EU agrees rules for Brexit transition, but UK gov predicts negative impact in all scenarios

SUMMARY:

The digital sector will be weighing up mixed Brexit news today. Whilst a transition phase will ease concerns, a leaked document suggests a tough path ahead.

Companies in the technology and digital sector will be weighing up their options today, as both some good and bad Brexit news hit the headlines. Whilst the European Commission has agreed on the guidelines for a transition phase after the end of March 2019 (the date that the UK is set to leave the EU), a leaked government impact assessment has suggested that there is no positive outcome for the economy post-Brexit.

Industry has been calling on the government for clarity over its position on Brexit, particularly as it relates to the transition or implementation phase, which see the UK stay inside the single market and customs union for a set period of time in order to ease the stress of the exit and secure a trading deal.

However, the Prime Minister’s party is firmly divided into two camps for what happens after this transition phase. Some want to remain closely aligned with the EU, which would see the UK still outside the institution, but part of the single market and customs union. This would maintain close trading links and make complications around data sharing far simpler. However, it would also likely mean that the UK wouldn’t have control over its border and free movement of people would remain – a key motivation for voters during the EU referendum in 2016.

Others want completely out of the customs union and single market, gaining control of the borders, and for the UK to forge stronger trading relationships and deals with other nations such as the US and those within the Commonwealth.

However, leaving the customs union and single market will mean (unless the UK can secure a bespoke deal, which has no been achieved before by any other country) that it will fall back on WTO rules, which are not great for trading in services.

A services focus is important for the UK, and it is a topic that has been raised by MPs – but for the UK to secure a good deal for digital Britain, it will need to progress the services element of any deal in the coming months.

Typically services are covered by WTO rules, which are light on tariffs, so that’s not a problem. However, those rules don’t take into consideration the regulations that will impact the trade in services across the EU, so Britain needs to build that into any FTA it signs.

We at diginomica/government have long been covering the impact of Brexit on the technology and digital sector, as well as on technology professionals across Whitehall, who are dealing with setting up new systems as we prepare to separate ourselves from the trading bloc.

The long and short of it is that this is not much positive news to be gleaned from the impact of Brexit and technology companies are greatly concerned about their access to EU skills, data sharing with the EU and using the UK as a launchpad for wider EU business. There are reports of companies putting contingency plans in place, with some evidence to suggest that operations could be moved to mainland Europe if the UK leaves the customs union and single market.

A transitional agreement

As noted above, the UK hopes to agree a transition, or implementation, phase with the EU, which will give it some extra time after March 2019 to agree its potential bespoke trading deal and ease the pressure on industry, both in the UK and the EU,

The good news reaching the headlines this morning is that the European Commission has confirmed that the EU27 has reached an agreement on the guidelines for the transition phase, making it all the more likely.

The European Commission has said that the transitional arrangement will need to follow the following rules:

  • There will be no “cherry picking”: The United Kingdom will continue to participate in the Customs Union and the Single Market (with all four freedoms). The Union acquis will continue to apply in full to and in the United Kingdom as if it were a Member State. As a result, the United Kingdom should remain bound by the obligations stemming from agreements with third countries. Any changes made to the acquis during this time should automatically apply to the United Kingdom.
  • All existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures will apply, including the competence of the Court of Justice of the European Union.
  • The United Kingdom will be a third country as of 30 March 2019. It will, therefore, no longer be represented in Union institutions, agencies, bodies and offices.
  • The transition period needs to be clearly defined and precisely limited in time. It should not last beyond 31 December 2020. Consequently, the provisions on citizens’ rights in the Withdrawal Agreement should apply as of the end of the transition period.

In other words – the UK will benefit from being part of the customs union and the single market, so can trade as it does now. But during he transitional agreement, the UK cannot have any influence on any of the rules or regulations passed, but must continue to follow all of EU law. Also, free movement of people will remain.

That being said, trading will be able to continue as it does now up until 31 December 2020, if it all goes ahead.

An impact study

However, despite the transitional arrangement making progress, an impact study was also leaked to BuzzFeed News this week, which shows that the government believes that the UK will be worse off outside the European Union under every scenario modelled.

The assessment is being kept tightly guarded inside government, according to BuzzFeed News and was prepared by officials across Whitehall for the Department for Exiting the European Union.

The impact study states that almost every sector of the economy will be negatively impacted across all scenarios, apart from agriculture, which would not be adversely affected under WTO rules. Every UK region will also be negatively impacted.

Under a ‘no deal’ scenario – one which has been touted by the Prime Minister herself as a possibility, which would see the UK fall back on WTO rules – would see the UK’s growth reduced by 8% over the next 15 years, compared to current forecasts.

Under a comprehensive free trade agreement with the EU, UK growth would be 5% lower over the next 15 years.

The soft Brexit option, of continued single market access through membership of the European Economic Area, would still lower growth by 2%.

My take

The progress on the transitional arrangement is about as positive as the news gets for the technology industry, as it relates to Brexit. But the impact analysis will be of huge concern to those investing in the UK. Even under the softest Brexit option available – staying part of the customs union and the single market – growth will be lower than compared to current forecasts. If you were running a technology company and you had the choice to invest in the UK or in France or Germany, what is the safer option?

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