Brexit Update 24th January 2020

By February 7, 2020 Brexit Updates

Top 3 developments

  • The Chancellor Sajid Javid told the Financial Times that there would “not be alignment” with the EU after Brexit and that companies would have to “adjust”.
  • Jess Phillips has pulled out of the Labour leadership contest, leaving only four candidates remaining.
  • A post-Brexit trade deal with the US has been threatened by the UK Government’s decision to allow Huawei access to the UK market to deliver 5G.

UK Update

Getting Brexit Done

The Withdrawal Agreement Bill received royal assent on Thursday, after being approved by the House of Commons and House of Lords. The strong Conservative majority from the December election has allowed Boris Johnson to deliver on his promise to ‘get Brexit done’. Urusla von der Leyen and Charles Michel, the leaders of the European Commission and Council, have formally signed the Withdrawal Agreement, this morning, ahead of the Brexit departure date on January 31st. The agreement will then be sent to Prime Minister, Boris Johnson, to be signed this afternoon.

Whilst the UK will remain part of the single market and customs union until the end of 2020, the UK will formally leave all of the EU’s decision-making bodies on midnight on January 31st 2020.

However, Brexit is not yet fully ‘done’ as the Withdrawal Agreement does not contain details of the future relationship between the EU and the UK. Discussions on this subject will formally begin in March, with Johnson having already, ambitiously, promised to deliver an agreement by the end of the transition period in December 2020.

Another one bites the dust…

As outlined last week, the remaining candidates in the Labour leadership election must now secure 5% of local parties or three affiliate organisations – including two unions – by the 14th February.

Emily Thornberry and Jess Philips have so far been unable to receive such support from affiliate organisations. This has resulted in Jess Phillips pulling out of the leadership race, despite securing 23 nominations from MPs, leaving just four candidates in the running. Phillips stated that “the Labour party will need to select a candidate who can unite all parts of our movement…And I have to be honest with myself…At this time, that person is not me.” Despite Phillips formally backing Lisa Nandy in the leadership race, Sir Keir Starmer is expected to pick up a lot of Phillips’ supporters as the contest moves onto the next round.

The remaining candidates, Thornberry in particular, will be spending the next three weeks campaigning to ensure support of Labour CLPs and affiliate organisations to ensure that they can move to the postal ballot round. Sir Keir Starmer already has enough support to progress through to the postal ballot round, receiving backing from Unision, Usdaw and Socialist Environment and Resources Association. Rebecca Long-Bailey and Lisa Nandy have so far only received support from one union each. Long-Bailey is being supported by the Bakers, Food & Allied Workers Union and Nandy is being backed by the National Union of Mineworkers. Emily Thornberry has yet to receive any support from affiliates and it is expected that she will pull out of the leadership race before February 14th, leaving three candidates to go to the postal ballot.

Although there are numerous calls for the new leader of the Labour party to be less London-centric, and a woman, Keir Starmer seems to be gaining the most support and is the current frontrunner. In an inexperienced field, Starmer’s relative prominence as Shadow Brexit Secretary appears to be a major asset. Opposition to Rebecca Long-Bailey, with her opponents dubbing her the ‘continuity Corbyn’ candidate, has also acted in Starmer’s favour during this campaign, enabling him to position himself as a more centrist candidate. Long-Bailey has rejected the claim that she is a copy of Corbyn, stating that she is her own person and not a puppet being controlled by men in the background.

It is still unclear who will be victorious on 4th April, but it is clear that it is slowly becoming a two-horse race between Sir Keir Starmer and Rebecca Long-Bailey.

You win some and you Leadsom

The British Government is likely to give the green light to Chinese tech company Huawei to help build the UK’s 5G network, following Theresa May’s provisional decision to allow Huawei access last year. The Prime Minister and Business Secretary, Andrea Leadsom, believe that Huawei offer the best way forward for quickly delivering 5G to the UK market given the lack of other suitable alternatives.

