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Situation Update - United Kingdom : EU Exit

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DEADLOCKED UK-EU TALKS ENTER THEIR FINAL PHASE WITH BOTH ATTEMPTING TO PROCURE THE BENEFITS OF THE OTHER SIDE’S COMPROMISE
  • Negotiatory deadlock mires the final phase of Brexit talks with the impasse stemming from disagreement on competition guarantees, dispute resolution mechanisms and symbolically relevant fisheries policy.

  • A trade deal could range from comprehensive to partial in scope, with the latter more consistent with the UK’s mantra to ‘take back control’.

  • Failure to reach an agreement would result in UK-EU trade being conducted on World Trade Organization (WTO) rules, resulting in costly tariffs on the UK’s activity with its largest trading partner.

  • Cessation of the transitionary period will result in Britons having to abide by a ban on non-essential travellers to EU states as per COVID-19 policy, in addition to any additional country specific rules.

  • Entities engaged in logistics are highly exposed to a no-deal Brexit due to high WTO tariffs on vehicles and the possibility of delays at the UK-EU border during the beginning of 2021.

  • The economically damaging protracted Brexit process has created uncertainty among investors, with a substantial repair in confidence conditional on consistent commercially favourable post-Brexit policy.

  • Brexit has stoked regional tensions within the UK, with a key upcoming challenge for Johnson’s government being pressure from Holyrood for a second Scottish independence referendum.

Situation

Negotiatory deadlock has mired the final phase of UK-EU trade agreement talks prior to the conclusion of the Brexit transitionary period on 31 December, whereby both are keen to maximise their odds of attaining the material and political benefits of the other side compromising first. Amidst the impasse, on 13 December British Prime Minister Boris Johnson and President of the European Commission Ursula von der Leyen jointly called for their respective negotiating teams to “go the extra mile” in the ensuing days to achieve a deal after talks ran over their latest deadline. Mutual intransigence primarily derives from discord over maintaining competition guarantees, with Brussels concerned that upon no longer being accountable to EU law the UK will deregulate itself into being more commercially appealing versus EU member states by enacting legislative shifts favourable to private entities on aspects such as taxation, environmental rules and the restrictions placed on state aid to companies. Other contentious areas involve the establishment of a mechanism for adjudication of post-Brexit disputes and the symbolically relevant issue of fisheries policy.

Should a trade deal be struck in the presently rapidly narrowing negotiating window, potential coverage ranges from comprehensive to partial. A comprehensive agreement would ensure free movement of goods and services with EU member states and is the most materially mutually beneficial outcome in immediate terms, though the close British alignment on EU rules that such a deal would require is inconsistent with the mantra of ‘taking back control’ as espoused by the 2016 Vote Leave campaign. More commensurate with the UK government’s objective of achieving greater domestic policy oversight is the notion of a partial trade deal akin to the EU’s relationship with Canada. Disruption in such a scenario would be sector-specific whereby the scope of tariffs, quotas and restrictions on free movement would depend on the extent of agreed cooperation in the respective area of economic activity. This option would likely be accompanied by a future patchwork of bi-lateral deals on matters that were not covered in the initial main trade agreement.

Failure to reach an agreement would bring about the alternative scenario where there is an absence of a deal, making Britain’s trade with the EU beholden to the costly default terms set by the World Trade Organization (WTO) after 31 December. Such a scenario would encompass a critically large segment of overall UK trade as per the EU being Britain’s largest trading partner; in 2019, 43% of all UK exports and 52% of all UK imports were with the EU. Entities engaged in cross UK-EU commerce would face substantially hiked tariffs, the introduction of quotas and much more cumbersome bureaucratic requisites. UK and EU officials have recurrently cited a desire to achieve a deal, though owing to the aforementioned points of contention on 11 December Johnson remarked that a no-deal Brexit is “very, very likely”, followed by how on 15 December his spokesman commented that no-deal “remained the most likely outcome”.

Implications

Cessation of the Brexit transitionary period bears extensive travel implications. Of circumstantial relevance are EU COVID-19 rules which stipulate a ban on non-essential visitors who are nationals of countries outside the EU and European Economic Area (EEA), with exemptions made only for nationals of those states deemed to have sufficiently suppressed the virus such as South Korea or New Zealand. EU officials have made no indication that an exception will be made for Britons post-Brexit, an aspect that EU policy makers can argue has public health benefits due to the UK having the highest cumulative official fatality count from COVID-19 in Europe in combination with how the countrywide severity of the pandemic is certain to accelerate in the UK over the festive period amidst government plans to relax rules to accommodate Christmas gatherings. British travellers will also have to abide by any regulations encompassing non-EU nationals when entering an EU country set by the respective member state government, such as how on 10 December Dutch ministries announced that henceforth all non-EU citizens will have to present a negative COVID-19 test when entering the Netherlands by sea or air.

Brexit has brought on significant political risk for commerce, particularly for those entities engaged in logistics. Most heavy goods vehicles used in the UK are manufactured in the EU, with cars imported from the EU set to face a 10% tariff rising to 22% for vans and trucks according to WTO trading rules in the absence of deal. This heightened cost for vehicles will be deferred to higher strata of the supply chain, in turn increasing the cost of imported items for the British consumer. Further risk comes in the form of new customs procedures with greater levels of bureaucracy at the UK-EU border which may be unable to keep up with freight demand, thereby creating the possibility of logistical delays during the beginning of 2021 as firms learn the practicalities of navigating the new rules.

More broadly, the UK will be concluding its Brexit transitionary period in the wake of economically damaging protracted negotiations. Sterling weakened following the 2016 referendum and has since remained depressed whilst the productivity of UK firms has been affected owing to the universal need for companies to commit upper-management time towards Brexit planning. The impending clarification of Britain’s future relationship with the EU by 31 December will offer some respite from uncertainty for investors and for the UK’s private sector, with a more substantial repair in confidence that would approximate pre-2016 perceptions of stability conditional on the government consistently making commercially favourable post-Brexit policy choices.

Brexit has stoked regional tensions within the UK, with one of the key upcoming challenges for Johnson’s government being fervent Scottish nationalism. All Scottish demarcations voted to remain as part of the EU in the 2016 Brexit referendum though the UK as a whole opted for an exit, whilst in the 2014 Scottish independence referendum London ironically emphasised that a ballot for remaining in the UK ensured Scotland’s membership in the EU. Johnson has consistently emphasised that the 2014 Scottish referendum was a “once in a lifetime” opportunity, though last month Scottish First Minister Nicola Sturgeon stated that Scotland should have another independence referendum in the early part of the next Scottish parliament, with Sturgeon’s Scottish National Party (SNP) expected to procure a majority in the May 2021 elections. Pressure for another independence referendum will propagate an internal political rift between Westminster and Holyrood, with Brexit highly likely to be cited by Sturgeon as one of the primary reasons why Scotland should have an opportunity for another independence vote.