Where next for Brexit?
Brexit will happen in just seven days as the UK looks set to formally leave the EU three-and-a-half years after holding the referendum. We explain what happens next.
Brexit Day: what will happen on 31 January 2020
The UK is due to formally leave the EU at 23:00 (London time) on 31 January 2020, which is being referred to as ‘Brexit Day’. This means the UK will no longer be a part of the EU and won’t hold any voting rights in the bloc.
However, there won’t be any immediate change to everyday life or disruption for businesses because of the transition period that will keep trade between the two as it is until 31 December 2020. This means the UK will still have access to the EU market and customs union during the transition period.
What should investors look out for
This will be a symbolic day more than anything else and simply shifts the discussion from how the pair divorce one another to what their future relationship will be like. Don’t expect too much reaction from the market from the event itself – although any speeches or remarks from either side could still influence the likes of GBP/EUR.
How has the value of the pound changed since Brexit?
Formal negotiations begin: March 2020
Discussions over future trade will already be underway considering there is little time to strike a trade deal, but formal negotiations are not expected to start until early March once EU members have managed to agree what they want to get out of the deal and give the European Commission the mandate it needs to officially open up talks. The current plan is for EU member states to approve the bloc’s negotiating plans at a meeting pencilled in for 25 February 2020.
What should investors look out for?
We should know the official stance of both sides by the start of March. The start of formal negotiations will set the mood for what will be a critical few months. Investors should analyse the overall tone and whether either side has moved their red lines or introduced new ones. One big area of discussion will be whether the UK is willing to stay regulatory aligned with the EU. The bloc has said the UK must stay aligned if it is to strike a wider trade deal while the UK wants to break free of EU rules so it can pursue its own agenda with the rest of the world.
EU summit: June 2020
There should be a UK-EU summit in June 2020, according to the political declaration signed last year, where the pair can reflect on the state of play. Both sides will want discussions to have advanced by this point to install faith that a comprehensive deal can be delivered in time.
Importantly, this is the last month that the UK can ask to extend the length of the transition period. The UK government has been adamant that it will not seek an extension beyond 31 December 2020, despite having the option for it to stretch out as far as the end of 2022. The EU has criticised the UK setting the deadline at the end of the year. The EU says this isn’t long enough to hash out a deal, but the UK says it can because it is already aligned with its neighbour. If the UK doesn’t ask for an extension by the end of June, then the transition period will end when 2020 comes to a close – whether or not the pair have managed to agree a deal or not.
What should investors look out for?
Real progress must be made by this point for a deal to be agreed in time and by this point we will know whether or not the deadline will be set in stone for the end of 2020. If things are not progressing smoothly and the UK still refuses to ask for an extension, then the fears of a no-deal scenario will rise significantly. If talks are advancing, then investors should be able to gauge what will be agreed and what could still be left unresolved by the end of the year.
If, for whatever reason, the UK government steps back and decides to ask for an extension and this is approved by the EU, then expect a positive response from markets. An extension will ultimately prolong the saga, but it provides a more realistic timescale for a trade deal to be agreed and removes the threat of a no deal – at least for a while.
Make or break: 26 November 2020
With the UK determined to have a deal done and dusted by the end of the year, the EU has said any trade deal would have to be agreed by late November if it is to have enough time to put it before all its member states so it can be ratified before 2020 comes to a close. EU members are scheduled to meet in the last week of November and this is considered the last chance to push a new deal through as the next meeting won’t be until mid-December, which won’t give the EU enough time to tie up all the loose ends before the end of the year.
What should investors look out for?
This is crunch time for both sides and expect this to be reflected in the markets. Many will be thoroughly analysing the scope of any deal considering this crucial EU meeting comes less than eight months after formal negotiations started. The EU has so far put on a united front in negotiations and there has been little trouble in gathering consensus and getting things approved by all 27 member states. But getting so many countries to agree to a deal that will have been rushed through could still introduce some problems. If there isn’t a deal approved by the end of this summit, then the no deal looks almost guaranteed – causing significant disruption for businesses and injecting volatility into markets.
Deal or no deal: 31 December 2020
If the transition period hasn’t been extended, then this will be the real ‘Brexit Day’. If the pair have managed to strike a new trade deal in time, then this will replace all existing arrangements. The EU has suggested the UK’s tight deadline means a comprehensive deal won’t be in place and that it will have to prioritise the most important areas before discussing other matters later. This suggests a new deal could be agreed to minimise tariffs on goods and keep them flowing across borders as they do now, but that other crucial areas like services – which account for most of the UK’s trade with the EU – could still be up in the air when we enter 2021.
If they fail to agree on a new relationship at all, then all trade will fall back onto World Trade Organisation (WTO) rules. This would be what is known as a ‘no-deal Brexit’, where there are no arrangements in place to manage goods, services and people moving between the UK and the EU and trade becomes more expensive because of the introduction of tariffs.
What should investors look out for?
What will 2021 have to offer? On one hand, it could mark the start of a new trade relationship between the pair that minimises disruption of existing trade while allowing the UK to pursue new opportunities around the rest of the world. Equipped with whatever investors learn from the November summit, they should begin to prepare for whatever will come at the end of the year by analysing the deal and responding appropriately. For example, if the pair haven’t got a deal covering security or financial services by the November summit then it would be wise to move out of any defence of banking stocks if they want to avoid any short-term volatility.
On the other, it could mark an unfruitful end for both sides after more than four years of talks and see trade fall off a cliff edge under a no deal. Much of this could already be priced in if the November summit goes badly, but you can still expect severe volatility in the markets and downward pressure on UK equities and GBP/EUR. A no deal will be chaotic, and it will be hard to protect any investments that are exposed. But investors can take actions like shifting their money to safe havens like gold, or into more domestic-focused stocks that are less vulnerable to a no-deal scenario.
What about the UK’s trade with non-EU countries?
The EU is by far the UK’s largest trading partner, so securing a new trade deal and avoiding a no-deal Brexit is in the interests of both sides. However, one of the key reasons the UK wanted to leave the EU is so it could capitalise on new trading opportunities with other countries.
All trade that the UK does with non-EU countries is governed by EU rules as they have been struck with the bloc as a whole, not just the UK. This means the UK will lose access to all the trade deals the EU has signed with other countries when the transition period ends.
The UK has already started negotiating new deals and arrangements with non-EU countries, but none of them will come into effect until the transition period ends. The UK has mostly focused on replacing the existing arrangements it has through current EU deals before looking to strike new relationships. This includes signing mutual recognition agreements – whereby countries acknowledge they have the same standards when it comes to things like manufacturing and testing – with the US, Australia and New Zealand, and talks with Japan are continuing.
Below is a table outlining what countries, or trading blocs, the UK has already managed to sign deals with, as well as those it is still in discussions with. Trade with any countries that the UK does not have a deal with by the end of the transition period will fall back onto WTO rules.
Most of the countries the UK has been talking to are not major trading partners, which will do little to allay any fears about future trade. For example, the 19 countries it is currently negotiating with accounted for less than 6.5% of all the UK’s international trade in 2018. You can keep up to date with the UK’s new trade deals here.
|UK has signed trade deals with….||UK is still negotiating deals with…|
|CARIFORUM trade bloc||Algeria|
|Eastern & Southern Africa trade bloc||Bosnia & Herzegovina|
|Iceland and Norway||Ivory Coast|
|Palestinian Authority||North Macedonia|
|Southern Africa Customs Union & Mozambique trade bloc||Serbia|
Source: UK government, 23 January 2020
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