A transitional period will not solve the Brexit puzzle

Posted in WTO and international trade

The fourth round of Brexit negotiations is about to start and the UK wants to move to the next phase to focus on the terms of the new relationship. In Florence, the Prime Minister has once again called for a new, deep and special partnership between the UK and the EU, although she has not specified the main features of this new relationship. She has emphasised that the UK and the EU need a new creative framework as none of the “off-the-shelf” models (e.g. EEA or CETA) will fit with the aim of the UK regaining domestic democratic control over decision making.

Reiterating her Lancaster speech, the Prime Minister has emphasised that by 29 March 2019, the UK will no longer be member of the EU Single Market or the EU Customs Union, but a time-limited transitional implementation period should start to give business time to adapt to a new trade and economic deal. During that transitional period, the status quo - i.e EU single market conditions - will continue to apply. This implementation period is proposed to last two years but in any event must not be open-ended. The PM called for the terms of this transitional period to be agreed as soon as possible.

While the continuation of the status quo after the divorce will certainly provide some relief to businesses, a transitional period will not avoid the cliff-edge. Unless there is a very ambitious and comprehensive trade agreement ready to be implemented by the end of that transitional period, any interim deal will only postpone the falling back into trading on ‘WTO terms only’.

Furthermore, businesses need long term certainty: this requires more clarity about the future partnership and its main components. That will certainly facilitate the commencement of real trade negotiations.

The Florence speech called for an innovative approach that allows the UK the flexibility to exercise an independent trade policy and conclude its own trade deals with other countries during the transitional period – even if they will only enter into force after the end of that transition. This proposal suggests that the UK would not expect to be subject to the common commercial policy. This might prove to be a considerable challenge: if the status quo is to continue (including the customs union and the common external tariff) that will not be possible.

Moreover, such an approach might not necessarily whet the negotiating appetite of the UK’s potential trade partners, who might prefer to wait and see the final concessions and trade–offs concluded between the UK and the EU, before tabling any offer. Potential trade partners might also have an interest in MFN tariffs concessions and services commitments to be applied individually by the UK, before moving into further preferential trade liberalisation.

The Prime Minister has recognised that regulatory issues are critical for a frictionless trade relationship with the EU and has reiterated the UK commitment to high standards and to strengthen them, avoiding any race to the bottom regulatory battle but she has  emphasised that the new economic partnership needs to be underpinned by a practical approach to regulations. The UK starts from a position of complete regulatory convergence with the EU so the challenge for the EU and the UK will be to decide what to do about future changes in law. The Florence speech has confirmed that the UK is ruling out models such as the EEA under which a permanent adaptation to EU regulation would need to take place. However, a complete break from EU regulations is not feasible. We should not forget that in order to have access to any market you need to comply with its regulations, standards and conformity assessment procedures. Given the importance of trade between the EU and the UK a harmonisation process of some kind needs to go on.

We will still need to wait to see whether the EU considers Mrs May’s new Brexit offer as ‘sufficient progress’ to move to negotiating a trade deal and indeed the terms of any transitional agreement.

Brexit: planning for the future as negotiations continue

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