Boris Johnson’s landslide victory has guaranteed Brexit, but the UK isn’t out of the woods yet.
Quentin Fitzsimmons, a fixed income portfolio manager with T. Rowe Price, believes that Johnson will gain parliamentary approval for the timetable for his Withdrawal Agreement Bill and the UK will leave the EU on 31 January.
But Brexit is just the start.
“While the approval of the Withdrawal Agreement Bill will facilitate the UK’s departure from the EU, it does not prescribe its future trading relationship with the bloc,” Mr Fitzsimmons said in a note.
“That must be determined by 31 December 2020, which leaves a very short transition period in which to negotiate the kind of deal that would usually be expected to take many years to agree upon.”
Negotiations are likely to be extremely volatile, with the EU sticking its key principle of the free flow of goods, services, capital and labour. And while the UK wants to maintain a high degree of freedom on the former three, the free movement of labour is likely to be a sticking point for Johnson.
The EU is also likely to pursue a hardline approach to send a message to other states that might seek a better deal outside the economic co-operative.
“Johnson has a very difficult path to tread: if he is seen to give too much ground to the EU, the more hardline ‘clean break’ MPs in his party could prevent a trade deal from being approved; if he demands too much in negotiations, it may be impossible for a deal to be agreed upon before the deadline,” Mr Fitzsimmons said.
“In the event that either of these two scenarios occurs, the UK will face the choice of leaving the EU without a deal at the end of 2020 or asking for an extension to the transition period – both of which carry considerable risks.”
If we’ve learned anything from the US-China trade war, it’s that trade negotiations – especially politically volatile trade negotiations – are rarely simple. A failure here could see the UK leave the EU with no deal and cause an economic deadlock of unprecedented proportions.