Beyond Brexit negotiations, the UK and the EU have decisions to make on their future relationship

With the latest round of Brexit negotiations failing to break the deadlock, talks look set to continue well into the autumn. But what will happen at the end of the year also depends on decisions each side needs to make unilaterally. Until these are made it will impossible for businesses and individuals to know how to fully prepare. Both sides will feel bound by the political realities of what they can offer, but both need to show their hands.  

Key decisions are wrapped up in the stalled negotiations

The future relationship envisaged by the political declaration relies on both the UK and EU making unilateral decisions. But key decisions have been put on hold, pending progress in the negotiations.

The EU has yet to make ‘equivalence’ decisions in financial services, which would mitigate some of the new barriers to trade caused by the UK leaving the single market. This is despite both sides ‘endeavouring’ to make these by the end of June. The EU has also yet to deem the UK’s data protection regime ‘adequate’, which would allow EU-UK data transfers to continue as they do now.

The EU has always linked these decisions to progress in negotiations – meaning that verdicts may not come until late this year. If there is no deal, they may not come at all. Faced with this uncertainty, many firms may have to reactivate last year’s costly no deal contingency plans, but some will hold out for clarity.

How the UK and EU might mitigate disruption remains unclear

Some disruption at the end of the year is highly likely, deal or no deal, as businesses adapt to new barriers to trade and government systems are put in place. Both sides can take steps to mitigate this.

Some measures have already been announced. In June, the UK government said that it will phase in new border formalities for EU imports into Great Britain over a six month period, reversing its earlier position. This allows more time for traders to adjust and for the government to recruit staff and build infrastructure for new inspections. The UK will also temporarily accept some EU aviation and rail licenses, to limit the risk of transport disruption and ease the burden on UK regulators taking on new responsibilities. The EU, too, has streamlined the process for those with some UK aviation licenses to apply for an EU equivalent.

However, further mitigations, which would be most valuable in a no agreement scenario, when disruption would be greater, would be welcome. For example, in 2019 the UK planned to temporarily recognise the EU ‘CE’ health, safety and environmental protection mark, providing firms time to prepare for a new UKCA regime. However, it remains unclear if this and other measures planned for last year will be repeated. Similarly, the EU has not yet renewed plans to grant the UK ‘listed status’, which is required to export some foods into the EU. Without it, some UK exports into the EU will be severely restricted from January.

A no deal outcome could also limit political appetite to grant mitigations. The EU has already indicated that its key priority will be to preserve the integrity of the single market, not limit disruption. An acrimonious end to negotiations could also hamper UK efforts to cushion the impact of no deal by striking bilateral agreements with individual member states to provide reciprocal healthcare rights for citizens and mutual recognition of professional qualifications.

Political realities will prevent much needed certainty

As our recent report showed, uncertainty over trading conditions at the end of the implementation period is harming business and individual preparations. If mitigations are announced too late, costly preparations may be made that turn out to be unnecessary or less urgent. Firms struggling with the costs of coronavirus can only afford to prepare once and may hold off from acting altogether in the hope that greater clarity will be forthcoming, risking readiness.

But with the politics of unilateral measures so closely tied to the ongoing negotiations, certainty could be some way off. Both sides will be reluctant to agree to measures now that they could offer later with strings attached. In the event of a no deal last year, the EU only planned to allow some flights and road transport operations to continue on condition that the UK reciprocated. Unilaterally recognising licenses or qualifications also involves a reduction in regulatory control, which both sides will be keen to avoid. There could also be political backlash to some UK unilateral measures that are likely to help EU traders as much, if not more so, than British ones, especially if the EU does not reciprocate.

Beyond negotiations, unilateral measures taken by the UK and EU will have a big impact on what businesses and individuals need to prepare for, and when. If the UK and EU want to drive readiness, both sides should be as clear as possible about what they have planned. But the political reality is that many announcements will come sporadically and late in the day, stoking uncertainty and making the difficult task of preparing for the end of the Brexit transition harder still.