Brexit: The Way Forward

Mayer Brown - Retained Interest

Mayer Brown - Retained Interest

After three and a half years of negotiations and uncertainty, the United Kingdom left the European Union at 11 p.m. on 31 January 2020. But when will Brexit actually be done? The scale of the task ahead for the UK and EU is significant and three key questions remain: (i) will the 'standstill' transition period be extended beyond December 2020; (ii) what kind of trade deal can be negotiated with the EU in the limited time available; and (iii) how real is the threat of a further 'no deal' cliff edge at the end of December? These (linked) issues are addressed below.

Standstill - but how long for?
The EU (Withdrawal Agreement) Act 2020 ('WAA') provides for a transition period, or standstill arrangement, during which EU law will continue to apply in the UK as if the UK were still a Member State (subject to certain limited exceptions). This means that the UK will continue to operate as if it were part of the EU Single Market and Customs Union, although it will have no further role in EU decision-making.

Either the UK or the EU may request a one-off extension to the transition period (by 'up to 1 or 2 years' to the end of December 2021 or December 2022). This would need to be agreed by 1 July 2020. An EU Summit is scheduled for June 2020 in order that each side can take stock of the progress of talks. The Prime Minister has repeatedly stated that, in the spirit of 'getting Brexit done', he will not request an extension and a provision preventing Ministers from agreeing to any extension has been included in the WAA. This means that further primary legislation would be required in order for the transition period to be extended, although this is unlikely to be problematic given the size of the Conservative party majority. 

Any extension would also require agreement on a continuing UK financial contribution to the EU budget and raise significant budgetary planning issues for the EU-27. As the EU appears to have conceded that some form of trade deal should be possible by the end of the year, it seems unlikely that the UK will make this request in June. A further extension might be possible towards the end of the year if more time for finalising a trade deal is required, but it would be both legally and politically problematic.

Trade deal – but what will it cover?
The Political Declaration with the EU (which is not legally binding) envisages a 'Super Canada' deal: an ambitious free trade agreement based on Canada's recent trade deal with the EU, offering 'no tariffs, fees, charges or quantitative restrictions' in return for 'robust commitments' to ensure a level playing field in key areas such as competition, State aid, labour, environment and tax. It would, if implemented, give the UK more scope for future regulatory divergence than was envisaged in the original declaration negotiated by (then) Prime Minister Theresa May. This implies that future trade will not be frictionless, with the extent of regulatory checks at borders being dependent on how far the UK seeks to depart from EU rules in key areas. As European Commission President von der Leyen commented on her trip to London last month: "The more divergence there is, the more distant the partnership has to be."

In addition, while the Political Declaration contemplates building on the customs arrangements in the Withdrawal Agreement in order to obviate the need for checks on rules of origin, it does not state that there will be no rules of origin determining whether goods can circulate duty-free between the EU and the UK. Indeed, the draft Council Decision setting out the EU mandate for negotiation of the trade agreement with the EU (the 'EU draft mandate') provides that "[t]he envisaged partnership should include appropriate rules of origin based on the standard preferential rules of origin of the Union and taking into account the Union's interest" and seeks the inclusion of provisions for the joint examination of appropriate measures in the event of errors committed by the competent authorities, in particular in the application of preferential rules of origin. The UK mandate has broader and more liberal terms, stating that there should be appropriate and modern rules of origin to facilitate trade between the parties to the greatest extent possible. As a result, the issue of agreeing common preferential rules of origin alone is likely to require some difficult discussions in the industry sectors which either side considers to be the most sensitive.

The Political Declaration also envisages an end to freedom of movement, but with the stated aim of providing visa-free travel.

Trade deals with the EU have historically taken several years to negotiate and ratify, and it is far from clear what level of trade deal can be agreed in 11 months. The EU-27 aim to have the negotiating mandate in place at the end of February, and will need a deal to be presented to the European Parliament in November if it is to be ratified by the end of the year.

The two sides are particularly far apart when it comes to the level playing field. The EU draft mandate requires the UK to commit to upholding EU rules in key areas such as competition, State aid, social policy and the environment – the concern being that any EU concessions would undermine the Single Market given the geographic proximity of the UK. In contrast, the Government's Written Statement on UK/EU relations states that the UK will in future develop separate and independent policies in these areas. Negotiations relating to the maintenance of State aid rules are likely to be particularly challenging, with the UK seeking 'full sovereignty' over future subsidies at the same time as the EU is requiring the continued application of EU State aid rules 'to and in the UK'.

