With Parliament expected to debate the government's Brexit deal over the next 2 weeks, our latest Q&A looks at the following aspects of the deal in more detail:
Q1: What does the Brexit deal consist of?
The "Brexit deal" that the UK government has reached with the EU consists of two elements:
A lengthy Withdrawal Agreement (585 pages) which will be legally binding if ratified. This sets out the arrangements for the UK's departure from the EU together with a transition period (see Q2) and the so-called "backstop" provisions relating to Northern Ireland (see Q5). During the transition, relatively little will change, which provides welcome certainty for business in the short term. A much shorter (26 page) political declaration which will not be legally binding. This provides some indication of the shape of the UK's future relationship with the EU after the transition has ended, although it provides very little detail. As a result, businesses face significant uncertainty as regards the medium to longer term.
As to the merits of the deal, see this article for an overview.
Q2: How long is the transition, does it change anything and can it be extended?
The Withdrawal Agreement (WA) provides for a transition period after 29 March 2019, which is scheduled to last until 31 December 2020. The key change that will take effect during that period is that immediately after 11.00 pm on 29 March 2019 (12.00 am Brussels time), the UK will cease to be a member of the European Union. However, beyond that, relatively little will change; indeed, the main point of the transition is (so far as possible) to maintain the status quo in order to allow more time to negotiate and prepare for the introduction of new arrangements between the UK and the EU. The WA achieves this by providing that, during the transition, EU law will continue to apply in the UK and other EU countries will treat the UK as if it were still a member state of the EU. However, this is not to say that nothing at all will change.
For example, on its own, the WA cannot legislate fully for the continuation of agreements (e.g. on trade and aviation) which the EU has negotiated with third countries. This is because the consent of those countries will be required if the UK is to continue to benefit from them during the transition. Whilst the UK will obviously hope that most countries will agree to "roll over" these agreements into the transition, this cannot be guaranteed. For example, some countries are thought to have attempted to use this issue to secure concessions from the UK in relation to possible future arrangements. If some of those countries refuse to consent to the continuation of existing trade arrangements, for example, UK businesses are likely to face higher tariffs on exports of their goods after 29 March 2019. Businesses importing goods from the relevant countries into the UK should not be affected because the WA provides that the UK will continue to honour the terms of existing EU-negotiated trade agreements (even if the relevant third country fails to reciprocate). However, the fact that the WA imposes this obligation means that the UK has very limited scope to retaliate should some third countries decide to "play hardball" over this issue. A great deal could depend on how much diplomatic pressure the EU is prepared to exert on third countries to agree to roll over their agreements for the benefit of the UK.
The WA also provides for an extension of the transition period to an as yet unstated date – although press reports suggest that the final version may allow extension until 2022. Any such extension must be agreed by July 2020. In our view, an extension will almost certainly be needed because the 21 months to 31 December 2020 is very unlikely to be sufficient time to negotiate, let alone allow business and government to prepare for, the UK's future relationship with the EU.
A key difficulty, however, is that any extension will require the UK to make additional contributions to the EU budget. This is likely to be highly controversial – yet if the UK fails to secure an extension, it will face much the same risk of a "cliff edge" Brexit in 2020 as it faces in March 2019 if the WA is not ratified and the transition does not go ahead as planned. This puts the UK in a very weak bargaining position vis-à-vis the EU. It is also likely to mean that businesses will need to consider further "no deal" preparations in the run-up to key dates such as July 2020, by which time any extension must be agreed.
Q3: What is the dispute resolution mechanism for the Withdrawal Agreement and does it involve the CJEU?
The Withdrawal Agreement provides for the establishment of a Joint Committee to oversee its operation and to act as the main forum for resolution of disputes (although there are special arrangements relating to citizens' rights – see below). Similar Joint Committee mechanisms are used to oversee numerous other EU agreements, such as the EEA Agreement and the EU-Ukraine Association Agreement.
