Photographer: Chris Ratcliffe/Bloomberg

U.K.’s Davis Open to Brexit Transition Deal If Final Goal Is Set

  • Davis says U.K. won’t publish Brexit plan before February
  • Says considering Turkey-style customs deal and FTA with EU

The U.K. and the European Union took a step closer to agreeing that a transition deal will be needed to cushion the blow from Brexit, after Britain’s chief negotiator said for the first time that he’s open to the idea.

Negotiators between the two sides must agree on the broad shape of the final deal charting the U.K.’s exit from the 28-nation bloc before starting talks on any transitional arrangements, Brexit Secretary David Davis told lawmakers in London Wednesday.

As he set out options for a future trade deal with the EU, Davis said he would accept a transitional agreement as a kind of “bridge” to the permanent future trading deal, if it was needed to smooth the path for businesses navigating Brexit during an “implementation phase.”

“Whatever the transitional arrangement is, we need to know where we are going before we decide on the transition,” Davis told the House of Commons Brexit Committee. “If you build a bridge, you need to have both sides established before you build the bridge, so we need to know where we are going.”

The cabinet minister said he believes it will be “perfectly possible” to decide “the end game” for the U.K.’s trading relationship with the EU in the two years available for negotiations once official notification is given of the intention to quit.

Barnier Stance

Davis’s statement represents the clearest outline so far of how the U.K. government sees the negotiations unfolding, with a transitional arrangement now appearing increasingly likely. With Michel Barnier, the European Commission chief negotiator, also backing the idea, both key architects of the Brexit deal are now publicly committed to considering a transition plan.

“There would be some point and usefulness to a transitional period if it is the path to this new partnership,” Barnier said last week. U.K. Chancellor of the Exchequer Philip Hammond warned on Monday that a final deal may not be possible in two years, making a transitional period essential. Taken together, the remarks from Davis, Hammond and Barnier are likely to be welcomed by business leaders who see a transition plan as essential to minimizing disruption.

At a separate hearing before lawmakers, the head of the Bank of England’s Prudential Regulation Authority, Sam Woods, said on Wednesday that it would be “in the interest of all parties to have a reasonable implementation phase.”

“Would a sudden and complete severance of all financial-services flows across the border be a financial-stability, safety and soundness problem?” Woods said. “Yes, I think it would be.”

‘Very Careful’

Prime Minister Theresa May has said she will trigger the formal start of the Brexit talks by invoking Article 50 of the EU’s Lisbon Treaty by the end of March. The premier has said she will not give a “running commentary” on Brexit but will publish a plan for lawmakers to scrutinize before triggering Article 50. Davis told the committee the plan is still being worked on and would not be published before February at the soonest. 

“It won’t be next month,” Davis said. “The policy work is still under way. There are quite a few decisions still to be made.” The government will have to be “very careful about what we do publish” to avoid undermining the U.K.’s negotiation position, he added.

Davis said no decision had been taken on whether the U.K. should stay in or leave the European single market, where more than 40 percent of British exports are sold, or whether it could pay the EU for trading rights. “We’re aiming for free access, the maximum free access to all possible markets,” he said.

Four Options

Davis set out the four options he is considering for the U.K.’s relationship with the European customs union, which sets common tariffs with countries outside the group. Ministers say the U.K. will not be free to negotiate its own trade deals with other individual countries such as India or the U.S. unless it first leaves the customs union.

For the first time, Davis said he is looking at replicating Turkey’s trade accord with the EU, as he confirmed the Norwegian and Swiss models are also on the table. “You have countries like Turkey, which has an arrangement which puts it inside the customs union for some of its economy and outside for others, which allows it to do very limited free-trade agreements,” Davis said.

Davis said his four options for a relationship with the customs union are: “Inside the customs union; a partially-inside Turkish model, if you like; outside but with a free-trade agreement and a customs arrangement, as happens in some parts of the world; and completely outside.”

‘Contingency Planning’

The committee pressed Davis on what he would do if no deal could be achieved after two years of talks. He said he thought it would be possible to reach an agreement to avoid the shock of the U.K. falling out of the EU with no deal at all, which would see World Trade Organization tariffs imposed on the sale of British goods to the EU. But he assured members of Parliament that “we will do contingency planning for all the likely outcomes.”

“The best outcome is a negotiated, free-access-to-markets outcome, and with it a negotiated outcome on justice, home affairs and security,” Davis said. Early talks with Barnier will focus on setting the timetable for negotiations, he said, but the deals are unlikely to be “done in six months.”

In a verdict likely to be welcomed by the aviation industry, Davis argued that the U.K. is “in a good position” to ensure open access to flights to the EU after leaving the bloc, saying the issue is a key priority for talks. “We have a fair degree of negotiation leverage -- leverage is the wrong word -- but it’s in other people’s interest to maintain this as well as ours,” he said.

Free Movement

Davis said his role is to repatriate control over immigration and it will be up to future governments to decide what the limits should be “in the national interest.” Levels of migration will not form part of the EU deal, he said.

“My job is to bring the decision back here,” Davis said. “It’s got to be clear control by this Parliament.” Governments will judge “what’s necessary for universities, what’s necessary for business, what’s necessary for fruit picking.”

May’s office backed Davis, saying his comments are in line with Britain’s approach to the issue. “We’ve been clear throughout as we approach these negotiations that one of the key objectives is that it will be the U.K. who will be controlling immigration,” May’s spokeswoman, Helen Bower, told reporters in London.

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE