UK-EU trade relations: Key Brexit milestones hit, but many steps to go

8 minute read 20.01.2020 Jason Mullen

Following three and half rollercoaster years (which followed five more years of rigorous debate), the United Kingdom looks set to formally withdraw from the European Union with a deal on 31 January 2020. This article explores what is likely to happen during the transition period, and what the implications, challenges and opportunities are for Australian exporters, investors and consumers.

Much like the US-China trade 'truce', the EU-UK deal provides some levels of market confidence and investment certainty. However, it is merely the 'end of the beginning' as it marks another step in the Brexit process – the start of a transition period lasting until 31 December 2020, which will continue to provide significant challenges for negotiators, and ongoing short-term uncertainty for Australian exporters, importers and investors awaiting the final deals. We recommend that Australian interests be alert to the process and commence understanding the potential impacts and opportunities that may arise from any future trade and investment agreements with the two key markets.

Australia has long historic and special ties to Europe and especially the UK, ranging from its colonisation, migration, culture, trade and investment, political systems and even our head of state. In economic terms, the two way trade and investment flows between the markets are significant. For example, in 2018-19, two way trade between Australia and the EU (minus the UK) was $83.9 billion and Australia and UK was $30.4 billion – with increasing mutual benefits in services trade and investment flows.

As such, Australian businesses and consumers have political, economic and cultural 'investments' in stability throughout the remaining Brexit process and the 'new European model' which could start from 1 January 2021.

UK and the European Union since 1973

The UK's membership of the European Union (and the European Economic Community before it) has been the subject of intermittent political and community debate since it joined in 1973. However, after a renewed level Euroscepticism and effective political pressure from parts of the Conservative Party, the UK Independence Party (UKIP) and the People's Pledge campaign, UK citizens participated in United Kingdom European Union membership referendum in June 2016. With a 72.2% registered voter turnout, 51.89% of UK citizens voted to leave the EU. In March 2017, the UK Government invoked Article 50 of the Treaty of the European Union and formally commenced the withdrawal process.

In the following years, we have all witnessed the confusion, uncertainty and fallout about how and when Brexit would take effect (if at all). There was parliamentary deadlock, historical political losses, three Prime Ministers, a general disruption of well-established supply chains, diminished trade and investment, and reduced market confidence.

In fact, the economic impact of the Brexit process on the UK has been significant. Bloomberg Economics suggests an economic impact of £130 billion, with another £70 billion likely by the end of this year. That doesn't include the remaining administrative costs which are estimated to be £30 billion. Others have suggested that the UK economy has contracted 3% and its growth lags behind other peer markets. However, while many businesses did consider redomiciling or establishing new subsidiaries as part of their Brexit contingency planning, in reality, the scale of corporate and labour mobility was lower than anticipated.
Nonetheless, Australian exporters and investors have been keenly watching Brexit proceedings and creating appropriate contingency plans for their own existing overseas operations and investments, supply of materials and inputs, value-adding processes, new market entry strategies and other supply chain arrangements.

However, after an emphatic victory in the December 2019 UK general election, Prime Minister Boris Johnson overturned the parliamentary deadlock and passed the negotiated withdrawal agreement bill to pave the way to 'Get Brexit Done'.

The next phase of Brexit

Starting on 31 January 2020, the UK and the EU will enter the next phase of Brexit - a transition period aimed to end on 31 December 2020. Given that a significant part of the UK withdrawal is leaving the EU Customs Union, this relatively short timeframe will be spent negotiating a free trade agreement focused on future tariff rates, customs procedures and other trade protocols, as well as other associated agreements relating to issues such as data sharing, tax treatment and security cooperation. During this transition period, the UK-EU trading relationship will follow the status quo.

While on the face of it there is some certainty with this set timetable, we anticipate a number of challenges for negotiators. Even the most simple of bilateral trade agreements are complex to negotiate and settle. However, with such entrenched historic and intertwined linkages, the negotiations will be extremely complex, with many cross-competing and conflicting agenda items. We anticipate some disagreement on the objectives and scope of the agreement, divergence of views on critical issues such as the trade in services, the EU's desire to include future sustainability commitments such as environmental and carbon emissions commitments, as well as grants of equivalence and adequacy decisions by the European Commission.

Furthermore, whilst the new parliamentary majority should enable the UK Government to ratify any future free trade agreement, the EU ratification process is more complex. There must be unanimity in Council, a majority in Parliament as well as ratification by all national and regional parliaments. This could equate to delays whilst EU members review their own particular cost-benefits, or, even worse, further negotiation should one EU member veto the entire agreement.

What will Brexit then look like?

Given the short time frame and level of complexity needed to settle, the completion of the transition period at the end of 31 December 2020 might take on a number of different possibilities. These could include:

A successfully concluded UK-EU free trade agreement which comes into force immediately.
No completed UK-EU free trade agreement. This could lead to non-preferential treatment, full tariff rates and relatively onerous customs procedures for goods passing between the markets, until a free trade agreement is successfully agreed and ratified.
The transition period has been mutually extended before the 1 July 2020 extension cut-off date. Interestingly, the UK's withdrawal legislation prohibited ministers requesting an extension to the transition period and Prime Minister Johnson also suggested he will not sanction any extensions. However, with the threat of increased costs for UK exporters (making them less competitive) and imports (threatening consumer back pockets), as well as significant administrative burden created by a no deal, we might expect Prime Minister Johnson to change his mind and enable an extension if needed and the EU agrees.

Other opportunities for Australians

Naturally, a concluded Brexit will have consequences for the Australian market, businesses and consumers. The Australian Government is putting in place a number of mechanisms to mitigate the longer-term impacts and facilitate new opportunities.

In June 2018, Australia and the EU formally commenced negotiations for a free trade agreement. The parties recently concluded a fifth round of negotiations, with realistic expectations that further negotiations will be pushed back until after the EU settles its agreement with the UK.

Despite that, the Europeans are renowned to be tough negotiators and a quick resolution is no fait accompli. It is expected Geographical Indications, the EU Common Agricultural Policy and future sustainability commitments relating to environment, climate and carbon emissions reductions, will be amongst a number of sticking points.

However, a ratified free trade agreement will provide Australian consumers with better access to high quality goods and services from Europe. And while it might seem like a panacea, providing Australian exporters and investors with preferential treatment and competitive access to a market of half a billion customers and a GDP of US$18.7 billion, Australian exporters and investors will still need to be mindful of the various market and cultural differences between the national markets of EU which can add significant risk to unprepared players.

Similarly, Australia and the UK have committed to negotiating a free trade agreement. In September 2016 they established a Joint Trade Working Group with four formal meetings having now been held. The UK's International Trade Committee has launched an inquiry examining the potential for a new trade relationship with Australia and its Secretary of State for International Trade and President of the Board of Trade The Rt Hon Elizabeth Truss MP has recently reaffirmed her commitment to signing this agreement with Australia 'within months' of the Brexit deal.

The benefits of the free trade agreement to Australian businesses and consumers will ultimately be determined by the Brexit transition and the final UK-EU free trade agreement.

Despite these opportunities, we recommend that Australian interests continue to monitor developments in Brexit transition period, understand the impacts of any changes to their tariffs, quotas or other non-tariff barriers, conduct due diligence and make adjustments to access appropriate supply markets and value chains, understand any state dispute settlement processes, and lobby the relevant industry association or Australian Government agency to try and include appropriate protections in any future free trade agreements with the EU and the UK.