The pro and cons of extending the Brexit transition

It’s been impossible to ignore the calls for the UK government to announce that it will be seeking an extension to the Brexit transition period (or at least to make clear that it’s still keeping its options open) as a result of the coronavirus crisis. Here I review the arguments on both sides – before coming down in favour of sticking to the current timetable.

The background

The UK has, of course, already left the EU. But it remains a member of the single market and customs union, and is still bound by EU rules, during a ‘transition period’ which is due to end on 31st December. This period is meant to provide time for the two sides to negotiate a new long-term relationship, covering issues such as trade and security cooperation, and to make the necessary preparations to implement the new arrangements.

The Withdrawal Agreement (WA) allows the UK and the EU to extend the transition period by up to two years, as long as the length of any extension is agreed before 1st July. However, the UK has passed domestic legislation which prevents ministers from seeking an extension.

This could be overturned with a short bill in the UK parliament. But, for now, the default position is that the UK will finally be leaving the economic institutions and jurisdiction of the EU at the end of this year, either with a new long-term agreement in place, or with ‘no deal’.

In this version of ‘no deal’, the rest of the WA would still apply, including the provisions on citizens’ rights, the financial settlement (aka ‘divorce bill’), and the protocol on trade in goods between Northern Ireland and the EU (though in practice the UK might have a little more freedom on how to interpret this). But as far as the rest of the UK is concerned, trade would be governed by WTO rules, making this a relatively clean break.

The case for an extension

The end-2020 timetable was already challenging. Even if the talks are completed in good time, it may take much longer to implement any new arrangements, including new borders, immigration policies, and regulators. And if the UK leaves without a Free Trade Agreement (FTA), there will be additional trade barriers to consider too. Given these challenges, many believe that it is simply too ambitious to stick with this timetable and deal with coronavirus at the same time.

For example, Joe Owen (writing for the Institute for Government) has argued that the government will need to accept that it’s current Brexit timetable is no longer viable, just as it has already postponed the COP26 UN climate summit, the strategic defence and foreign policy review, and a comprehensive spending review.

Matt Bevington (The UK in a Changing Europe) has emphasised that UK and EU negotiators are unable to meet face-to-face, their governments are busy tackling Covid-19, and businesses are having to concentrate on surviving the current crisis rather than preparing for whatever might come next.

Dmitry Grozoubinski and David Henig have made similar points.

An extension would therefore allow more time for the negotiations to be completed properly and for all parties to prepare. It would mean that any costs of completing Brexit could be delayed until the economy is in better shape. In the meantime, one source of business uncertainty will at least have been taken away.

What’s more, the disruption caused by coronavirus could make it harder to reap the benefits of Brexit. As Joe Owen sees it, ‘there will be no big trade deals negotiated while the world’s governments are similarly distracted by the pandemic. There is little immigration to control when travel is suspended. Regulatory freedom makes little difference to an economy in deep freeze’.

Sam Lowe (Centre for European Reform) has also concluded that the UK should request a transition extension as a matter of urgency. In his view, any additional contributions to the EU budget would be a small price to pay to maintain free trade with the UK’s biggest partner for a little longer. In the meantime, there is little evidence that EU rules have tied the UK’s hands in dealing with the coronavirus crisis.

Others have put the case rather more brutally.

Chris Grey has suggested that a failure to extend would be ‘beyond all reason’, noting that there may be a tendency to focus too much on the trade negotiations themselves, while downplaying the challenges of business preparations (especially among SMEs) and the (re-)regulatory work that still has to be done.

Ian Dunt has argued that refusing to extend the transition period is ‘not just obscene. It is criminally irresponsible’.

The case against an extension

First, opponents of an extension argue that its ridiculous to claim that the current hiatus in face-to-face meetings, or the fact that some people have occasionally had to drop out for a couple of weeks, means that it is now impossible to complete the negotiations on time.

Other organisations have somehow been able to find ways to continue working, often using ‘new’ technologies which are already familiar to the average teenager. Even the UK and EU parliaments are now up and running again, and the EU has been able to make other big decisions during the crisis.

A more serious question is whether the civil service has the capacity to tackle coronavirus and the next phase of Brexit simultaneously. Some mandarins are reported to have briefed Ministers that they can’t do both. But it’s still hard to believe that we don’t have enough ministers and civil servants to do more than one thing at a time – or that we cannot hire more specialists if required. People’s views on this point also seem to depend on who they talk to: other sources are more optimistic.

There is good reasons too for wanting to stick to the deadline. Supporters of an extension often argue that the end-2020 deadline is ‘arbitrary’ and, as such, we shouldn’t worry about pushing it back. This is misleading.

For a start, 31st December isn’t an ‘arbitrary’ date. It marks the end of the EU’s current multiannual financial framework (MFF), which is the budget outline for 2014 to 2020. Extending the transition period is likely to mean that the UK would be expected to contribute to at least part of the new seven-year budget for 2021 to 2027 as well.

