Having experienced a lull in developments in the second half of 2016, 2017 has seen fast moving events with regard to the UK’s withdrawal from the European Union. Less than a full month in, Theresa May has outlined her negotiating objectives, the Supreme Court has confirmed an Act of Parliament will be needed to trigger Article 50 and the Government has pledged to lay out its plans in a more detailed white paper to be laid before MPs.
Theresa May’s speech on Brexit on 14 January 2017 is the feature of this article. The speech attempted to give more clarity around the Government’s Brexit plan. The Government has signalled that it will give notice under Article 50 TFEU to leave the European Union in March. It will then have a period of two years to negotiate the terms of the future relationship between the UK and EU, although this may be extended with the agreement of the 27 EU Member States.
a. Leaving the internal market – which rules will remain?
As anticipated, Mrs May confirmed that the UK would leave the single market, which allows goods, services, persons and capitals to flow freely between the 28 (soon to be 27) member states. In theory, this leaves the UK free to deregulate business in the UK by dispensing with the laws that govern trading with the other member states. This is welcomed by some commentators, such as Roger Bootle, who consider that the EU's regulatory activities have gone too far, to the point that they are holding back UK industry unnecessarily.
In reality though, whether or not these rules remain on the UK statute books, business will still be required to conform with EU norms and standards when exporting into the internal market. The existence of common legal requirements across most of the continent lends itself to an ease of trading which many businesses are keen to retain.
For example, a key concern held by stakeholders relates to financial services and whether UK banks will continue to enjoy the right to provide services directly to other customers in the EU (known as "passporting rights"). This right depends in part upon the observance by member states of common EU standards and obligations (for example minimum capitalisation thresholds for banks). It is unclear whether the EU will allow UK banks to continue to enjoy such rights but, if it does, it will likely require the UK banking industry to continue to operate to EU standards.
b. A trade deal with the single market – how would it work?
Mrs May has also signalled that the UK will seek to negotiate an ambitious trade agreement with the internal market, albeit as an external party.
Whilst the details of any such deal remain to be seen (and there are no obvious precedent agreements between the EU and a departing member state), it is likely that the UK would wish to include provisions covering free movement for goods, services, capital and certain types of persons (in all likelihood, those who offer skilled work or can provide services on a cross-border basis). It is unknown firstly whether the EU will share this ambition and, if it does, whether it will require the UK to continue to observe EU rules in areas such as competition, state aid and public procurement. This seems likely as otherwise EU based businesses would not find themselves competing on a level playing field. More problematic would be the UK’s desired, partial approach to free movement of persons. Agreeing to allow only specified categories of workers free movement into the UK may be seen by many in the EU as a dangerous precedent to set and one which could undermine the fabric of the EU itself.
Mrs May suggested that any Free Trade Agreement may "take in elements of current Single Market arrangements" in certain areas, such as the freedom to provide financial services across national borders, where, in her view, "it makes no sense to start again from scratch when Britain and the remaining Member States have adhered to the same rules for so many years".
The Prime Minister has stressed that there should be no cliff edge for business. This appears to mean, in practice, that she may seek to agree with the EU that after the UK has left the single market that it will continue to have transitional periods, during which it would still have temporary access as it went through a phased withdrawal.
c. How will customs rules work?
Currently, the UK is part of the EU’s customs union. This means that once goods have entered into the internal market (and a common external tariff has been paid), these may be transported freely between each of the member states without any further duties being paid or customs formalities being needed. Mrs May appeared to indicate a withdrawal, at least to a major extent, from the customs union.
In some respects, May’s confirmation that the UK will leave the customs union comes as no surprise; remaining a member of the customs union would have prevented the UK from negotiating its own external trade deals, a cornerstone of its emerging post-Brexit economic strategy. Indeed, the Government has created a new Ministry of International trade headed by Liam Fox, to attempt to negotiate such deals. Much has been made recently of the possibility of a UK-USA free trade agreement following the meeting of a former Government minister with the new US President.
