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Article 50 has been triggered! So what does that mean?

The short answer is that it means the UK's formal timetable for leaving the EU has finally started, but not that there will be immediate changes in law or regulation. Formal service of Article 50 notice begins a timetable of negotiations, which after two years means that the member serving notice (the UK) will leave the EU and EU law (in the form of the EU Treaties) will cease to apply to it. The period may be extended with the unanimous consent of all members (the UK and the remaining 27 other EU members) but it is too early to say if this will be relevant. Thus, as at 30 March 2019, it is now possible to say that the UK should be expected to no longer be a member of the EU, and will be out on its own, so to speak.

What will the Article 50 notice say?

The notice states the UK's giving of notice as per Article 50 to leave the EU (and the parallel EURATOM Treaty) as per UK law, recognising that the giving of such notice has passed the necessary legislative and constitutional steps to give proper effect. The notice also seeks to set the tone for ensuing negotiations by engendering a spirt of goodwill and mutual advantage to both sides to ensure the negotiations are handled sensibly and in a spirit of cooperation, and that the UK wishes to remain the closest possible partner to the EU going forward, in every sense including trade but also defence and the fight against terrorism. The UK government has previously set out a White Paper of its intentions in the exit and new deal negotiation process, and this has narrowed some of the options. It seems relatively clear from this that the UK will not seek to continue to be a member of the so-called "single market" nor to be a part of the EU's customs union. These things already narrow down the post-EU scenarios for the UK considerably. The UK will however wish to construct some sort of free trade agreement (FTA) with the EU going forwards in order not to disrupt trade and hence continue preferential arrangements, as well as conclude the UK's existing responsibilities to the EU in a sensible fashion.

The law hasn't changed (yet)

What is clear is that while a timetable for exit has been triggered, nothing else has changed legally and EU law continues to apply in the UK as before. Some policies and attitudes of enforcement agencies may change a bit in light of the Article 50 process but technically the law has not changed. UK Courts and EU institutions are duty bound to apply EU law as before until the point of clarification of negotiations into what a new regime will be. This is not expected to be clear until the latter part of the two year negotiation period, at the earliest. The UK government has long since admitted that businesses will have to learn to live with the uncertainty this creates.

What will the ensuing EU/UK negotiations be about?

Article 50 provides for discussions to be held between the remaining members and the departing member as to the terms of exit, or rather "the divorce" as it has become known. This is a means of determining how one member may extract itself from the financial commitments of EU membership in particular and how liabilities (and assets) may be shared in order to create a sensible settlement for all. Liabilities include ongoing pensions of UK officials in the EU institutions and current EU budget commitments that the UK signed up to. Assets include the many EU institutions' investments. There is no precedent for how this will be done however, and Article 50 sets no detail or particular principles. The EU has previously said it wants this side closed before discussion of the UK's new relationship with the EU. It is increasingly obvious to negotiators on both sides that any financial settlement cannot be wholly distinct from setting the new relationship so clearly the two will be inter-linked. In order to be adopted the final "deal" between the EU and UK will need to be adopted by qualified majority of the remaining EU members.

Will EU/UK trade be able to continue uninterrupted?

This is the big question and while there is public optimism on both sides that a new relationship can be carved out that will disrupt existing trade flows as little as possible, this can certainly not be guaranteed. Businesses need to contemplate the possibility of "no deal" (see below). Article 50 does not provide for what happens if there is no agreement between the parties and/or whatever agreement is reached fails to be adopted. Article 50 provides that at the end of the two years the member giving notice will leave. If this happens without a deal in place, this is the so-called "cliff edge" scenario.

What does no deal (within two years) mean?

