The mantra of "Brexit means Brexit" has long been heard since Prime Minister Theresa May first came into office. However, this soundbite has never been properly explained further. This has created great uncertainty and speculation as to what form the UK's departure from the EU might ever take, and what the impact of that would be on business. Business normally does not like uncertainty.
In her much reported speech of 17 January Mrs. May gave the clearest indications yet of the UK Government's intentions and objectives in the negotiations with the remaining EU member States (the "EU 27"). While the hopes of one party at the start of any negotiation can never be any more than a stated wish list, it is helpful in that it at least narrows some of the ideas previously under consideration. For example, it has previously been speculated that the UK might seek a so-called "Norway-style" arrangement along the lines of the EFTA/EEA Agreements which secures membership of the single market, but to be part of such an "EU-lite" type of arrangement is now firmly not in discussion.
Mrs. May’s speech alights on 12 key points of principle that she says the UK will seek, and whether the EU 27 will agree to these in any combination or at all remains to be seen, but the following points are nevertheless a starting point:
- Provision of certainty about leaving the EU
- UK control of its own laws
- Strengthen the Union (of the UK)
- Maintain common travel area with Ireland
- Immigration control
- Rights for EU nationals in UK and UK nationals in EU
- Protect workers rights
- Free trade with EU markets
- New free trade agreements with other countries
- Best place for science and innovation
- Cooperation on security
- Smooth orderly Brexit
- What should business do now?
By way of reminder, the process for leaving the EU is for the departing Member State to serve notice to the other members under Article 50 (EU Treaty) following which a 2 year negotiation period ensues in which to conclude the terms of exit. At the end of the 2 years the member having served notice then leaves and ceases to be bound by the EU Treaty. This belies any amount of detail as what needs to be considered on exit, but reminds us that most fundamentally, the UK should expect a 2 year negotiation period following Article 50 notice. In this time period the EU's first priority will be to conclude exit arrangements, but the UK will also seek to determine the future relationship going forward.
Mrs. May confirmed first of all that she intends for the UK to serve notice by the end of March 2017. In theory this means the UK leaving the EU by April 2019. Otherwise, Mrs. May's newly stated 12 points plus brief comment are as follows:
This is not so much a point of substance in negotiation as to clarify that whatever final deal is put together will be put to the UK parliament for its approval, and the UK Government will be as clear as it can be to business as the process unfolds. The UK Government has already been clear that on departure from the EU it will seek to enact into UK law directly whatever EU legislation is in place (that is not already in specific UK law) in order to maintain the status quo on day one. Following this an orderly departure in different areas can be undertaken over time as the UK Parliament might see fit.
The clearly stated intention is for the UK not to be subject to the law making of EU institutions or the jurisdiction of the European Court of Justice any further. To be outside the judgement of EU law altogether in such a way is incompatible with being in an associated EU arrangement such as EFTA, hence this should not be considered. What Mrs. May did not acknowledge is that even membership of the World Trade Organisation (WTO), on which the UK intends to rely, still involves some agreement to be bound by the judgements of WTO panels in trade disputes, albeit this is very different to the current overarching nature of EU law upon the UK.
Mrs. May made clear the intention to maintain and strengthen the UK as more than the sum of its parts: England, Scotland, Wales and Northern Ireland. This means the UK will remain one common market and free trade area within itself but the national governments outside England will be involved in the Brexit negotiation process.
Mrs. May recognised the long historic links with (the Republic of) Ireland and stated the strong desire to maintain a special relationship with its closest neighbour and the only EU country with which the UK will share a land border. In this vein it is a stated objective that people will continue to be able to travel freely between the UK and Ireland in future, as they can at present (particularly since both countries are outside the EU's primary Schengen free travel area). However, such a free travel area does not address the much more difficult issue of whether Northern Ireland will need to adopt a "hard" border for the movement of commercial goods. If there can be no free trade or customs union area between the UK and Ireland there seems little chance of avoiding border checks (customs control) for goods, particularly if Ireland is to maintain a united negotiating position within the EU 27.
Mrs. May was clear that she believes this was one of the most important reasons why the UK voted for Brexit, hence the free movement of workers principle of the EU can no longer apply in the UK. Mrs. May was clear to say this will not mean EU nationals will not be welcome in future (they will) but that a UK-controlled immigration system must be introduced to deal with this. Perhaps this issue more than any other means that the UK will not seek to remain a member of the single market.
