Brexit – Next Steps

The UK referendum on the country’s membership of the EU, which produced a narrow majority for departure, took place more than two years ago. At the time of writing, uncertainty still reigns over what that outcome means for the UK’s future economic and political relations with the EU and for the UK’s own legal framework and policy options. As things currently stand, the UK is set to leave the EU on 29 March 2019. As this date approaches, Cooley will be on hand to provide you with advice and insight.

State of flux

The British government triggered the formal process for leaving the EU on 29 March 2017, by serving notice to the European Council of the UK’s “intention to withdraw” under Article 50 of the EU Treaty. This provides that the UK and EU have up to two years from the date of notification to negotiate a withdrawal agreement setting out the terms of departure. Although a later date may be provided for in that agreement, and it also remains possible that the UK government will be forced to ask the EU for an extension of the two year negotiating period, the current expectation is that Brexit will formally take effect two years after that notice was given, i.e. at 11pm GMT/midnight CET on the 29 March 2019. Until that point, the UK remains an EU Member State and UK businesses and citizens continue to enjoy all associated rights, and be subject to related obligations, under the EU Treaties. After that date, the default position is that the UK becomes a ‘third country’ to which EU law no longer applies. At that point, UK businesses and citizens lose the benefits that come with membership, such as free trade in goods and services, access to the financial services passporting regime, unitary pan-European intellectual property rights and the free movement of people.

The reality beyond that basic legal position is complex and uncertain. The domestic politics of Brexit remain highly contentious, particularly with respect to the extent to which the UK should seek to maintain continued alignment with EU laws (thereby keeping trade as open as possible), or adopt UK-specific rules that diverge from EU law (at a cost in terms of loss of market access).  Another contentious issue is the separate (though related) question of whether the UK should seek to remain in a customs union with the EU, thereby minimising barriers to trade in goods, or set its own trade policy outside the customs union. The latter may facilitate future trade deals with other third countries, albeit at the cost of introducing significant customs formalities for goods passing between the UK and EU.

The EU and UK reached political agreement on key aspects of the proposed withdrawal agreement in December 2017. While this was expected to enable the UK and EU negotiation teams to move on to discussing the future EU/UK trading relationship, at the time of writing critical outstanding items for the withdrawal agreement remain to be agreed. These include the status of Northern Ireland after Brexit, which is particularly difficult to settle given the conflicting objectives of the two sides (maintaining an open border between Northern Ireland and Ireland vs. ensuring that Northern Ireland is treated in the same way as the rest of the UK while at the same time allowing UK law to diverge from EU law). This means that ratification of the withdrawal agreement cannot currently proceed and, unless its terms can be agreed by the end of 2018, the UK risks leaving the EU in March with no agreement in place on the terms of departure or any prospect of agreement on a future trading relationship (‘no deal Brexit’).

The EU published a number of guidance documents in March 2018 on the implications of such an outcome for businesses across the EU. In August 2018, the British government started publishing its own set of guidance documents, which set out in some detail the consequences of a no deal departure. The government’s documents reflect an overall policy approach based on the UK taking unilateral action to minimise disruption of trade into the country, for example by allowing medicines tested in the EU to be imported without subjecting them to further testing in the UK, while hoping for a degree of reciprocity from the EU and Member States in return to ease trade from the UK to the EU. Whether such reciprocity would be forthcoming in the inevitably acrimonious setting of a no deal exit is unclear.

On any interpretation, the consequences of an immediate move from Member State to third country status, with no agreement in place as to its terms, would be severe. UK manufacturing chains and service suppliers currently substantially depend on open access to the rest of the EU as their ‘home market’, enjoying completely fluid business relations with most of Continental Europe. Overnight, UK businesses would be facing a host of border issues and additional formalities, and would be cut off from a range of EU administrative and regulatory authorities upon which their work depends. The UK government currently is nowhere near putting in place domestic alternatives, and there is no realistic prospect that these will be in place by March 2019.

Assuming the terms of the withdrawal agreement can be settled, thereby avoiding the ‘no deal’ scenario, there would still be significant uncertainty over the shape of the future relationship between the UK and the EU. This is because the withdrawal agreement will primarily deal with the terms of departure. At most, it will only contain a general outline of the shape of the proposed future relationship that reflects a shared political objective, rather than agreed terms. Negotiation of that future trading relationship is proving to be complex and contentious.

The EU negotiating position is that the UK’s ‘red lines’ (no freedom of movement, regulatory autonomy, an independent trade policy, no substantial financial contributions, no ECJ jurisdiction) point to a relatively basic free-trade agreement, based on the recent EU/Canada ‘Comprehensive Economic and Trade Agreement’, albeit with additional provisions covering matters such as security cooperation (‘Canada+’). The EU’s chief negotiator has confirmed that alternatives, such as an EEA-style arrangement (the ‘Norway option’) under which the UK retains membership of the Single Market in return for agreeing to implement most EU laws (without having a say in their drafting), remain available if the UK negotiating position were to shift.

