David Harrison, Jonathan Olson-Welsh and Rebecca Timms on what to expect as we get set to exit the EU
The Conservatives’ general election win has paved the way for the UK to leave the EU on 31 January, ending a prolonged period of uncertainty for the construction industry. Companies operating in this sector should anticipate changes to their legal and regulatory framework that might take effect at the end of 2020.
Some of those changes will relate to trade and access to the EU single market; for example, companies should monitor any specific arrangements governing the ability of UK entities to bid for EU public procurement contracts (as well as to maintain existing ones) after the end of the transition period.
Brexit may serve as a catalyst for a renewed emphasis on certain aspects of competition enforcement, fuelled by increased resources provided to the Competition and Markets Authority and the UK authorities’ desire to play an active role in international enforcement. The details of the new UK state aid framework remain unclear, and this is also likely to become an important area of focus over the next year.
There are also three key questions for the year ahead:
- The length of the transition period
- The scope of the trade deal with the EU
- The continuing risk of a no-deal exit
Standstill – but how long for?
The transition period is a standstill arrangement during which the UK will continue to benefit from EU rules on free movement of goods and workers, as well as existing trade and customs arrangements. This is scheduled to last until the end of December 2020.
In theory, the UK or the EU may request a one-off extension to the transition period (to the end of either 2021 or 2022) by 1 July 2020. However, a provision preventing UK ministers from agreeing to an extension has now been included in draft domestic legislation. Assuming this becomes law, further primary legislation would be required for the transition period to be extended. Any extension would also require a further UK financial contribution to the EU budget. As the EU also appears to have conceded that some form of trade deal should be possible by the end of the year, it seems unlikely the UK will make this request in June.
What might a trade deal cover?
The political declaration with the EU (which is not legally binding) envisages a free trade agreement based on Canada’s recent trade deal with the EU involving “no tariffs, fees, charges or quantitative restrictions”. While such an agreement would commit the UK to maintaining minimum standards in areas such as environment, competition and state aid, it would, if implemented, give the UK scope for future regulatory divergence, with the extent of regulatory checks at borders being dependent on how far the UK seeks to depart from EU rules in key areas.
The declaration also envisages an end to freedom of movement for workers, but with the stated aim of providing visa-free travel for short-term visits.
The prime minister has campaigned strongly on the benefits of regulatory divergence
However, there are strong indications that, for any comprehensive trade deal to be put in place, the EU would require the UK to follow EU rules in key areas – its primary concern being that any EU concessions would undermine the single market. In contrast, the prime minister has campaigned strongly on the benefits of regulatory divergence, appearing to rule out a deal involving a high degree of future alignment.
The likely outcome will be a “bare bones” agreement by the end of 2020, focusing on trade in goods. The UK’s position is that any agreement should be negotiated on a sector-by-sector basis, with the UK agreeing to align with EU rules in some areas (for instance, chemicals) but not others. However, the EU may be unwilling to accept this.
Such an agreement would leave further issues unresolved at the end of this year. It would therefore be likely to be complemented by additional temporary deals (relating to air transport, for example) and negotiation of further agreements (such as on services more generally) after the end of 2020.
Is no deal still a threat?
The threat of a no-deal exit will now shift to the end of the transition period. Trade with the EU on WTO terms at the end of this period would in principle entail the imposition of tariffs on certain products as well as customs and regulatory checks at borders. In reality, however, the UK would be likely to seek a new, phased implementation period in order to avoid a regulatory cliff edge if no agreement with the EU can be reached.
Companies in the construction sector should monitor developments carefully as full details of the UK’s future trading relationship with the EU, and related timing issues, may not become clear until the end of the year.
David Harrison is co-head of the European anti-trust and competition team, Jonathan Olson-Welsh a partner in the construction and engineering team and Rebecca Timms a support lawyer at Mayer Brown