At midnight tonight Luxembourg time, the United Kingdom will leave the European Union. For business in the EU and the UK, nothing will change during 2020. However, everything could change from 1 January 2021 as there is still considerable uncertainty on what the future relationship between the EU and the UK will look like. This newsflash looks at what Brexit means for business and the steps ahead.
Transition Period until 31 December 2020
During 2020, nothing will really change for companies, services, goods and individuals. The transition period provided for in the Withdrawal Agreement between the UK and the EU stipulates that EU law will continue to be applicable to and in the UK until 31 December 2020. As a consequence, the free movement of goods, services, capital and people within the EU will continue to include the UK for eleven more months at least. Companies and economic operators (“undertakings”) in the EU-27 may therefore pursue their economic activities in the UK as before. Similarly, UK undertakings will continue during this time to benefit from the EU passport and trade freely in the EU.
After 2020, however, there is still uncertainty surrounding the nature of the relationship between the EU and UK and therefore what access undertakings in the EU will have in the UK and vice versa.
Although the transition period could be extended by a year or two by joint agreement between the EU and UK before 1 July 2020, it is important to note that the UK Government has stated on a number of occasions that it does not want the transition period to last longer than is currently foreseen. This means that a treaty or agreement governing arrangements between the EU and the UK will need to be negotiated by and effective on 1 January 2021 in order to avoid the effects of a so-called Hard Brexit after the end of the transition period.
Free Trade Agreement applicable from 1 January 2021?
The EU and UK will spend the coming months negotiating an agreement to govern their relationship after the end of the transition period.
Using the Political Declaration agreed between the EU and the UK in October 2019 as its starting point, this is likely to be a single far-reaching agreement covering not just trade but also such diverse issues as political and judicial cooperation, security, mobility of persons and fishing, among others. It is not anticipated that the UK will join the European Economic Area nor be part of a common customs union with the EU meaning that every area of economic cooperation will be in theory up for negotiation.
As regards specifically trade in goods and services, both the EU and UK would like to have the greatest access possible for their undertakings to each other’s markets in order to have the most encompassing free trade agreement achievable. A key issue for the EU in this respect will be whether or how much the UK is prepared to align itself with EU standards. For the EU, this means creating a level playing field in terms of competition and State aid rules, taxation, labour and social protection and environmental standards. It also denotes ensuring that UK-based service providers adhere to the same regulatory requirements (for instance, as regards investor or customer protection and data protection). It is also clear that the EU is not willing to give the UK the same access to the single market as it has now, in particular if the UK is not prepared to be flexible on such issues as the free movement of people.
Given the number of areas and points to negotiate, it is unlikely that a comprehensive agreement will be agreed and implemented by 1 January 2021. Rather, it appears likely that the EU and UK will agree a first, basic agreement before that date, which may be amended over time to cover other areas as consensus is reached.
A Hard Brexit could yet happen on 1 January 2021
If no agreement is agreed by the EU with the UK or it is not comprehensive by 1 January 2021, there is the same risk of a Hard Brexit occurring as has been discussed at length in recent years. This could lead notably to EU-based service-providers being unable to offer their services in the UK, customs’ tariffs for goods coming from the EU to the UK and refusal by the UK to accept EU-product authorisations and reciprocal issues occurring for UK undertakings wishing to have commercial dealings in the EU.
Undertakings in the EU and the UK will therefore need to pay attention to what the future agreement contains. Given that there is still considerable uncertainty as to what the relationship between the EU and UK will mean for undertakings from 1 January 2021, undertakings affected by Brexit will require contingency plans for the worst case scenario of a Hard Brexit. They may also wish to postpone important business decisions until they have greater clarity on the future relationship.
Compliments of Arendt Medernach, a Member of the EACCNY