For businesses there is little difference between preparing to exit the transition period with an EU-UK free trade agreement in place and preparing to exit without one.
But there are still good reasons for Boris Johnson and the European leaders to spend political capital on concluding a trade deal. Exiting the transition period at the end of the year with an EU-UK free trade agreement in place is still preferable to failing to reach an agreement.
1. Duty-free and quota-free trade
An EU-UK free trade agreement will still result in new non-tariff, regulatory, barriers to trade. But the fact that it could remove all tariffs and quotas (so long as the products meet rules of origin requirements) is not to be sniffed at. And while an agreement will not come close to replicating the near-frictionless trade the UK enjoyed as an EU member, it could take the edge off some of the new regulatory hurdles that will emerge. For example, it could reduce the rate of physical inspection at the border on products of animal origin from up to 50 percent of consignments to near zero.
A trade deal could also create a framework for the continued recognition of professional qualifications in both the EU and UK and make it easier for people to fulfil short-term services contracts in both territories.
2. Supplementary benefits
The EU is yet to decide whether to allow businesses to conduct some EU-focused financial services out of the UK by granting the UK’s regulatory regime ‘equivalence’. It also needs to decide whether to recognise the UK’s data protection regime as ‘adequate’, and therefore whether to allow companies to continue storing the personal data of EU citizens on servers located in the UK.
“Any agreement that the EU and UK negotiate in time for the end of the year will not be the final word on the relationship. Inevitably it will evolve over time”
3. Customs co-operation
It also remains possible that a free trade agreement could include a further implementation period. This could, for example, extend elements of the transition period such as the UK’s membership of the EU customs union and single market for goods for a further period of time and would not necessarily require the approval of Member-State parliaments. While there are few senior voices in either the EU or UK advocating for such an approach, the fully-fledged rupture due on 1 January remains a political choice, not a technical or legal inevitability.
4. Northern Ireland Protocol
The Withdrawal Agreement’s Northern Ireland Protocol is legally binding on both parties whether or not there is an agreement between the EU and UK on the future relationship. But in practice the protocol’s successful implementation requires the EU and UK to work together.
An EU-UK free trade agreement could also minimise the need for strict controls on a number of goods entering Northern Ireland from the rest of the UK. The EU is concerned that foreign goods subject to lower UK tariffs will enter the EU via Northern Ireland either directly, or incorporated as inputs into other products, giving these goods an unfair competitive advantage over EU-produced alternatives. With a free trade agreement, the actual risk of unfair competition is removed so long as the UK also matches the EU tariff on imports from the rest of the world. Unfortunately, the UK has needlessly created a problem for itself here by marginally tweaking many of its external tariffs to be slightly lower than the EU’s, meaning the EU would need to agree to tolerate minor differences.
“Even though the end of the transition period will bring big changes and disruption for many people and companies no matter what, a deal is still worth fighting for”
5. A platform on which to build in future
Any agreement that the EU and UK negotiate in time for the end of the year will not be the final word on the relationship. Inevitably it will evolve over time, and the existence of a free trade agreement, however basic, provides a foundation on which to build. Some Brexit supporters do not want a deal between the EU and UK, and instead prioritise a trade agreement with the US, precisely because they believe it will guard against future UK re-integration with the EU.
Concluding an EU-UK agreement on the future trading relationship before the end of the year will require compromises from both sides. Ideally the EU and UK would reach a more comprehensive agreement, also covering research, social security co-operation and justice and home affairs (as well as foreign and security policy, which the UK has so far refused to discuss at all). But even if that proves impossible, and even though the end of the transition period will bring big changes and disruption for many people and companies no matter what, a deal is still worth fighting for.