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Should business put Brexit back on the agenda?

Brexit has understandably taken a backseat as governments and business respond to the impact of the COVID-19 pandemic. However, with the UK having left the EU, how they will work together in future continues to be mapped. The two sides were in regular contact during the first few weeks of the pandemic and exchanged legal texts (the EU has published its text, the UK is yet to do so), although there was little formal negotiating going on.

Now activity levels and commentary are clearly stepping up again. The third of four negotiating rounds, led by David Frost and Michel Barnier, takes place via video conferencing this week. The final round of talks are set for the week of 1 June. Meetings of the Joint Committee and its sub committees, which are responsible for key decisions on citizen’s rights and the Northern Ireland Protocol, have also commenced. UK MPs on Select Committees have begun examining the complex issues and stakeholders have been giving evidence.

The progress of negotiations and decision making, however, has been slow. Whilst some technical issues have been resolved, there remain a number of big sticking points. The lack of progress and the disruption to business and the economy caused by COVID-19 is sparking increasing commentary on whether the UK will request an extension of the transition period due to expire on 31 December 2020. However, an extension has been consistently and flatly rejected as an option by the UK government.

A high-level stock take on progress in June by both sides at some point before the European Summit on 18 and 19 June, will be crucial to determining the way forward.

I asked Raoul Ruparel – who was previously closely involved in the first phase of the Brexit negotiations and is now part of Deloitte’s Brexit Insights team – for his views on the key issues slowing the negotiations and what might happen next:

What are the key sticking points? Are there obvious resolutions?

There are five major differences between the two sides at this stage of discussions. All have the potential to derail a deal, though some have more obvious resolutions than others.

“1. Level playing field (LPF). There are two aspects to this. On most LPF issues the EU is seeking non-regression from EU rules as of the end of the transition period, with enforcement via a dispute resolution mechanism. This goes beyond precedent in previous EU free trade agreements (FTAs), which is what the UK would like to see. There are two paths to resolution here: either the constraints are made unenforceable, or the bar for non-regression is lowered to be more in line with international standards and most FTAs. A more difficult problem is the difference over state aid rules. This is both technically and politically challenging, given the UK is clear it wants to adopt a different approach while the EU wants the UK to align with EU rules going forward. The gulf is large and the landing zone is not obvious.

“2. Structure and governance of the future relationship. The UK wants a suite of agreements while the EU wants a single one. The EU is particularly keen on an overarching governance system, where punishments for breaching one part of the agreement can be read across to other parts. A compromise here won’t be easy to reach, but there is not a huge difference between a loose set of agreements and a single overall agreement made up of various subsections.

“3. Fisheries. The UK is seeking annual negotiations and the EU is essentially seeking the status quo – or at least long-term access to UK waters. A compromise here could see a multi-annual deal on access to waters, potentially with some grandfathering of quotas. The UK has sent a compromise text to the EU this week so we wait to see how this is received.

“4. Security cooperation, in particular justice and home affairs. The UK is seeking access to certain EU tools and databases (for which there is little to no precedent). However, the UK is unwilling to accept any jurisdiction or oversight from the European Court of Justice when it comes to how data or information is handled. Given the unprecedented nature of this part of the negotiation and the fact it crosses into sensitive member state competences, it was always likely to take longer to conclude. The focus may for now be on what happens in the interim.

“5. The Northern Ireland Protocol (NIP). The two sides have a fundamentally different approach here. The EU believes the UK needs to institute a full third country border between GB and NI, the only aspect of which is up for discussion is which goods are not at risk of entering Ireland via NI and therefore are not subject to tariffs. On the other hand the UK is seeking the lightest touch implementation of the NIP to limit the changes on the ground while still meeting its commitments under the Withdrawal Agreement. This fundamental difference could read across to the wider negotiations, with the EU likely to leverage progress on one to secure progress on the other.

“The combination of these differences is currently acting as a significant drag on the negotiations and decreasing the chances of a deal being struck in the time available.”

What happens next? How could these issues be resolved?

The differences are not purely technical, but political in many cases. Flexibility will need to be given to the negotiators on both sides by politicians to deviate from their mandate. The high-level stock take on progress in June by both sides will be crucial to determining the way forward. Until that point, it is hard to see much progress being made on the big dividing issues.

“Given the delays from COVID-19, and the significant differences, the prospect of there not being an agreement at the end of the year has risen in my view. While still not the most likely outcome, the gaps are significant with both sides pursuing opposing positions in certain areas. The fall-back option of having some tariffs in place if agreement cannot be reached on issues such as LPF, may not actually be on the table. There is limited time to have a line-by-line tariff negotiation, not least because it would be politically contentious among EU member states who have different economic incentives. Given any deal is likely to be narrow and shallow, the difference between having a deal and not having one is much smaller than many might have expected.”

What are the options for an extension? Do you think there will be an extension agreed ahead of 30 June deadline?

“Given the significant delays caused by the COVID-19 pandemic, particularly to preparations for the end of the transition, the prospect of an extension has certainly increased but is still unpredictable given the UK government’s categorical rejection of it so far.

“The actual decision and form any extension could take is complex and nuanced. According to the Withdrawal Agreement, it must be agreed by the Joint Committee by 30 June 2020, with the detail negotiated before then, including a financial contribution by the UK in line with previous annual EU budget contributions.

“If an extension to the transition period is agreed, the most likely option at the moment looks to be one where the UK aims for a single flexible extension for as short a period as possible. The two sides could agree to extend the transition period for a maximum of one year due to the COVID-19 pandemic, however, it would be able to end earlier if a deal is finalised. The exact target date will depend on how long the lockdown and associated impacts last, but the UK may aim to be able to end it after three or six months. A variation on this would be for the UK to seek a rolling monthly extension until the deal is in place.”

What does all this mean for business?

COVID-19 has undoubtedly had a significant impact on preparations for Brexit. Much of government resource previously devoted to Brexit has been moved onto dealing with the pandemic. Most businesses have had to turn their attention to the huge COVID-19-driven change in the economy and therefore have had little time or resource to devote to preparing for the Brexit-driven changes coming at the end of the year – we have seen detailed Brexit planning programmes at many businesses completely suspended, losing valuable time, but which is simply unavoidable.

It will be challenging for business to prepare without more detail. However if the UK government continues with its timeline, it will be important to bring forward further technical notices and guidance as decisions are made and agreements reached. The EU will need to do the same.

In the meantime, Brexit needs to return to the business agenda and because we can see the negotiating positions of both sides, we already have clarity in many known change areas that business can and should prepare for now. In the uncertain areas there is a choice to make: either prepare for a ‘non-negotiated scenario outcome’, or wait for more detail knowing the latter will mean less time to implement.

Join us at 11.00 GMT on 18 May for our latest webinar as we review the outcome of the third round of the trade negotiations between the UK and the EU.

For support in assessing or establishing your Brexit related plans, you can email us.

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