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UK businesses are again raising concerns over the lack of progress in Brexit negotiations – but even if a free trade agreement (FTA) is agreed within the next six months, the government faces crucial questions over how it would be implemented in practice.

A fourth round of talks concluded last week with “some progress, but not much”, according to the EU’s chief negotiator, Michel Barnier.

In a speech in Brussels on June 10, Barnier said his team is “faced with the refusal of British negotiators to seriously engage with us” in several areas, including arrangements over fishing, judicial co-operation and a level playing field between the two respective markets.

As things stand, the UK ceased to be a member state on January 31 this year and is now in a transition period until the end of 2020. If, at that point, no deal has been agreed, the UK will revert to trading on World Trade Organization (WTO) terms.

Last year’s withdrawal agreement states that the transition period can be extended – but only if both sides agree to do so before the end of June.

Barnier says the EU has “always been open to the possibility of extension, one or two years, provided for in the withdrawal agreement. Given the current situation, our door remains open.”

But so far, the UK Prime Minister’s office has been adamant that no extension will be sought and MPs say that will be emphasised in a Brexit joint committee meeting on June 12.

For the Confederation of British Industry (CBI), an influential industry association representing nearly 200,000 UK businesses, the prospect of reverting to WTO terms from January 1 next year is a matter of life or death for many firms – particularly given the impact of the Covid-19 pandemic on the country’s economy.

“Many businesses are fighting to survive as the impact of Covid-19 unfolds,” says Carolyn Fairbairn, director general of the CBI.

“A recovery plan that reaches all parts of the UK is essential. Every opportunity for growth must be seized, particularly to support young people and kickstart demand. A good deal with the EU would be a foundation stone of renewal.”

Fairbairn’s comments follow warnings earlier this week from CBI deputy director general, Josh Hardie, that ending the transition period without a deal would be “deeply damaging” to UK businesses.

“Progress is worryingly slow, causing deep concern to firms when resilience has rarely been more fragile,” he says. “The stark reality is that most businesses are understandably unprepared for a dramatic change in trading relations with our biggest partner in just six months’ time.”

 

FTA not cure-all for business community

However, simply agreeing an FTA within the next six months does not necessarily overcome those concerns.

Speaking before a UK parliamentary inquiry on June 10, experts pointed out that putting the new arrangements into practice immediately from the start of 2021 would still cause a shock for firms involved in international trade.

Sam Lowe, a research fellow at the Centre for European Reform (CER) think tank, says that even if a deal is agreed – which remains a possibility – there remains “a really big problem on the implementation side”.

Lowe told the inquiry that even if an agreement is reached, moving from the “high alignment relationship which exists now, to this future relationship overnight, is going to look on the ground as if we’ve left without one”.

“That’s not something either party would necessarily want if they’ve just spent so much political capital on getting something signed.”

Catherine Barnard, professor of European Union and labour law at Trinity College, Cambridge University, told the same hearing that the trade agreement reached could, theoretically, contain a transition period of its own, so that any new barriers to trade can be phased in gradually.

“Lots of trade agreements have adaptation periods, transition periods, put on the front of them,” she said, suggesting in this case a one-year process of implementation could help firms “adapt to the new circumstances”.

CER’s Lowe added that a temporary extension of single market membership could be possible – at least for goods – though that would be “much more difficult than just simply saying ‘can we extend the transition period now’, to which the EU would say ‘yes’”.

 

Exporters taking “pre-emptive action”

There are signs UK firms are already adapting to a world in which trade with the EU is more difficult. A recent survey suggests more than half of UK businesses are considering exporting goods and services into new markets, due to a combination of Brexit and the Covid-19 pandemic.

Significantly, the new study of 26,000 UK firms carried out by the University of Aston has shown many are already actively switching exports away from EU markets and towards other developed economies.

Researchers revealed on June 1 that micro businesses had switched nearly half of their new export growth by value from EU to non-EU markets since the UK voted to leave in 2016. The figure for small businesses was 19%.

“The value of this trade was £10.45bn per year,” the university says.

“‘Diverted’ exports went mainly to the BRICS (Brazil, Russia, India, China, South Africa) and Commonwealth countries such as Australia, New Zealand and parts of Sub-Saharan Africa, and to a lesser extent to rich OECD countries including the US, Japan and South Korea.

“Industries particularly exposed to potential future tariffs, including food and drink, chemicals, textiles and transport manufacturing, saw the biggest shift, indicating that firms most worried about the current transition period ending without a trade deal were taking pre-emptive action.”

Jun Du, professor of economics at Aston Business School, says UK firms “seem to be defying conventional theories of trade gravity”, whereby most companies trade with markets that are geographically close.