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As Britain leaves the European Union, Brian Daly, head of Brexit, explains what we know about the process and, crucially, what remains unknown.

We have now reached a moment of history. At 11.00pm on January 31st, the UK left the European Union, a major event for both Britain and the wider European project.

Given the numerous plot twists and turns over the past thee and a half years, many people already feel fatigued by Brexit – Boris Johnson even wants to ban the use of the word. However, we are now entering a key phase in the process, and one that will have profound consequences for businesses across the island of Ireland.

With the UK officially leaving, both sides will now work out the rules that will govern how the UK and the EU will interact in the future. The negotiations will be hard fought, but their outcome will be significant.

In the October 2019 Political Declarations, both sides set out a desire for an ambitious relationship across a wide array of issues – not just in trade in goods and services, but also on security, air and road transport (including the landbridge), energy, fisheries and data.

However, the new UK government, buoyed by its electoral mandate, has a very clear desire to diverge from the EU, or at least the right to do so, and is in a very powerful position domestically. This is likely to have a big impact on the negotiations.

As in any environment when the rules are changing, there will be winners and losers in both the UK and EU. Much of this will be determined by the new rules of engagement and how prepared businesses are for these changes.

So, as the UK officially leaves, just what do we know? And, more crucially, what do we not know?

The known knowns

Of course, we know that the UK has left the EU. And we know that a Transition Period applies until the end of this year, which effectively means that nothing changes as EU law still applies.

And we also know that Britain is leaving the European Economic Area, which enables the extension of the European Union's single market to non-EU member parties.

Irrespective of whether the two sides agree a Free Trade Agreement (FTA) – and the hope is that a wide-ranging FTA will be agreed – we do have some clarity on several other issues relating to both north-south and east-west trade:

  • The Protocol on Northern Ireland means that there will be no tariffs, quotas or paperwork required for goods moving between the Republic of Ireland and Northern Ireland and vice versa; and
  • Irish companies dealing with the UK and UK companies dealing with EU will have to handle customs paperwork and clearing goods through customs after the transition period.

We also know that the Common Travel Area will apply for Irish and UK nationals travelling between Ireland and the UK, and that the Single Electricity Market on island of Ireland will be maintained.

In the coming days, the EU will publish its negotiating mandate with a view to agreeing it on February 25. The Commission is currently holding half day seminars for the 27 EU member states to lay the foundations for an agreed position.

The known unknowns

Key unknowns are what we are transitioning to, and how the process of getting there will play out.

One of the most striking aspects of the process to date has been the level of unanimity between the 27 EU states. The unanimity and sense of shared purpose has created a powerful political dynamic, and it will be interesting to see if it is maintained in the next phase of the negotiations.

With the UK formally leaving, the rules of engagement change. The process moves from the much talked about Article 50 to Article 218, a provision in the Lisbon Treaty that covers trade deals between the EU and third countries.

Some analysts have observed that this gives more power to the various national governments via the Council than the European Commission. As such, it will be interesting to see whether this hinders unanimity. It will also be interesting to see if the negotiations will be conducted on the basis that nothing is agreed until everything is agreed.

There are also significant questions around the Transition Period and the FTA.

First, will the Transition Period be extended? The parties must decide before July 1 of this year whether they want to extend it to the end of 2021 or 2022. The UK has legislated against extending, so it currently looks unlikely that an extension will occur, or at least not a formal one under the terms of the Withdrawal Agreement.

Secondly, if an FTA is agreed, what will it cover? For example, will it be what’s called a ‘bare bones deal’ on tariff free trade in 2020 but little else on things like market access and services? Or, in the absence of a deal, are we moving to trading on tariff laden WTO terms, which would have a big impact on sectors such as agriculture, food, textiles and autos.

There are also questions about what level of divergence will the UK want from EU standards. This is crucial, as it will affect the willingness of the EU to agree market access and tariff and quota regimes.

There are a number of other unanswered questions also:

  • Will the parties agree on what financial services regulations will be considered equivalent? The Withdrawal Agreement calls for the parties to endeavour to do this by June 30;
  • Will each side agree their respective data privacy rules are adequate and, if so, when will they announce this? This is crucial for many companies, especially for services;
  • Will a deal be done on fisheries? The Withdrawal Agreement says best endeavours should be made to get this done by June 30, but the EU sees access to waters being part of agreement on the overall FTA.

It will be a complex process and will be heavily contested with politics likely to play an important part in the negotiations. As the process moves on, we will hopefully get a better sense of what can be achieved or not achieved, and hence be better able to predict the consequences. 

The mood music in the UK

When analysing the negotiations, it is crucial to look at the political situation in the UK. The new government in the UK is in a very powerful position and is brimming with optimism. It obviously wants to use this newfound strength to set the scene and the tone for the negotiations. Already, they are talking about departure being an opportunity for divergence.

The Prime Minister wants to ban the use of the word Brexit and have the next phase seen as a technocratic negotiation conducted behind closed doors.

Meanwhile, the Chancellor has acknowledged that there will be winners and losers in the UK economy – in other words he seems to be saying there will be trade friction and perhaps some tariffs. There is some view, for example, that the UK auto sector is in terminal decline and hence they won’t risk everything to save it.

The word from many in the UK is that the government won’t want to accept the EU’s ordering of how the negotiations will be conducted. Furthermore, they will be hoping for more tension within the EU 27, and between the Council and the Commission.

There is a view that whilst they know everything won’t be agreed before the end of 2020, they would hope to have sufficient progress and have a plan to agree on other things beyond 2020 – perhaps a sense in the UK that a way will be found for an effective extension and they are entering a period of permanent negotiation. Time will tell if such a landing zone is possible.

Final comments

January 31 is a defining moment for both Britain and the EU. But it is also the start of a process that will takes both effort and time to finalise but one way or the other, change is coming. With so many unknowns, it is crucial that Irish businesses are prepared.

In this context steps can now be taken to prepare for the knowns on issues such as:

  • making sure you have a system to gather the information that will be needed for clearing goods through customs,
  • understanding supply chains – for example even if an FTA is agreed, it will only cover goods that are considered UK origin – hence if goods coming to IRL from UK having a significant non-UK component they may not qualify as having UK origin, and
  • understand what reliefs from customs may be available.

 

This article originally appeared on The Currency, and is reproduced here with their kind permission.

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