EU leaders today signed off on two political agreements: the transition period and guidelines for the forthcoming negotiations over the future EU-UK relationship.
Summary: In Brexit negotiation and political terms, compared to where we were six months ago, this week’s deal was a significant achievement and has increased the chances of a negotiated outcome. But in operational planning terms, businesses now face a fork in the road. Decide to put plans on hold, based on this week’s political agreement; or press ahead awaiting full legal certainty. Navigating the margins between political direction and legal certainty – and what plans to trigger and when – requires business to look at a range of interacting factors, not only this week’s agreement.
Political clarity, not legal certainty: As has been highlighted by the EU side throughout the week, “nothing is agreed until everything is agreed” meaning we will not have full legal certainty that the transition is indeed happening until the Withdrawal Agreement and transition agreement are ratified – in October at the earliest. The agreement this week looks more substantive than perhaps expected and there is significant buy-in on all sides, which is very good news. But there is still risks to ratification down the road, including:
A fork in the road for business planning: Businesses therefore need to decide whether to plan on the basis of political clarity, trusting this week’s agreement and putting some or all Brexit plans on hold; or on the basis of legal certainty, pressing ahead with plans for a March 2019 Brexit as a transition period is not yet guaranteed.
Politics and negotiation dynamics are only one of several triggers: Whether legal or political clarity are considered a sufficiently sound basis for decisions also needs to be weighed against a range of other factors including probability of end outcomes (i.e., single EU authorisation regime in pharma or aviation) materiality of risk or opportunity, lead times, interacting business decisions and level and timing of investment to mitigate against a risk or exploiting an opportunity. In reality, what actions to trigger and when will vary between functions in a business, between businesses and between sectors.
Identify ‘no regrets’ moves: There are still several actions that companies should press ahead with that will help irrespective of the final Brexit outcome. For example, supplier and customer engagement including contract reviews, identification of critical and fragile suppliers, workforce engagement etc.
Actively plan for a Free Trade Agreement: With this week’s agreement, the risk of a ‘No Deal’ scenario has decreased further, with the central scenario remaining a FTA, followed by some sort of customs union. Particularly for manufacturers, automotive, retailers and consumer products, whilst keeping an eye on how to mitigate in a WTO scenario, the focus should now shift to how to manage and qualify for a FTA. For example, planning for how to meet potential EU Rules of Origin thresholds, to avoid being hit by tariffs via the backdoor.
Beware a 1 January 2021 ‘cliff edge’: Lead times may mean that even with a 21 months transition, full Brexit readiness by time of the UK’s de facto exit may prove a challenge for businesses. So whilst not a sprint, Brexit planning should still follow a healthy running pace. In addition, the actual agreement on the UK’s and the EU’s future relationship will not be signed and ratified until the second half of 2019 at the earliest. The time between business fully knowing the new trading and regulatory arrangement, and when it has to be ready may therefore in reality be 12 months or shorter.
Summary of agreement – what we know versus what we don’t:
Join our short webcast for interpretation of the agreements, an update on trade negotiations and recommended next steps for business.
Date: Tuesday 27 March
Time: 10:00-10:30 (GMT)
Compliments of EY, a member of the EACCNY