Brexit commentary | 21 Mar 2018

A green, yellow and white Brexit

Overview

On Monday, EU and UK negotiators published a colour-coded draft of the Withdrawal Agreement – green for provisions which are largely agreed already, yellow for provisions where there is agreement on the policy but the wording may change, and white for areas where there is no agreement at this stage. 

Clearly, progress has been made – but how much comfort can you take from Monday's announcement? In particular, given that agreement appears to have been reached on the transition period, is it better to wait and see rather than commit time and resources to contingency plans?

The perils of "wait and see"

It is encouraging that agreement appears to have been reached on the transition period – but as any lawyer will tell you, it is often the last 10-20% of any agreement which takes up most of the time.  In this case, a number of highly controversial issues remain unresolved, including the role of the ECJ and the border between Northern lreland and the Republic of Ireland – and talks on the future trading relationship have yet to start. Since the transition is conditional on agreement being reached on the Withdrawal Agreement as a whole, it cannot be taken for granted. As a result, our view remains that you should hope for the best, but continue to plan for the worst.

A worryingly short transition period

Even if all goes according to plan, the proposed transition period only lasts until the end of December 2020 – with no provision for it to be extended. This allows very little time to prepare for changes which are likely to have a major impact, such as the introduction of customs controls or the loss of Single Market access rights – and raises the prospect of EU-UK trade being subject to a significant level of disruption when the transition ends. Any contingency planning which you undertake now in anticipation of a hard Brexit in March 2019 will also stand you in good stead for the end of the transition period, especially if it occurs as soon as December 2020.

In practice, the transition may well be used to allow more time to reach agreement on future trading arrangements, following which a further transition/implementation phase could be agreed (and there is nothing in the draft Withdrawal Agreement which would prevent this). However, if those talks were to collapse, the probable outcome would be disruption on a par with a hard Brexit – but in January 2021 rather than March 2019.

Transition: don't assume everything will stay the same

Even if you are prepared to plan on the assumption that a transition period will apply, you still need to consider whether your business could be adversely affected by issues which cannot be legislated for in the Withdrawal Agreement.

For example, the draft envisages that the UK will continue to honour international agreements negotiated by the EU during the transition – but neither the EU nor the UK can force third countries to do the same. If third countries refuse to honour their obligations under agreements on matters such as free trade or aviation, UK firms will stand to lose access to markets and key services such as air freight may be disrupted (due to loss of traffic rights). Indeed, there have been reports that South Korea and Chile are seeking concessions from the UK before they will agree to "roll over" their free trade agreements with the EU. For a more detailed discussion of these risks, see our webinar "Is your supply chain Brexit-ready?"

The hard border problem

Theresa May once called for a "red, white and blue" Brexit - but the green, white and yellow colour coding of the draft Withdrawal Agreement happens to be far closer to the flag of the Republic of Ireland. No doubt the choice of colours was unintentional, but it serves as a reminder that there is still no solution to the problem of how to avoid a hard border between Northern Ireland and the Republic, other than the "backstop" proposed by the EU (which has already been rejected by the UK). Until the outlines of such a solution are clearer, it would be premature to assume that a Brexit transition is "in the bag".

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