UK-EU Free Trade Agreement – 2020 Brexit battleground

With the date for the UK to exit the political structures of the EU now set at 31 January, the focus for 2020 will move to the much more challenging phase – negotiating a UK-EU Free Trade Agreement (FTA). This agreement must be concluded in a 2020 ‘transition period’, when the UK still remains in the EU trading structures – the Customs Union, VAT regime and Single Market. During the transition period, the UK will continue to enjoy the preferential trade terms negotiated by the EU on its behalf; but it will continue to contribute to the EU budget.

'No-deal' avoided; 'No-trade-deal' now the risk

Failure to agree an FTA would mean a ‘no-trade-deal’ Brexit on 31 December 2020. Remember - the UK has a Withdrawal Deal now, so a full, hard Brexit has been avoided. This includes a trade deal for Northern Ireland, giving it a special dual UK and EU market membership. But if the UK is unable to secure and FTA we face the imposition of punitive tariffs, quotas and other restrictions on trade between the UK and EU. There is an option to extend the trade transition period for up to two years further; but the political optics of further Brexit delay will make this highly unlikely. 

UK and EU set for collision over alignment vs access

Entering the negotiations, the UK is unlikely to accept continuing full goods and services regulatory alignment with the EU as this would tie its hands-on future FTA’s with the US, China and others. This will concern the EU, which fears the UK will set itself-up as a low-cost competing neighbour via dilutions to employment laws, environmental requirements and state-aid grants.

Therefore a modest first-round FTA deal is likely for 2020, with drawn-out negotiations for several years afterwards around more complex and sensitive sectors. The big loser will be services, particularly financial services, where politicians have been slow to grasp the impact of the loss of EU Single Market access and 'passporting' rights Brexit will entail for UK.

What is likely from 2020 UK-EU Free Trade Agreement

Given the tight negotiating timetable, the key terms for a 2020 FTA will likely include the following:

• Continuing tariff and quota-free trade on all goods. Challenges will include the UK wanting to protect some sectors such as agriculture.
• Minimised border checks and paperwork to prevent trade friction via recognition of standards and assessment bodies.
• A basic Canada-style services deal.
• Mutual recognition of professional and trade qualifications.
• Creation of regulatory legislative communications forum to avoid any unnecessary divergence and therefore trade barriers.
• Non-regression clause to ensure UK does not reverse existing commitments on state-aid, competition and environmental rules.
• Industry-specific side agreements on energy, aviation, security and defence.
• Migration and movement of people agreements, including business VISA waivers.

The Brexit VAT implications will be the UK leaves the EU VAT regime in all cases on 31 December 2020. It will become a third-country, meaning all imports/exports from and to the EU will become subject to import VAT. The UK will also surrender a range of VAT simplifications on trade with EU businesses.