Sunday’s deadline for reaching a post-Brexit trade deal between the UK and EU came and went as both sides committed to continue negotiating ahead of the end of the Brexit transition period at 11pm UK time on 31 December 2020.
The decision to keep negotiations open appears to have been driven by progress on tariffs, suggesting a deal may still be possible.
By default, Governments place tariffs on items being brought into their countries to protect local suppliers from advantages firms overseas might gain from factors such as state subsidies, lighter regulation or lower labour costs.
A trade deal will usually involve reducing tariffs, limiting them to specific circumstances or scrapping them entirely by creating other mechanisms to ensure businesses on one side of the deal do not have an unfair competitive advantage over those on the other side.
This is the ‘level playing field’ that negotiators are trying to agree on and could take the form of guaranteed minimum standards of regulation on anything from workers’ rights to animal welfare.
While the logic of a ‘level playing field’ is straightforward, the task of actually creating one that takes into account multiple advanced economies and all sorts of sector-specific issues is hugely complicated, which is why such negotiations usually take many years.
Added to the mix, as a consequence of the UK’s withdrawal from the EU earlier this year, is the challenge of creating a ‘level playing field’ that continues to function effectively over time while both sides retain political independence from each other. News reports suggest that this is one of the trickiest issues that negotiators must now overcome to reach a deal.
Ultimately, any trade deal involves balancing tariff-free access to markets against the need to implement measures to create a ‘level playing field’.
In reaching the best possible deal for their own side, negotiators need to make the other side believe that they are willing to walk away without a deal, which may in part explain some of the pessimistic statements from both sides about the possibility of a deal.
However, this does not explain all of the pessimism and a ‘no-deal’ Brexit may even be probable. Given the complexity of this trade-off and the short time remaining to achieve a deal that meets the requirements of all the EU’s member states and the UK, there is a significant possibility that negotiators will not reach a deal in time to be ratified by 31 December 2020.
In that scenario, instead of level playing field measures, tariffs – some of which will increase costs several times over – will apply to goods being moved between the UK and EU and vice versa.
If your business trades with the EU and you have not prepared for a no-deal Brexit, you should take action immediately to ensure that you can continue to trade if talks break down in the coming days.