Brexit is now real. On the 31st of January, the United Kingdom (UK) formally left the European Union (EU). The next phase is an 11-month transitional period to negotiate a new relationship with the EU—a trade deal—in particular. Meanwhile, in the United States (US), President Trump has said he wants a US-UK trade agreement implemented by the end of the year.
To deliberate about what happens next and how multinational companies will be affected, Thomson Reuters turned to John Grayston, who has practiced EU law in Brussels for 15 year and in 2007 founded Grayston & Company, an independent law firm specializing in EU regulatory and trade law.
Is a UK-EU trade deal and a clean break likely in 11 months?
It’s a very ambitious timetable. It could be realistic if the UK agreed to maintain EU standards and EU rules—that is, to remain bound by the EU Single Market rules. This looks politically unlikely, however. And the further the UK wants to move away from being bound by EU rules—opening the door to a more US-centric Trump trade deal—the more difficult it becomes to reach a conclusion on the EU deal by December 2020.
There is a lot of dancing around the handbags in both the UK and the EU as to whether this means there will be a further extension to the transitional period. The EU, I think, is clearly minded to take more time, possibly up to two years, and the UK Prime Minister, 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 terms—with all the negative connotations that that would bring.
What is the likely scenario if there’s no deal at year’s end?
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—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—UK ends the transition on 31 December 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 EU in a single document, the UK 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 UK motor vehicle manufacturer, and I’ve said to them 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.
Because industry wants matters to be settled. . .
The uncertainty of Brexit has been, until now, whether the UK would actually leave. Now, the uncertainty shifts to how the UK will agree to terms of trade with the EU for the future. Even now, there are murmurings that, while Boris Johnson talks the talk regarding the UK leaving definitively with a free trade agreement on 31 December 2020, there are some who still believe that he is looking for a much closer trading relationship with the EU.
This would be news to President Trump, who clearly believes that the UK will be willing to throw its hand in with the US.
What might that look like?
The thought of the moment, as Prince Harry and Meghan have headed off to Canada, is that the UK is looking for a Canada-style deal with the EU. (NOTE: The Comprehensive Economic Trade Agreement, a free-trade agreement between Canada and the EU, went into effect provisionally in September 2017.)
That would be a more distant relationship with the EU than previously negotiated by past Prime Minister Theresa May. It would, in particular, raise lots of compliance issues for companies in the UK. Because, as you know, a free trade agreement, free of duty access to the EU, would only be available for qualifying products—those that are deemed to be of UK origin. A UK company who today is importing from China and then selling into the EU, for example, those goods would not qualify as UK-origin under a Canada-style agreement—so they would pay customs duties on import into the EU.
That’s why I talk about another period of uncertainty to determine what’s actually going to be the commercial deal.
What are the likely challenges during the UK-EU trade negotiations?
I think the idea that it will be easy for the UK to negotiate this trade deal because we have been an EU member state and therefore have applied the EU rules—will quickly be seen to be misleading.
The value of the current state of harmonization between EU and UK rules will be lost entirely if the UK 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, make our own rules, so I can’t see any reason why the UK would want to leave the EU only to then maintain all of the EU rules. That’s just madness. And if this is the plan it would be far better to remain a member state.
Balancing that, President Trump is facing an election in November and wants to do a great, a fantastic trade deal with the UK, with Boris. For Trump, the deal needs to be clear and simple if it is to be complete by the time of the US Presidential election. The more Boris is tempted to go with the US deal, the more he knows that an EU deal will become impossible within the same time-frame.
How else might the US influence or impact the negotiations?
Some of the rhetoric about the UK-US 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 US? 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 EU 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 US which allows chlorine-washed chicken into the UK, the EU will not allow chicken from the UK into the EU unless it comes with a certificate saying it’s not US-origin and with rigorous checks in importation. This means administrative and costs penalties for UK producers.
In an election year, the US President will want to be very clear that any deal with the UK works for US industry—including agriculture and food as well as Boeing and others. I think there are quite clear issues.
So, there is a lot to address during the 11-month transition period.
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 a first of January 2021 new trade agreement or a hard deal Brexit.
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