Posted: 25 Aug. 2020 12 min. read

Brexit negotiations: the clock counts down

The question front of mind for anyone involved in preparing their business for Brexit is still whether the EU and the UK will actually reach a negotiated outcome. Progress has been protracted and slow with an already ambitious mandate and bold timetable hindered by the massive impact of COVID-19.

With just four months to go, businesses are now focusing on making changes in the areas they know, such as customs procedures, but having to make judgement calls in other areas such as the level of market access, regulatory alignment and movement of people. Whilst some scenario prediction is possible, the ‘no-deal’ outcome is the most used base case.

So, how likely is it? The sticking points outlined in our blog three months ago still remain largely unchanged. And Michel Barnier’s declaration last Friday, following the seventh round of formal negotiations, that a trade deal currently “seems unlikely” provides little solace to businesses seeking clarity about the future. Behind the politics, however, has there been any progress? How much time is really left for the two sides to negotiate further?

While the UK parliament is in recess, we’ve taken stock of these questions by assessing the movements reported from each negotiating team, and summarised the newly revised timeline.

Structure and governance

There have been clear signs of progress around the way the agreement is structured. Originally the UK had sought a series of separate agreements in areas such as fishing, aviation and nuclear cooperation. However, indications are the UK has relaxed its intentions in this area, having taken on board the EU’s concerns surrounding its multi-deal arrangements with Switzerland. The EU meanwhile has reportedly relented on some of the UK’s concerns over the ECJ having a future role in matters concerning the UK and on restrictions over the UK’s ability to diverge from EU law in the future.

It is still unclear what governance structures could be established that satisfy both parties, but movement from both sides has clearly been noted.

Level playing field

This is the biggest ongoing area of dispute, particularly with regard to future state aid restrictions.

The EU has continually sought to tie the UK more closely to the existing EU state aid regime. There have been signals of possible movement in Brussels on state aid restrictions, where their demands have shifted to simply a “shared philosophy” on future subsidies rather than full alignment with EU rules.

However, for there to be further progress the EU has set out that there needs to be greater clarity on the UK’s future domestic state aid regime. Originally the UK government had suggested it would not have any form of domestic state aid regime, though there are signs this position is being reconsidered – not least due to concern around what this would mean for the UK’s internal market. Things are at somewhat of an impasse until either the UK confirms its future state aid policy or a proposal is put forward to consider how to oversee UK/EU trade from a state aid stand point.

Suggestions of a dispute resolution mechanism where tariffs or other retaliatory measures are taken if one side engages in unfair state aid have so far been dismissed by the EU.

Security cooperation

As with other areas, a key ongoing issue with regard to security co-operation has been the UK’s insistence in avoiding ECJ oversight on any of its actions. This has led to a reluctance on the EU’s part in granting the UK access to many of its security databases and programmes. Such systems exist to aid European countries in security collaboration where data on criminals can easily be accessed by the relevant authorities in each state.

Statements from Michel Barnier back in July however have indicated progress is being made. These include the EU being willing to explore options that allow some access without ECJ involvement, and the UK accepting more limitations on future cooperation in this area as a result.

Fisheries

The UK no longer wants to adhere to the EU’s Common Fisheries Policy, instead proposing annual talks with the EU on fishing rights; it is deeply resistant to the concept of giving the EU long-term guarantees about access to British waters and quotas. During Brexit negotiations in July, Michel Barnier confirmed he would support a UK proposal of zonal attachment, coupled with other factors to determine fishing rights. This compromise demonstrates progress on the EU’s original position as both sides recognise they will need to be “creative” in order to break the deadlock on the trade agreement. Fishing rights are unlikely to derail the negotiations entirely, but given the political sensitivity will be finalised at the last moment.

As such, we see the level playing field and state aid issues as the two biggest stumbling blocks to a deal being done; business should monitor developments here closely. Failure to reach agreement on these two issues could jeopardise agreement in all the other areas being negotiated, much of which is actually mutually beneficial to businesses both in the UK and the EU.

