The European Council has agreed its negotiating mandate for the European Commission in the next round of Brexit negotiations, which is expected to focus on transitional arrangements in the period immediately after the UK's departure. This followed a speech last week by David Davis, Secretary of State for Exiting the European Union, and an open letter to business, both of which also concentrated on the transition. Many businesses have been calling for greater clarity on transition as a matter of urgency – so it is a welcome development that the Brexit negotiators are now moving on to this key area. But here are 3 key points to bear in mind when considering the impact of transitional arrangements on your Brexit planning:
1. Don't assume that nothing will change during transition
In terms of trading arrangements between the UK and the EU, both sides appear to be aiming for a transition which, as far as possible, maintains the status quo. However, as the first draft of the EU's negotiating guidelines pointed out, "as from the date of its withdrawal from the Union, the United Kingdom will no longer benefit from agreements concluded by the Union…" This was a reference to numerous arrangements between the EU and third countries, on matters ranging from air transport to trade (some estimates put the number of such agreements at over 700).
In the final version of the mandate, this rather stark language has been toned down; the document states that during transition, the UK should "remain bound" by such agreements, but will "no longer participate in any bodies set up by those agreements." The fact remains, however, that unless third countries are prepared to "roll over" these agreements into the transition period, the UK will stand to lose the benefit of them. In the context of a trade agreement, this would mean reversion to WTO terms for trade between the UK and the relevant third country. As David Davis observed in his speech, it will be in the interests of most third countries to allow these arrangements to continue. However, there may be a minority of cases where difficulties arise e.g. because the third country sees an opportunity to extract a concession from the UK. Businesses should not therefore assume that 100% of the arrangements with third countries will necessarily be preserved during the transition. For example, a company which relies on goods imported from countries with which the EU has a free trade agreement may wish to consider how it would respond to price rises resulting from a reversion to WTO tariffs.
2. Don't assume transition will allow adequate time to prepare
The transition period is intended to give governments and business sufficient time to prepare for the UK moving away from its current arrangements with the EU. However, both sides are talking in terms of a transition period of about 2 years or less (21 months in the case of the EU). In our view, this is not likely to be long enough to allow adequate preparations for an "orderly" Brexit. First of all, it is unlikely that the detail of future arrangements with the EU will have been agreed by the time of the UK's exit date; as a result, neither business nor government will know exactly what it is preparing for until well into the transition period. Secondly, unless the UK's future relationship with the EU ends up being a very close one indeed, significant preparatory work will be required, much of which is likely to take longer than 2 years; for example, the infrastructure required to manage the imposition of customs controls between the UK and the EU would be very difficult to deliver within such a tight timeframe. Unfortunately, it may be that 2020-2021 is the timeframe which will emerge from the talks, because this is easier for both sides to agree politically – and business will just have to hope that an extension can be agreed if/when it becomes clear that this is not long enough.
3. Don't assume that transition is inevitable
Whilst both sides recognise the need for a transition and appear to be aiming for similar "standstill" arrangements, there are several potential flashpoints. In the UK, many pro-Brexit politicians have expressed concerns about the UK effectively becoming a "vassal state" because, if it accepts the EU's terms, it will no longer have a say on new EU laws which it would be forced to adopt during the transition. In response, the UK government is reported to be seeking a "good faith" obligation designed to prevent the EU adopting new rules which would damage the UK (but this may not be acceptable to the EU). It is also likely to emphasise that during the transition, the UK expects to be able to negotiate and potentially even sign new trade agreements with other countries - although it is unlikely to be allowed to implement them until after the end of the transition period, unless specifically authorised to do so by the EU.
Another potential flashpoint concerns citizens' rights. The final EU negotiating mandate calls for the citizens' rights part of the withdrawal agreement (agreed as part of the Phase 1 negotiations) to apply from the end of the transition, rather than from March 2019. This language was not in the first draft and may prove difficult for the UK to accept, given its objective of securing greater control over immigration from the EU.
Finally, even if agreement in principle can be reached on transitional arrangements by March of this year, this will only be a non-binding, political agreement. As both sides have adopted the mantra "nothing is agreed until everything agreed", this means any agreement on transition could unravel if subsequent talks on other aspects of the withdrawal agreement are unsuccessful.