The clearly stated intention is to provide reassurance to millions of individuals in the above categories as soon as possible. Mrs. May stated that this should be an issue that is agreed quickly in order to give individual people better certainty, and should not wait for the final outcomes of broader negotiations. The clear expectation is that no EU nationals legally resident in the UK should be expected to have to leave following an exit from the EU, but the UK Government clearly wants such a position to be reciprocal as against its own nationals living in the EU.
This is a statement probably aimed more at the UK audience in order to reassure it that although a lot of workers rights' legislation in the UK at present emanates from the EU, the UK Government has no intention of scaling back on this and will keep fair worker protection as a priority in the future even when no longer obliged by the EU to do so.
This is what is of primary interest to business. Mrs. May was clear that the UK will not seek membership of the EU's single market (on the basis the quid pro quo's for this like free movement of workers are too great), nor will it seek to remain part of the EU customs union. Rather, the UK will seek a free trade agreement (FTA) with the EU of the style enjoyed by other trading partners with the EU such as Canada, while developing its own external trade policy and its own schedule of tariffs (ie. import duties against different products imported into the UK). Clearly FTAs between other countries and the EU exist hence one with the UK cannot be impossible . Dropping out of the EU and single market does not mean trade with the EU is prevented, it should just mean trade will likely be under WTO basic rules only (which means tariffs on imports and exports between the UK and EU) unless and until the EU and UK conclude a preferential FTA with one another, to cover whichever goods and services it sees fit. The fear of business is that historically such FTAs take several years to negotiate and deliver, and that the EU's desire to ensure the UK is worse off outside the EU may inhibit the EUin doing such a deal with the UK quickly, or perhaps at all.
Famously, being a member of the EU prohibits a country from negotiating its own FTAs with other countries elsewhere in the world. EU members hold such agreements as an EU bloc or not at all. Mrs. May’s clearly stated intention is that the UK will concludeFTAs with as many other countries as it can in the years to come, when no longer prevented from doing so. The UK intention therefore is to be an independent WTO trading member
The UK's intention here is to reassure all investors in the knowledge economy that the UK intends to remain at the forefront of research and development and innovation. This is an area threatened by withdrawing from historic EU funding arrangements, especially in the higher education sector, but the Government has already stated its intentions to stand behind previous EU funding when it ends, and this statement makes clear yet again that the Government will make every effort to keep the UK at the "cutting edge" on this issue.
Mrs. May stated clearly that leaving the EU should not mean leaving cooperation with EU members on issues such as security and the fight against terrorism, in which the UK has always had amongst the EU's leading capabilities.
Mrs. May's stated intention is to avoid the "disorderly" Brexit, where one day the UK is a member, then the next day it is not, with no agreement as to how this will be managed. Mrs. May describes this as wishing to avoid a "cliff edge" scenario, such as would likely create an extremely damaging period of disruption for business especially. Referencing what is one of business' biggest fears, Mrs. May said that the UK was willing to entertain some sort of transitional agreement, which it is acknowledged could mean some limited extension of the jurisdiction of the European Court of Justice for example. There is no clarity yet as to what such a transitional period would entail noor how long it would last, save that it should be as brief as possible.
Theresa May’s 12 points are by no means a full Brexit blueprint nor do they answer a multitude of questions as to the detail of what Brexit will look like and what it will mean for business across the different sectors. They can therefore be taken as a "starter for 10" only. What they do achieve though is to take some potential scenarios apparently "off the table" and move the negotiating position towards a firm exit from the EU and all that goes with it. The hope for the UK beyond this is that the EU 27 will wish to continue to do business (on the basis the UK buys from the EU much more than it sells to it) and hence will be prepared to conclude an FTA within a reasonable time frame, and if this cannot happen within the 2 years' negotiation period after Article 50 is triggered, then some sort of transitional period (albeit certainly not open ended) may be contemplated.
As to what should business do now, the only safe advice has to be to plan for a so-called "hard" Brexit, in which an FTA with the EU may not be concluded before the 2 year Article 50 period expires, and in which a transitional agreement may not be in place. This means contemplating business with the EU under basic WTO rules only, with tariffs in place in trade between the EU and the UK and vice versa. This means any business buying goods from the EU or selling to the EU needs to be conscious of future tariffs potential (and beyond that potential lack of regulatory equivalence) and what it might mean for them. Whether this means re-evaluation of supply chains with greater focus either domestically or outside Europe will require case by case analysis. Beyond this, having done their homework, UK businesses absolutely must communicate what they need the UK Government to do to ensure their interests are best protected.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.