Brave New World: the UK formally separates from the EU

The UK has now formally withdrawn from the EU.  We will see little change in the short term, thanks to an 11-month “transition period”, but the all-too-fleeting timeframe for negotiating new trade agreements with the EU and others, including New Zealand, means that the medium-term picture for business and exporters remains as murky as ever.

Following the passage of the UK Withdrawal Agreement through the British Parliament, and parallel approvals from the European Council and the European Parliament, the UK split away from the EU at 11pm London time on Friday 31 January (noon last Saturday, New Zealand time).  

Plus ça change…

In the immediate term, we will see very little change to the status quo.  A “transition period” through to the end of 2020 means that the UK will continue to adhere to EU regulations on trade, although it will no longer take part in the EU decision-making processes for these.  In most respects, including for trade with third countries such as New Zealand, it will be business as usual.   

Dealing with the EU

At the same time, an intense negotiation on future arrangements will get underway from 1 March between the UK and EU.    Timing is extremely tight in the transition period.   Reaching a deal in eleven months – or closer to eight, if you factor in ratification – would constitute unprecedented speed for a line-by-line tariff negotiation, including on politically-sensitive sectors such as agriculture and fisheries, and for sorting out the complex regulatory rules needed for modern trade, including services.  The UK could once again end up at a cliff-edge ‘no deal’ exit, with all the attendant economic and regulatory costs (including for New Zealand – see our earlier blog).   At least for now, British businesses have no certainty about the trading conditions they will face from 1 January, despite urgings from No. 10 to “adjust”.

“Obviously a gold-standard FTA with the UK is strongly in New Zealand’s economic interests, and will help to demonstrate the UK’s credentials as a champion of trade liberalisation.”

 Shaking off the regulatory shackles?

The early signals are that the UK will be at pains to assert its regulatory sovereignty: it will very deliberately no longer seek alignment with EU regulatory approaches.  The battleground issues are likely to be sanitary and phytosanitary requirements (that is, food safety and biosecurity rules – including the infamous “chlorine chicken”), environmental and labour standards, state aid and digital regulation.    Even if its approach de facto remains close to that of the EU, the potential that the UK could diverge means that British exports to the Continent will face significantly higher compliance costs than they did when part of the Single Market – and the greater the swing away from the EU approach, the more burdensome the checks and restrictions are likely to be.   

The UK has also said that it will pursue an FTA at least as ambitious as the Canada-EU deal.  The Canada-EU FTA provides for largely tariff-free trade but also limits market access on the most sensitive products – and took eight years to negotiate and ratify.     PM Boris Johnson will reportedly outline further details of the UK’s approach in a speech in the UK on 3 February.

Trade deals on the menu

Meanwhile, the UK is now free to start official talks with third countries, including New Zealand.    Preparatory discussions have been underway for some time, but the UK is now free to engage in formal negotiations.   PM Boris Johnson is reportedly keen to conclude a bilateral deal as quickly as possible.  That said, there are some other significant priorities on its radar, including not just the negotiations with the EU, but also potentially with the US, which may impact on the New Zealand process.   

Both sides have expressed enthusiasm for an ambitious deal.   Obviously a gold-standard FTA with the UK is strongly in New Zealand’s economic interests, and will help to demonstrate the UK’s credentials as a champion of trade liberalisation.  It may not all be smooth sailing, however.  Where the UK comes out on its new regulatory philosophy may have an impact (notwithstanding the various post-Brexit regulatory arrangements that the Government has helpfully negotiated with the UK), and it would not be a surprise if agriculture market access remains tricky, even though win/win outcomes should be entirely possible given our counter-seasonal production and shared commercial interests in growing markets and expanding value chains, as we argued in this report.  

This post was prepared by Stephanie Honey, Associate Director of NZIBF.