With the date for the UK to exit the political structures of the EU now set at 31 January, the focus for 2020 will move to the much more challenging phase of Brexit – negotiating a UK-EU Free Trade Agreement (FTA). The shallow scope of this as a Canada-style deal is clear from the Boris Johnson election success. However, there is limited public understanding of the implications of playing off EU trade access with regulatory alignment. That will change, and compromise will come. Here is what should happen – and it will, unpalatably, include the UK being in the trading structures of the EU until at least 2022.
No change in 2020 – except for Northern Ireland
The FTA must be decided in an 11-month ‘transition period’ up till the end of 2020, when the UK remains in the EU trading structures – the Customs Union, VAT regime and Single Market. During this transition period, the UK will continue to enjoy the preferential trade terms negotiated by the EU on its behalf. This means no practical changes to EU-UK trade.
The exception is Northern Ireland, which under the WA becomes an EU VAT, customs and regulatory enclave of the EU after 31 January 2020. The question of whether it gets to enjoy the ‘best of both worlds’ (free UK and EU market access) or if it will become a compliance tangle not worth the bother may take years to answer.
‘No-deal’ avoided; ‘No-trade-deal’ now the risk
Failure to secure an FTA would mean a ‘no-trade-deal’ Brexit on 31 December 2020. Remember – the UK has a Withdrawal Agreement (WA) deal now, so a full, hard Brexit has been avoided. But if the UK is unable to secure an FTA it faces the imposition of punitive tariffs, quotas and other restrictions on trade between the UK and EU. There is an option to extend the trade transition period for up to two years further; but the political optics of further Brexit delay will make this highly unlikely to be agreed by the 1 July 2020 deadline set in the WA.
UK and EU set for collision over ‘alignment vs access’
Entering the negotiations, the UK is unlikely to accept continuing full goods and services regulatory alignment with the EU as this would tie its hands for future FTAs with the US, China and others. This will concern the EU, which fears the UK will set itself up as a low-cost competing neighbour via dilutions to employment laws, environmental requirements and state-aid grants. It will therefore negotiate hard with the threat of full imposition of EU tariffs on UK imports. The UK, by contrast, has already given away any threat of tariffs on EU imports. This will significantly weaken the UK’s ability to deviate from the EU regulatory framework without imposing significant damage on a huge share of UK’s trade.