What’s more, any deadline – even an ‘arbitrary’ one – is crucial to focus minds and ensure there is some sense of urgency. Or as John Longworth has put it, ‘business will have had four and a half years to prepare and a lockdown in which to think about it. Any additional small disruption will be as nothing to that created by the “Coronavirus Crisis” and a new world awaits.’ Many people just want to get on with it.

Consistent with this, David Frost (Britain’s chief Brexit negotiator) has tweeted four reasons why it is not in the UK’s interest to extend: it would ‘simply prolong negotiations, create even more uncertainty, leave us liable to pay more to the EU in future, and keep us bound by evolving EU laws at a time when we need to control our own affairs’.

These points are, if anything, strengthened rather than weakened by the coronavirus crisis. For example, many businesses will now be rebuilding supply chains that have been disrupted by Covid-19 and already incurring costs in doing so (a point made by Wolfgang Munchau). The sooner they know what the new long-term arrangements are, the better, to avoid having to rebuild them twice. The slump in economic activity might make it easier to implement these new arrangements too, because reduced trade flows mean there will be less pressure on borders.

The potential liabilities to the EU could now also be greater than otherwise, because of the additional financial demands that the coronavirus crisis has placed on the EU budget. (Professor David Paton is one of many to raise this point.) This risk could be minimised by fixing the amount of any additional budget contributions in advance, but this would still have to be negotiated and agreed. It would also be important to limit other potential liabilities, including those that the UK might have via institutions such as the EIB.

What’s more, it’s not as if delaying even further would increase the chances of getting a better deal. Indeed, as Jon Moynihan and Barney Reynolds have argued, the coronavirus crisis has strengthened the UK’s hand in some areas, notably financial services.

The coronavirus crisis has also underlined the value of independent economic policies. To be fair, the EU has been willing to say that the rescue packages adopted by individual member countries are consistent with state aid rules, at least in the current circumstances and under certain conditions. But these rules and regulations, and others, remain in place. If the transition period is extended, the UK would have to continue to rely on the EU’s willingness to be flexible, and would have no say on the development of these rules in the meantime.

In addition, as Shanker Singham has argued, any extension would put a hold on the implementation of an independent trade policy, including new deals with the US, Australia, New Zealand, Japan and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) countries. I would add that this isn’t just about doing deals: as long as the UK is stuck in limbo it would not be possible to reduce tariff or non-tariff barriers unilaterally either.

Finally, it’s still possible to show some flexibility in response to coronavirus without extending the transition period. For example, David Campbell Bannerman has suggested postponing any major summit meetings until September and using the summer to finalise the FTA and other agreements.

The UK could also use these exceptional circumstances to revive the idea of an interim agreement under WTO Article XXIV until a long-term deal can be completed (although there are still some significant doubts over this, not least whether a deal that already has zero tariffs would count as an ‘interim’ agreement for these purposes).

My view

The case for an extension was neatly summarised in a Sunday Times editorial; ‘if we are lucky, and only if we are lucky, the economy will be crawling out of the coronavirus slump by the end of the year. Businesses, having devoted all their efforts to surviving the lockdown, have put Brexit preparations on the backburner. To inflict on them an abrupt change in Britain’s relationship with the EU, or a no-deal Brexit, would be the height of irresponsibility.’

I think this narrative is wrong, for three reasons.

First, it is wrong on the timing. If the change in the UK’s relationship were taking place this weekend, at the height of the coronavirus crisis, it would make more sense to announce a delay now. But a lot could change between now and the current deadline for agreeing an extension (on 1st July), let alone by the end of the year.

Second, this narrative is wrong on the relative magnitudes. If we take the OBR’s April coronavirus reference scenario as a starting point, GDP might be about to fall by as much as 35% in the second quarter of this year, before rebounding by 27% in the third and then 21% in fourth quarters.

As it happens, I think the initial decline is likely to be much smaller (because the lockdown will not last much longer), and the recovery slower (it will probably take much longer than half a year to get back to ‘normal’). But the key point is that any economic impacts from a change in our relationship with the EU are likely to be trivial compared to the swings in GDP due to coronavirus. These swings could easily see a contraction of more than 10% in 2020, followed by growth of more than 10% in 2021.

Admittedly, Chris Grey has compared this argument to saying that just because you’re being struck by lightning, you might as well stick your finger in the mains for good measure as well. But I prefer a different analogy. Suppose you know you’ll eventually have to eat a small frog. Why not pop it in your mouth at the same time as swallowing a much larger one?

Of course, I don’t want to make light of the challenges to some individual businesses and households. This could still be another large frog for those most exposed to any costs of Brexit proper. There is now an even stronger case for providing them with some additional financial support to help adapt to whatever the new trading arrangements might be.

But this brings me to the third and perhaps most important flaw in the Sunday Times’ narrative: it ignores the many ways in which the coronavirus crisis could both reduce some of the costs and increase some of the benefits of proceeding with the next stage of Brexit as planned, relative to a further delay. Or put another way, the small frog might now be much smaller, and somewhat tastier.

In summary, I can see good economic arguments on both sides. I also think it’s unhelpful to dismiss those who take an opposite view as either diehard Remainiacs, or dogmatic Brexiteers. However, I guess few will be surprised to read that I’m still against an extension of the transition period.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s