Uncertainty to prevail despite transition deal

The EU and UK are on course to agree a transitional Brexit arrangement later this week, but business uncertainty is likely to continue for many months or even years. On Monday, EU negotiator Michel Barnier and the UK’s Brexit Secretary David Davis announced that they had agreed in principle a transitional arrangement to run from 29 March 2019 to December 2020. The two sides had been negotiating a draft agreement over the weekend, ahead of a meeting of EU leaders in Brussels on Friday. The agreement was widely expected, despite well-publicised differences on issues like the Irish border and the rights of EU citizens living in the UK. The in-principle agreement resolves some issues, but leaves others – such as future arrangements for Irish border – open for further negotiations. Speaking to CRE last week, political risk consultancy Control Risks said a transition deal was highly likely, but this does not necessarily mean there will be much clarity for businesses before the UK leaves. “Although the Conservative government prefers to call it an ‘implementation period’, there is unlikely to be much to implement in terms of the business environment come March 2019,” according to Alexandra Kellert, western Europe analyst at Control Risks. “Instead, the UK is likely to technically leave the bloc while continuing to apply all EU legislation until new deals are agreed. This would provide stability in the short term, but prolong uncertainty,” she said. The business community has been pushing the government to agree a transition period of several years after the UK leaves the EU in March 2019. For example, the Association of British Insurers recently reiterated calls for the government to urgently agree a “straightforward transitional” agreement. UK and EU manufacturers also called for a transition agreement to avoid disruption to supply chains. A transitional deal should protect supply chains in the short term, but longer-term uncertainty will persist, Ms Kellert said. Control Risks maintains its view that the UK and the EU are unlikely to resolve the details of their future relationship before March 2019. However, it believes the UK is likely to obtain a deal for a transition period of at least two years to avoid a cliff-edge scenario that would see it leave the bloc without new arrangements in place. “In terms of risks for businesses, this means that uncertainty about the longer term will continue beyond the one-year outlook, but that EU conditions are likely to remain in place until an agreement is concluded,” said Ms Kellert. Control Risks believes the UK and the EU will eventually conclude a trade deal, but not for at least the next two years. “Full clarity on the future of the UK’s business environment is unlikely until at least 2021,” said Ms Kellert. The complexity of negotiations, as well as the huge task of changing UK law, have led some to consider a delay in leaving the EU. A report published by the UK parliament’s Exiting the EU Committee on Sunday concludes that the timetable for negotiating a bespoke trade agreement was tight and that extra time may be required. It recommends that the government should seek an extension to Article 50 to give trade negotiations more time. Earlier this month, Prime Minister Theresa May set out her vision of the UK/EU relationship after Brexit in her ‘Coffee House’ Brexit speech. The speech came just days after opposition leader Jeremy Corbyn proposed that the UK should remain in the Customs Union. According to Control Risks, neither statement changes the outlook for negotiations as they were both aimed at domestic audiences, more than addressing EU concerns. In particular, on both sides the statements were aimed at quashing internal disputes within the Conservative and Labour parties, rather than giving details to genuinely inform Brexit negotiations, said Ms Kellert. “We continue to see a no-deal scenario as unlikely. While the EU is highly unlikely to agree to all of the UK’s demands, the two sides are likely to agree to revisit them during the transitional period and in the meantime will conclude a deal to avoid chaos at the end of the two-year Article 50 period,” she said. Ms May’s speech was part of a series of presentations by government ministers on Brexit ahead of trade talks, which included calls by the UK Chancellor, Philip Hammond, for a trade agreement between the UK and EU to include financial services. According to Control Risks, the EU is unlikely to agree to include financial services within a future trade deal. However, the issue could be dealt with in a separate agreement, allowing both sides to save face, said Ms Kellert. A recent joint study by Oliver Wyman and Clifford Chance stated that Brexit outcomes remain uncertain, with a wide range of future trading relationships between the EU27 and UK still possible. It calculated that the annual direct cost of new tariffs and non-tariff barriers (if the UK were to resort to WTO rules) will be about £27bn for UK firms and about £31bn for EU27 firms. However, the cost of red tape would reduce to £17bn for UK firms and £14bn for EU firms if the final deal included a customs agreement broadly in line with today’s Customs Union. About 70% of the extra costs arising from trade barriers will be incurred by just five sectors in the UK: financial services; automotive; agriculture, food and drink; consumer goods; and chemicals and plastics. The report suggests that companies can take steps to mitigate the impact of Brexit, but these will reduce ‘red tape’ costs by only 10% to 30%. Last week, the government’s own Brexit impact study was published. It showed that GDP growth during the next 15 years would be 7.7% lower with a WTO Brexit, compared with a 1.5% reduction if the UK stays in the European Economic Area.

Uncertainty to prevail despite transition deal

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