With 9 months to go before Britain leaves the EU, the UK Government yesterday published its most detailed proposals to date for the future relationship between the UK and EU.

The UK Government's approach

The White Paper reflects two priorities:

  • respecting the result of the Referendum by ensuring, post-Brexit, UK sovereignty over its borders, money and laws (albeit subject to some practical constraints)
  • a view that the interests of the UK's post-Brexit economy will be best served by balancing:
    • flexibility to "seize opportunities" in the "industries of the future" based on digital and services; and
    • safeguarding the deep integration of the UK in a EU wide market for goods (and specifically integration on the island of Ireland),

whilst also recognising that in some specific areas like competition law, financial services, data transfers and the nuclear industry, there will be benefits for both the UK and EU in maintaining particularly close cooperation.

Key themes

The White Paper builds on the key proposals in the statement issued following the UK Cabinet's Chequers summit last Friday. Key areas for business include:

1. "Frictionless" trade in goods – through a "common rulebook" (i.e. the UK and EU having many of the same regulations).

This is driven by the integration of European supply chains and the importance of avoiding a "hard border" in Ireland. Consequently, the common rulebook will cover anything necessary for frictionless trade at the UK/EU border. Crucially, the UK side of the common rulebook will be legislated for by the UK Parliament, so ensuring EU law no longer applies directly in the UK. However, the White Paper recognises that, if the UK fails to follow EU rules, it would be in breach of the new UK/EU agreement with potential consequences.

2. A "facilitated customs arrangement" (i.e. collecting tariffs at the border of a combined EU/UK zone not at the EU/UK border).

This unprecedented proposal is driven by a desire for tariff (and customs border) free trade with the EU, combined with freedom for the UK to negotiate its own trade deals with other countries (indeed there is specific reference to the possibility of a UK/US trade agreement).

The White Paper makes clear that it would eliminate any tariffs, quotas and rules of origin requirements on goods traded between the UK and the EU. For goods entering the UK directly from outside the EU, the UK would look to charge a UK or EU tariff based on the ultimate destination of the goods using a "trusted trader" scheme where possible. Where the destination of the goods cannot be robustly demonstrated, the UK would charge the higher of the UK or EU tariff. It remains to be seen whether the EU would accept the principle of the UK collecting tariffs on the EU's behalf.

The UK would have freedom to negotiate its own trade deals with the rest of the world. However, divergence of UK and EU trade arrangements would not be without potential complexity. The White Paper explicitly recognises that in areas covered by the common rulebook, the UK's ability to negotiate separate deals could be limited. In addition, third country imports and exports to and from the EU would be subject to EU deals with those third countries and could then enter or leave the UK without a second customs border. This has the potential to create issues for the UK with the collection of tariffs if goods are customarily imported first into the EU and then moved on into the UK. Although the White Paper envisages criminal sanctions and intelligence led investigations to address material risks of circumvention of UK tariffs, the potential for complexity is particularly high in this area.

More generally, the White Paper appears to acknowledge that introducing infrastructure for the Facilitated Customs Arrangement will be a significant enterprise suggesting this may well not be completed by the end of the Transition Period in which the UK may well need to continue to apply EU tariffs for an extended period.

3. Regulations applicable to services would be less closely aligned implying greater some "friction" for businesses providing services across the new EU/UK border.

This is driven by an aim, consistently expressed in the White Paper, to promote the UK's flexibility in the regulation of services to enable the UK's dominant economic sector to innovate, and so thrive in global markets – something UK Government sees as a key Brexit prize. In contrast to its approach to goods, the White Paper's starting point for services is more traditional free trade concepts, based on the WTO's General Agreement on Trade in Services. This represents a markedly lower level of integration than is proposed for goods and there is a recognition that, alongside the perceived opportunities in global markets, access to the EU market would be reduced.

