Road to Brexit: Theresa May sets out “Five Tests” with which to judge eventual deal

by Pillsbury Winthrop Shaw Pittman LLP

Pillsbury Winthrop Shaw Pittman LLP

The Prime Minister has given the clearest indication yet of what the UK will seek in the Brexit negotiations.

  • Access to each side’s markets is going to be less than it is today.
  • The UK will leave the single market and things are going to be different in the future, but the UK will not take part in a regulatory race to the bottom at the expense of workers’ rights or the environment.
  • May wants the UK is to become “a champion of free trade” after Brexit.

In a long awaited “Road to Brexit speech at Mansion House in London on 2 March 2018, Prime Minster May announced that she had set five tests against which any Brexit agreement should be judged.

I want the broadest and deepest possible agreement—covering more sectors and co-operating more fully than any Free Trade Agreement anywhere in the world today.

—Prime Minster Theresa May

The full text of the prime minister’s speech is available here. Some of the key themes from the speech likely to be of interest to businesses based, or operating in, the UK and the rest of the EU are discussed in this client alert.

The Five Tests
The Brexit deal must:

  1. enable the UK to regain control of its laws, borders and money, while recognising the referendum “was not a vote for a distant relationship with our neighbours”;
  2. be enduring and not lead to endless future negotiations;
  3. protect people’s jobs and security;
  4. be consistent with Britain remaining a “modern, open, outward-looking, tolerant” nation that stands up for its values while meeting international obligations; and
  5. “strengthen our union of nations and our union of people.”

Bespoke Future Relationship
Rather than adopting an existing model such as membership of the European Economic Area or the European Free Trade Association (the so-called Norway model) or looking to replicate a Canada-style Free Trade Agreement, the UK will continue to press for a bespoke deal which is tailored for UK interests. Accepting an “off-the-shelf” deal, would, she said, “mean a significant reduction in … access to each other’s markets compared to that which [the UK and the EU27] currently enjoy” as well as being “inconsistent with the commitments” made by both sides regarding Northern Ireland. Five foundations should underpin the future trading relationship:

  1. reciprocal binding commitments are needed to ensure open and binding competition;
  2. the dispute resolution mechanism must be completely independent;
  3. ongoing dialogue and consultation between the EU and the UK will be required, especially between regulators;
  4. detailed arrangements to facilitate data protection and security as well as data flows between the UK and the EU are needed (rather than an EU adequacy finding), with an ongoing role for the UK’s Information Commissioner’s Office; and
  5. whilst free movement of people will come to an end, with the UK regaining control over its borders, links between people, enabling citizens to work and study in the UK, and the EU, must be maintained.

Recognising the “very particular challenges” that Brexit brings for both Northern Ireland and the Republic of Ireland, May says that a hard border must be avoided and that “physical infrastructure at the border, or any related checks and controls, have been ruled out,” whilst also rejecting the idea of creating a customs and regulatory border between the island of Ireland and the Great Britain (i.e., the Irish Sea), since breaking up the UK’s own common market is unacceptable.

An agreement on customs will be needed: May refers to two proposals already put to the EU. The first envisages a “customs partnership” which would see the UK would mirror the EU’s requirements for imports from the rest of the world, applying the same tariffs and the same rules of origin as the EU for those goods arriving in the UK and intended for the EU, whilst enabling the UK to apply its own tariffs and trade policy for goods coming into the UK market. The second proposal is for a “highly streamlined customs arrangement, where [the UK and the EU] would jointly agree to implement a range of measures to minimise frictions to trade, together with specific provisions for Northern Ireland.”

However, there is no real degree of detail yet on how either of these would proposals would work nor how goods can continue to flow freely between the north and south once Northern Ireland leaves the EU customs union and single market, especially given that, as prime minister recognises herself, 80% of north-south trade is carried out by micro-, small- and medium-sized businesses that are most likely to be adversely impacted by the introduction of new rules, processes and checks.

EU law and the European Court of Justice
Here the Prime Minister has softened her tone somewhat, recognising that the UK will continue to be affected by decisions of the European Court of Justice even after the UK leaves its jurisdiction. She cites, by way of example, the ECJ’s declaration that the U.S. Safe Harbour Framework for data sharing was invalid, as well as the Withdrawal Bill, which will import EU law into UK law on day one, with UK courts then having to consider and interpret EU case law where appropriate. May also says that where the UK continues to participate in an EU agency it will have to respect the remit of the ECJ over that agency.

However, since EU treaties and EU law will no longer apply to the UK after Brexit, May argues that the ECJ cannot have jurisdiction over the UK in settling disputes arising from the future relationship, and nor could the UK courts be expected to have jurisdiction over the EU in case of such a dispute. Here, the example of Switzerland may set a precedent, with Swiss Foreign Minister Ignazio Cassis recently stating that Switzerland could agree to an independent arbitration panel as part of a deal that would also allow Swiss laws to change in line with EU legislation, moving closer toward the EU’s plans for a three-person arbitration panel to resolve Swiss-EU disputes.

Regulatory Alignment
The Prime Minister also acknowledges that regulatory alignment between the UK and the EU, across multiple industries, will be needed to enable market access in the future, so that—for example—the UK will remain “in step” with the EU’s regulations on state aid and competition (anti-trust). The UK will look to match EU regulatory standards (and possibly adopt identical rules) to ensure that trade in most goods remains as free as possible. A comprehensive system of mutual regulation will be needed to ensure that products still only need to undergo one series of regulatory approvals, in one country. In practice, this will mean that UK and EU regulatory standards will remain substantially similar in the future.

Associate Membership
In the chemicals, medicines and aerospace sectors, the UK will seek “associate” membership of the relevant EU agencies after Brexit with the UK agreeing to abide by their rules and make an “appropriate” financial contribution. This will enable a single series of regulatory approvals, in one country only, as well as permitting UK firms to resolve certain challenges in the UK courts instead of the ECJ. The UK would also be able to contribute technical capability and expertise. Of course, associate members typically do not have voting power and have to rely on soft influence.

Financial Services
Accepting that UK-based banks will lose their passporting rights to provide services across the EU, May promised more details shortly on how the UK government envisions financial services as part of a comprehensive trade agreement.

We are clear that a future comprehensive trade partnership with the European Union must include goods as well as services.

–UK Chancellor Philip Hammond

In practice however many financial services firms are already taking steps to implement their contingency plans, building their out EU-based operations and moving jobs and roles there.

Whilst May’s speech reflects her determination to agree to a trade deal with the EU before the UK leaves the EU, it comes late in the process, at a time when the EU has been clear about its plans to make a declaration—a high-level political statement—which is to be annexed to the Withdrawal Agreement and use the circa two-year transition period to negotiate the future trade agreement. Although May’s speech provided some much needed clarity on key negotiation issues for the UK, businesses will remain particularly concerned that the detail of the future trade and customs arrangements still remains rather unclear.

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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