Following last week's general election, the United Kingdom (U.K.) is set to exit the European Union (EU) on 31 January 2020. We outline the challenges that the U.K. and EU will need to navigate as they work toward complete separation.
The General Election
Prime Minister Boris Johnson's Conservative Party won a significant majority of the seats in the U.K. House of Commons. This means that, barring any foreseen circumstances, they will be able to implement their manifesto commitments to complete Brexit in 2020.
Brexit – What Happens Next?
The Withdrawal Agreement
As discussed in our previous update, the U.K. and EU agreed to a deal in October for the U.K. to leave the EU, which must now pass through Parliament. The Withdrawal Agreement Bill will likely be reintroduced into Parliament this week, with the legislative process coming to an end at some point in January.
The Transition Period
If the Withdrawal Agreement is passed, very little will change immediately after 31 January, as the U.K. and EU have agreed to a standstill period. The U.K. will be legally separate from the EU (a “third country”) but will follow all EU rules until 31 December 2020. The Agreement includes an option to extend the transition period for one or two years if both parties agree that they need more time to negotiate by June 2020. However, the U.K. now proposes to amend the Withdrawal Bill to prevent such an extension. Therefore, if no deal is reached by 31 December 2020, the U.K. will trade with the EU under the World Trade Organization rules by default, raising the prospect of significant tariffs on some goods and non-tariff barriers to trade. The reintroduction of the prospect of a no-deal crash out (see our previous update) puts significant pressure on both the U.K. and the EU to reach agreement on a complex and wide-ranging trade deal within a very tight timeframe.
The Post-Brexit Relationship
The purpose of the transition period is to use the time to negotiate the future relationship between the U.K. as a “third country” and the EU. The shape of the future relationship will be subject to negotiations. However, both the Withdrawal Agreement and the Conservative Party’s pre-election manifesto made clear that the U.K. will leave the EU Customs Union, single market and the jurisdiction of the European Court of Justice. Similarly, the EU will seek to fulfill its own objectives, such as protecting the integrity of the single market, maintaining a level playing field and ensuring that the U.K. does not gain a competitive advantage in diverging from (or reducing) EU regulatory standards.
Both sides have said that they want an ambitious and comprehensive free trade deal, but there is no precedent for a trade deal of this size and complexity being agreed in such a short timeframe. Any agreement will need to be ratified before coming into force, a process that could take several months. It is possible that a “bare-bones” agreement can be reached by the end of 2020, with the more complex decisions taken later. Alternatively, there is still a risk that the U.K. exits the transition period with no trade deal on 31 December 2020.
Although the outcome of the election has ended uncertainty in the domestic political situation in the U.K., U.S. businesses should keep Brexit on their priority list throughout 2020. Many U.S. businesses have already done extensive planning in anticipation of a managed exit and have implemented contingency measures for a disorderly “no deal” Brexit. Others have adopted a “wait and see” approach while political developments have played out. In 2020, any U.S. business which has operations in, or significant trading relationships with, the EU and the U.K. will need to make concrete plans for both scenarios.