4. Enhanced cooperation in particular areas.

This is driven by a principle that the characteristics of these specific areas mean that both the UK and the EU will benefit from special arrangements. In some of these areas, such as competition law and state aid, the White Paper takes the view that the UK and EU approaches will inherently be aligned and therefore cooperation will be mutually beneficial. In other areas, the practicalities of an industry or an issue are seen as dictating a "cross border approach" which facilitates managed integration. Data transfers, aviation and energy are examples of this category. In several areas, the paper proposes that the UK should continue to participate, albeit on a non-voting basis, in EU bodies or initiatives and recognises this may require a financial contribution and alignment with the rules of those bodies. Examples include the European Medicines Agency and the European Data Protection Board. Financial services, where the White Paper proposes an "enhanced equivalence" approach (which potentially falls short of "mutual recognition"), are called out for specific treatment because of the importance of the UK's financial services hub globally as well as to the UK and EU.

5. Commitment not to let UK standards for environment, climate change, social and employment, and consumer protection to fall below current levels.

This is driven by the view, expressed in the White Paper, that the UK is itself a strong proponent of high standards in these areas and there are benefits for both the UK and EU of working together to support and promote those standards. The White Paper imports the concept of "non-regression" to reflect this aim in some areas.

6. A "mobility framework" to replace current free movement of people.

This is driven by a desire end full free movement, a key issue in the Referendum, whilst maintaining close cultural and economic ties between the peoples of the UK and EU. Having asserted the UK's ability to determine its own immigration policy and the need to strengthen border security, the White Paper targets reciprocal arrangements to facilitate travel between the UK and the EU. The target is to devise arrangements which support the needs of business, tourism and education.

7. New UK/EU institutions to manage the new agreements. To underpin the other elements of the proposed deal and to respect both UK sovereignty and the integrity of the EU's institutions, the White Paper proposes a bespoke institutional framework. The arrangements seek to ensure ongoing political dialogue through a joint-ministerial body and parliamentary input, technical and practical alignment through official level working groups and binding arbitration to resolve disagreements and provide redress for non-compliance. On a first reading, this area of the paper could prove potentially the most sensitive both in UK politics and with the EU. Although the UK appears to be seeking to build its proposal on concepts which have some precedent, the model risks being perceived as seeking to give the UK a quasi-membership status. There is a risk it could prove difficult to thread the needle between UK political sensitivities about the UK being a "rule taker" and potential EU concerns regarding the UK's influence over EU rules despite no longer being a member.

Prospects

Overall, the White Paper's proposals imply a "pick and mix" Brexit with a variety of implications for business.

The EU's considered reaction is as yet unclear, as is the full extent of the domestic political ramifications. Political attention is likely to focus most intensely on whether the UK will become a "rule taker" in some areas, the implications of reduced market access for the UK's predominant service sector and the role of the European Court in the new institutional arrangements will function.

In short, adoption of the UK's proposals, both by the EU and domestically, remains far from certain.

Implications

The White Paper is an important contribution to the debate over the long term relationship between the UK and the EU. If agreed, it would, in the short term at least, be encapsulated in a Framework Document accompanying a Withdrawal Agreement. Following 29 March 2019, the UK and EU would need to negotiate full form agreements reflecting that framework in detail. Unless the UK and EU can align around a Framework for the future relationship there appears little prospect of agreeing a Withdrawal Agreement.

As a result, the most immediate implication of today's proposals is likely to be for the prospects for a Withdrawal Agreement which will avoid a "cliff-edge" next March.

Of course, even if a Framework is agreed, there is no guarantee that final agreement on the future relationship will be reached early in any transition period (or indeed at all). Given the complexity that would be involved in turning the UK's proposals into full agreements, even if they were to be adopted (in principle) on all sides at this stage, the potential for a "cliff-edge" at the end of transition will therefore remain well into 2019 and probably 2020.

Next Steps for Business

Business will have a number of priorities including:

  • carefully assessing the implications of the proposals for their specific Brexit risks including both the detail which is included in the paper and areas where further detail is required
  • engaging in the next phase of policy development including inputting into the outstanding areas of detail and influencing the next phase of the dialogue between the UK and the EU
  • starting to develop plans for their business should the White Paper's proposals move forward
  • continuing to assess, and prepare for, the possibility of a "no deal" Brexit which could occur just 9 months from now.