Endgame Or Infinity War: Brexit In 2020

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We’re delighted to welcome our newest member, Rowan Public Affairs.

The organisation aims to help SW businesses be more effective in their dealings with the government. Chris Hodder, one of its Directors provides a topical perspective on Brexit below.

The UK is about to “get Brexit done”, but the endgame is not yet in sight. Chris Hodder examines what that means for both politics and business.

With the Withdrawal Bill making its way through the Lords over the next couple of weeks, Britain’s formal membership of the EU looks set to end on the 31st January 2020 as scheduled. Whether you’re planning to celebrate with a Big Ben bong or looking to man the barricades, there is no doubt that this will be a momentous occasion in both Britain’s and the EU’s history.

Although we are not “crashing out” without a deal, the challenges ahead both politically and for business will be significant. The main challenge will be the deadline of 31st December 2020 and the government’s refusal (probably to be confirmed in legislation) to extend the implementation/transition period beyond this.

Politically, this means that a deal must be struck before later this year (late November) to allow time for both parties to ratify (i.e. give legal effect to) a deal. Consequently, the actual negotiating period will be around 9 months punctuated by a “knocking heads together” summit in June.

Most EU external trade deals assume zero tariffs on goods and then work on regulatory alignment to ensure those goods are equivalent with mutual recognition being the output such as that in the EU-Japan deal. However, the UK’s starting point is unique; the EU has never concluded a deal with a country that already has the same rules and regulations. The focus from the EU’s point of view, wrongly in my view, is on ensuring that there is not only continued regulatory convergence but that the EU is the benchmark and there is a body to enforce this.

Broadly, industry will continue to seek regulatory convergence regardless of the final position, but divergence may in the end be of benefit to both parties. There are good reasons for this.

1.    The geography of the EU is very different, and this has a real-world effect on things such as vehicle headlights which need to be on all the time in Northern countries but are probably unneeded all day long in Greece.

2.    The UK is culturally different to the rest of the EU and has different market demands and expectations. For example, regulations on sports or music rights sales would disproportionately affect the UK.

3.    The UK is not fundamentally different to the EU and therefore would make a good test bed for new types of products allowed by divergent regulations.

The EU needs to deregulate to remain competitive and having a diverging market on your doorstep will demonstrate which changes are good, bad or indifferent. It is incredibly common for countries to compare themselves to their neighbours or peers and, as the UK will be both to the EU, this will be widely beneficial.

The EU will try to set the agenda which is likely to focus on issues of key importance to the main countries in the EU: farming, fishing and manufacturing. As the UK will continue to be a net importer of food and goods for a few years yet, accepting EU rules but with the option to diverge later may be a price worth paying to allow access to EU markets for more specialised exports and the service sector. Comparative advantage comes into play here, but the political debate will be around who decides and enforces. No doubt an independent trades dispute body will end up being created.

For business, the challenges will be the uncertainty of the end point. Whilst the actual fact of leaving the institutions of the EU will be confirmed in only a few days’ time, the endgame of the “final” arrangement is still some way off. The rest of 2020 will be punctuated by consultations and debates on the value of regulatory divergence, the difficulties of attracting investment and, outside the Westminster bubble, how British manufacturing will represent itself in its largest export market. These issues are unlikely to be resolved until 2021 at the earliest and therefore much of 2020 will be spent avoiding making big decisions until a deal is agreed at the end of November.

Although the mechanics of Westminster are now unblocked and the actual ‘Brexit’ bit of Brexit is upon us, further detail about of the future relationship will be another 12 months in the making with a lot of hyperbole and bluster on both sides. My best guess is that we’ll end up with a form of mutual recognition on most goods, a trade disputes body and a non-binding agreement on “seeking regulatory harmony”.

Rather than business as usual, I can see 2020 being a quieter but still very eventful year.