In July 2018, the UK government responded by publishing a long-awaited White Paper setting out its own preferred model for the future relationship (commonly referred to as the ‘Chequers proposal’, as it was presented to the Cabinet at the Prime Minister’s country residence of that name). This envisages a hybrid partnership, under which the UK would remain aligned with the rules of the EU’s Single Market for goods (including food), through a process of ‘ongoing harmonisation’, while diverging from the EU regime for trade in services (including financial services, digital services and broadcasting).   Membership of the EU customs union would be replaced by a ‘facilitated customs arrangement’, while the UK would introduce a domestic state aid regime that would track the EU regime. Rules for environmental protection and employment law would remain harmonised on an ongoing basis, to address EU concerns of the potential for UK businesses to exploit lower standards to undercut EU-businesses.  Although disputes between the EU and UK relating to this partnership relationship would be resolved by an independent arbitration panel, the White Paper notes that the CJEU would have a role in interpreting EU rules to which the UK had agreed to adhere.

While the EU has been careful not to reject the July White Paper outright, its lead negotiator has highlighted a number of fundamental concerns with the proposed model.  In so doing, he is maintaining the EU’s consistent position that the UK cannot enjoy the benefits of EU membership without accepting the attendant obligations (generally referred to as ‘cherry picking’).

Since it is effectively impossible for even a limited free trade agreement to be negotiated by March 2019, there will need to a ‘transitional period’ before any new trading relationship is put in place. This would extend the current EU legal and trading framework beyond that date and thereby avoid a so-called ‘cliff edge’ Brexit.  The EU has indicated openness to such an arrangement, provided that it does not last beyond the end of 2020 and that the UK agrees to apply EU law in full for its duration, as if it was still a Member State.  Assuming such a transitional period can be agreed as part of the withdrawal agreement, it remains unclear what would happen after that date, as it is unlikely that any new trading arrangement can be agreed, ratified and implemented in time. In any event, UK businesses and citizens will need to make adjustments as and when any new trading arrangements are put in place.

In the meantime, the UK is starting to discuss new free trade agreements with countries outside the EU, including those that already have such agreements in place with the EU. Such discussions are unlikely to progress materially until the UK’s current trading arrangement with the EU become clearer and, in any event, these agreements cannot be concluded until the UK has left the EU.  While the UK government is seeking to extend the benefit of existing free trade agreements between the EU and third countries beyond Brexit, it is not yet clear whether it will succeed in this.  A number of complex issues, including the allocation of tariff rate quotas, remain to be settled. The UK and EU made a proposal in the autumn of 2017 to the World Trade Organisation (WTO) regarding their future division of the EU’s existing tariff rate quotas and schedules.   A number of leading WTO Members pushed back, confirming that the UK’s trading relations even within the “fall-back” WTO system will be the subject of substantial negotiations and related uncertainty.  Negotiations remain ongoing at the time of writing.

Plan ahead

Reflecting the UK’s membership of the EU for over 45 years, a significant portion of UK law is either directly implemented EU law or reflects EU law influences. Most EU law applies in the UK only by virtue of the European Communities Act 1972, which gives binding effect in domestic law to EU legislation and wider legal principles underpinned by the EU Treaties. While EU laws that have been incorporated into UK statute will remain in place after March 2019, other EU laws will no longer have effect once Brexit occurs (which requires that the European Communities Act be repealed).

Failure to take account of this would leave material gaps in UK domestic law post-Brexit, leading to significant legal uncertainty and disruption. To address this, Parliament has passed the European Union (Withdrawal) Act 2018, which will convert all applicable EU law into UK domestic law at the date of withdrawal. The intention is that ministers will then use secondary legislation to fix any issues (for example, to remove references in UK statutes to the European Commission that reflect a role that ends when the UK is no longer a Member State). More controversially, ministers will also gain extensive powers to modify “domesticated EU law” over time, allowing a gradual divergence of the two legal regimes. A number of other bills related to Brexit are either already before Parliament or are expected to be introduced soon. Further primary legislation will also be needed to implement the terms of the withdrawal agreement.

The government will also need to put in place a range of new institutional and administrative arrangements to replace functions carried out by EU-level institutions, since the mere translation of EU laws and regulations into UK law will be ineffective without the appropriate institutional structures in place to enforce them.   While the government has made a start to this process, for example by increasing the budget of the UK Competition and Markets Authority and announcing the hiring of 9000 additional civil servants, completing what would amount to rebuilding the British administrative state will take years.

While much remains uncertain, we recommend that our clients should plan for all possible scenarios.  In the current climate, where a ‘no deal’ exit cannot be ruled out, companies should urgently review the implications of such an outcome for the functioning of their businesses.  Even if the UK manages to negotiate a transition period with the EU beyond March 2019, work undertaken now will serve as a basic blueprint for UK business’ eventual shift to life outside of the EU legal framework.  We stand ready to assist with this planning.

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