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The UK government is resisting calls to extend the Brexit transition period beyond the end of this year, despite concerns that Covid-19 has stalled negotiations and piled pressure on businesses.

Trade talks between Britain and the EU have already been hampered by the outbreak of the virus. Though the first round of negotiations took place as planned in early March, two subsequent rounds were postponed after widespread lockdown measures were introduced across the continent.

At the same time, chief negotiators Michel Barnier and David Frost tested positive for Covid-19 and entered self-isolation respectively, while UK Prime Minister Boris Johnson spent a week in hospital – including several days in intensive care – after contracting the virus.

Though virtual talks between Barnier and Frost resume today, the aim is only to set new dates for further discussions. Any potential extension to the transition period is not on the agenda, and a spokesperson for the UK Prime Minister’s office has confirmed to GTR that its position remains unchanged: agree a free trade deal by the end of the year, or revert to World Trade Organisation (WTO) rules and tariffs from January 1.

The costs and complexity caused by leaving without a deal make that an increasingly risky strategy. Fabian Zuleeg, chief executive of Brussels-based think tank the European Policy Centre, believes reaching an agreement within that timeframe “is completely unrealistic now”.

“It was already a challenge beforehand, but now it looks impossible to get to a deal by the end of the year,” he said during a recent webinar hosted by the Institute for Government. “Unless one or the other side in these negotiations is willing to concede in quite a major way then we are far from having an agreement by the end of the year.”

 

Businesses under pressure

Preparing for a no-deal Brexit has likely slipped down the agenda for most UK firms since the outbreak of coronavirus, as signs emerge that the pandemic could have a devastating effect on the global economy.

The WTO are warning that the volume of goods traded around the world this year is expected to drop by as much as 32% compared to 2019, drawing parallels with the 2008 global financial crisis and the Great Depression of the 1930s.

In the UK’s case, forecasts published this week by the government’s Office for Budget Responsibility float the possibility of a 35% drop in GDP in the second quarter of this year, along with a hike in public sector borrowing that would account for the largest single-year deficit since the Second World War.

“If you are in a major economic crisis, regardless of what your beliefs might be about the nature of the long-term relationship, to add another economic shock to that mix at some point, either during this year or at the end of this year, just seems reckless,” Zuleeg says.

That view is relatively widespread on the continent. The European People’s Party – the largest group of MEPs within the European Parliament – issued a statement in late March arguing that the global pandemic “will inevitably add to the disruption, deal or no deal”.

“I can only hope that common sense and substance will prevail over ideology. An extension of the transition period is the only responsible thing to do,” says Christophe Hansen, a Luxembourg MEP and member of the parliament’s Committee on International Trade.

Even if a deal was agreed in time, that would still pose major questions for firms involved in trade between the UK and EU.

Sam Lowe, a senior research fellow at the Centre for European Reform (CER) think tank and a committee member of the UK Trade Forum, pointed out in January that even if a free trade deal was agreed in time, that would still likely result in the immediate introduction of new barriers to trade.

Lowe tells GTR this week that is still the case “but now with business already on its knees”.

 

Legal uncertainty

The Withdrawal Agreement struck between the UK and EU allows for an extension of the transition period for up to two years, but only if requested before July 1. According to Catherine Barnard, a Cambridge University professor who specialises in European Union law, that creates several complications.

First, Barnard points out that a 2019 Conservative manifesto promise not to seek an extension “was more or less enshrined in law” by Brexit legislation passed by the UK government in January. It is possible that could be overturned in parliament – but parliament is currently not sitting due to the UK’s lockdown measures.

Second, even if an extension was proposed and agreed by the end of June, the Withdrawal Agreement only allows for that to happen once.

“Let’s say for argument’s sake there is a request for a six-month extension that proves not to be long enough due to the legacy effects of coronavirus, or because there is a second or third wave,” she said during the same webinar. “Then what happens if even more time is required?”

Barnard adds that there are “complexities” if an extension is sought after the July cut off, including the possibility that a delay would have to be ratified by parliament in every EU member state. If the continent is still attempting to contain the virus, or faces a second outbreak, that could be difficult to achieve in practice.

That said, the same obstacle may present itself even if a deal is agreed. “The more ambitious the trade agreement is, the more likely it is to be what’s called a mixed agreement,” she says. “That means it’s got to be agreed by the EU – probably unanimously – and also by the national and regional parliaments.”

Even if normal service is resumed within the coming months, that means a free trade agreement may need to be finalised well before the end of the year to ensure it has the necessary parliamentary approvals.