The deal, as envisaged in the Prime Minister’s proposal, would also allow for the UK to negotiate trade deals with third party countries at potentially more favourable rates.
Some of the main points from the Chequers proposal
- Free trade area with EU with common rulebook for goods
- Commitment to maintaining high standards
- Joint institutional framework
- Meet our shared commitments to Northern Ireland and Ireland
- End to annual payment to EU budget but with UK contributions to shared projects.
In short, the idea is to deliver as frictionless trade as possible with the EU after Brexit, while avoiding the need for a hard border between the Republic of Ireland and Northern Ireland.
However, after providing warm comments on Chequers throughout the summer, Brussels’ Brexit negotiators appear to have put up a tougher line of opposition of late. This has been replicated at home amid signs that the Cabinet is increasingly looking at other options – such as a Canada-style arrangement.
A key sticking point is the backstop that would come into place if the facilitated customs arrangement is not ready in time.
What happened at Chequers?
At Chequers on Friday 6 July, the Prime Minister appeared to have bound Cabinet opinion on a negotiating package for the UK’s future relationship with the EU. What followed, however, was an air of uncertainty and contention as two big players, David Davies (Brexit Secretary) and Boris Johnson (Foreign Secretary) resigned from these Ministerial positions, with both seemingly uncomfortable pressing the Chequers proposal with Brussels and generally unhappy with Downing Street’s management of Brexit.
Talks on the shape of future trading arrangements, such as outlined by Chequers, or an alternative arrangement, are even further on the backburner with some news reports suggesting detailed discussions on this will not begin until the UK enters a transition period.
Despite the ground to be covered in talks on future trading arrangements, lead Brussels negotiators and the Prime Minister’s Brexit team have remained optimistic that a deal can be struck before the year-end. But do UK businesses have the same confidence? What are the alternatives? And what does this mean for importers/exporters and sterling?
Canada deal: something no British Prime Minister would agree to?Recent news articles suggest the Cabinet is pushing May to move away from the Chequers deal towards a Canada-style agreement, while the government also continues preparedness work for a ‘no-deal’ Brexit.
Canada has a largely tariff-free trade agreement with the EU. However, as it does not follow single market rules, it faces more regulatory barriers, including checks to ensure goods meet EU regulatory standards and a higher level of paperwork. The deal does not prevent Canada from entering into trade deals with other countries and it is not subject to EU law or institutions.
What is a Canada deal?
|Single Market access||Non-EU trade||Free movement of Labour||Social/labour law||EU Law/regulation||EU Budget contributions|
|Free trade agreement in goods - tariffs cut to 0% (on 99% of goods). Major non-tariff barriers removed, but customs procedures still a requirement.||Ability to strike independent trade deals with countries around the world.||No right of free movement of labour.||No||CETA only includes a limited amount of regulatory recognition for goods. Very little in terms of services alignment.||No budget contributions. EU could demand ‘voluntary’ contributions to certain programmes in return for closer arrangement than Canada|
Disruption to imports and exports / the impact of tariffsBefore the completion of Brexit and the final extrication of the UK from the EU, there will be a transition phase, currently set to 21 months, with the potential for a ‘Temporary Customs Arrangement’ even then. The timings put on the length of transition are potentially moveable, depending on the final deal including what financial contribution the UK agrees to make at the end of it all.
This transitional stage, which could last well beyond 2020, creates all sorts of questions particularly in the food sector, where exports form a critical part of the overall economic value of the UK’s food supply chain: What are the customs implications facing fresh produce importers? How quickly might we see any change in tariffs? And how quickly might these be passed on to the consumer?
This includes how to apply tariffs on goods headed into or out of the EU and, whichever way the issue is resolved, whether the UK can expect to have frictionless access to the single market. Another issue is whether tariffs will be uniform or if there will be sectoral variations applied.
Pound uncertainty may persistWhat does this uncertainty mean in the short term for sterling and is there any medium-term stability that can be gained while more long term planning (beyond 2022) takes place?
While there is already a large Brexit premium priced into the market, the pound remains at risk to either side depending on the outcome.
In the short term, any kind of deal that the UK agrees with the EU will be seen by the market as a positive outcome. In particular, a relief rally on the avoidance of a ‘no deal’ can be expected. But it’s difficult to imagine a sustained rally in the pound as long as questions persist around details of the agreement.
To reach a deal, compromises will have to be made on both sides, and the problem with compromise is that you can end up with a deal that neither side actually wanted.
In summary, an agreement with the EU on any kind of Brexit deal will at least initially see sterling tick higher. If subsequently it seems like a bad deal, the pound could well partially retrace those gains. There will likely then follow 21 months of relative stability as the details are ironed out. But the pound’s longer term direction will likely also be determined over the course of this period as the knock on effects of the deal become reality.