Global Threat Analyst – Europe & CIS
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The UK government recently confirmed that it will not request an extension to the Brexit transition period, which is due to expire on 31st December.
This leaves the UK with four months at most to negotiate a free trade agreement (FTA) given the head of the EU’s negotiating team, Michel Barnier has pinpointed the end of October as the cut-off point for any deal. Any deal must undergo ratification by the UK Houses of Parliament, the European Council (made up of the heads of states and governments of the EU27) and the European Parliament.
Brexit negotiations: situational assessment
There have been four major areas of disagreement in Brexit negotiations so far: the so-called ‘level playing field’ (LPF), governance, security and fisheries.
The Level Playing Field: The EU argues the UK should not be allowed to undercut EU standards and gain a competitive advantage, given its geographic proximity and the level of economic interdependence between the two partners. The EU wants compliance enforced via a dispute settlement mechanism. However, the UK government wishes to have the ability to diverge from EU regulations and is only prepared to offer a general commitment not to undercut EU standards, rather than having this enforced by formal dispute settlement mechanisms.
Governance: The EU prefers a comprehensive agreement, where all areas of future co-operation are governed by a single overarching deal. This would provide a framework for the future relationship to evolve and for the EU to retaliate if the UK breaches its obligations. In contrast, the UK prefers a series of bilateral agreements, rather than one overarching agreement. It fears the EU proposal will allow it to punish the UK in unrelated areas, in the event of non-compliance with the original agreement.
Security: The UK has proposed a separate bilateral treaty that grants it access to the European Criminal Records Information System, (ECRIS), but the EU is reluctant to offer access to any third-party country outside of the Schengen zone, particularly one that has not committed to the continued application of the European Convention on Human Rights (ECHR) in domestic law.
Fisheries: The UK argues there should be a separate bilateral agreement on fisheries, not linked to any wider trade agreement or dispute resolution. Under this model, fishing opportunities and access to waters are renegotiated annually on the principle of zonal attachment. In contrast, the EU prefers upholding ‘continued reciprocal access’ to fishing waters, where existing EU fishing access continues indefinitely on the same terms. The EU also wants this area linked to the wider trade agreement, with the inclusion of punitive clauses that allow it to impose tariffs on UK fish, if the UK were to block access to its waters.
The effect of COVID-19
The conducting of talks remotely has undermined the ability of each negotiating team to develop a mutual understanding of the other’s goals and interests, as well to establish personal relationships. However, as infection rates continue to drop across the EU, both negotiating teams are hopeful of conducting face-to-face talks as the 31st October deadline approaches. This is likely to precede a significant intensification of negotiations. The economic disruption arising from COVID-19 has also arguably reduced any UK fear of ‘No-Deal’; with government sources arguing that the perceived, relative costs of a looser arrangement now appear far lower.
The coming months of Brexit negotiations
Can a deal be reached?
While disagreements remain unresolved, a deal is still possible. However, given time pressures it will require a notable intensification in brexit negotiations throughout the summer. There are considerable points of convergence; the UK government has broadly accepted that leaving the single market and customs union erects more barriers to trade. This is in contrast to its negotiation stance earlier in the process, where there appeared to be a contradictory desire for frictionless trade and regulatory divergence. There is also a joint desire to avoid tariffs and quotas on trade in goods.
Where can compromises be found?
Despite the EU being the senior partner in the negotiations, compromises will be needed on both sides. Ursula von der Leyen has signalled the EU’s willingness to soften its position on state aid, fisheries and the role of European courts, while the UK government’s large majority gives it room to offer significant concessions in a way that Theresa May’s government could not. A possible compromise to the LPF has also been mooted, where the UK accepts the conditions of the LPF but maintains the sovereign right to deviate from EU rules. In this context, the EU could impose tariffs on British exports if it feels the latter is backtracking on its commitments.
What operational risks does a ‘No Deal’ Brexit pose?
Tariffs: Trade under WTO regulations involves the imposition of far higher tariffs, as countries must abide by ‘Most Favoured Nation’ (MFN) regulations, which mean they cannot discriminate between different members in applying the same tariff. This increases the cost of trade; while the EU’s MFN tariff is 3.2%, tariffs on some sectors, such as agriculture rise as high as 25%. EU MFN tariffs reach 189% for some dairy products.
Non-Tariff Barriers (NTBs): A failure to reach an agreement will also result in increased non-tariff barriers, such as technical barriers, quotas and differing national qualifications and standards. This poses a particular risk to the UK’s services sector, where the EU’s regime for free movement of services is much better developed than the WTO’s, given the former has an extensive programme for the mutual recognition of qualifications.
Checks at UK/EU borders: While the UK government has backtracked on plans to introduce full border checks with the EU from 1st January, these are likely to be fully introduced when there is sufficient administrative capacity to manage the added bureaucracy that arises from inspections at the UK/EU border. This raises the prospect of bottlenecks and disruption at ports, posing a risk to ‘Just-In-Time’ (JIT) supply chains which cut costs by minimising inventory levels and delivering goods ‘just in time’ to be sold.
What steps should businesses take?
- Establish an internal information gathering mechanism. This should comprise of subject matter experts helping to assess the potential implications that arise from different outcomes of the negotiations.
- Form a Brexit Management Team. This should establish internal triggers to assess the probability of a deal being agreed at any one point.
- Author risk management plans. These should address specific operational issues such as supply chain disruption, the increased cost of doing trade under WTO rules and mitigating the added bureaucracy of non-tariff barriers.
- In the event of a failure to reach an agreement on the future relationship, organisations should implement their respective plans and establish a Crisis Management Team. This should provide support to business units affected by operational disruption and dedicate resources to monitoring the latest developments.
- Identify key measurables for success. As the situation becomes clearer, plans should be adapted to become sustainable in the longer term. Companies that quickly adapt to new arrangements between the UK and EU are likely to be more successful in the long-term.
How can Healix assist?
One of the central challenges for companies planning for Brexit is uncertainty over the outcome of negotiations. Establishing a Brexit Management Team made up of relevant stakeholders is an essential first step. As Brexit negotiations progress (or fail to do so), your organisation will transition through several ‘stages’ beginning with ‘Planning & Monitoring’ before transitioning to ‘Operational Implementation’ and concluding with ‘Measurement & Assessment’.
During the Planning & Monitoring stage, stakeholders will need to go through a range of scenarios and establish the likely business and operational conditions of each. Plans can then be established on the basis of these findings, including contingencies for business continuity and supply chain management. It is also essential to ensure that your management team is appraised of the latest developments, with expert opinion that turns general information into genuine business intelligence.
Healix can assist your company through this process by offering a range of embedded analysis and monitoring options. Utilising these services can save time and reduce longer-term costs by freeing up resources that would otherwise be burdened with the associated workload. We select risk professionals uniquely chosen for their expertise who are able to embed within your business while remaining integrated with the wider Healix team, ensuring peer-to-peer access to our team of analysts, operations coordinators and managers.
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To find out more about how Healix can help your organisation, please contact email@example.com and one of our team will get back to you.