Other areas of note for businesses

  • Aside from these major sticking points, the UK appears to have conceded on other key areas of negotiation which businesses should continue to monitor in the ongoing discussions, including Rules of Origin. It has been reported the UK is now willing to accept less favourable terms in this area and has withdrawn from ambitious hopes of ‘diagonal cumulation’. This means some manufactured products would not be eligible for preferential tariffs, increasing costs or resulting in adjustments to supply chains to take advantage of preferential tariffs.
  • Mutual recognition of professional qualifications (MRPQs) – It looks likely the UK will give way on the wide-ranging MRPQ agreements it was initially seeking. Instead we might expect a number of professional service sectors, e.g. legal services to no longer be able to provide services within the EU and have to adhere to each host country’s policies post Brexit.
  • Mode 4 Provisions – These provisions concern the movement of UK/EU nationals into each other’s territory for the provision of services, important especially to the UK given its service-based economy. Reassuringly, the types of workers both sides want covered, the nature of the easements requested and other matters are largely aligned. This is looking like it could be agreed, the main question now being  the length of time a worker can remain, with a potential happy medium expected somewhere between 90 and 180 days out of every year.
  • Data adequacy – The ECJ’s decision to invalidate the EU-US Privacy Shield agreement is a major development and could signal further barriers to the EU granting the UK adequacy and ensuring seamless data flows between the two. This could be compounded further if the UK tries to strike a data agreement with the US. If there’s a no-deal outcome, businesses looking to send data from the EU or UK to the US will have to rely on standard contractual clauses (SCCs). However, these are not in themselves straightforward as the ECJ’s ruling signals reliance on SCCs will be subject to much greater levels of scrutiny from EU Data Protection Authorities and data flows will be suspended if they do not respect the privacy rights of EU citizens.

What’s coming up?

The UK and the EU have now commenced three more full rounds of negotiations leading up to early October. From then we will be heading towards make or break territory with regards to the possibility of a deal.  Here’s the expected timeline for the remaining four months:

There is likely a little room for this process to be streamlined or condensed further, and we could see some movement on dates, particularly on consents if a deal were close to being finalised.

Amidst all this uncertainty, business can make changes in the ‘known change areas’, including those agreed under the Withdrawal Agreement. These should be designed and implemented now to alleviate the burden in the last few weeks of the year - as the timeline shows, if there is a deal done, there will be very little time to adjust for the unknowns. Even in the unknown areas, we now have a far better idea of likely outcomes given the latest negotiating positions so preparations can be made on a scenario basis, in addition to a ‘no-deal’ worst case outcome.

Be sure to stay up to date with the most important business-focused developments via our Brexit pulse alerts. For support in assessing your Brexit-related plans, Deloitte’s Brexit team remains on hand to help.

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Key contacts

Amanda Tickel

Amanda Tickel

Global Brexit Lead

Amanda leads Deloitte’s global Brexit insights team based in the UK and co-ordinates Deloitte’s Brexit expertise across the global network of firms. She advises businesses on the spectrum of Brexit related issues, assessing the scale of potential impact under various scenarios and helping clients to plan mitigating actions to minimise impact and maximise opportunity. Amanda is also an International Tax Partner advising on supply chain and trading chain models. She mainly works with the technology, telecoms, media, consumer retail and manufacturing industries. Amanda has held a wide number of roles during her career; including leading client relationships, global representative to the OECD, mentoring, non-executive board roles and trusteeships.

Raoul Ruparel OBE

Raoul Ruparel OBE

Adviser

Raoul works as an Adviser to Deloitte based in the Global Brexit Insights team advising across a range of business lines on topics ranging from Brexit to trade policy, economic policy and the wider political landscape in the UK and EU. He helps businesses understand what the UK’s exit from the EU means for them and how they can best position to mitigate any impact and take advantage of the opportunities. His previous roles include Special Adviser to the Prime Minister on Europe and Special Adviser to the Secretary of State for Exiting the EU. Raoul holds two masters degrees from the University of Chicago in economics and public policy and an undergraduate degree from the University of Manchester.