COVID-19 impact on Brexit: What will a second wave mean?

14th August 2020

This year, the world has experienced its biggest economic downturn in over a century. In the UK, 50% of companies reported a fall in business in April compared to the previous three months, all while the government continues to negotiate its exit from the European Union (EU). Both COVID-19 and Brexit will have a profound effect on the economy, but it is expected that each will affect different sectors.  

The rapid spread of COVID-19 meant that many customer-facing sectors felt a strong and almost instant impact, whereas others, such as distribution and manufacturing, have needed to increase their workload to meet urgent demand arising from this pandemic. Brexit, on the other hand, will have an almost opposite effect on the different sectors, by introducing new barriers to trade, migration, investment with the EU and a change in the UK’s relationships with other countries. Tariff and non-tariff barriers that are a potential outcome of Brexit may affect sectors like automotive, food, professional and financial services, which could significantly affect the size of the UK economy in the long run.1

The change in the health of the economy due to the pandemic means that each sector needs to be analysed. It is clear that some sectors will see a reduction in market access post-Brexit and at a time where certain sectors find themselves in unprecedented difficulty due to the pandemic, a further reduction in trade may very well push them towards being unviable. It is therefore clear that the process of drawing up withdrawal plans needs to be informed by the existing circumstances of each sector.

With both Brexit and COVID-19 very active and credible threats to the economy, it is extremely difficult to predict the long-term outcome when there are so many variables at play. The central bank has set out two scenarios. The first, ‘The Baseline’ scenario, is gravitated towards the gradual re-opening of the economy and a rebound of economic activity. This model suggests that the economy will have contracted by a total of nine per cent by the end of this year but will expand by nearly six per cent in 2021.  The second, more ‘severe’ model, sees the economy contracting by nearly 14 per cent in 2020 with unemployment staying elevated for several years after that. This model is based on the lockdown period having an even more damaging impact on economic activity with the UK experiencing a second wave of the virus at some point over the next year. This scenario wouldn’t see the economy fully recover until 2023-20242.

Despite the impact of the pandemic the UK is yet to ask for an extension to Brexit, and remains in the transition period, so where does that leave us? With the official deadline to apply for an extension now passed, it looks as if the UK has two options. The first being that a UK and EU trade deal is negotiated by the end of the year, which if all aspects are agreed, could give the UK a new trading relationship at the end of the transition period on December 31st. The second option looks to be that the UK exits the transition period without a trade deal, a no-deal Brexit. This would leave the parameter of the UK’s trading relationships in the hands of the World Trade Organisation, meaning that the majority of UK goods would be subject to tariffs until a free trade deal was ready3.

However, with withdrawal negotiations being delayed as a result of governments needing to prioritise their response to the pandemic, the transition period deadline is quickly creeping closer, so what would happen if we experienced a second wave of the virus?

The deadline to formally extend the transition period has now passed but it does seem that there may be other options for the UK to delay its exit from the UK. It has been suggested that the UK may be able to use article 50 of the agreement under international law as it would constitute an amendment to an existing argument. However, many EU lawyers have argued that Article 50 was ‘turned off’ on the day the UK chose to leave the EU (31st January 2020)4. Alternatively, a more complex version of this arrangement would be that that EU heads of state and government, and the UK government could enter into an international agreement outside of EU law. However, this would be a very difficult process legally and would most likely require a unanimous agreement with all member states as well as the EU council.

The UK could also reach a trade deal with the EU, which has a fairly lengthy implementation period that would effectively enter into new arrangements gradually over a number of years. Finally, the Joint Committee may agree to a new extension, which in normal circumstances would be extremely unlikely, however, if the UK experiences a second wave of COVID-19, an extension may be seen as necessary5.

Ultimately as the impact of COVID-19 continues to become more apparent, the government needs to consider fine-tuning its plans to account for the difference in the economy as it faces its biggest downturn in a lifetime. If the UK experiences a second wave of COVID-19, once again government resources and time will be redirected away from Brexit negotiations. Appropriate steps need to be taken to ensure that the pandemic has a lesser impact on the outcome of the withdrawal agreement as much as possible.