LONDON — It looks increasingly likely that the U.K. and EU will not reach a trade agreement by Oct. 15, missing a deadline imposed by British Prime Minister Boris Johnson.
The U.K. stopped being a member of the European Union in January but agreed to keep applying EU rules until the end of 2020 to ensure it would have time to agree on new border arrangements. However, negotiations over a future trade deal remain gridlocked, raising serious questions about how the process will play out.
"I don't see there will be a massive breakthrough this week," Simon Coveney, the Irish minister for foreign affairs, said Tuesday after a meeting with his European counterparts.
Speaking last month, Johnson said that without an agreement over new trade arrangements by Oct. 15, both sides "should accept that and move on." He believes that without a deal, the U.K. and the EU should prepare to trade goods based on World Trade Organization rules, starting in January 2021. This would likely mean higher costs and barriers for exporters on both sides, when compared to a formal deal.
Johnson's self-imposed deadline coincides with an EU summit, where the 27 European leaders will be gathering in Brussels. However, the heads of state are not expected to go beyond a "stock-taking" discussion over trade talks with the U.K.
Ahead of that summit, a draft document has shown that EU leaders will conclude there is "still not sufficient" progress to conclude trade talks, according to Reuters.
The European Union is expected to push for negotiations to continue in the coming weeks, rather than ending them this week.
Our central scenario is that, taking advantage of the Covid-19 crisis, the U.K. government will leave the EU with no trade deal.Peter ChatwellHead of multi-asset strategy at Mizuho
"The EU will continue to work for a fair deal in the coming days and weeks," the EU's chief Brexit negotiator Michel Barnier tweeted on Tuesday.
The Irish minister for foreign affairs conveyed a similar message, saying Tuesday that "there are a number of weeks left in these negotiations, not days."
Technically speaking, negotiating teams have until the end of the year to develop new trade arrangements. However, they need to ensure whatever deal they put together has enough time to be approved by lawmakers in Westminster and Brussels.
Despite "some progress" over competition rules, fishing rights remain a major hurdle in the negotiations. On the one hand, EU-based fishing crews want to keep their access to U.K. waters; but on the other hand, the U.K. wants to restrict that but keep selling British fish to the EU market.
In addition, there is another issue complicating talks even further: a legislation put forward by the U.K. government, which overrides parts of the previous commitments made to the EU.
The Internal Market Bill is being discussed in the House of Lords, the U.K. Parliament's upper chamber. But the EU has said it will not sign a new trade deal until this bill is updated to reflect compliance with previous accords.
"Our central scenario is that, taking advantage of the Covid-19 crisis, the U.K. government will leave the EU with no trade deal," Peter Chatwell, head of multi-asset strategy at Mizuho, said in an email on Wednesday.
This is because the U.K. government will be able to "blame" the EU for breaking the negotiations and the coronavirus pandemic for the economic shock, he said.
"Probably, if the U.K. break the talks, cable falls to the 1.26 area, but is nowhere close to our actual no-deal Brexit forecast of 1.15," Chatwell added.
Sterling traded at around $1.29 on Wednesday and the currency cross is just marginally lower than the level seen at the start of the year.
