Brexit – Where do we stand and what happens now?

Following the election result, it seems likely that the UK will leave the EU on 31 January 2020 on the terms of the revised Withdrawal Agreement (the “WA”), which was agreed at political level with the EU in October.

Given the Conservative Party majority, it is also likely that the EU (Withdrawal Agreement) Bill (the WAB) will be in substantially the same form as the bill which was introduced to the House of Commons to implement the WA and which passed its second reading before the General Election.

This note considers the next stages in the process, on the assumption that the WA is concluded. In summary, there are two key points for businesses to consider in the short and medium term:

  • The impact of the transition period from 1 February until 31 December 2020 provided for in the WA. As we explain below, during this time businesses will see little or no change (at least in legal terms).
  • What may happen at the end of the transition period? Eleven months may be insufficient time for the UK and the EU to negotiate, draft and ratify a detailed free trade agreement. There is, therefore, a risk of a “no trade deal Brexit”, which will result in the UK and the EU trading on WTO terms from 1 January 2021.

We consider each of these points in turn.

The transition period

During the transition period, most EU law (including any new legislation, case law or other changes made by the EU after exit day) will continue to apply to and in the UK in the same way as it did while the UK was a member of the EU. This means that the legal framework within which most businesses operate, including the jurisdiction of the Court of Justice of the European Union, will remain unchanged during that time. The main difference will be that, as a “third country”, the UK will no longer send or appoint representatives to EU institutions (except, on invitation, as observers) and will have little or no influence over the making of new laws.

One area of potential uncertainty is that countries with whom the EU has negotiated free trade agreements will not strictly be obliged to treat the UK as part of the EU during the transition period (although the EU will notify them that they should do so). Businesses will therefore need to be mindful of any impact on the terms of their trade with non-EU countries that are announced during the transition period.. On the other hand, the UK will be bound by obligations stemming from international agreements concluded by the EU. The terms of the WA permit the UK to negotiate, sign and ratify trade agreements with non-EU countries during the transition agreement, provided that those agreements do not come into force until after the end of the transition period (unless the EU agrees otherwise).

The WA provides for the transition period to end on 31 December 2020. Article 132 allows for a single extension of the transition period of one or two years, provided that both the EU and the UK (via the Joint Committee established by the WA) agree to this before 1 July 2020. Without such an agreement before the 1 July deadline, there will be no obvious legal mechanism for extending the transition period. Article 50 of the Treaty on the European Union, which allowed repeated extensions to the deadline for negotiating the WA, will not apply. It is important to note that extending the transition period would be a fundamentally different process from extending the Article 50 negotiating period since the UK will no longer be an EU Member State and the terms of the WA are such that there is unlikely to be an effective opportunity to do this after 1 July 2020.

If the transition period is extended, the UK will be required to make further contributions to the EU budget (in an amount to be negotiated by the UK and the EU) for the extended duration of the transition period. Furthermore, during an extended transition period, the UK would continue to be subject to EU rules without having any meaningful control over the making of them.

Section 132, which provides for an extension of the transition period, was in the original Withdrawal Agreement, negotiated whilst Theresa May was Prime Minister. In the recent election, the Conservative Party’s manifesto contained a commitment (in bold text) not to extend the transition period. Furthermore, whilst the WAB expressly requires Parliamentary approval to extend the transition period, no such consent is required not to request an extension.

Negotiations for future arrangements

The WA is primarily concerned with historic and transitional issues. Other than the Ireland/Northern Ireland Protocol, the WA says very little about the future relationship between the EU and the UK, which remains to be negotiated.

A non-binding framework for the future relationship between the UK and the EU is set out in the Political Declaration (PD), which was agreed at the same time as the WA. Article 17 of the PD provides that the “Parties agree to develop an ambitious, wide-ranging and balanced economic partnership. This partnership will be comprehensive, encompassing a Free Trade Agreement, as well as wider sectoral cooperation where it is in the mutual interest of both Parties”.

The UK’s negotiating position

It is worth noting that the text of the original PD, which was negotiated while Theresa May was Prime Minister, envisaged the creation of a “free trade area” as opposed to a “Free Trade Agreement”. A statement in the earlier text,that the trading relationship should be “as close as possible”, has been removed. These amendments may be largely symbolic but they are in keeping with the idea that the current government is looking for a relationship which entails less alignment with EU rules than was the case under Theresa May’s government.

