Brexit commentary |

Brexit: UK suffers withdrawal symptoms

Overview

Theresa May’s Brexit deal has been received with a distinct lack of enthusiasm from almost all sides in the UK and was swiftly pronounced dead on arrival by some commentators.

Yet she appears to have seen off a possible challenge to her leadership (at least for now) and the deal is being presented by its supporters as the only alternative to a disastrous “no deal” Brexit. So is the deal really as bad as some of its critics claim - or is it the best that could be achieved in difficult political circumstances?

What is the deal?

The deal consists of a draft Withdrawal Agreement and a political declaration about the future relationship between the UK and the EU. Whilst the former is a detailed, full form legal document running to 585 pages which is almost ready to sign (and will be legally binding if ratified), the most recent leaked draft of the latter is a mere 26 pages (and will not be legally binding). It’s fair to say that the draft Withdrawal Agreement (if ratified) delivers a reasonable degree of certainty until at least the end of December 2020, by providing for a transition period.

We will be commenting on aspects of the Withdrawal Agreement and the political declaration (expected to be finalised this weekend) in more detail over the next few weeks. In broad terms, the effect of the Withdrawal Agreement is that, despite the fact that the UK will formally leave the EU on 29 March 2019, not much else will change until the end of 2020 - although there are some potentially significant exceptions (for example, on its own, the Withdrawal Agreement cannot fully preserve trading arrangements with third countries which are based on EU-negotiated free trade agreements; if some of those countries refuse to consent to the continuation of existing arrangements, UK businesses are likely to face higher tariffs on exports of their goods after 29 March 2019). Beyond December 2020 though, the position is far less certain. The draft political declaration is sufficiently vague that it could result in the UK ending up with anything between the following:

  • a reasonably close economic relationship with the EU in some areas, particularly in relation to goods (including, potentially a customs union and other measures designed to preserve "frictionless trade” as far as possible); or
  • a much looser relationship based around a free trade agreement (which might not go much further than Canada’s). 

Consequently, as things stand, the deal does not give a clear sense of where the UK is ultimately heading in its relations with the EU after Brexit.

What about Northern Ireland?

The Withdrawal Agreement also commits the UK to a “backstop” relating to Northern Ireland which would keep the UK in a customs union with the EU until alternative arrangements can be found to avoid a hard land border between the province and the Republic of Ireland. The backstop will result in a regulatory border for goods flowing from Great Britain to Northern Ireland (but not the other way around i.e. goods would potentially be able to flow from Northern Ireland to Great Britain as they do now). This is politically problematic because it is strongly opposed by the Democratic Unionist Party on which Theresa May relies for her majority in Parliament (and which has recently abstained on amendments to the Finance Bill in protest at the Brexit deal). It is also anathema to leading Brexiters because it locks the UK into a customs union with the EU, heavily constraining its ability to conclude trade deals with other countries, and commits it to maintaining alignment with EU rules in areas such as state aid and the environment.

Political considerations aside though, the backstop could potentially be quite good for Northern Ireland from an economic perspective because to some extent, it could enable the province to have "the best of both worlds". It would be the only part of the UK which was effectively inside the Single Market for goods, a status which it could use to attract foreign investment, as the UK did for many years based on its membership of the EU. At the same time, businesses in Northern Ireland could benefit from privileged access to the UK market for goods compared with their competitors in the EU.

Is it a bad deal?

The best defence of the deal is that:

  • assuming it is ratified, it will deliver a reasonable degree of certainty in the short term and avoid a highly disruptive "no deal" Brexit; and
  • in the current political climate, it was never going to be possible to agree a political declaration which would give a clearer sense of the long term direction (and in any event, that declaration would never have been legally binding).

It can also be argued that the EU was more focussed on the Withdrawal Agreement than on the future relationship – although the EU would no doubt respond that if the UK had wanted greater clarity on the latter, then it should have produced its "initial ask" much earlier than July this year (when the "Chequers plan" was published).

On this view, the deal is the best that could be achieved in difficult political circumstances and creates the time and space to negotiate the future relationship. Although we doubt that agreement with the EU can be reached on this by December 2020, when the transition is due to end, the draft Withdrawal Agreement allows for an extension of the period (of as yet unspecified length, but it is thought that it could last until 2022). This is certainly a welcome addition to the draft of the Withdrawal Agreement which appeared in March this year.

However, it also highlights one of the problems of having so little detail agreed as regards the future relationship – because the extension of the transition can only occur with the agreement of the EU and will require the UK to make additional financial contributions to the EU's budget (which is likely to be highly controversial politically). Without an extension, the UK will in 2020 face the same "cliff edge" of a hard Brexit that it faces in March next year if no deal can be agreed. This puts the UK in an extremely weak bargaining position vis-a-vis the EU.

It may be that more detail will emerge about the substance of the UK's future relationship with the EU following this weekend's summit meeting of EU leaders. However, based on the leaked text of the draft political declaration, businesses face the prospect of significant uncertainty over the UK's longer term relationship with the EU for some time.

NOTE: Since this article was written, an official version of the draft political declaration has become available which runs to 36 pages, rather than the 26 referred to in the leaked version above. However, the wording appears to be largely the same if not identical; the main reason for the difference in the number of pages is the adoption of more generous spacing in the official version.

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