Brexit uncertainty for businesses still looms large, warns Nicky Morgan

Tuesday, 27 February 2018 00:01

On 14 December 2017, the Treasury Committee published its report on transitional arrangements for exiting the European Union. The report concluded that an agreement between the UK and EU on transitional arrangements was urgent. The Government has sent its response to the report to the Committee, which has been published today. A Government response to one of the Committee’s findings relating to firms’ contingency plans stated: ‘As with any...Request free trial

The Government has sent its response to the report to the Committee, which has been published today. A Government response to one of the Committee’s findings relating to firms’ contingency plans stated:

‘As with any regulatory change businesses are advised to understand how these may affect their business and explore potential impacts.’

Commenting on the report, Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, said:

“The Committee is pleased that the overall framework for transitional arrangements recommended in this report has largely been accepted by the Government. Businesses are now crying out for the certainty of having a transition period secured.

“But, as the draft texts published by both sides show, transition is not yet a done deal. It is vital that remaining disagreements over the duration and governance of the transition period are resolved quickly. A failure to reach agreement in the March European Council would be economically damaging, and dramatically diminish the value of whatever is eventually negotiated.

“There is less pragmatism on display from the Government when it comes to the long-term relationship between the UK and the EU. Key questions remain unanswered and details are in short supply. “Canada plus plus plus” is not a basis for long-term decision making.

“In this environment of pervasive uncertainty, it is extraordinary that the Government – in its response to the Committee’s Report – is advising businesses to “understand” and “explore potential impacts” of “regulatory change” arising from Brexit. Firms can hardly begin to understand change until they know what it consists of. Brexit uncertainty for businesses still looms large.

“And in the absence of clarity, they will have no choice but to prepare for the one eventuality that they can understand: the worst-case scenario of a trade relationship based on WTO commitments. As the Committee concluded, adaptation to ‘WTO rules’ could involve a ‘relocation of jobs and economic activity from the UK to the rest of the EU’.”

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Notes to Editors

The Committee’s report on transitional arrangements is here, the summary of which is below:

The Committee supports a time-limited ‘standstill’ transition arrangement after the Article 50 negotiations conclude, and welcomes the broad alignment between the UK and EU27 on this issue.

It agrees with the Chancellor that transitional arrangements are “a wasting asset”. They should be sufficiently simple to negotiate within a matter of weeks, to provide early certainty from 30 March 2019, and to maximise the time available for subsequent discussion on the future framework for trade.

It is highly likely that for certain sectors, including financial services, the ‘standstill’ transition period will have to be followed by an adaption period, once the terms of the future relationship become known with clarity.

The Committee strongly supports the Government’s objective of maintaining “the freest and most frictionless trade possible”, but considers it “very challenging” for the terms of the ‘bespoke’ free trade agreement envisaged by the Government to be fully agreed within the Article 50 process.

Taking this into account, there are two broad possible outcomes for UK-EU trade on 30 March 2019: a reversion to a trade relationship based on WTO commitments (so-called “no deal”), or the preservation, on a temporary basis, of the status quo, through a standstill transition.

The difference between these two outcomes is dramatic, and it is overwhelmingly in the economic interests of both the UK and the EU to reach an agreement on transition.

The Government appears to consider it inevitable that arrangements would be reached in the dying days of the Article 50 process to mitigate the most disruptive consequences of a ‘no deal’ scenario. But the history of international trade diplomacy is replete with examples of short-sighted political considerations prevailing over economic self-interest.

Firms are starting to take action to prepare for a ‘no deal’ scenario, and this will gather momentum over time. Reaching an agreement on transition is therefore an urgent priority. If it expedites the negotiations, the Government should not rule out a transition arrangement that encompasses EU rules beyond those pertaining to the Single Market and Customs Union, and retains, on a temporary basis, the principles of direct effect and supremacy of EU law. Visible disagreement between the parties on these points of principle would lead to a loss of confidence among businesses, and diminish the value of whatever is eventually negotiated.

The Committee heard two reasonable ways of giving effect to a ‘standstill’ transition:
- By appending relevant Treaty provisions to the Withdrawal Agreement
- By specifying in the Withdrawal Agreement which Treaty provisions will continue to apply

Transitional arrangements would exist to allow preparation for the UK’s future outside the EU. Nothing in the Withdrawal Agreement should prevent the UK from starting the process of establishing independent trade relationships during the transition period.