If the dispute cannot be resolved, either the EU or the UK can refer the matter to an arbitration under the auspices of the Permanent Court of Arbitration (PCA) in the Hague. Arbitrators would be drawn from a list of 25 persons (10 nominated by the UK, 10 nominated by the EU and a further 5 agreed jointly to act as chairpersons of any arbitration panels). A panel hearing any dispute would consist of 5 arbitrators (2 UK nominees, 2 EU nominees and a chair). If the EU and UK cannot agree on the make-up of the panel, there is provision for appointments to be made by the Secretary General of the PCA.
Any ruling of the arbitration panel is binding on the parties. Should one party fail to comply within a reasonable period of time, the complainant may ask the arbitration panel to determine an appropriate period for compliance and impose a penalty payment. In the event of continued non-compliance, the complainant is entitled to suspend its obligations under the agreement, subject to an obligation to ensure that its response is proportionate to the breach.
Where the dispute raises a question of the interpretation of EU law, the arbitration panel must refer that question to the Court of Justice of the European Union (CJEU). The CJEU's ruling will be binding on the arbitration panel.
The use of arbitration and the mechanism for involving the CJEU appear to have been "borrowed" from Association Agreements such as that between the EU and Ukraine. In the EEA Agreement, by contrast, there is an option for the parties to seek a ruling from the CJEU if both wish to do so (but there is no obligation to involve the CJEU). There is also no provision for arbitration - so if the EEA Joint Committee cannot resolve the dispute, the only option for the aggrieved party is to suspend the operation of parts of the agreement in response to the alleged breach.
There are special dispute resolution provisions relating to citizens' rights. These allow for references to the Court of Justice of the European Union from the UK or national courts in EU member states concerning the interpretation of the provisions of the Withdrawal Agreement relating to citizens' rights. Cases involving citizens' rights could continue to be referred to the CJEU where proceedings had commenced either during the transition period or within 8 years of the end of the transition period. In addition, the UK is also required to set up an independent body to monitor its compliance with those provisions and if necessary take legal action in the UK courts to enforce such compliance. These arrangements will remain in place for at least 8 years after the end of the transition (possibly longer).
Q4: What form will the future relationship take and how will disputes be resolved?
The EU is known to be keen to avoid the future relationship with the UK being governed by a complex web of bilateral agreements, as is the case in relation to its arrangements with Switzerland. It is therefore not surprising that the political declaration proposes that the future relationship will be subject to an over-arching framework, potentially in the form of an Association Agreement (as used by the EU to govern its relations with countries such as Ukraine and Moldova). For more detail on Association Agreements, see this article and this Q&A.
This is not to say that the entire EU-UK relationship will be dealt with in a single document; instead, there is likely to be an over-arching Association Agreement (or similar) which will provide the main framework, but the parties may choose to deal with the detail of some issues in separate texts (which would nevertheless sit within the overall framework).
As regards dispute resolution, the political declaration envisages that the mechanisms will be similar to those agreed in relation to the Withdrawal Agreement i.e. the future relationship will be supervised by a Joint Committee and if that body cannot resolve any disputes, they will be referred to binding arbitration (see Q3). It is not clear whether the future relationship will include a mechanism for referral of questions of EU law to the Court of Justice of the European Union (CJEU). If the agreement involves the UK committing to a high degree of alignment with EU law, the EU is likely to insist on such a provision being included, even though it may contravene the UK's' "red lines."
Q5: What does the Northern Ireland backstop involve and why is it politically problematic?
The Withdrawal Agreement also commits the UK to a “backstop” relating to Northern Ireland which would keep the UK in a customs union with the EU until alternative arrangements can be found to avoid a hard land border between the province and the Republic of Ireland. The backstop will result in a regulatory border for goods flowing from Great Britain to Northern Ireland (but not necessarily the other way around i.e. goods would potentially be able to flow from Northern Ireland to Great Britain as they do now).
