light in a tunnel

Brexit: Is there light at the end of the tunnel?

  • Jeroen Gobbin, Partner |

Last week was in many ways a week full of surprises. Not only did Boris Johnson and his Conservatives win the UK elections with a large majority of 365 out of 650 seats, but we also had to say goodbye to one of my personal favorite artists Panamarenko, a prominent Belgian artist. Both gentlemen, apart from their somewhat eccentric hairstyles, have more in common than you would expect. It is not always clear to the general public whether they truly believe in their own hyperbolic tales, or rather, by doing so, unintentionally create a reality that goes beyond the norm. And all of this, finally, with the necessary amount of mischief, which in turn gives them a highly likeable factor, yielding some success both in politics and in art.

In any case, the elections of 12 December 2019 have already provided the necessary clarity on one point - it appears that Boris Johnson will succeed, via the so-called withdrawal bill, in getting his Brexit deal voted before 31 January 2020. This will then trigger the start of a transition phase that will last until 1 January 2021, giving the United Kingdom and the EU time to conclude a new trade agreement. This transition can be extended by a maximum of two years until 1 January 2023 but must be requested before July 2020.

In my opinion, it is unlikely that a comprehensive new Free Trade Agreement (FTA) can be concluded by the end of December 2020. After all, the aspirations on both sides of the Channel in certain areas (such as the dynamic alignment of regulations between the UK and the EU) appear to be too far apart for this, and any negotiations between the United States and the United Kingdom are also in danger of being a potential killjoy. Not to mention the difficult and time-consuming ratification process of a possible FTA between the 27 EU Member States and their respective Parliaments (remember CETA?).

In other words, as I already mentioned in my previous blog post, the next cliffhanger is already in sight, and perhaps even closer than we think. After all, the draft withdrawal bill to be submitted by Prime Minister Boris Johnson in the House of Commons this week would foresee that the government would be legally prohibited from extending the transition period. In the Bill, the Parliament would also lose control over the approval of the FTA and the transition period. This will immediately dampen the euphoria, uncertainty will prevail and the risk of a no-deal scenario as of 31 December 2020 will once again emerge.

While plenty of no-deal preparations have already been made, a no-deal will still have serious consequences and could lead to a contraction of the economy both in the UK and in the EU, the effects of which will be particularly noticeable in Belgium and in Flanders, as shown by a study carried out by KU Leuven professor Hylke Vandenbussche on behalf of the Flemish government.

But even if Boris Johnson’s recent moves are merely an exercise in smoke and mirrors, and the risk of an effective no-deal could be regarded as small, companies should still be prepared for new customs formalities, possible customs duties and other non-tariff barriers after the transition phase. Whereas it is up to economic operators to prepare themselves for this and, where necessary, to adapt or initiate the necessary processes, the traditional excuses that we often hear – “It will not come to that” or “There is still too much uncertainty to act” or “The economy is ultimately more important than politics” - are unfortunately no longer valid.

What's more, it is already possible to make a reasonably accurate assessment of whether your company will have to make use of special arrangements in the future, such as inward and/or outward processing if production takes place partly in the UK. Whether or not to use a customs warehouse in Belgium or in the UK can now also be worked out in more detail.

Finally, it’s important to keep in mind the unlikelihood that any agreement (in whatever shape or form) between the UK and the EU by 31 December 2020 will be welcomed equally with open arms by all sectors and businesses. Take for example the services sector - and specifically the financial services sector – it is highly improbable that a comprehensive regulation will be drawn up within the framework of an FTA to satisfy their needs. The impact could be softened, however, if the EU recognizes the UK as 'equivalent' for regulatory purposes, and if EU regulators take unilateral measures to allow activity to continue in the UK for a certain period of time. Such measures would have to be clarified by the end of 2020, not to mention establishing a regulation to address the storage, management, processing and use of (personal or non-personal) data.

Like Panamarenko, we can all live in a dream world and hope that this Brexit saga stops. But in all honesty, the chances of this happening are very small, and we should prepare ourselves (as best as possible) for Brexit to happen, in whatever shape or form.