After almost 3 years of “will they, won't they", Brexit – the UK’s departure from the European Union – has become a certainty. Following his strong victory in December’s general election, Boris Johnson’s Government has achieved what Theresa May’s could not – namely, obtain Parliament’s approval for the terms of the UK’s departure from the EU. As a result, Brexit occurs today, 31 January 2020.

What Happens Next?

Whilst the legal relationship between the UK and the EU will change fundamentally on that date, there will be little immediate or practical difference. This is because the UK’s departure will be immediately followed by a transitional arrangement which largely preserves the status quo for trade in goods and services and movement of people.

But the transitional period will expire on 31 December 2020 (unless extended by the end of June – which Johnson has vowed he will never do).  What follows the transitional period is yet to be agreed and is the subject of intense negotiation and speculation.  And, given the limited time available and Johnson’s refusal to countenance an extension to the transitional period, the risk of ‘a no deal exit’ remains a real possibility.  Under this scenario, trade in goods would be covered by WTO tariffs and terms, the UK would lose access to the EU Single Market, and there would be a severe economic hit.

Trade Negotiations Begin

Conscious of these risks, UK and EU negotiators are expected to focus their efforts on a small number of inter-linked priorities once the trade negotiations commence next month. Even then, timing is likely to be extremely tight given that most trade negotiations require significant stakeholder input and multiple rounds of negotiations. We can expect the rest of the year to be taken up with a game of “push me, pull you”, with negotiations aimed at reaching agreement on a shallow trade agreement that provides for tariff-free and frictionless trade in goods. Negotiation on other critical areas such as services, trade, intellectual property, mutual recognition of professional qualifications and security cooperation are likely to extend beyond the end of the transition period.

The UK will want to achieve the best possible access to the EU’s Single Market for its goods (and services) while retaining the ability to depart, as it sees fit, from overly restrictive EU rules and regulations. This is likely to be a tough ask, especially given the short timeframe for the negotiations and ongoing concerns that the UK could undercut the block’s high levels of regulatory protection after it has left the EU and gain an unfair advantage for its domestic industry.

Even before the start of the negotiations, the EU is reminding the UK that any trade deal must include ‘level playing field’ provisions covering areas such as competition and state aid (EU anti-subsidy rules), taxation, labour and social protection and environment. This would require the UK to largely replicate the existing EU regimes and introduce effective domestic enforcement and oversight.

The EU is also likely to go further and argue that the UK’s access to the EU Single Market is dependent on its acceptance of ‘dynamic alignment’ with current and future EU rules and regulations.  From the UK side, this is highly controversial as Britain would have no say in shaping the rules and it will be seen as depriving the UK of the opportunity to seize the freedoms that Brexit allows it to pursue. Specifically, it would limit the UK’s ability to negotiate far-reaching trade agreements with third countries, including the U.S. For example, alignment with EU food and animal welfare standards would severely limit the scope of any future UK-U.S. trade deal in the area of agri-foods as the EU and U.S.’s approach to animal, plant and public health risk differ fundamentally and appear almost impossible to reconcile.

Economic Sanctions

In addition to facilitating new trading relationships with third countries, Brexit will give the UK greater freedom to pursue its own foreign policy, in particular with respect to economic sanctions. The UK has already put in place the necessary legislative framework to transpose existing EU sanctions regimes into UK law and to empower the UK going forward to adapt and amend its sanctions legislation in line with its own policy objectives. There are some indications already that the UK is willing to take a stricter approach than the EU; for instance, guidance provided by the UK Office of Financial Sanctions Implementation (OFSI) in relation to the Russia sanctions regime suggests that UK sanctions may be more prohibitive than the equivalent EU provisions. The UK has also announced that it intends to adopt a “Magnitsky-style” human rights sanctions regime even before the end of the transition period.

Impact on the Energy Industry

In the area of energy, the UK's departure from the EU should not lead to significant immediate market disruption in the sector, especially as Northern Ireland will remain part of an all-Ireland single energy market and the UK is committed to decarbonisation. Going forward, the EU and the UK will still have a common interest in trading energy post-Brexit, although they will need to make arrangements to ensure gas and electricity flows through pipelines and interconnectors continue unimpeded by the UK’s departure from the EU’s single energy market. The UK is also exiting from the EU’s single market for the trade in nuclear materials and technology (EURATOM) and is putting in place its own framework to address nuclear safety and radioactive waste.

Impact on Intellectual Property and Data

European Union trade marks and registered Community designs, including those international trade marks and designs that designate the EU, will still be effective in the UK after Brexit. Everything is at a standstill during the transition period and then, after 31 December 2020, existing trade marks and designs (as at 31 December 2020) will be cloned free of charge into UK national registrations with no loss of priority or seniority. Pending EU applications (as at 31 December 2020) can be re-filed in the UK and then pursued as a UK national application, again with no loss of priority.  European patents are unaffected.  The European patent system is governed by the European Patent Convention and European patents will continue to be granted by the European Patent Office and be effective in the UK (if validated there). The future of the Unitary Patent and the Unified Patents Court is less clear, although this is for more than just Brexit-related reasons.  On the data side, the UK ICO confirmed on 30 January that nothing changes during the transition period. After that, regulations set out in GDPR will continue to apply in the UK (in the form of UK GDPR) and the UK has  indicated that there will be no change in relation to data transfers to the EEA, but the UK will be a third country for transfers of personal data from the EEA. Appropriate safeguards will need to be in place while the UK awaits an adequacy decision from the European Commission.

A Symbol of Dissatisfaction

Reaching agreement on a shallow trade deal by 31 December 2020 cannot be taken as given. There are numerous areas, other than regulatory alignment which have the potential to derail the negotiations.  Fisheries represents only 0.1% of the UK economy, but are a symbol of the UK's dissatisfaction with the EU and certain of its policies. The EU is reported to be prioritising access to UK fishing waters in its sequencing of the trade negotiations and discussions could become fractious.

Conclusion

The risk of a post-Brexit cliff-edge in UK-EU trade relations on 1 January 2021 cannot be ignored. Many international firms with cross border operations are likely to have implemented their ‘no deal’ Brexit contingency plans last year and should be better prepared and less impacted. This is likely to be the case for UK based firms in the banking and finance sector who are likely to have already transferred staff and operations and obtained the necessary licences to provide their services in the EU. For the manufacturing sector, and in particular companies that have just in time supply processes or have complex pan-European supply chains this is likely to be an unwelcome ‘déjà vu’. Unfortunately, negotiations over a UK-EU deal and its terms are again likely to go down to the wire.

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