On 17 January 2017, Theresa May, the British Prime Minister, set out her Brexit plan in the form of 12 objectives. These elaborated on the ideas set out in her speech at the Conservative Party conference back in October 2016. The key headlines are that the UK:
- will leave the Single Market;
- will take back control of its laws and end the jurisdiction of the Court of Justice of the EU (“CJEU”) in the UK;
- will ensure that it can control immigration to Britain from Europe;
- will seek a comprehensive free trade agreement with the EU allowing for the freest possible trade in goods and services between Britain and the EU’s Member States;
- aims to enter into a customs agreement with the EU, but wants the ability to enter into its own free trade agreements with other countries and fix its own external tariffs on imports into the UK; and
- will seek a phased implementation of the changes to the UK’s and EU’s relationship but not an “unlimited transitional status”.
In this briefing, we analyse what these key objectives mean for businesses.
Exit the Single Market
In her speech, Mrs May reiterated that the UK will no longer be bound by EU laws and the jurisdiction of the CJEU post-Brexit. She will ensure that the UK will be able to control immigration to Britain from Europe. In order to meet these objectives, it is impossible for the UK to remain a full member of the EU or even a member of the EEA, as they are both non-negotiable elements of membership of the Single Market.
Instead, the UK Government will be seeking access to the Single Market through a “new, comprehensive, bold and ambitious” free trade agreement allowing for the freest possible trade in goods and services between the UK and the EU, thereby allowing British companies the maximum freedom to trade with and operate within European markets (and vice-versa). Mrs May suggested that the agreement could include current Single Market arrangements in certain areas giving the export of cars of lorries and the freedom to provide financial services, as examples. She does not, however, want the UK to have to pay “vast contributions” to the EU for this access. In other words, the Prime Minister is seeking the benefits from the Single Market without the obligations of having to contribute (significantly) to the EU budget, and abide by EU laws and the jurisdiction of the CJEU. Such a deal certainly sounds ambitious.
Outside of the EU Customs Union
The EU Customs Union is a trade agreement between countries under which members agree not to impose tariffs on each other’s goods, and agree to impose the EU’s Common External Tariff on goods imported from countries outside the Customs Union. This means that once goods enter any country in the Customs Union, they can move freely to any other country in the Customs Union without border checks, rules of origin and customs formalities.
Mrs May is keen to have some sort of customs agreement with the EU, as she wants continued tariff-free trade with the EU and she wants cross-border trade there to be as “frictionless as possible.” She does not, however, want to be part of the EU’s Common Commercial Policy or be bound by the Common External Tariff, as this will restrict the UK’s ability to enter into free trade agreements with other countries. Instead, Mrs May wants the UK (rather than the EU) to be able to set its own external tariffs and negotiate its own trade agreements.
Given Mrs May’s objectives, it will not be possible for the UK to remain in the EU Customs Union. However, whether the EU and its Member States will be willing to be imaginative and flexible to create some sort of customs relationship with the UK to reduce tariff and non-tariff barriers will remain to be seen. Any such agreement will no doubt require the UK and the EU to agree to adhere to the same product regulations. The very question is how disputes will be determined if the CJEU will have no jurisdiction in relation to the UK.
Trade agreements with countries outside the EU
Mrs May highlighted that she wants the UK to be a global trading nation and that she would be seeking free trade agreements with countries around the world. Indeed, in her speech, she listed a number of countries that have already expressed their interest in entering into trade deals with the UK including Brazil, China, the Gulf States and, of course, the United States. Trade discussions have already begun with some countries such as Australia, New Zealand and India, but due to the EU’s Common Commercial Policy, the UK cannot legally enter into trade agreements with any of these countries until it actually leaves the EU. These agreements should bring significant advantages for UK businesses. It must not, however, be forgotten that Brexit is likely to signal the end of the UK’s participation in the trade agreements that have been entered into by the EU on behalf of its Member States with over 50 countries including Mexico, South Africa and South Korea. Businesses operating in the UK are, therefore, likely to lose the benefits of those agreements on Brexit.
