Lost in Transition

The 21 month brexit ‘implementation period’ planned from March 2019 is intended to provide continuity and security for UK exporters – but exports outside the EU face problems

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In September last year, Private Eye reported on the plight of a UK co-operative, OMSCo, which exports premium organic cheddar to the US. It took OMSCo eight years, and substantial investment, to develop the brand and change working practices in order to gain USDA certified organic status. The agreement under which the cheese is imported to the US is an ‘equivalence agreement’ between the EU and US. If the UK leaves the EU, a UK/US agreement would be needed for trade to continue, and, as it takes over a year to manufacture, package and export the cheese, OMSCo needs to start planning now. Without certainty on the US market, the brand is under serious threat.

In her Lancaster House speech a year ago, and in the Florence speech in September, Theresa May emphasised the need for a phased approach to avoid a ‘cliff-edge’ for business. In Florence she announced an ‘implementation period’:

“…a period of implementation giving businesses and people alike the certainty that they will be able to prepare for the change; and a guarantee that this implementation period will be time-limited, giving everyone the certainty that this will not go on for ever.”

The second half of the sentence was a nod to the brexit hard-liners in her party, who were concerned that an interim arrangement would be extended indefinitely. Their concerns also ruled out the most obvious way of avoiding uncertainty: to extend the Article 50 period until negotiations are complete. The hard-liners demanded a clear exit in March 2019, at the end of the Article 50 two-year notice period.

As far as trade with the EU is concerned, the implementation period is as good as continued membership: trade in goods and services continues under the same, unified rules. As we are no longer members, we have no say in those rules and have to accept whatever changes are made, but the hard-liners seem to have accepted that, presumably as a price worth paying for the certainty that we have left the EU, and that the implementation period is fixed.

For trade outside the EU, the position is far more complex. The EU has signed around 750 agreements with other countries. These range from wide ranging free trade agreements  (such as those with Canada and South Korea), to simple agreements on recognition and equivalence, such as the agreement on organic standards with the US. Debate often focuses on tariffs, and the availability of WTO terms as a fall-back, but other types of agreement can be just as important. People won’t pay a premium for your cheese if you can’t say it’s organic. And many products can’t, in practice, be exported at all, if you can’t demonstrate that they meet the importing country’s standards for quality and safety.

The House of Commons International Trade Committee is conducting an inquiry into the replication of EU agreements after brexit, and listened to evidence from expert witnesses in November and December. In November testimony, Philippe De Baere and Andrew Hood, who are international trade lawyers, both agreed that there was no simple and general mechanism through which the agreements could be ‘grandfathered’ or copy-and-pasted into new UK-oriented agreements: both for technical reasons, and because the countries involved may not see the same outcome from a UK-only agreement that they would from an EU-wide agreement, or might not be prepared to make the same concessions. Not all agreements will be problematic: some, according to Hosuk Lee-Makiayama, Director of the European Centre for International Political Economy, should be ‘plain sailing’, at least in relative terms:

“One example that comes to my mind is the number of agreements we have signed on land transport, which have been signed by the UK on its own accord. There is really no interest to get the UK out of car safety standards, which have been pretty much agreed in most of the world, or the continental transport agreements that we have in the European subcontinent. They will require work, but just trying to figure out what kind of work we need and to address the counterparts and saying that we need to transition them into a new context is going to take quite a lot of time.”

An obvious overall approach to these agreements would be to review the whole set and red-light high-impact ones for urgent attention. This would at least allow exporters to know which ones were likely to be resolved by the time UK exits, and would hopefully identify some ‘low hanging fruit’ that could be signed and agreed without delay. Some agreements can be readily identified as urgent: expert witnesses identified the airline sector, where, without agreements, airline schedules and travel patterns could be severely impacted. Looking more generally, however, critical items are scattered widely across the agreements, according to Lee-Makiayama: “I would say there is a critical one in almost every one of them. That is the amount of work that we have ahead of us, trying to scope out which are critical, which can be very easily transitioned into a bilateral context.”

Likewise, it will take significant effort just to work out which agreements can be reproduced easily and which will require significant effort. And we should not expect all of them to be easy to reproduce:

“In some cases, it changes our commitment, and this is very true in the case of the free trade agreements that we have signed. In those cases there will be renegotiation and there will be quite a lot of political entrepreneurship, I would guess from both sides to try to change the terms of trade to their benefit. I think most counterparts of the UK have recognised the fact that they would need to transition the agreement into a bilateral context, but in the end it will come at a certain price.

In other cases, for example agriculture and fisheries, these are cases where managed trade prevails. You do not give up anything and if you can change the terms of trade to your advantage you are going to try to do so. It is not just our counterparts. It might also be the European Union or another country, a third country, who might find it beneficial to try to exploit a situation. Energy is an extremely sensitive area, and the UK leaving Euratom is one of the big question marks in terms of how is the UK going to find the material to continue its nuclear power plants. The list is endless and it is very difficult to say, of all the agreements that have been signed in the name of the UK and the member states for the last 30 years among them, is there any general direction of which are red, amber or green? It is rather dangerous for me to even try to make such a generalisation.”

In summary – any business that exports or imports to countries outside the EU is unlikely to see the certainty in the implementation period that was promised at Lancaster House and in Florence. It’s possible that the Department for International Trade has things in hand, but, even if they do, it will be worth little unless details are forthcoming soon. Many businesses, like OMSCo, need to plan ahead: airline schedules are fixed at least a year in advance, for example. The recent disclosure of poorly researched impact assessments is not encouraging: nor is the extremely high staff turnover at DxEU, coupled with  the report that 44% of the workforce plan to leave within the next 12 months, or the persistent stories that the Department of International Trade is short of seasoned negotiators.  Andrew Adonis’s view that “The Government is hurtling towards the EU’s emergency exit with no credible plan for the future of British trade” appears reasonable – even without considering trade impacts beyond the implementation period.

There are at least two solutions. The first and most obvious would be not to brexit at all, and for myself I feel that this will become an increasingly attractive option as the realities sink in. But, beyond that, we could, as mentioned at the start of this article, request the EU for an extension of Article 50. We don’t have a right to such an extension – it would need to be agreed – but there are reasons to think that the EU would be receptive: a customised implementation period is legally complex and  raises complexities for the EU as well as for the UK. Time to change course is running out, but the current trajectory will not yield the smooth, managed transition we’ve been promised.

 

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