On 22 May 2017 the EU adopted its negotiating Directives setting out how it will negotiate the UK’s withdrawal from the EU. It is expected that formal negotiations will start soon after the UK general elections on 8 June. This, in summary, is what businesses need to know about the EU and UK objectives for Brexit.
The EU’s negotiating priorities
The EU intends for the negotiations to take place in two distinct phases, with the European Council (EU heads of state) deciding when “sufficient progress” on the first phase has been made, after which the second can begin. The European Council’s guidelines stipulate that negotiations under Article 50 TEU (the two-year period for withdrawal) will be conducted in full transparency and as a single package, and that there will be no scope for separate negotiations between individual Member States and the UK.
Key elements of phase 1
Phase 1 is limited to exit issues. The emphasis is on an “an orderly withdrawal” with as much clarity and legal certainty as possible.
- 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 ECJ) should be maintained to supervise the effective enforcement of these rights.
- The UK’s financial settlement: The UK’s outstanding financial commitments as a member of the EU must be fairly settled.
- Ireland: Continuing to support the achievements of the Peace Process will “remain of paramount importance”. 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.
- Recognition of legal proceedings instituted before Brexit: Legal proceedings before the ECJ concerning the UK that are commenced before the withdrawal date should continue, and be subsequently enforced. Judgments of the ECJ concerning the UK that are handed down before the withdrawal date should continue to be recognised and enforced.
Key elements of phase 2
Phase 2 will consider the framework for the EU-UK relationship post-Brexit. It has two main elements:
- Preparatory discussions on a free trade agreement: Preparatory discussions on the framework for the future EU-UK comprehensive trade deal. The EU wants “strong and constructive ties” with the UK, including a free trade agreements that is “balanced, ambitious and wide-ranging”. It must, however, contain safeguards against unfair competitive advantages for the UK through, for example, competition, state aid, tax, social, and environmental policy. In other words, a level playing field will be required across the board. Whilst preparatory discussion on the trade agreement can start in phase 2, the agreement can only be finalised once the UK has left the EU and becomes a “third country” in EU legal terms.
- Possibility of formulating transitional arrangements: Transitional arrangements may also be agreed in the second phase to cover the interim between Brexit and the coming into force of a new trade agreement. Such arrangements could, significantly, 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 ECJ are maintained.
The UK’s negotiating priorities
The UK’s policy towards the negotiations has not been set out in similar detail. It derives from Government White Papers, speeches of the Prime Minister, and her Article 50 notification letter. Should a Conservative Government be returned, it is set out to a limited extent in the Conservative Party 2017 election manifesto. The central themes are:
- Sovereignty: Taking control of its own laws, including ending the jurisdiction of the ECJ
- Immigration: Controlling the number of immigrants arriving in the UK, including EU nationals
- Ireland: Maintaining the Common Travel Area and a soft border with Northern Ireland
- Citizens’ 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 the same rules and laws will apply immediately 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 through a new customs agreement
- Free Trade with third countries: Taking the opportunity to strike free trade agreements with large 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 within the two year deadline
- Transitional measures: Phased implementation of the outcome
The ten “known knowns” of which business should be aware
- No Single Market access: The UK will not be in the Single Market after it leaves the EU, unless on a transitional basis until an EU-UK trade agreement comes into force. Both sides have agreed on this. 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. Business should urgently consider to what extent this will affect their bottom lines.
- No cherry-picking of Single Market policies: It also means that the UK will not be able cherry-pick any elements of the Single Market for a bilateral deal as part of the withdrawal process. It is unlikely that the UK financial services sector, for example, will benefit from a separate agreement allowing it to “passport” its services to the EU on Brexit Day.
- No Customs Union access: 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 countries, which could give preferential treatment to UK-based exporters over European competitors.
- The EU wants a comprehensive trade deal: This is significant. An EU-UK trade deal will never offer the same access to EU markets as membership of the Single Market, but will nonetheless offer businesses on both sides important preferential trading rights.
- The risk of a cliff-edge Brexit is real: 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 powerful legal and commercial incentives to avoid this, as the consequences could well lead to regulatory chaos. But these are, ultimately, political negotiations between an exiting EU Member State and the remainder of the EU: the stakes are high, and the final result is unpredictable. The UK’s financial settlement, the role of the ECJ, and the free movement of people are three UK red lines which could make a compromise difficult. Business would therefore be well advised to plan for this worst-case-scenario.
- Nothing is agreed until everything is agreed: The EU will apply this negotiating policy to the Brexit negotiations, which means that the chance of a cliff-edge Brexit might not be ruled out until the very end of the negotiations.
- The UK’s timeline is unrealistic: The UK Government’s aim of concluding the negotiations with the EU on a free trade deal in two years is unlikely to be met, particularly if the EU succeeds in having phased, rather than parallel, negotiations. A timeline of five to ten years is more consistent with past EU trade negotiations. The importance of transitional measures being put in place to cover the interim cannot, therefore, be emphasized enough.
- Early agreement on citizens’ rights: That said, the EU expects to reach a final draft agreement on the rights of EU citizens in the UK and UK citizens in the EU by autumn 2017. Businesses should monitor these discussions closely to judge what the human resources implications will be, and particularly what assurances they can give affected staff.
- Early agreement on Ireland: Similarly, expect a final draft agreement on Ireland earlier in the two-year process. There is likely to be agreement that the Common Travel Area between the UK and Ireland will continue, and great efforts will be made to maintain the soft border between Ireland and Northern Ireland.
- The Great Repeal Bill: The “Great Repeal Bill” and similar legislation nationalising EU law will not alone provide a substitute basis for the continuation of EU-UK commercial and regulatory cooperation across all areas of EU policy. The withdrawal agreement will have to provide links between EU law and UK law.