World Trade Organisation (“WTO”)
The WTO is a global international organisation which provides a framework for trading in goods and services. The UK is already a member of the WTO. However, the EU currently represents the UK as well as the other EU Member States at WTO meetings and negotiations. Furthermore, as members of the EU Customs Union must adopt the EU’s Common External Tariff, the UK does not have its own tariff (and services) schedules at the WTO. These will be need to be adopted before the UK can commence negotiating trade agreements with non-EU countries. It is envisaged that the UK will seek to adopt the EU’s schedules in the short term.
If no trade deal is agreed between the UK and the EU, they will trade under WTO rules. This would mean that the EU would be obliged to impose its Common External Tariff on UK imports and the UK would be free to impose import tariffs on goods entering the UK (from the EU and elsewhere). Goods would also be subject to customs checks. The EU’s Common External Tariff varies from 0% on cotton, 10% on automobiles, 26% on sugar and confectionery, to 45% on certain dairy products. Goods exported from the UK to the EU would still need to comply with EU standards.
Mrs May made clear that the UK cannot accept the free movement of people from the EU to the UK. She wants to be able to control the number of people entering the UK from the EU whilst still attracting “the brightest and the best to work or study in Britain”. It will remain to be seen how the UK Government envisages controlling immigration and whether its policy will also include non-skilled workers on whom industries such as agriculture hugely depend.
Any free trade agreement that the UK enters into is likely to require a certain amount of mobility of people. It is not clear at this stage whether EU nationals will have any preferential immigration status post-Brexit compared with non-EU nationals.
Implement the EU acquis into UK law to provide certainty
As already announced by the UK Government, it will incorporate the EU acquis (body of existing EU law) into UK law on Brexit to provide legal certainty for businesses through the Great Repeal Act. The UK Parliament will then decide on any changes to that law after “full scrutiny and proper Parliamentary debate”. The Prime Minister highlighted that workers’ rights under EU legislation “will be fully protected and maintained”.
Some changes will, however, have to be made on Brexit. For example, it makes no sense for the UK to incorporate the laws which ensure the operation of the Single Market, such as EU competition laws into UK law on Brexit. UK businesses that operate in the rest of the EU will still, however, need to comply with EU law.
According to the Mrs May, she will be trying to reach an agreement on the UK’s future trading partnership with the EU by the time the two-year Article 50 process has ended after which she wants a “smooth, orderly Brexit”. She does not want there to be a “cliff-edge for business” or a threat to stability, as the UK and the EU’s relationship changes to a new partnership. Instead Mrs May will seek a phased process to implement the changes resulting from that change in their relationship so that businesses will have sufficient time to plan and prepare for those new arrangements. In her speech, Mrs May proposes that this be done on an issues by issues basis and that, for each issue, the time needed to phase-in the new arrangement may differ. This brings a welcome relief for businesses although any such interim arrangements will need the agreement of the EU.
The Prime Minister confirmed that the final deal that is agreed between the UK and the EU will be put to a vote in both the House of Commons and the House of Lords before it comes into force. This, however, is more likely to be a rubber stamp exercise rather than allow Parliament to jeopardise Brexit.
The Prime Minister’s speech focused on building a “Global Britain” and a “great, global, trading nation”. If the UK Government succeeds in obtaining free trade in goods and services with the EU through a comprehensive free trade agreement, as well as extensive free trade agreements with countries around the globe, this will result in significant benefits for UK businesses and customers alike. Trade deals do not, however, happen overnight and the UK cannot enter into any trade agreements before it leaves the EU. Furthermore, there are doubts as to whether Theresa May will be able to obtain all of the items on her wish-list once negotiations with the EU commence. Therefore, businesses that have supply chains or that provide services between the UK and the EU, or that currently rely on the EU’s existing free trade agreements with other countries for their supply chains should consider their own Brexit plan and the potential cost implications of Brexit on their business.