Brexit Transition: Where Are We At? by Edelman

BREXIT TRANSITION: WHERE ARE WE AT?

Edelman 31 July 2017

Pawel Swidlicki Brexit Analyst Pawel.Swidlicki@Edelman.com Since the election, Chancellor Philip Hammond has focused his energies on securing a transition period so that when the UK formally leaves the EU on 29th March 2019, it will not immediately face a ‘cliff-edge’ scenario; a key objective for UK business. In recent weeks the idea has gained real momentum, nonetheless, the exact scope, design and duration and scope of this arrangement remain unclear at this stage and subject to both to disagreements around the Cabinet table, and negotiations with the EU.

WHAT DO WE KNOW SO FAR? How long would the transition last? Although most of the details have yet to be officially confirmed as government policy, the outline of the transitional arrangement is becoming discernible. According to the FT, Hammond envisages a two-stage process – firstly a “transition phase” during which the UK will retain full access to the single market and customs union, followed by a further “implementation phase”, during which the new UK-EU trade deal can gradually take effect. It is envisaged that in total, the entire process will last for up to three years, meaning that at the latest, it will expire just before the 2022 general election campaign. This would allow the government to go into that election on the basis of having ‘delivered Brexit’; Brexiteers fear that allowing the transition to run any longer would risk it becoming a de facto more permanent arrangement, especially under a potential Labour government.

Will the UK stay inside the single market and customs union? From the perspective of business, what matters most is certainty over practical arrangements such as the regulatory system, the immigration regime and customs checks. The government has said that formerly, once the UK leaves the EU, it will also leave the single market and the customs union. Technically this will be true, but as Hammond told the BBC Radio 4’s Today programme on Friday, “many things will look similar”. From a presentational perspective, the challenge will be to convince voters that things are changing as a result of Brexit, while in reality, introducing such changes gradually. As far as the single market component of the transition is concerned, the government has a couple of options. The first would be to reach for the ‘off the shelf’ option of staying within the European Economic Area via joining the European Free Trade Association (EFTA). However, this comes with its own complications and it might resemble full EU membership too closely to be palatable to most Brexiteers. An alternative could be a looser arrangement under which the UK essentially mirrors the EEA but without formal membership, with new bilateral institutions set up to oversee and enforce the agreement instead. The UK would have to continue to observe the four freedoms during the period but crucially, even if EU law will continue to apply for all intents and purposes, it will no longer have direct effect; a key principle for Brexiteers. When it comes to the customs union transition, Hammond’s preference is to strike a new customs agreement with the EU post-Brexit to maintain the status quo at UK ports and on the Irish border while more permanent arrangements are worked out. This would hamper the UK’s ability to enter into new FTAs immediately post-Brexit, but the UK could negotiate such deals during this transitional period and have them come into effect at a later date. This is still very much a live debate however.

If a transitional deal were struck broadly along the lines set out above, the answer to the question of whether the UK was or was no longer part of the single market and customs union would therefore depend on how literally one were to interpret the new situation. What about immigration? On immigration, Home Secretary Amber Rudd noted in her recent letter to the Migration Advisory Committee that as part of the transition period there would be no ‘cliff-edge’ for employees or individuals, meaning the free flow of labour will be maintained throughout the transition period. In order to differentiate these new arrivals from those EU nationals eligible to receive settled status post-Brexit, the government intends to introduce “a straightforward system for their registration and documentation”. However, it is not clear the EU will be willing to accept this, as it constitutes differential treatment for EU nationals which is not compatible with the EU’s definition of free movement, and its current Brexit negotiating guidelines state that the integrity of the four freedoms must also be preserved during any transition period.

WHAT ARE THE DIVIDING LINES WITHIN CABINET? With Prime Minister Theresa May away on holiday, the debate about how the transition ought to look like has been conducted by Cabinet Ministers via the media. Following comments by Michael Gove and Liam Fox last week that they would be willing to accept a transitional arrangement in principle, it looked as though the Cabinet was edging towards consensus. However, the weekend papers reported there are still several dividing lines, most notably on immigration. In an interview with the Sunday Times, Fox hit back at the suggestion free movement would continue in full during the transition, claiming that “control of our own borders was one of the elements we wanted… unregulated free movement would seem to me not to keep faith with that decision.” In theory, it could be argued that the positions of Hammond and Rudd are not incompatible with that of Fox; free movement will formally end, but in order to give businesses time to adjust and for a new comprehensive skills-based system to be put into place, the UK would choose not to restrict EU migration for the two-to-three-year period. As a UK policy choice, it would be compatible with the referendum result which was about the principle of ‘taking control’. However, such an argument could try the patience of many voters who expect Brexit to lead to a noticeable reduction in immigration from the EU.

31 July 2017

Meanwhile, Foreign Secretary Boris Johnson has so far kept his own council as regards the details of the transition arrangement but writing in The Sunday Telegraph, his former economic advisor, Gerard Lyons, hit out at Hammond by comparing some of the warnings about a ‘cliff-edge Brexit’ to the hysteria around the Y2K computer bug at the turn of the millennium. While endorsing the idea of a transition in principle, he said it ought to be a bespoke British deal and that it should not exceed two years.

The big unknown is where Theresa May herself stands. Although she conceded in her Lancaster House speech that an “implementation period” may be necessary, (purposefully avoiding the word transition), she has not spelled out in any detail how this would look in practice, hence why, with the clock ticking down, the vacuum has been filled by other Cabinet ministers. It is rumoured that Downing Street is planning a major Brexit-related speech in September; this would be a good opportunity for May to seize back the initiative and set out her own vision for how the transition ought to look. If not in September, it is hard to see how she can dodge the issue at her speech at the Tory party conference in October.

WHAT ARE WE TRANSITIONING TO? As welcome and important as the debate about the transitional arrangement is, it does not resolve the uncertainty over how exactly the new, longer-term “deep and special” UK-EU relationship will look like. The UK has still not fully resolved the dilemma of how much control we want to take back and how much we are willing to continue to give up in order to retain some of the benefits of EU membership. For example, a comprehensive agreement allowing for not only for tariff free access but also regulatory co-operation to check the emergence of non-tariff barriers would be of greater economic value, but the trade-off would be adhering to EU rules to a greater extent than many on the Leave side would like. Conversely, a loser FTA would give the UK more scope to enact policy changes but entail greater economic divergence from the EU post Brexit. Putting in place a transition period would give the UK and EU more time to flesh out the details of the new relationship; having this fully agreed alongside the terms of divorce within the two year Article 50 period was always highly ambitious. However, it will be important for both sides to have at least agreed on the broad framework of the new relationship, otherwise there is a risk the transitional agreement could end up being a bridge to nowhere.