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COVID-19 and its implications for Brexit

Posted on 16 April 2020

The UK left the European Union on 31 January 2020, just one day after the World Health Organisation declared the novel coronavirus outbreak a Public Health Emergency of International Concern (PHEIC).  Whilst the UK is no longer an EU Member State, a transition period is now in effect until 11pm on 31 December 2020.  During the transition period, the UK remains a member of the Single Market and Customs Union, and EU laws continue to apply in the UK as if the UK remained an EU Member State.  But, crucially, the UK no longer has a seat at the EU decision-making table.  

The transition period has two main elements: it provides a period of time for the UK and EU to (1) implement the provisions of the EU Withdrawal Agreement (in effect, to manage in an orderly way the ramifications of their 'divorce') and (2) negotiate the terms of their future relationship, in relation to trade, and more generally.  The UK also intended to use the transition period to negotiate new trade deals with non-EU countries, such as the United States.  And, of course, having a transition period in place would allow businesses to adapt to new and potentially very different regulatory frameworks when trading in both the UK and EU after 1 January 2021. 

All that is now seriously impacted by the COVID-19 outbreak, leading to calls from several quarters for the transition period to be extended.  Many businesses had adopted the approach of seeing how UK/EU negotiations had developed by the end of June 2020 as, at that point, it would be apparent whether a deal was likely to be achieved or there would be a cliff edge from January 2021.  Given the current difficulties in progressing the negotiating timetable as a result of COVID-19, many consider that the prospects of such a cliff edge have been greatly increased.  This time, it would be a 'No Trade Deal' scenario, as opposed to a 'No Deal' one – i.e., the future UK and EU trading relationship from 1 January 2021 would be governed by WTO rules.  WTO rules are both complex and weak when it comes to services which make up over 40% by value of UK exports to the EU, as such a No Trade Deal Brexit presents a real threat to the UK service industry.

For most businesses, their immediate focus will be on managing the implications of COVID-19 for their business.  However, unless and until the Government confirms an extension should be agreed, the risk of a 'No Trade Deal Brexit' also looms. 

Timeline of negotiations

Even without the significant difficulties now presented by COVID-19, 11 months was always going to be an overly tight timetable for agreeing the future terms of such a complex relationship, not least when comparing it to other trade negotiations previously conducted by the EU.  Bear in mind that the expiry date of December 2020 was set in the original version of the draft Withdrawal Agreement negotiated by Teresa May's Government, and wasn't then extended to take account of the subsequent delays.  As noted by Michel Barnier, the Head of the EU's Task Force for Relations with the UK, in early January 2020: "the timeframe is hugely challenging.  A new clock is ticking", with the EU expecting negotiations to have been concluded by October 2020, allowing time for the agreement to be ratified before the end of the transition period.

In late February, the EU and UK published their negotiating mandates.  The UK Government's approach has a Comprehensive Free Trade Agreement (CFTA) at its core, along the lines of those agreed by the EU with Canada and other countries.  In his foreword, the Prime Minister suggested that 11 months was "a limited, but sufficient, time for the UK and the EU to reach agreement".  He reiterated that the UK was committed to work in a "speedy and determined fashion" in the "appropriate number" of negotiating rounds before the high level 'taking stock' meeting scheduled for June 2020 (as provided for in the Political Declaration, agreed alongside the Withdrawal Agreement).  If, by that point, there was no "broad outline of an agreement", the Government would consider whether its attention should transfer to domestic exit preparations, as opposed to further negotiations with the EU27. 

However, it has been doubted whether the "appropriate number" of negotiating rounds (five scheduled rounds were agreed to take place every two to three weeks between early March and mid-May, with further rounds to be mutually agreed), can now effectively take place.  It has been widely reported that both Boris Johnson and Michel Barnier, as well as members of the respective negotiating teams, have been personally affected by COVID-19.  Whilst the first round of talks did take place on 2-5 March in Brussels, the second round due to take place in London on 18-20 March 2020 were cancelled due to travel restrictions.  The third round of talks, scheduled for 6-8 April, also did not take place. 

In a European Commission press release on 18 March, it said that negotiators were exploring alternative ways to continue discussions, including if possible by video conferencing: "both sides remain in close contact with one another.  Substantive work on the draft legal texts by both parties will continue in the weeks ahead".  The UK Government meanwhile also stated that both sides remain fully committed to the negotiations and were exploring flexibility in the structure of the framework for the discussions.  Progress has not completely stalled, as borne out by the parties exchanging draft legal texts (EU here, the UK's has not been published), and the first teleconference taking place on 30 March on the implementation of the Withdrawal Agreement.  However, reportedly, video conferencing had not been immediately easy to arrange.  These issues now seem ironed out as, on 15 April, the UK and EU negotiators issued a joint statement setting out a structure for future negotiating rounds via videoconference. These will now last a week and take place in the weeks commencing 20 April, 11 May and 1 June.

Can the transition period be extended?

The Withdrawal Agreement contains a mechanism allowing an extension of up to two years, but the UK-EU Joint Committee must agree this extension before 1 July 2020.  If no agreement to extend is reached by that date, it seems very likely that UK businesses will, once more, be facing a cliff edge 'No Trade Deal' scenario.  Following its manifesto pledge before the December 2019 General Election, the UK Government has consistently ruled out agreeing any extension to the transition period and indeed has gone one step further, specifically legislating in the European Union (Withdrawal Agreement) Act 2020 to prevent a Minster of the Crown agreeing in the Joint Committee to an extension of the period.  Accordingly, the only basis upon which the UK could agree an extension would be through new legislation. 

Should the transition period be extended?

COVID-19 clearly presents vast difficulties in negotiating a fully-formed agreement during an even more constrained timetable.  For businesses already dealing with the implications of COVID-19, the concern is about navigating straitened trading conditions in a No Trade Deal scenario.  The logistics industry, for example, already stretched thin as a result of the outbreak, has issued calls for an extension through the Freight Transport Association, the Road Haulage Association and the British International Freight Association.  Other industries are highlighting that COVID-19 is giving a taste of the impact of the loss of free movement of persons, such as the agriculture industry, which has always been heavily reliant on migrant workers (as illustrated by the recent news of seasonal workers from Romania being flown to the UK to do crop harvesting).  The issues in relation to the passage of goods into and through Northern Ireland and implementation of the Protocol are also particularly stark.

At present, the Government does not appear to be responding favourably to these calls: Paymaster General Penny Mordaunt responded to a recent question in the Commons as follows: "The transition period ends on 31 December 2020.  This is enshrined in UK law.  Our preparations for the end of the transition period continue as normal and remain a priority".   Over the coming weeks, however, the pressure to extend the transition period will no doubt increase, from both politicians and from across industry.

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