2020 is likely to be the year in which Brexit becomes real; when, for the first time, the UK seriously confronts the trade-offs and choices which leaving requires. Very little about the future terms of trade is yet set in stone – the pharma sector still has a lot to play for. But major decisions will come early in the next parliament, and industry needs to get ready to engage.
The election is just the start
Although the General Election on December 12 is billed as a fundamental choice between competing visions of the UK’s future, there has so far been almost no public scrutiny of the main parties’ proposals for the EU relationship. There is a very good reason for that; none of the politicians want to talk about the trade-offs inherent in future trade talks. The political controversy around the pharma sector shows why; Labour and the Liberal Democrats, as well as the SNP in Scotland argue that the Conservatives want to swap US for EU regulatory alignment, and open up drug pricing in order to secure a US trade deal. The Conservatives, who polls suggest are heading for a majority, say they will push for a free trade deal with the EU in less than twelve months, which would be unprecedented, taking the UK out of the EU Customs Union and the Single Market by December 31, 2020. They do not want discussion of the possible costs for business. So, the election is unlikely to provide much of a mandate for the future terms of trade with the EU.
What is the process for EU-UK trade talks?
There are five main stages, each providing opportunities for pharma companies to engage:
a) UK draft negotiating mandate drawn up. Advisers will work on this during the election; Boris Johnson would want to put it to parliament as early as possible;
b) Parliament scrutinises the mandate. This might start in January, as soon as the exit deal is ratified. Opposition parties will try to pressurise the government to stay aligned with EU standards in many areas;
c) The EU agrees its mandate, among the 27 Member States and after consulting the European parliament;
d) Substantive trade talks – starting, at best, in March 2020. Johnson says that he will not extend the standstill transition beyond December 31 2020, which in practice gives 8-9 months. He must decide on extending by 1 July 2020, but new Conservatives MPs are likely to be more hardline on Brexit than their predecessors. Johnson faces either an early confrontation with them over extension (including increased EU budget contributions), or paying the EU’s price to get a basic goods deal done before December, including requirements to follow EU standards;
e) Parliamentary approval. MPs cannot amend or reject the trade deal, but can hold it up for 21 days; in theory indefinitely.
Who will be the key figures to engage with?
Although some Brexiteers want EU trade talks run by the Trade Department (DIT), Johnson is more likely to run them from the centre, out of Cabinet Office/DExEU with a direct line to No10. David Frost may well stay on to lead the talks, with oversight from a Minister – as Michael Gove and the ‘XO’ Cabinet committee oversaw the exit deal. The Treasury, Department for
Business, Energy & Industrial Strategy (BEIS) and Department for Health and Social Care (DHSC) will also be crucial voices in the Whitehall debate.
With civil service capacity stretched by the talks, there is a serious risk of trade-offs being made at speed, driven by popular politics. As we see in the election, fishermen, farmers and ‘protecting the NHS’ are more popular causes than pharma companies. This underlines the need for industry to be on the front-foot, having conversations with government and ensuring that these trade-offs reflect industry realities, not political popularity.
Where will the EU be coming from?
This will be a trade negotiation like no other. The UK and EU start with full alignment, but Conservative party policy is to be fully free to diverge on regulations, as well as leaving the EU’s supervisory and enforcement mechanisms. It is not only the supposedly ‘protectionist’ French who see this as a competitive threat; the UK’s traditional economic allies, including Ireland, the Dutch and the Nordics are the most exposed to the UK economy and so will be the strongest voices insisting on the UK following EU level-playing-field rules.
Boris Johnson has abandoned the goal of ‘frictionless’ trade with the EU, but he wants a zero tariff and zero quota deal. The EU will demand closer UK alignment to its rules than with any other major trade partner in exchange. If the UK cannot accept this, then EU market access will be limited – probably including tariffs on some goods.
What should pharma companies do?
Immediate engagement post-election should be a priority. Trade bodies will continue to play a vital role, but companies should also consider how to engage with the government in their own right, for three reasons:
1. the different potential trade deal outcomes would affect major pharma companies in different ways;
2. trade talks will bring up commercially sensitive questions (DIT are already working with companies through their Expert Trade Advisory Groups to look at ways to protect commercial confidentiality); and
3. companies are employers and investors in the UK – this provides the best leverage with a government who have not yet decided where they want to diverge from EU rules, and why.
There are risks for companies in engaging directly with government in one of the most politically contentious areas of future trade relationships – but there are greater risks in standing back.
Paul McGrade is Brexit senior counsel at Lexington Communications.