Brexit: the state of play on 11 December 2020

Written on 11 Dec 2020

 

The UK left the European Union on 31 January 2020. In EU jargon, the UK became a 'third country'.

From that date to 31 December 2020, the UK is in the 'transition period'. During the transition period, the UK remains part of the EU Single Market and the Customs Union. Because of this transition period, the practical detailed consequences of leaving the EU may not yet be widely seen in the UK.

The UK could have extended the transition period to the end of 2021 or 2022. It chose not to do so. As a result, the transition period will end at 11.00 p.m. on 31 December 2020. At that moment, the UK will leave the EU Single Market and the Customs Union.

The trade negotiations

The UK and the EU have been negotiating their 'future relationship' since spring 2020. At the heart of those negotiations are the terms of a trade agreement.

The trade agreement needs to apply from the moment of the end of the transition period. If there is no trade agreement in place, Great Britain and the EU will trade on World Trade Organisation terms. Those are the 'baseline' terms of trade for two countries or blocs which have not agreed other trading arrangements.  Trading on WTO terms would be a marked change for some sectors of the closely integrated British and EU economies.

(A side note: you will have noticed that I said 'Great Britain', not 'the UK', in the preceding paragraph. That is because different trading terms have been agreed for Northern Ireland and the EU, in order to maintain a frictionless border on the island of Ireland. In short, Northern Ireland remains in the EU Single Market for goods, and participates in the EU Customs Union, with an internal customs border introduced between Northern Ireland and the rest of the United Kingdom. Those NI-EU trading terms will apply irrespective of whether the UK and the EU agree a trade deal.)

State of the trade negotiations

Deadlines for the completion of the trade negotiations have come and gone, all missed. The talks now appear to be at a dead end. The central issue of dispute is on what the EU calls the 'level playing field' (LPF).

The EU's view is that the trade agreement must guarantee that a LPF is maintained between the EU and the UK in labour, environmental, climate and health regulation, and on state aid.  This is because the EU fears that the UK could pursue a deregulatory agenda in these areas, so lowering costs for UK business and giving them a commercial advantage over EU competitors. Or could back particular sectors or companies with state aid in a way not allowed by the EU state aid regime.

So the EU ask of the UK is that it agrees not to regress from existing regulatory standards. Exactly what else the EU wants – such as a 'ratchet', by which the UK would agree to match higher EU standards introduced in these areas – is unclear from what we know about the negotiations, though the EU clearly wants more than an simple agreement to maintain existing standards.

The UK view is that agreeing to a regulatory LPF requires the UK to remain in the EU's regulatory orbit – which the government sees as contradicting the desire for 'sovereignty' that is at the heart of its rationale for Brexit. Nor does the UK wish to introduce a state aid regulator on the EU model.

Many solutions have been put forward as to how this LPF issue could be resolved. However, at the time of writing (the afternoon in London on Friday 11 December) both the UK and the EU are playing down chances of agreement by their deadline of Sunday 13 December. Though, as with all Brexit deadlines, we can probably view this as flexible.

The real hard deadline is 31 December 2020. My understanding is that – if it really came to it – negotiations could continue right up to that date, with issues around legal ratification of any agreement being fudged and, in effect carried over to 2021, with any agreement applying provisionally from 1 January 2021.

However, even if talks do continue past the current deadline of Sunday, I expect that both sides would declare 'no trade deal' at some point in the next few days. That would give businesses some certainty, at least, of the trading terms that will apply from 1 January 2021 (however complex and unwelcome that certainty of 'WTO terms' would be).

Whatever happens, barriers, friction and bureaucracy will be introduced into GB-EU trade

Irrespective of whether a trade deal is agreed, it is certain that barriers, friction and bureaucracy will be introduced into GB-EU trade. This is the inevitable consequence of the UK government's decision that 'Brexit' means leaving the EU Single Market and Customs Union.

On goods movement, although a trade deal would mean no tariffs or quotas, there will be new 'non-tariff barriers', including import/export and safety and security declarations, and sanitary and phyto-sanitary certifications (including export health certificates). Products will need to conform to existing standards in the relevant jurisdiction and in some cases be certified by a third party as doing so, and be appropriately labelled.

On services and capital movement, all 'passporting' rights for financial services between the UK and EU will end, and will also finish for sectors such as broadcasting. Regulated cross-border services will need to rely on equivalence decisions taken unilaterally by the EU or UK, or on the national regimes of each EU Member State. This will be the case irrespective of whether there is a deal.

On movement of people, free movement ends on 31 December 2020. Although it is expected that short-term business trips to the EU will remain visa-free, there may be local permissions required for some business visits, such as contractual services supplies. This is an area where a trade agreement would be particularly helpful; if not, the default will be to the WTO 'Mode 4' regime and so the national regimes of each EU Member State applying to business visits (and the purpose of a visit) would come into play.

Finally, data. This is outside the scope of the trade negotiations. The EU has to decide whether to grant the UK data protection regime an 'adequacy decision', which would means personal data can pass from the EU to the UK in the same way as it does at the moment. If no decision is granted, then businesses will need to look to put in place other mechanisms for UK to EU personal data transfers, such as standard contractual clauses. The UK has already made a temporary adequacy decision for UK to EU movement of personal data.

From here to 2021

As often in the Brexit process, we are waiting for an outcome to the negotiations between the EU and the UK as they try to put in place an agreement to replace the largely frictionless trading arrangements which have been in place since the introduction of the Single Market. We will at least know by the end of 2020…although if there is 'no deal', the negotiations will inevitably be resumed sooner or later in 2021.