The amount of information and analysis published since the UK’s referendum decision to leave the EU is bewildering. Reading it all would take as long as the Brexit negotiations themselves.
Boardroom Brexit has been designed to help senior executives like you cut through to the issues that really matter for your business.
In this first issue of Boardroom Brexit, we look at the negotiating mandates of the EU and UK and distil them into the crucial things that you need to know and do. Future issues will follow the course of the negotiations with the same emphasis on concise, practical, commercial guidance.
Why it matters?
First of all, you might be asking why negotiating mandates matter to your business. Already the negotiating mandates show the shape of what a UK-EU withdrawal agreement will look like. There are some overarching themes, both negative and positive, that we have identified, which may have a significant impact on your business:
1. The UK will not be in the Single Market after it leaves the EU, unless on a transitional basis until the UK-EU trade agreement comes into force. This means that the two-way free movement of people, capital, goods and services between the EU and the UK, will change, in all likelihood significantly.
2. It also means that the UK will not be able cherry-pick any elements of the Single Market for a bilateral deal. So it is highly unlikely, for example, that the UK financial services sector will benefit from a separate agreement as part of the withdrawal process allowing it to “passport” its services to the EU, as it does now.
3. Neither will the UK be in the Customs Union. On the negative side this will mean new rules on customs clearance for EU imports into the UK and UK imports into the EU. On the plus side, outside the Customs Union the UK will be able to conclude bilateral free trade agreements with emerging as well as established economies, which could give preferential treatment to UK-based exporters over their European competitors.
4. Whilst both the EU and the UK will start the negotiations in good faith, both acknowledge that they could fail, leading to a “cliff-edge” Brexit on 29 March 2019 without any agreed rules in place for the immediate aftermath. There will be a powerful legal and commercial incentives to avoid this, as the consequences could well lead to regulatory chaos. But these are, ultimately, political negotiations between one Member State leaving and the EU and the remainder of the EU: critical political and economic considerations are at stake.
EU Negotiating Directives
The Directives stipulate that there should be two distinct phases to the negotiations, with the EU deciding when the first phase ends and the second begins. Phase 1 is limited to exit issues—what the EU calls “an orderly withdrawal”. Phase 2 will consider preparatory discussions on the framework for the future EU-UK comprehensive trade deal. The deal can only be finalised, however, once the UK has left the EU. Transitional arrangements may also be agreed in this phase to cover the interim between Brexit and the coming into force of a new trade agreement. Significantly, such arrangements could include extending the application of EU law in the UK on a temporary basis, so long as the full supervisory authority of the European Commission and the EU Court of Justice (ECJ) are maintained.
Key elements of Phase 1:
■ Citizens’ rights: Safeguarding the status and rights of EU citizens in UK and UK citizens in the EU as at the date of withdrawal is the first priority of the EU. These should be exactly the same as the rights all EU citizens have now, including the right to permanent residence, the right to work, the rights to social security, healthcare and pension payments, and the mutual recognition of formal qualifications. The jurisdiction of the Court of Justice of the EU (the Court of Justice) should be maintained to supervise the effective enforcement of these rights in the UK.
■ Settling the UK’s financial obligations: The UK’s outstanding financial commitments will need to be settled to the EU’s satisfaction before the negotiations can move on to Phase 2.
■ Ireland: The impact of Brexit on Ireland will require “imaginative solutions…” including with the aim of avoiding a hard border".
■Goods placed on the market before Brexit: The withdrawal agreement should ensure that any good lawfully placed on the EU market before the withdrawal date can continue to be available on the market or put into service after that date in both the UK and the EU-27.
■Recognition of legal proceedings instituted before Brexit: Legal proceedings before the ECJ commenced before the withdrawal date should continue and be enforced; judgments of the ECJ handed down before the withdrawal date should continue to be recognised and executed.
The UK’s policy towards the negotiations has not been set out in any detail. It derives from Government White Papers, ministerial speeches, and the Article 50 notification letter. Should a Conservative Government be returned, it is also considered in the Conservative Party 2017 election manifesto. The central UK themes, from a business perspective, are:
■ Sovereignty: Taking control of its own laws, including ending the jurisdiction of the Court of Justice of the EU.
■ Immigration: Controlling the number of immigrants arriving in the UK, including EU nationals.
■ Ireland: Maintaining the Common Travel Area between the UK and Ireland and a soft border with Northern Ireland.
■ Citizen’s rights: Securing the rights of UK nationals in the EU and EU nationals in the UK at an early stage in the negotiations.
■ Certainty: Nationalising the existing body of EU law through the “Great Repeal Bill” and other UK legislation, to ensure that, wherever practical, the same rules and laws will apply post-Brexit as they did pre-Brexit.
■ Free Trade with EU: Securing a comprehensive free trade in goods and services between the UK and EU, but as a third country outside the Single Market and Customs Union.
■ A new customs agreement with the EU: Facilitating as frictionless trade in goods as possible.
■ Free Trade with third countries: Taking the opportunity to strike free trade agreements with established and emerging markets to boost UK exports and maximise Foreign Direct Investment.
■ Parallel, rather than sequential, negotiations: Running the withdrawal negotiations and negotiations on a new trade agreement in parallel, with a view to finalising both at the same time.
■ Transitional measures: Phased implementation of the outcome of the negotiations.
The most important thing you should do now. Prepare.
This, unsurprisingly, is the advice the EU has given to business: “Business and other stakeholders will lose the predictability and certainty that comes with EU law.… National authorities, business and other stakeholders should take all necessary steps to prepare for the consequences of the United Kingdom’s withdrawal.”
Your business would be well advised to run a risk and opportunity assessment of the impact of Brexit, to include the following considerations:
■ Is your company sufficiently well-informed about the Brexit process—timelines, politics, likely outcomes—to be able to assess its impact on your business?
■ How much of your business relies on cross-border EU rules, and what rules will replace them? For example, what do “WTO rules” actually mean? How will the UK’s exit from the Single Market affect your supply chain? Will your company have to restructure or re-locate to continue operating both in the EU’s Single Market and in the UK market?
■ Will the “Great Repeal Bill” provide a substitute basis for how UK businesses trade with the EU, and for how EU businesses trade with the UK, if there is a hard Brexit?
■ A full commercial impact assessment: Brexit may affect suppliers of goods and services – e.g. WTO tariffs on supplies from and to the EU; customs clearance may incur additional cost. Which of your operations and clients will this affect? Will it impact on their turnover and profitability, and create greater risks for you?
■ Ensure existing and new contracts have appropriate provisions covering changes of law and other possible consequences of Brexit.
■ What advantages can be gained from UK trade liberalisation with non-EU countries? New customers? New supply chains? And is it necessary for EU-based companies to look for other markets than the UK?
■ What advantages can be gained for companies operating in a sector in the UK that is no longer being regulated by EU law?
■ How can my company or industry's interests be best represented at EU and UK level? What does an effective policy and regulatory advocacy strategy for Brexit look like?
You should then put in place contingency plans to ensure your business can respond quickly and flexibly to any risks and opportunities that arise from the negotiations.