Both formulations of the Political Declaration focus primarily on trade in goods. There is very little provision for trade in services in general and financial services in particular, other than a limited aspiration for mutual recognition. It is likely that any free trade agreement will be similarly limited in scope.

The EU’s negotiating position

The EU is likely to start from the position that the UK’s “red lines” (end of freedom of movement, no jurisdiction for the Court of Justice of the European Union, no substantial financial commitments, regulatory autonomy and an independent trade policy) will involve trade-offs in terms of market access. The EU will argue (as it has in the past) that the UK should not be allowed to “cherry pick” the benefits of EU membership, without complying with the obligations of membership, because this would jeopardise the integrity of the EU’s Single Market and Customs Union. The EU is also likely to argue that, given the UK’s size and geographical proximity to the EU, any free trade agreement should include strict level playing field commitments on issues such as state aid, competition and social and environmental regulations.

Timing

As is well known, it was originally intended that the UK would leave the EU on 29 March 2019. This would have allowed for a nineteen month transition period, in which to negotiate, draft and ratify an agreement on the future relationship. Even then, some commentators questioned whether this would be long enough. Comparisons were made with the EU’s free trade agreement with Canada, which took about seven years to finalise.

As a result of the delays in the UK’s departure from the EU, there will now be only eleven months between exit day and the end of the transition period unless both sides agree to an extension before 1 July, which would involve a significant change of policy by the UK government within a relatively short timescale. There is an ongoing debate about how long the negotiations are likely to take. Some argue that the fact that the UK and the EU will be starting from a position of regulatory alignment will mean that an agreement can be negotiated quickly. Others suggest that, whilst a Norway style arrangement could be negotiated relatively quickly on a “top-down” basis, the UK’s desire to diverge from EU rules will require a lengthy and complicated “bottom-up” approach to negotiations. Whichever side is right, time is short.

Furthermore, any agreement reached between EU and UK negotiators will also need to be ratified. The type of agreement (or agreements) envisaged by the PD would cover areas falling outside the EU’s competence, meaning that it will be a “mixed agreement” and will need to be ratified by the national and regional parliaments of the remaining EU27 Member States. This is highly unlikely to be achieved by the end of 2020. Whilst it may be possible for a mixed agreement to be implemented on a provisional basis, this will be limited to the aspects of the agreement which fall within the EU’s competence (unless all EU27 Member States agree otherwise).

On the UK side, depending on any amendments made to the WAB before it is passed, the terms of any future agreement will likely require Parliamentary approval. 

In these circumstances, it is possible if not likely that eleven months will prove too short a timescale for the UK and the EU to conclude “an ambitious, wide-ranging and balanced economic partnership” of the kind envisaged by the PD.

What happens if an agreement on the future relationship is not concluded before the end of the transition period?

The immediate effects of a “no trade deal Brexit” will, in some respects, be more co-ordinated than would have been the case under a “no withdrawal agreement Brexit”. This is because the WA contains provision for continuity in the operation of on-going procedures at the end of the transition period. For example, mergers with a UK dimension notified to the EU but not cleared, or competition proceedings initiated by the EU but not concluded, before the end of the transition period will, after the end of the transition period, continue to be determined by the EU until their conclusion, rather than having to start again before the UK authorities as would have been the case if the WA had not been ratified.

However, unless and until a new free trade agreement is agreed and ratified, all future trade would take place on WTO terms. Tariffs would apply to UK goods and, perhaps more importantly, and in any event, non-tariff barriers would apply to UK goods and services in the same way as they do in relation to other non-EU countries. Businesses will therefore need to monitor the progress of negotiations and maintain their preparations for a “no trade deal Brexit”.

On the other hand, even if a free trade agreement is concluded before the end of the transition period, it is likely to be limited in scope and to make very little if any provision for harmonisation of regulatory standards or removal of non-tariff barriers or for trade in services with the EU. This may mean that businesses will still have to make significant adjustments in order to accommodate the new regime.

Conclusion

While the transition period until the end of 2020 will provide continuity and legal certainty, business will need to remain vigilant in relation to possible developments during that period. In particular UK nationals and businesses will remain subject to the full force and effect of EU law during that period. Within five months of Exit Day the UK will have to decide whether to extend the transition period or risk a no trade deal Brexit at the end of the year with all the consequences of trading on WTO terms that follow.

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