On January 31, the UK exited the EU, after more than three years of constitutional turmoil. The UK now embarks on a year of transition and negotiations as it heads out into a world of new trade relations, with opportunities and challenges in equal measure. This is a watershed moment for all companies who trade in or out of the UK or the EU. Whether trading in goods or services, companies face strategic re-assessments not just of where they trade, but how they organize their trading activities: upstream for inputs and downstream to their customers and markets. How will they be affected – from a regulatory, trade, customs, commercial, investment and disputes perspective?
What Just Happened: Overview
A new binding international treaty was born – binding and enforceable as between the UK and the EU. The UK’s European Withdrawal Agreement Act 2020 was approved by the European Parliament on January 29, 2020 after receiving Royal Assent in the UK. This agreement, along with the 36-page Political Declaration agreed between the UK and European Commission, provides the framework of aims and principles to guide the forthcoming negotiations towards a free trade agreement (FTA) between the UK and European Commission. The European Commission will receive its negotiating mandate from the Council on February 24.
What Happens Now: Key Transition Dates
On February 24, the Commission negotiation team will receive its mandate and the two sides will then embark on a negotiation which both sides recognize will be intense, difficult and politically charged. There is very little time to negotiate all that the UK seeks and the Commission has set down two milestones: July 2020 for completion of a number of chapters (as yet undefined), and October 2020 for completion of negotiations, in order to allow the necessary time in the EU for ratification. The Commission has said that not all sectors are likely to be covered in the FTA – some (as yet unknown) may have to wait until 2021. For those sectors left out, companies may face a “cliff-edge” of no-deal trading and will have to plan for that.
In the meantime, during the transition through 2020, life continues as business as usual. There are no required operational changes (but the UK ceases to participate in EU-decision-making, such as pre-market access approval procedures).
What to Consider: Potential Bear Traps
Because of the tight timetable, any FTA is likely to be thin and narrow, covering goods only; services will not be included. There is at present little prospect of an extension to the transition period (to allow for a more measured, detailed and extensive FTA scope) because the UK has turned its face against this and incorporated a prohibition on any extension request in the UK legislation. A change to this position currently seems unlikely, but it cannot be entirely excluded that this position could evolve as the negotiations take shape.
The UK’s goal for an FTA is to allow full access for goods without quotas and on a zero tariff basis. The European Commission has indicated that meeting the UK’s goal will be conditional on the extent to which the UK maintains a “level playing field.” This means the UK should remain aligned with the EU on environmental protections, the full body of regulatory protections and state aids (an important antitrust pillar in the EU designed to prevent a state favoring individual companies or industries). The UK already has signaled that it plans regulatory divergence. In relation to the environment, the EU has indicated it seeks a level playing field in nine areas including the “prevention, reduction, and elimination of risks to human health or the environment arising from the production, use, release and disposal of chemical substances.”
As the negotiations progress, the UK also will be engaged in negotiating trade deals with other countries, such as the United States and Japan. At some point, the UK will be faced with choices as to the areas in which, and the extent to which, it wishes to remain aligned with the EU. There remains a risk that no FTA will be achieved. The tight timetable and the signals given (about the UK’s goal and expectations) suggest the journey, will be fraught at times. This is not simply an issue for the UK and the EU; it will profoundly affect all businesses that trade into or through different European markets. This period of transition presents businesses with an opportunity to have their voices heard and to seek to influence the direction in which the negotiations go.
What to Look Out For: Impacted Sectors
The following are a number of areas and sectors that may be of particular interest and focus during the FTA negotiations.
- Food regulation
- Antitrust/competition law
- Intellectual Property
- Financial Crime & Compliance
- Insurance regulation
- Financial Services/Commodities regulation
Steptoe’s Brexit Resources page provides further updates by the Brexit team members on issues in the areas noted above.
What to Believe: A Few Myths and the Facts
Myth 1: Everything will change on February 1, 2020.
Fact: NO, it will be business as usual through December 31, 2020, and the UK will remain aligned with the EU and its regulatory regimes, but companies must be attuned to the business risks they face, some of which are indicated above.
Myth 2: Once the FTA is agreed upon there will be frictionless trade between the UK and the EU from 2021.
Fact: NO, it will be different and bumpy. Even if both sides wish to remain aligned on regulations, there will have to be customs checks (for example for conformity with rules of origin), and delays and immigration will be challenging in some sectors. Notwithstanding that, an FTA will be better than a cliff-edge.
Myth 3: US clients need do nothing.
Fact: WRONG; US-UK trade negotiations will begin, in parallel with the UK-EU negotiations, and this will be complex and will create tensions. This will affect not only US clients trading into the UK and the EU, but also US clients that may be invested in the UK as a platform for servicing the EU.
Myth 4: Everything will be in the FTA.
Fact: NO, there are expected to be a number of sectors that will not be included and these will be deferred until 2021.
Myth 5: A cliff-edge is as bad for the EU as it could be for the UK.
Fact: NO, the EU already has embarked on a series of unilateral measures designed to minimize the impact on the EU and its trading position. Whilst not perfect and not offering a full solution, they do ameliorate the damage for the EU.
What are the Next Steps?
Even those companies in industries (such as financial services) that have been planning for Brexit for some time now are going to have to deal with the fact that it is finally, truly, taking place and will bring concrete changes to the governing legal regime that need to be addressed. The Commission will publish on a regular basis relevant documents and materials during the negotiating process. It is keen to be as transparent as possible and a link to the relevant section of the Commission’s web site is here.