs that it plans to move from its current position in the coming weeks. It is still possible that negotiations will speed up as of September and that a last-minute deal will be agreed in the autumn. This would likely result in an agreement of limited scope, focusing on the basics and leaving much room for uncertainties.
Facing multiple scenarios, the EU and the UK have delivered a clear message to businesses through their preparedness campaigns: it is better to prepare too much than not enough when it comes to Brexit. In this regard, all business either in the UK or in the EU should be preparing either for no-deal, or for a "deal lite," which in either case assumes a hard transition.