However, the UK has faced pressure from multiple western allies to ban the Chinese technology giant. Both the US and Australia have already banned the company from working on their 5G projects. The most significant pressure is coming from the US who have suggested that their appetite for a post-Brexit trade deal would be ‘diminished’ if the UK Government gives the go ahead to Huawei. Mike Gallagher, a member of the US House of Representatives, who sits on the US House Committee on Homeland Security reported that “if the UK stands firm in its values and rejects Huawei surveillance, there’s no reason why the US and UK couldn’t quickly reach a trade agreement that aligns both our principles and our economies”.

The fear over Huawei is based on security concerns since the company is legally obliged to comply with Chinese state security agencies. Consequently, Huawei could use their equipment and access to commit espionage on behalf of the Chinese government. US state officials have therefore suggested that the deal between the UK Government and Huawei could also be detrimental to the intelligence-sharing relationship with Britain.

This adds to concerns over UK-US trade negotiations after relations hit a potential stumbling block when Mr Johnson revealed his plans to impose a tax on multinational digital firms, as laid out in the Conservative manifesto. Trump has argued that this tax will also threaten trade deals, however, Sajid Javid has so far stuck to the promise despite France suspending its own plans for a digital tax and recommendations from the OECD to find a global solution to the issue. Given a quick and successful trade deal with the US has been a rallying point behind which Brexit voters have campaigned, Mr Johnson now faces a choice of loyalty between his Vote Leave supporters and his 2019 General Election pledges.

EU Update

Javid doesn’t toe the align line

The Chancellor Sajid Javid caused concern amongst some UK businesses last week when he told the Financial Times that there would “not be alignment” with the EU on regulation once the UK left and that companies would have to “adjust” to differing arrangements. The opposition to his comments quickly mounted, especially from manufacturing sectors such as the car and aerospace industries – which heavily depend on complex supply chains – who warned that this would cost “billions” and damage “UK manufacturing and consumer choice.”

The Chancellor however doubled down upon his remarks, saying that firms have known since 2016 that the UK is leaving the EU and would have to adjust to new rules, and insisted that there would be divergence. Brussels is keen for the UK to maintain alignment because they do not want the UK to deviate from standards or increase state financial support to make British industry more competitive than companies based in the EU-27. This is why European Commission chiefs are seeking to tie Britain into level playing field guarantees on state aid, tax, social standards and the environment as part of a post-Brexit trade deal.

The EU have highlighted that they would not sign up to any trade deal that did not have a level-playing field because it would create unfair competition. To this point, Javid did seek to reassure the EU that there would be no wholesale dumping of EU regulations, and that there would be no divergence for the sake of it. But the EU’s position is more accurately one that is seeking to defend its own self-interest, rather than being an arbiter of fairness.

The argument for divergence or alignment is as politically charged as it is economically polarising. But is important to clarify however that even if the UK did unilaterally align itself to EU rules and regulations, there would still be new barriers to trade and border friction. Regulatory alignment does not ensure frictionless trade. Regardless of alignment or divergence, once the UK has left the single market, UK goods will face new regulatory controls at the EU border. For example, all food exports will need additional paperwork and will be subject to physical inspections, because the UK is outside of the European food hygiene regime. Another example is that even if firms align with EU rules, they will still need an EU-established entity to bear the legal responsibility for ensuring the products comply with EU rules.

The point being that even with full alignment, there will still be disruption to value chains and increased bureaucracy, so this might offer a little explanation as to why the Chancellor is looking to diverge in some areas; because the opportunities of determining the rules and regulations for sectors such as financial services, technology and medicine are greater than the barriers that divergence will create for other sectors. Frictionless trade is over, and the Chancellor will have to decide just how much friction the UK is willing to tolerate.

Upcoming Key Dates

  • 31st January: Departure date from the European Union.
  • March: Future relationship talks begin.
  • 4th April: Result of the Labour Leadership Contest.
  • 31st December: End of the transition period.

 

 

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