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Will COVID-19 change the UK's Brexit strategy?

Overview

Although the UK has left the EU, significant change will only take place after the transition period has expired and the UK has moved to a new relationship with the EU.  The UK Government has a choice as to how quickly that change happens.  Going fast allows the Government to claim that it is delivering on its core promise to "get Brexit done" – but risks a significant shock to the economy.  The Government has (outwardly at least) given the impression that it leans towards a "fast" Brexit.  Does the coronavirus outbreak change this calculation?

Problems with a "fast" Brexit

A "fast" Brexit would mean that the UK would have third country status vis-à-vis the EU in relation to all aspects of its trading relationship from 11 pm on 31 December 2020.  This will be a major change for many businesses, which arguably poses a significant economic risk.

SUPPLY CHAINS

To take just one example, requiring supply chains to comply with customs formalities and checks is envisaged under both a "deal" and a "no deal" scenario.  This is a very significant change as compared with the current situation, where (for example), HGVs arriving in Dover or Calais carrying EU or UK goods enter with minimal checks and no customs-related formalities at all.  Indeed, in some respects, the red tape aspects of EU-UK goods trade would be more onerous under a "deal" scenario because in order to benefit from preferential tariffs, proof of origin documentation would be necessary (in addition to the standard customs-related formalities).  To make this change as smooth as possible, work would need to have started on construction of new customs infrastructure and the details of exactly how the system will work in relation to high volumes of roll-on roll-off traffic would need to be shared with business now (to enable business to be fully prepared).  However, so far as the UK is concerned, there does not appear to be any immediate prospect of either of these steps being taken in sufficient time for a reasonably orderly "switchover" to a new system on 1 January 2021. 

A "slower" Brexit would allow more time for business and Government to prepare, reducing disruption and spreading the impact of any economic "hit" over a longer period.   Although the UK Government has indicated that it will not extend the transition period, it could seek agreement with the EU that certain aspects of the new relationship should not apply immediately and should be phased in over time.  

Factors in favour of a "fast" Brexit

A "slower" Brexit carries two main political risks for the Government:

  • It could add to public frustration with the pace of change, leading to a perception that the Government has failed to deliver its core promise to "get Brexit done"; and

  • Spreading the economic risk over a longer time period may mean that the economy has not had time to recover by the time of the next election, thus hurting the Government's chances of re-election.

Viewed in this light, Brexit is something which is best got out of the way as early as possible in the Government's current term of office so as to leave as long as possible for the economy to recover – and to allow more time to make progress with initiatives which can be portrayed as positive new opportunities arising out of Brexit, such as free trade agreements or freeports (the benefits of which are likely to take years to feed through to the economy).

Currently, the government's thinking appears to lean in favour of this approach;  for example, the UK is not asking for any phased implementation of aspects of the proposed free trade agreement  and this is not a formal workstream in the current negotiations with the EU.

DOES CORONAVIRUS CHANGE THIS?

The coronavirus pandemic is widely predicted to have a negative economic impact and has already caused stock markets to fall substantially.  It is also widely predicted that the move to a free trade relationship with the EU will result in a further "hit" to the economy (see for example this report from the Office for Budget Responsibility at paragraph 2.14).  If coronavirus has already caused significant economic pain, the Government may be reluctant to add to it by moving to a free trade relationship with the EU without provisions allowing at least some aspects of it to be phased in over time.  It may therefore conclude that the balance of political risk has shifted in favour of a "slower" Brexit.

In addition, the timetable for negotiating the post-Brexit trade relationship with the EU was already extremely challenging even before coronavirus began to disrupt the talks.  The government may therefore conclude that in the circumstances, there will not be sufficient time to reach agreement by its original deadline.

How could the Government change course?

The Government could seek an extension to the transition period of up to 2 years, but under the Withdrawal Agreement it must do so before 1 July.   This would allow more time for the negotiations themselves.  It could also be used to provide for an implementation/phase-in period once agreement has been reached.  As noted above, this would be welcomed by many businesses as it would give them time to prepare knowing exactly what they would be preparing for.

Alternatively or in addition, the Government could seek to negotiate implementation arrangements as part of the proposed free trade agreement with the EU.  The problem with this is that it adds to the burdens on the negotiating teams, whereas extending the transition would be a relatively straightforward process.

WILL THE GOVERNMENT CHANGE COURSE?

The economic impact of COVID-19 seems certain to increase the pressure on the Government to reconsider its approach to Brexit, particularly as regards timing.  However, so far, the Government has shown little appetite for accommodating requests from business to moderate its approach – and at the time of writing, its official position was that no extension would be requested to the transition period.   Our advice therefore remains that businesses should hope for the best, but continue to prepare for the worst case scenario of a "no deal" outcome.  Even if there is a deal, such planning will not be wasted because the relatively unambitious scope of the proposed free trade agreement with the EU is likely to result in some level of disruption whenever the switchover to that relationship occurs.

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