On 29 January the EU Commission agreed and published its negotiation directives covering what is referred to as Phase 2 of the Brexit talks.
What is critical in this stage of the talks is agreement of transitional arrangements and outline agreement on the future relationship between the UK and EU, ie the future trading relationship.
As was the case in the first phase of the talks, the EU side has outlined a set of negotiating positions or directives that not only supplement their earlier Phase 1 directives from May 2017 but also set out a fairly defined or rigid set of directives for agreeing the transitional arrangements in Phase 2 of the talks.
These include:
- Transitional arralangements will require the UK’s continued participation in the customs union and the single market. As stated in the press release and by EU chief negotiator Michel Barnier in the 29 January announcement, there will be no cherry picking by the UK.
- Any time-limited period of transition requires that existing EU regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures apply, including the competence of the Court of Justice of the European Union.
- The UK will be a third country as of 30 March 2019. It will, therefore, no longer be represented in EU institutions, agencies, bodies and offices.
- Lastly, the transition period should apply as from the date of entry into force of the withdrawal agreement and should not last beyond 31 December 2020.
In phase 1 of the talks, the EU held a firm line in negotiations on the divorce bill, the Irish border and the status of EU citizens.
Given their view that sufficient progress was made to move to phase 2, it would seem reasonable to assume that the EU directives for phase 2 talks will be equally firm.
The important aspect for both sides is that a transitional arrangement is on the table, even though there could be debate about the length of that transition period.
A transition arrangement is recognised as something that will enable both businesses and the public sector to prepare for the future relationship outside of the EU.
The general consensus is that the existing timeframes were too tight to get a trade deal and preparations in place, so having some transition period beyond the exit date to make preparations is a valuable asset.
Evidence from trade bodies given to the House of Commons Treasury committee for its inquiry into transitional arrangements for exiting the EU suggested that there would need to be both a ‘standstill period’, during which the same or similar rules of trade apply immediately after the UK leaves the EU.
Some considered that this standstill period should last as long as five years.
For some sectors, the committee further concluded that a period of adaption should follow the standstill period to allow time to adjust to changes to the legal and operational environment under the future trade relationship, once it is known with clarity.
In short, the MPs recommended a standstill period following exit at the end of March 2019 and a further transitional period after that to adapt to new operating and regulatory environments. This is clearly not what is on offer from the EU negotiating position.
The conclusions from the Treasury committee point to the current lack of clarity on the nature of the future relationship.
In order to plan for potential scenarios of course a transition period is welcome, however without clarity on the future position, it makes the asset of having a transitional period a rapidly wasting one, unless details are established fairly early in the process.
This impacts both the public and private sectors in preparation for Brexit. If you look at the potential for a so-called hard Brexit or reverting to World Trade Organization rules, which still exists if no deal can be reached in the current timeframes, there would be a range of issues for the public sector to consider.
These include issues such as the system’s ability to handle increases in transactions around customs and trade declarations.
HMRC has already noted to the Treasury committee the increase in potential transactions given a no-deal scenario and the position on systems changes currently underway.
Similarly, there would need to be consideration of operational issues at borders and ports that may require investment and upgrade of infrastructure and personnel.
Other administrative arrangements currently performed by EU regulatory agencies such as the European Supervisory Agencies, the European Aviation Safety Agency, the European Chemicals Agency, and the European Medicines Agency, will need to be considered and might have to be repatriated.
These do not take account of the potential for medium- to longer-term public sector workforce issues that could result in an abrupt change on immigration and ability to work in the UK.
The chancellor himself in evidence to the Treasury committee noted that transitional arrangements are a “wasting asset”, the value of which will diminish the longer they take to negotiate. That clock is already ticking.
