Brexit is imminent. On January 31, the United Kingdom will formally leave the European Union and the two entities will enter an 11-month transitional period to negotiate a new trade deal. Meanwhile, U.S. President Donald Trump has said he wants a U.S.-U.K. trade agreement implemented by the end of the year.
To discuss what happens next and how multinational companies will be affected, Thomson Reuters turned to John Grayston, who has practiced E.U. law in Brussels for 15 years. In 2007, he founded Grayston & Company, an independent law firm specializing in E.U. regulatory and trade law.
This interview, which was edited for length and clarity, will be published in two parts. This is the first installment.
Thomson Reuters: Is a U.K.-E.U. trade deal and a clean break likely in 11 months?
John Grayston: It’s a very ambitious timetable. It could be realistic if the U.K. agreed to maintain E.U. standards and E.U. rules — that is, to remain bound by the E.U. Single Market rules. This looks politically unlikely, however, and the further the U.K. wants to move away from being bound by E.U. rules — opening the door to a more U.S.-centric Trump trade deal — the more difficult it becomes to reach a conclusion on the E.U. deal by December 2020.
There is a lot of dancing around the handbags in both the U.K. and the E.U. as to whether this means there will be a further extension to the transitional period. The E.U., I think, is clearly minded to make available more time, possibly up to two years, and [U.K. Prime Minster] Boris Johnson is, for political reasons, very committed to leaving definitively at the end of 2020.
Now, if we leave definitively at the end of 2020 without a trade agreement of any description, we then fall back into what’s being called the hard Brexit — trading on World Trade Organization (WTO) terms — with all the negative connotations that it would bring.
Thomson Reuters: What is the likely scenario if there’s no deal at year’s end?
John Grayston: I think at this stage, [Johnson] is politically so strong that there’s no point in discussing whether or not he’s going to allow an extension. But I would suspect that if, towards the end of the year, it proves impossible to reach a new trade agreement to enter into force on the first of January next year, then in some shape or form there will be an extension.
My caveat is that one of the routes around that would be, rather than having an extension, that Boris would keep his political pledge — the U.K. ends the transition on December 31, 2020 — but then instead enters into a series of sectoral deals, what I call the ‘salami slice’ approach. Instead of the comprehensive deal with the E.U. in a single document, the U.K. would agree to specific deals for specific issues. And outside of these deals the standard WTO terms would apply.
Messy perhaps, but far better than a no-deal hard Brexit.
So, for example, I’m working for a U.K. motor vehicle manufacturer, and I’ve said to them that one of the options could be that you would have a trade agreement to deal with the motor vehicle industry to allow that to carry on doing its business. Of course, they would be very happy if that was the case.
Thomson Reuters: Because industry wants matters to be settled, is that right?
John Grayston: The uncertainty of Brexit has been, until now, whether the U.K. would actually leave. Now, the uncertainty shifts to how the U.K. will agree to terms of trade with the E.U. for the future. Even now, there are murmurings that, while Boris Johnson talks the talk regarding the U.K. leaving definitively with a free trade agreement on December 31, there are some who still believe that he is looking for a much closer trading relationship with the E.U.
This would be news to President Trump, who clearly believes that the U.K. will be willing to throw its hand in with the U.S.
Thomson Reuters: What might that look like?
John Grayston: The thought of the moment, as Prince Harry and Meghan head off to Canada, is that the U.K. is looking for a Canada-style deal with the E.U. (Note: The Comprehensive Economic Trade Agreement, a free-trade agreement between Canada and the E.U., went into effect provisionally in September 2017.)
That would be a more distant relationship with the E.U. than [former] Prime Minister Theresa May has previously negotiated. It would, in particular, raise lots of compliance issues for companies in the U.K. Because, as you know, a free trade agreement, free of duty access to the E.U., would only be available for qualifying products — those that are deemed to be of U.K. origin. For a U.K. company that today is importing from China and then selling into the E.U., for example, those goods would not qualify as U.K.-origin under a Canada-style agreement — so they would pay customs duties on import into the E.U.
That’s why I talk about a period of uncertainty now to determine what’s actually going to be the commercial deal.
Thomson Reuters: What are the likely challenges during the U.K.-E.U. trade negotiations?
John Grayston: I think the idea that it will be easy for the U.K. to negotiate this trade deal because we have been an E.U. member state and therefore have applied the E.U. rules will quickly be seen to be misleading.
The value of the current state of harmonization between E.U. and U.K. rules will be lost entirely if the U.K. maintains its desire to set its own rules and standards. Indeed, the whole intention of leaving is that we go off and do our own thing and make our own rules. So, I can’t see any reason why the U.K. would want to leave the E.U. only to then maintain all of the E.U. rules. That’s just madness. And if this is the plan it would be far better to remain a member state.
The uncertainty of Brexit has been, until now, whether the U.K. would actually leave. Now, the uncertainty shifts to how the U.K. will agree to terms of trade with the E.U. for the future.
Balancing that, The Donald is facing an election in November and wants to do a great, fantastic trade deal with the U.K., with Boris. For Trump, the deal needs to be clear and simple if it is to be complete by the time of the (U.S. presidential) election. The more Boris is tempted to go with the U.S. deal, the more he knows that an E.U. deal will become impossible within the same time-frame.
Thomson Reuters: How else might the U.S. influence or impact the negotiations?
John Grayston: Some of the rhetoric about the U.K.- U.S. deal is overblown, but there are political concerns. For example, what happens to the National Health Service? Do we open the National Health Service to competition from the U.S.? The irony being that this increased competition is thought to perhaps increase prices to the National Health Service. This is not specifically my area, but I’ll just say that’s a political issue, I think, first and foremost.
The technical issue which is most often expressed is this: Folks in the States seem to be living quite well, but they regularly eat products that the E.U. has banned on health grounds: chlorine-washed chicken and hormone-produced beef to list two examples. So, if we have a trade deal with the U.S. which allows chlorine-washed chicken into the U.K., the E.U. will not allow chicken from the U.K. into the E.U. unless it comes with a certificate saying it’s not U.S.-origin and with rigorous checks in importation. This means administrative and costs penalties for U.K. producers.
In an election year, the president will want to be very clear that any deal with the U.K. works for U.S. industry — including agriculture and food as well as Boeing and others. I think there are quite clear issues.
Thomson Reuters: So, there is a lot to address during the 11-month transition period.
John Grayston: The vagaries of the day-in, day-out negotiations are probably going to be too complex to monitor directly, but everybody needs to keep a careful watch on the overall timetable to understand whether we are progressing towards January 1, 2021 new trade agreement or a hard-deal Brexit.
Check out Part 2 of this interview here.