United Kingdom: Brexit draft withdrawal agreement should reassure firms to an extent, but uncertainties remain
March 26, 2018
The draft agreement reached on 19 March on the UK’s withdrawal from the EU should encourage some companies to avoid executing contingency plans that would have seen jobs shift to the continent, thus safeguarding some investment in the UK. While the accord is expected to provide more certainty to businesses, it is only a preliminary version of the final treaty. Moreover, the Irish border issue remains unresolved, and there is still little clarity on the future trading relationship. With the agreement approved by the EU at a summit on 22–23 March, both sides will now be able to begin trade negotiations.
The draft establishes a transition period that begins once the UK leaves the EU in March 2019 and ends on 31 December 2020. During this time, the UK will remain part of the single market and customs union, and the free movement of people will continue. The UK will also be able to sign trade agreements with other countries. However, with so much focus on securing a trade deal with the EU and replicating the EU’s existing deals with third countries, it is unclear whether the UK will have the resources to simultaneously pursue other trade negotiations. Many nations will also likely want to see the future UK-EU commercial relationship finalized before engaging in discussions with the UK.
The reaction from leading business organizations such as the Confederation of British Industry, the Institute of Directors, EEF and the Federation of Small Businesses was largely positive. Maintaining existing regulatory structures and the free flow of goods, capital, services and people until the end of 2020 will minimize disruptions to firms, who will only have to adjust to one new set of rules when a future UK-EU trade deal comes into force.
However, significant uncertainties remain. Firstly, the final withdrawal treaty needs to be signed and then ratified by the UK parliament, the European Parliament and the European Council before the transition period is officially in place—both sides hope the treaty can be signed by October 2018. The most significant obstacle to this happening is the lack of consensus over how to avoid a hard border in Ireland. In the draft, the UK and EU agreed to include a “backstop” solution in the final withdrawal treaty in the absence of another solution, which could involve Northern Ireland effectively remaining part of the customs union post-Brexit. However, this would likely prove politically unpalatable for the Democratic Unionist Party, which is currently ensuring Prime Minister Theresa May’s parliamentary majority.
In addition, the draft does not mention a possible extension to the transition period if trade negotiations have not concluded by December 2020. UK firms thus still face the prospect of abruptly losing access to EU markets. Furthermore, regardless of the transition period, some companies will likely be unwilling to invest in the UK until the future trading arrangement is agreed on.
In this regard, slightly more clarity over the UK’s position has emerged in recent weeks. In a speech on 2 March, Prime Minister Theresa May called for a bespoke trade deal offering a level of market access in between that currently enjoyed by Canada (which has a simple free trade agreement) and Norway (a member of the Single Market). Regarding goods, she indicated that after Brexit regulations in many areas could remain highly similar to the EU’s to avoid trade barriers. The UK also hopes to incorporate financial services—a key export sector where the UK has a strong competitive advantage—in any final trade deal. The EU had expressed reluctance to do so, although the bloc’s most recent negotiating guidelines hint at a slight softening and the possibility of granting some market access for financial services. May also made it clear the UK is prepared to pay to continue participating in certain European agencies, such as those covering medicine, chemicals and aviation.
UK GDP Forecast
Despite the likely implementation of a transition phase, economic uncertainty will continue to dampen growth this year and next. FocusEconomics Consensus Forecast panelists see an expansion of 1.5% in 2018 and 1.4% in 2019.
Author: Oliver Reynolds, Economist