Brexit - Phase 2

However, the passage of the Bill will also usher in the next phase in the Brexit negotiations, and many commentators agree that the conclusion of a comprehensive free trade agreement (FTA) with the EU in just 11 months is a tall order. As widely reported, the Bill is now expected to contain a Government amendment which would rule out any extension to the transition period. Critics have been quick to express concern that this re-introduces the prospect of a no-deal cliff edge in January 2021, but the comfortable Parliamentary majority for the Government suggests an easier passage for the Bill through Parliament than on the previous attempt.

No extension to transition?

If the proposed amendment to the Bill which rules out an extension survives through to Royal Assent, it will impact the UK approach to the provision contained in the EU Withdrawal Agreement itself whereby a decision to extend or not must, in effect, be a joint one, taken by a joint committee of UK and EU representatives. Under the terms of the Agreement, the joint committee may decide to extend for "up to 1 or 2 years" on a one-off basis, and, as discussed in our earlier article, such a decision must be taken before 1 July 2020. There have been reports that Brussels was considering taking the initiative and requesting an extension itself, given that a "no deal" scenario is as unattractive to the EU as it is to many UK businesses, but the existence of the proposed "no-extension" provision in UK legislation may tie the hands of the UK representative (who will be a Government minister). We will comment further on the scope of the relevant provision when we have had sight of the final wording in the Bill.

The EU has signalled its readiness to commence negotiations swiftly and is expected to ratify a new negotiating mandate in the new year.  On the UK side, a new report from the Institute for Government suggests that DExEU should be wound down and replaced with new structures in readiness for the next, even more complex, phase of the negotiations, so the new Government will have to move swiftly if it is not to start the negotiations on the back foot. Given the likely complexity and sensitivity of the next phase of negotiations, it is hard to envisage there being a fully-negotiated EU/UK FTA in place by December 2020. A more likely possibility is a limited deal agreed by the end of 2020, forming the foundation of a more comprehensive agreement which is negotiated over a longer period, although this could be operationally challenging for businesses having to adapt to a piecemeal approach to the introduction of new regulation. The EU has indicated that a "bare-bones" deal may focus on key EU priorities such as trade in goods and fishing rights in UK waters, leaving trade in services to be agreed. We would also expect the Irish issue to rear its head again next year if progress towards an agreement falters, so many hurdles remain.

Future trade - a binary choice?

The Government's case for no extension is based on the claim that the EU/UK trade treaty will be easier to negotiate than equivalent EU treaties with other territories in view of the existing regulatory alignment between the UK and EU, and therefore, negotiations will focus only on those areas where the UK wishes to diverge from EU rules and regulatory standards going forward. As noted here, the revised Political Declaration negotiated by the Johnson government signals a looser trade relationship with the EU than previously envisaged by the Theresa May deal, as a trade-off in favour of greater freedom for the UK to conclude treaties with other territories such as the US. Indeed, the Conservative manifesto pledged to have 80% of UK trade covered by free trade agreements within three years and the early signals suggest the new Johnson government will reject a deal which involves a high degree of alignment with Europe. If, as expected, the UK does pivot towards alignment with US rather than EU rules and standards, such an approach is likely to complicate negotiations with the EU, particularly given the sensitive political backdrop: many US businesses use the UK as a platform for trade with the EU; and EU/US trade relations are already under strain due to protectionist shifts in trade policy under the Trump Administration.

The Political Declaration commits the UK only to maintaining current standards rather than keeping pace with the EU in relation to competition, state aid, social and employment standards, environment, climate change and tax matters, and any divergence from EU standards may result in trade barriers with the EU. The EU sees this as a binary choice for the UK, either it accepts the EU rule book in return for free market access, or it has a Canada-style FTA which would represent a step change in EU market access for the UK. Even if such an FTA is agreed, the changes needed both by Government and the business community to adapt to such a substantially different trading relationship with the UK's largest trading partner may cause significant disruption, particularly if there is no agreement on phased implementation.

No deal still a possibility?

The challenges outlined above lead us to the conclusion that a no-deal outcome on 1 January 2021 still cannot be ruled out and no-deal planning is still likely to be of assistance. The UK Government itself is reportedly continuing with its no-deal preparations.

Brexit legislation

Meanwhile, we expect the new Government's legislative programme outlined in the Queen's Speech on Thursday 19 December to resurrect the various Brexit-related Bills which were contained in the last Queen's Speech in October, including bills on trade, financial services, fisheries and agriculture, environment and immigration. It is possible that the text of these Bills may differ from those presented in the last Parliamentary session. We await their publication and will keep you posted on key developments.