By Conor Lambe, Economist at Danske Bank
Political uncertainty has been the overriding theme of this autumn. Divisions within the Cabinet on Brexit were played out in the newspapers and, following the Conservative party conference, there was considerable speculation around whether the Prime Minister would remain in post, or be forced from office. But amidst the turmoil, there was one positive for exporters in Northern Ireland and the rest of the UK.
At her speech in Florence, Theresa May clarified what the UK Government would like to happen come ‘Brexit Day’ on 29th March 2019. The Prime Minister stated that the UK Government wants a Brexit transition period lasting for “around two years”. During this time, it is envisaged that market access for businesses in both the UK and the EU “should continue on current terms”. This suggests that, perhaps not formally but for all intents and purposes, the UK would remain a member of the EU single market and customs union for a number of years after Brexit happens.
For local businesses that export to Europe, this is a welcome step. If a transition period like this can be agreed upon, these companies could continue to benefit from the tariff-free access they currently enjoy to EU markets for a little while longer. It is also very unlikely that they would face any new non-tariff barriers linked to regulatory differences between the UK and EU during this period.
On the surface this seems like a positive step, but there are a couple of warnings that need to be sounded. The first is that, if it is to really benefit businesses, a transition period must be used to fulfil its purpose and not just to push a potential ‘cliff edge’ out to 2021. Making sufficient progress on separation issues and moving onto negotiations around the UK and EU’s future relationship still needs to happen as soon as possible so trade talks can be well underway come 2019. Following that, the transition period should be used to conclude the negotiations and formalise a free trade agreement (FTA).
There would also need to be sufficient time for exporting businesses to adapt their processes so that they are well prepared to operate under the FTA once it comes into effect.
And the transition period should be used to make sure that there are no practical issues once the new arrangements come into force. For example, any technology that may be used at the Northern Ireland border must have been tested and be operating smoothly. And any new customs staff must have been hired and trained.
If these things don’t happen and the transition period only serves to increase the degree of political posturing and to slow the rate of progress made during the negotiations, then rather than provide some clarity for businesses, it will only extend the period of uncertainty. That would not be helpful and it certainly would not make it any easier for businesses to plan for the future.
The second point to note is that the EU negotiators and political leaders have to agree to a transition period for it to happen. There is no doubt that a smooth adjustment to the new terms under which the UK and EU will cooperate would be beneficial for businesses in the UK and Europe. Therefore, it seems likely that an agreement to have such a period will eventually be reached. But we don’t know how quickly that will actually happen.
Theresa May’s speech in Florence confirmed that the Government recognises that companies need some certainty as they begin to plan for the years ahead. A transition period in line with what she set out during that speech would be a good thing for exporting businesses, but it must be used to achieve what it is meant to achieve.
This article was published in the November/December 2017 issue of Ambition