The result is that a likely outcome will be a 'bare bones' agreement by the end of 2020 relating to trade in goods only, prioritising those areas where failure to reach an agreement by the end of 2020 would result in an economically damaging cliff edge, or where the EU has exclusive law-making power. Current indications are that the UK will seek to negotiate via a 'suite' of agreements, although it is unclear how far the EU would be willing to accept this. 

In any event, it is highly likely that many issues will remain unresolved at the end of the year and the agreement could be complemented by additional temporary deals (e.g. relating to air or rail transport) and negotiation of further agreements (e.g. on services more generally) after the end of 2020.

No deal – still a threat?
All of this means that the threat of a no deal exit will now shift to the end of the transition period if no agreement on the future relationship can be reached. Trade with the EU on WTO terms at the end of that period could mean significant tariffs for both sides (unless the UK unilaterally waives customs duties for some goods for a further period) plus customs and regulatory checks at borders. The terms of trade in goods for Northern Ireland have already been agreed in the Withdrawal Agreement.

The effect on businesses would be similar to that of a no deal Brexit and it will be important for contingency plans to be kept in place in order to mitigate the economic (and political) effects of this. In reality, the UK could request a new, phased transition period in order to avoid a regulatory cliff edge if no agreement with the EU is reached. However, there is still a risk that talks break down, and the issue of future EU access to British fishing waters is likely to be particularly contentious.

It will be important for companies to be prepared for changes in the legal and regulatory framework affecting their operations and strategic decision-making at the end of 2020. However, given the limited time frame for negotiations, the final nature of the future trading relationship with the EU may not become clear until the end of the year. Businesses may, as a result, only have a few weeks to prepare.

There will be other immediate domestic pressures on the Government during this time. The UK will need to seek to 'roll over' existing trade agreements that the EU has with third countries (for example, Canada and Japan), as well as negotiate and ratify new ones (notably with the USA). It will also need to pass primary legislation to replace existing EU frameworks and establish new domestic policies, for example, in relation to immigration and trade.

January 2020: Ratification of the Withdrawal Agreement and Political Declaration 
As well as the Northern Ireland Protocol, the formal legal terms of the Withdrawal Agreement relate to separation issues such as citizens' rights, the transition period and the financial settlement, as well as provisions to allow businesses more time to adjust to leaving the EU, e.g. the ongoing recognition of professional qualifications.

The Act to put the Withdrawal Agreement onto the UK statute book, the WAA, has become law. The Withdrawal Agreement has also been approved by the European Parliament in a plenary vote and endorsed by the 27 remaining Member States. It has the status of an international treaty.

The accompanying Political Declaration is not legally binding, but forms the basis for the negotiation of an agreement between the EU and UK on their future trading relationship. 

1 February 2020 – 31 December 2020 (subject to extension): Transition Period
The WAA provides for EU law to continue to apply in the UK as if the UK were still a Member State during the transition period, subject to certain exceptions, e.g. elements of the EU Charter of Fundamental Rights will not be binding on the UK. New directly applicable EU legislation will also apply automatically within the UK, while other new EU measures will need to be implemented domestically as before.

The UK and EU will aim during the transition period to negotiate and ratify a legally binding agreement for their future relationship. The WAA does not now require the Government to seek approval of its negotiating objectives, or the final trade agreement, from the UK parliament. Negotiations will be conducted by a new 'Taskforce Europe' sitting in the Cabinet Office and 10 Downing Street.

EU law as it exists at the end of the transition period (with some limited exceptions) will be transposed into UK law, creating a body of 'retained EU law' which will provide legal continuity for the UK going forward. As noted above, the UK will be in a position to diverge from this at the end of the transition period, subject to any level playing field commitments agreed as part of the trade negotiations with the EU.

Beyond 31 December 2020 (subject to extension): The Future Relationship
The UK may face a potential legal and regulatory cliff edge at the end of December if there is no trade deal in place. Trade talks with the EU negotiating team are in any event likely to continue well beyond this time.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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