29 August 2017

The shape of a Brexit transition deal the UK might seek is becoming a bit clearer, but Jill Rutter says there is still a question mark over whether one is on offer.

August has been a month of transition.

The last two weeks seem to be signalling movement from both the Government and Opposition on a Brexit transition deal. First we had the joint démarche between the Chancellor Philip Hammond and the International Trade Secretry Liam Fox in the Telegraph, a concession from a Brexiteer Cabinet Minister that there would have to be a transition period, and perhaps a concession from the Chancellor that our final destination would be out of both the EU Single Market and Customs Union.

Then came the set of “future partnership” and position papers – which make it clear that the UK Government is seeking “a model of close association with the EU Customs Union for a time-limited period” to avoid a cliff-edge. As part of that, the UK would still operate the EU external tariff and not bring into force any new trade agreements which were “not consistent with the terms of the interim agreement”. 

Mimicking the current Customs Union is necessary, but not sufficient, to preserve frictionless trade after Brexit. Many businesses dependent on EU goods trade, and all services, are much more dependent on Single Market continuity. The Government papers have (so far) been silent on this – save on the need to agree some form of regulatory equivalence to cope with the cross-border agri-food trade in Northern Ireland.

The option of staying in the Single Market and a customs union with the EU has now been put forward by the Shadow Secretary of State for Exiting the EU, Kier Starmer. He says: “Labour would seek a transitional deal that maintains the same basic terms that we currently enjoy with the EU. That means we would seek to remain in a customs union with the EU and within the Single Market during this period. It means we would abide by the common rules of both.”

Although he doesn’t say it, this position probably means staying in the Common Agricultural Policy and the Common Fisheries Policy too.

The ticking Brexit clock is concentrating the minds.

Why all this talk on transition now? On the Government side, it seems to reflect the increased power in the Cabinet of the Brexit pragmatists, most notably Hammond. He will be only too aware of the time needed for adjustment to cope with new processes at pinch-point ports – and will have heard the calls from the CBI and the Institute of Directors among others for early clarity on transition. Businesses are already warning that they need certainty about post-Brexit arrangements in the next few months.

The Government also knows that the sooner a transition can be agreed, the less risk to business and the less it will incur nugatory spending on putting the mattresses at the foot of the cliff. Agreement on transition now is hugely more valuable than a last minute deal.

Bespoke or not bespoke, that is the question.

The other emerging recognition is that, whatever its demerits, a transition that mirrors (the other word of the summer) the status quo means one adjustment – not two – for business. The sheer complexity of negotiating a new deal for the transition and then a longer-term future partnership is just not worth the hassle. So, a time-limited period outside the EU's political institutions but inside the economic ones offers an “off-the-shelf” answer.

(Almost) everyone agrees a Brexit transition must be – transitional.

One thing both Labour and Conservative parties are at pains to make clear is that this is “time-limited” and not a “back-door” to staying in the EU. In July Hammond spoke of a three-year transition, but then there were reports that the Brexiteer Cabinet ministers wanted only a year. Meanwhile, Labour has offered the rather ambiguous “as long as is necessary” formula.

The EU negotiating guidelines (binding on EU Chief Negotiator Michel Barnier unless amended) also talk of a time-limited transition; the European Parliament says it expects this to last no more than three years.

If Europe concedes, it will be (largely) on their terms.

That is a useful reminder that the UK can ask for transition – but it may not get it and will certainly be asked to pay a price. Although the intervention this weekend from the German Chambers of Commerce on the need for rapid clarity on future relations was helpful, some EU countries may benefit from transition brinkmanship. A late agreement on transition can avoid disruption – but interim uncertainty may just tip cautious businesses into their lap.

The EU guidelines are pretty clear on its terms for transition: “Should a time-limited prolongation of Union acquis be considered, this would require existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures to apply.” 

But money is still our strongest card.

As we have argued before, the EU does face an imminent budget crunch with the loss of a big net contributor. Staving off the day when other countries have to cover the gap left by the UK’s departure may be the incentive for the EU to agree that is needed. The big question is whether the Government could rely on the Opposition to back whatever payments are needed to buy transition.

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