Three possible scenarios after the Brexit transition period expires

12/10/20

Unclear trade relationship

The consequences of Brexit will soon become known. The transition phase during which the United Kingdom (UK) has continued to be treated as a member of the European Union (EU) will end on 31 December 2020. It is still not entirely clear what the trade relationship will look like after that; however, it is certain that the UK will become a third country in the eyes of the EU. A hard border between the UK and the EU will therefore be a fact from 1 January 2021. There will be significant additional costs due to customs formalities, and extra time to get goods from A to B, as a result. Duties and quota may come into effect, depending on the outcome of the negotiations between the UK and the EU. Prepare yourself based on the following three scenarios.

Scenario 1: trade agreement

Although the negotiations on a trade agreement between the EU and UK are extremely difficult and seem to be deadlocked now and then, there is still the possibility that the UK and the EU could reach a last minute trade agreement. We do however note that this seems unlikely, given the fundamental differences of opinion in the field of fisheries, the creation of a level playing field (among others comparable environmental rules, working conditions and state aid rules) and the handling of disputes between the UK and the EU. Furthermore, the Internal Market bill recently launched by the UK government undermines the Withdrawal Agreement in some areas and has added to the growing distrust for the UK in Brussels.

As all EU member states and the UK will have to ratify any trade agreement, there will need to be an agreement by the end of October, beginning of November at the very latest in order for a trade agreement to be possible. A trade agreement is likely to ensure that there will be no customs duties or quota on the flow of goods between the EU and the UK. However, a trade agreement will still mean that the UK becomes a third country to the EU, which will mean other sorts of customs formalities. Therefore, even with the most favourable outcome, businesses will need to prepare for significant changes compared to the current situation.

Scenario 2: No trade agreement

A second scenario could be that both parties conclude that a trade agreement simply does not work at this moment in time. After all, there are fundamental differences of opinion and the UK does not want to commit itself to certain minimum criteria which would put limits on future trade agreements that the UK may want to conclude with other countries. Think of the free trade treaty with the United States that the Brexiteers covet. If there is no free trade agreement between the EU and the UK, this means that from 1 January 2021, in addition to all customs formalities, customs duties and quota will also apply. This will further hamper trade between the EU and the UK.

The EU has already indicated that 1 January 2021 is a hard date; there will be no new transitional law to ease the effects of a potential ‘no trade agreement’ situation. Hopefully, in this scenario, both parties will be able to properly implement the Withdrawal Agreement and deal with matters such as AVG/GDPR as well as personnel aspects.

Scenario 3: hard no deal

A third scenario could be a hard no deal in which the UK and the EU do not succeed to conclude anything and relations between the two become even tougher. We already see this happening due to the UK law which partly sets aside the Withdrawal Agreement and the legal procedures initiated by the EU against the UK. A hard no deal would be the worst possible scenario in which good cooperation in many areas would become much more difficult, even in areas that have been largely regulated in the Withdrawal Agreement, such as, for example, the movement of goods in relation to (Northern) Ireland.

The EU has already indicated that 1 January 2021 is a hard date; there will be no new transitional law to ease the effects of a potential ‘no trade agreement’ situation.

The UK, a third country anyway

Despite all the uncertainties, it is certain that the UK will become a third country to the EU after 31 December 2020 and that customs formalities, among other things, will apply. We are increasingly seeing UK companies setting up a branch in the Netherlands and vice versa. In order to prepare for this new situation, they are also transferring logistic activities to the Netherlands. The bottom line is that it may be necessary to set up a local entity in order to comply with certain laws and regulations.

For some companies it is also simply commercially desirable to trade through a UK or EU based company. In addition, several companies are adapting their supply chains to the new situation where the UK is no longer part of the internal market.These are often far reaching processes that involve many parties and require adaptation of all sorts of IT and other systems. We encourage you to make good use of the limited time remaining until the end of this year and prepare for the new post-Brexit reality.