Under the backstop, there will be a single customs territory between the UK and the EU, comprised of the EU customs territory and a new UK customs territory (which will include Northern Ireland). Customs duties will be prohibited on movements of goods within the single customs territory and the UK must align its external tariffs for third country imports with the EU's Common Customs Tariff. Therefore, the basic parameters of the single customs territory look very similar to the UK's existing participation in the EU's customs union. However, certain EU customs rules in the EU's Union Customs Code will continue to apply to Northern Ireland (but not the rest of the UK). In particular, there will not be a full regulatory union between the UK and Northern Ireland – but Northern Ireland will effectively be in a regulatory union with the Republic of Ireland as regards goods (to avoid checks at the land border with the Republic). This is why the backstop envisages regulatory checks on goods moving from the rest of the UK into Northern Ireland.
The backstop is politically problematic because it is strongly opposed by the Democratic Unionist Party on which Theresa May relies for her majority in Parliament (and which has recently abstained on amendments to the Finance Bill in protest at the Brexit deal). It is also anathema to leading Brexiters because it locks the UK into a customs union with the EU, heavily constraining its ability to conclude trade deals with other countries, and commits it to maintaining alignment with EU rules in areas such as state aid and the environment. In particular, the backstop requires the UK to apply EU state aid rules to measures which would affect cross-border trade between the UK and the EU, meaning that there would be little practical distinction between the state aid rules applicable to Northern Ireland and those applicable to the rest of the UK.
Political considerations aside though, the backstop could potentially be quite good for Northern Ireland from an economic perspective because to some extent, it could enable the province to have "the best of both worlds". It would be the only part of the UK which was effectively inside the Single Market for goods, a status which it could use to attract foreign investment, as the UK did for many years based on its membership of the EU. At the same time, businesses in Northern Ireland could benefit from privileged access to the UK market for goods compared with their competitors in the EU and derive other competitive advantages.
For example, EU VAT rules on supplies of goods would continue to apply to Northern Ireland. Northern Ireland will remain part of the UK VAT area, meaning that the place of supplies made in Northern Ireland would still be the UK and the UK would continue to collect VAT and set rates of VAT. The alignment of EU rules on goods in Northern Ireland means that no up-front VAT should be payable on movements of goods across the Irish border, whereas up-front VAT may be payable on imports of goods from the EU into the rest of the UK. This may result in a competitive advantage for businesses in Northern Ireland. The UK government has also stated that no up-front VAT will be payable on movements of goods between Northern Ireland and Great Britain.
Q6: Does the Withdrawal Agreement and in particular the Northern Ireland backstop mitigate the adverse effects of a "no deal" scenario at the end of the transition?
If the transition comes to an end and UK and the EU have been unable to agree on the terms of their future relationship, the UK will leave the EU without a deal. Some of the uncertainty in this situation would be removed by provisions of the Withdrawal Agreement dealing with issues such as goods originating from the UK which have been legally placed on the market before the end of the transition but have not yet been sold to final customers (the Withdrawal Agreement provides that such goods can continue to be sold in the EU after the end of the transition). There are similar "wind-down" or transitional provisions on certain other matters such as tax. However, the overall impact of these provisions in mitigating the adverse effects of a "no deal" Brexit will be fairly limited.
It has also been suggested that the Northern Ireland backstop (see Q5) could mitigate some of the adverse effects of a "no deal" scenario in relation to goods because it would require the UK to remain in a customs union with the EU. This would avoid the imposition of tariffs on exports of goods from the UK or imports from the EU, together with the need for customs declarations and other related paperwork such as certificates of origin. However, it would not avoid the need for additional regulatory checks on goods. Much would depend on how far the EU and UK could agree to minimise the impact of such regulatory checks. On its own, though, the backstop is unlikely to be sufficient to preserve current levels of frictionless trade and thus prevent delays at key ports such as Dover. Supply chains would therefore be likely to face at least some level of disruption. Nor would the backstop prevent UK suppliers of more heavily regulated products such as chemicals or pharmaceuticals having to obtain new EU approvals or registrations for their products (as any UK approvals or registrations would no longer be recognised by the EU as valid after the end of the transition). It follows that the backstop can only partially mitigate the adverse effects of a "no deal" scenario in relation to goods and it would have very limited impact in other areas.