Kenneth Armstrong / Jan 2021
With the end of the ‘transition period’ on 31 December, the new year began with a new Trade and Cooperation Agreement (the ‘TCA’) governing the European Union’s relationship with the United Kingdom. But while the transition period served certain of its political purposes, managing the economic transition is proving more challenging.
Given EU insistence that an agreement on a future relationship could only be negotiated once the UK had exited the EU, a transition period was needed to give both sides time to negotiate the terms of any new partnership. Although capable of being extended by up to one or two years, UK refusal to agree any such extension meant that any new relationship had to be legally in place by the end of 2020. Escaping the transition period and exiting the Customs Union and the Single Market, became the UK’s prime political directive.
However, the transition period was also envisaged as a period of economic adjustment to new ways of trading. Indeed, given that Theresa May’s government initially believed it would be possible to negotiate a future relationship in tandem with settling the terms of withdrawal, the point of an ‘implementation period’ was principally to allow new processes to come onstream and to give businesses time to make the necessary administrative and economic changes. A transition period wasn’t simply to avoid an economic cliff-edge; it was to be a means of smoothing adjustments along a guide path to a future relationship.
Of course, certain parts of the economy were already making changes. The financial services sector in the UK took action early to move elements of their businesses to EU member states where presence in the territory was a regulatory requirement. Pharmaceutical companies adjusted to the transfer of the European Medicines Agency from London to Amsterdam and the loss of the ability of the UK’s own medicines regulator to lead the evaluation process for EU market authorisations. But if these adjustments occurred in light of what was either known or predicted, other changes are occurring as new realities come to light.
Most publicly, the impact of Brexit on food supply chains and the road haulage industry is becoming clearer. Exiting the Customs Union brings complex ‘rules of origin’ into play with significant consequences for goods arriving into UK distribution hubs from the EU only to be exported back to the EU. Having lost their legal identity as EU goods on leaving the Union’s customs territory, such goods do not automatically become UK goods without some element of processing and so do not benefit from tariff-free access to the EU market.
It is not just the UK’s role as a distribution centre that it affected. Positioned between the island of Ireland and Continental Europe, Great Britain has served as a ‘land bridge’ for the movement of goods between Ireland and other EU states within the Customs Union and the Single Market. Even for goods that are simply in transit, any closures of this land bridge – as was experienced in mid-December as a new variant of Covid-19 in the UK resulted in a temporary halt of cross-channel freight movements – or delays resulting from new paperwork – including permits simply to enter Kent – will encourage businesses to look for ways to avoid Great Britain entirely. Stena Line is planning on redeploying a ship originally destined for travel between Northern Ireland and the UK to run a route from Rosslare to Cherbourg. Brittany Ferries is also adding capacity to this route.
Quick fixes in the form of ‘grace periods’ have begun to emerge. During the summer of 2020 the UK announced it would not require summary import declarations for goods coming into the UK from the EU between 1 January and 30 June 2021. However, it is export delays that have proved a significant source of concern, in particular for Scottish exporters of fresh seafood leading the Scottish Food and Drink association to call for a grace period for export certification.
Meanwhile, the implementation of the Northern Ireland Protocol and its application of EU rules has raised problems for the importation of meat products into Northern Ireland. In a unilateral declaration in mid-December, the UK committed to restrict meat product exports to those aimed at end consumers – and sold by supermarkets – in Northern Ireland and labelled as ‘Not for Sale’ outside of Northern Ireland. This will last until 1 July 2021.
It is tempting to see all of these as temporary teething problems and clearly some bumps in the road will smooth out over time. But it’s the actions taken to – literally – avoid the road completely, or the effects on businesses while problems are sorted that will generate longer-term changes. Transition hasn’t ended; it’s just getting started.