Mrs May indicated though her desire to push for an association agreement between the UK and the customs union. She acknowledged that she had no preconceptions about how it wishes to negotiate a special relationship with the customs union. No doubt, her Government is opposed to the introduction of tariffs between UK businesses and their continental trading partners, as this would have the potential to render UK goods and services less attractive.
A drawback of Mrs May’s approach is that it will require “rules of origin” to be applied to goods passing between the EU and UK. These rules would be needed in order to ensure that goods from third countries could not benefit from the special and reciprocal fiscal privileges that were intended to be reserved for EU and UK merchandise. That means that any deal would still need to be accompanied by the introduction of customs checks and formalities for EU and UK trade in goods as each side would wish to ensure that goods from third parties were not benefiting from the exemption from customs duties. Obviously, that has the potential to disrupt trade to a significant degree.
In practice, there may be a pragmatic solution. For example, two of the three EFTA countries (Iceland and Norway, the other being Switzerland) sit outside of the customs union but form part of the EU single market. Norway has a land border with Sweden (an EU member) which technically is also a frontier to the customs union, so customs checks are conducted. These checks are sporadic along the Norway–Sweden border. Cars are usually not forced to stop. To combat drug smuggling, the use of CCTV surveillance has recently been increased, with systems using Automatic number plate recognition being rolled-out in 2016 and 2017. We understand that the UK is considering this as a possible model to be adopted for the Irish land-border, to avoid a disruption in trade between Ulster and the Republic of Ireland.
Any agreement on customs requires the approval of the EU 27 and Mrs May did not address what would happen if a solution on some sort of partial union was not forthcoming. It was not clear whether the UK would impose tariffs on EU exports to the UK. In reality, the UK is an important export market for the EU and it is unlikely that the 27 member states would wish to see the UK re-impose customs duties on their goods.
d. When will a deal be concluded?
The UK will seek to agree a "phased process of implementation" after the conclusion of the two year process initiated by the triggering of Article 50. The aim of this process will be to allow businesses to plan and prepare for any new arrangements agreed between the UK and the EU. Mrs May suggested that this process might apply to, among other things, the future legal and regulatory framework for financial services. Although Mrs May did not use the term, this suggests that the UK hopes to put in place transitional arrangements to soften the immediate impact of its departure from the EU.
One unknown is whether or not the deal that is negotiated within the two year notice period will contain the elements that relate to the future trading relationship with the EU. EU Commissioners have suggested that the terms of the divorce must be negotiated first and it is only once the UK has formally left that it can begin negotiating the terms of any trade deal to dictate the future commercial relationship. That will no doubt worry business. In reality though, many insiders consider that the two deals will be negotiated in parallel with the second being concluded shortly after the divorce arrangement is finalised.
e. Why does it matter for business?
Mrs May's speech introduces a myriad of different post-Brexit scenarios, each of which presents very different trading environments and regulations. How far will any free trade agreement go, which goods will it cover and will it also allow free movement of services? The answers to these and other questions will have profound repercussions for the shape of UK commercial law and business regulation, along with the levels of formality that businesses are required to observe to reach their customers.
It is unknown whether the EU will allow Mrs May the continued market access she desires while railing back on EU regulation and abandoning the principle of freedom of movement. EU negotiators such as Guy Verhofstadt appear to reject this idea - stating that the UK cannot end up in a better position than the one she currently finds herself as a member. On the other hand, Mrs May has indicated her willingness to simply walk away if a mutually agreeable position cannot be found. "No deal is better than a bad deal" she stated, creating the possibility of 2019 ushering in a swift and radical end to the way in which the UK does business with its closest neighbours in the EU.
As mentioned above, the Prime Minister has stressed that there should be no cliff edge for business, meaning transitional arrangements could temporarily prolong the UK’s stay in the single market even after she has ceased to be a member of the EU. In other words, her Government will strive to avoid a situation where long-established business rules disappear overnight, leaving an extensive legal vacuum. On the other hand, one of her explicit objectives is “taking back control” over UK law, which would indicate a desire to deregulate in certain areas, as yet unspecified, in order to make the UK economy more attractive – and potentially to compensate for the drawback of diminished market access (or possibly, tariffs). Clearly, a good deal remains to be seen.