The revised Brexit deal announced by the UK and the EU yesterday contains some important changes to the package agreed during Theresa May's premiership – but before we look at what's different, it's important to keep in mind what hasn't changed:
- Withdrawal Agreement largely unchanged save for new backstop provisions, as widely reported
- Transition period unchanged – due to expire on 31 December 2020
- Political declaration on future trade with EU points more clearly towards a “harder” Brexit than the May deal
- Goods exports: more EU-UK red tape but a freer hand on international trade policy
- Looser commitment to maintain EU standards (e.g. on tax, competition, social, employment and environment) may mean the UK is offered more restricted EU market access in return
- Level of commitment on services access is unchanged and remains limited, as per the May deal
What's the same
The basic package of a detailed, legally binding draft Withdrawal Agreement accompanied by a non-binding Political Declaration about the future relationship remains largely intact. With the notable exception of the provisions on the Irish backstop, the Withdrawal Agreement is unchanged. In the light of the extension to the Article 50 period, one might have expected the length of the transition period to be extended as well - but the draft Withdrawal Agreement continues to provide for a transition period lasting only until 31 December 2020. As we have observed previously, this is unlikely to be sufficient time to negotiate the highly complex arrangements required for the future relationship.
Most of the text of the Political Declaration negotiated by Theresa May has also been retained – but as explained below, it is now somewhat less ambitious and appears to envisage a more distant future trading relationship. Despite the UK being a predominantly service-based economy, there is no new wording on services (including financial services), where the level of commitment/ambition in the previous text was already at the lower end of the spectrum.
As widely reported, the section of the draft Withdrawal Agreement dealing with Northern Ireland has been replaced in its entirety, which is an important change and is obviously highly significant for businesses there. This is explained in the box below.
THE REVISED NORTHERN IRELAND PROTOCOL
Legally, Northern Ireland will remain in a customs union with the UK, but goods going from the UK to the province will face EU tariffs together with EU customs and regulatory checks. This means that, for practical purposes, Northern Ireland will be treated as if it were also in a "virtual customs union" with the EU. Businesses in the province will be able to claim a rebate from the UK authorities if the goods are consumed in Northern Ireland. This is likely to mean additional red tape and additional costs. The rebate system is also likely to have an adverse impact on cashflow, as businesses will have to pay the EU tariff upfront and will then probably have to wait to be reimbursed.
However, for most businesses, the key issue is what the revised deal – particularly the revised Political Declaration - tells us about the shape of the UK's future relationship with the EU.
Goods exports: more EU-UK red tape but a freer hand on trade policy
The previous version of the Political Declaration at least allowed for the possibility of a relationship that would make life somewhat easier for exporters to the EU, particularly in terms of reducing the burden of border red tape. In the revised version, wording that would have assisted with this has been deleted, such as commitments to align with EU rules on product regulation and to try to remove the need for Certificates of Origin documentation (these are generally required in order to take advantage of lower or zero tariffs on exports to the EU). Also deleted is text which discussed the possibility of a "spectrum of different outcomes" for goods checks and controls. It would therefore appear that the aim of preserving as much as possible of the "frictionless" elements of current UK-EU trade in goods has largely been abandoned.
The aim of "frictionless trade" with the EU appears to have been largely abandoned.
The flipside of this is that the abandonment of these commitments will leave the UK with a freer hand to enter into free trade deals with the rest of the world. However, those agreements are likely to take some considerable time to put in place and even more time for businesses to start taking advantage of them (for example, take-up of preferential tariffs by EU exporters under the EU-Canada Free Trade Agreement, provisionally in force now for over 2 years, is still only at 37%). In practice, countries also tend to trade more with their nearest neighbours than more geographically distant territories. In view of this, making up for the loss of access to EU markets through entering into trade deals elsewhere is likely to prove challenging for the UK.
Level playing field provisions
One of the EU's conditions for a close trading relationship with a high level of market access is that the UK should commit to a "level playing field" in relation to competition and state aid rules, social and employment standards , environment, climate change and relevant tax matters. Whereas the previous version of the Political Declaration held out the possibility of a higher level of commitment from the UK in return for greater market access, the revised version merely commits the UK to maintaining current standards – it does not envisage that the UK will keep pace with the EU in these areas. This is likely to constrain the level of market access that the EU is willing to offer in many areas.
The revised Political Declaration includes new wording under the dispute resolution section providing for a "flexible mediation mechanism" designed to allow disputes to be settled more quickly than via the more formal process of binding arbitration. However, it appears that this mechanism would be non-binding and would not prevent resort to more formal processes. The revised document also contains slightly more detail on the organisation of talks on the future relationship, although it continues to suggest that talks will have concluded by the end of 2020 – which, as noted above, does not seem realistic.
Overall, the revised Political Declaration is less ambitious and points towards a "harder" Brexit (particularly in relation to goods) than some of the future relationships which might have emerged under Theresa May's version. Whereas her version might have had the UK ending up somewhere between Switzerland and Ukraine in terms of our trading relationship with the EU, the revised document seems to envisage a looser arrangement, more along the lines of the EU-Canada Free Trade Agreement.
The deal is now expected to be debated by the UK Parliament on Saturday 19 October. Even if it gains the support of MPs, we find it difficult to see how the government could avoid having to seek an extension of the Article 50 period, as it would still need to pass primary legislation implementing the revised Withdrawal Agreement – and there is very little time left to achieve that ahead of 31 October.