In short, no deal within the two years means either all parties agree to extend the negotiation period (which currently seems unlikely) or formal exit takes place and the UK is outside the EU as of 30 March 2019. This means the rights and benefits of EU membership cease to apply as of that date. In this scenario it is commonly understood that the UK will revert to individual membership of the World Trade Organisation (WTO) and will need to trade with the EU as any other third country, and without the benefit of any FTA such as the EU enjoys with some countries in order to put into place preferential arrangements. This has a number of very significant consequences:

  • Workers: Absent political agreement to the contrary, the current rights that EU and UK nationals have to live and work in each other's territories will cease to apply. From all the statements issued on both sides it seems highly unlikely that persons will be under pressure to leave their place of establishment on either side, but this has not yet been absolutely guaranteed. The UK will need to apply immigration laws to EU nationals going forwards in the absence of any preferential status having been agreed with the EU (and vice versa). The UK may of course adapt current immigration law to suit this new situation, given its reliance on migrant labour from the EU historically.
  • Goods and import tariffs. This means that exports of UK origin goods from the UK to the EU will be subject to the EU's Common Customs Tariff on entry into the EU customs territory. In simple terms UK goods will be treated in the same way henceforth as goods from other non-EU countries with whom there is currently no FTA such as the USA or Russia, for example. This will create a customs duty charge according to the tariff applicable to different classifications of goods (eg. cars are set at 10%), and administration in clearing the goods at border levels. The Republic of Ireland is EU customs territory for this purpose and for this reason it is difficult to see how a no-deal (ie. no FTA) scenario can avoid erecting a customs border at the very least along the border with Northern Ireland (NB. the Article 50 letter does note that special attention should be paid to dealing with Ireland sympathetically). Similar arrangements will need to be put in place at UK borders for importation of EU origin goods, although the UK government will enjoy some latitude in how this is put into place and ultimately what tariffs to charge (see below).
  • Non-tariff barriers. Membership of the single market currently assures that UK goods exported to the EU should not be met with other regulatory barriers that would prevent their free circulation in the EU. While UK goods and standards are all set to EU levels presently anyway (meaning that in theory they should be acceptable across the EU) what must be in doubt is the extent to which relevant national authorities (perhaps under pressure from their domestic industries) will accept relevant UK authorisations as proof of meeting relevant standards going forward post Brexit, and hence whether more subtle forms of erecting barriers to trade might become commonplace.
  • Services. This area is perhaps the least clear and is of particular concern to the City of London financial services industry especially (and resulting rights for so-called "passporting"). Many services were not completely harmonised between EU Member States anyway, but other (particularly highly regulated) services will need to adapt to the scenario of no longer being able to take for granted the ability to provide services across the EU from a UK establishment. In some cases this means creating establishments elsewhere in the EU from which to continue to provide services, even if not all former UK staff would necessarily need to reside there as well.

Is the UK's WTO membership clear and secure?

The UK is a member of the WTO (formerly GATT) since before accession to the EU, but its membership has effectively been subsumed by EU membership given that the EU has enjoyed exclusive competence over external trade on the UK's behalf. The EU's competence in this area will cease on the UK's exit. Members of the WTO each have their own tariff schedules listing the tariffs to which they commit to trade with other countries. WTO members must apply those tariffs equally to other WTO members the "most favoured nation principle", unless they enjoy FTAs with other members, in which case they may diverge vis-à-vis dealings with those members. The WTO also includes a series of commitments (eg. anti-dumping and anti-subsidy rules) that the UK will need to abide by and agree to be judged by (for international trade purposes) under the jurisdiction of WTO Dispute Settlement panels. The UK is already within all such rules on account of EU membership, but will need to assume these rights and duties in its own right post Brexit, and create the institutions and frameworks necessary to do this.

The UK will need to adopt its own "schedules" for WTO purposes. The easiest thing for business continuity will be for the UK to adopt the EU's schedules en bloc, since this is what the UK works with in terms of trade with third countries now. Various complications exist around the issue of agricultural goods in particular, which are subject not just to tariffs via the EU's WTO schedules but also to "tariff quotas" (ie. maximum volumes of different types of goods from different countries that can enter EU territory). The EU's tariff quotas on such goods will need redistribution and it is not yet clear how this would be done, albeit there is at least some precedent in the way the EU has been able to enlarge its own territory following the accessions of new states, without disrupting trade too unduly. Having said all the above, to say that this can all be done smoothly presumes goodwill and a willingness to be accommodating from all sides. This cannot yet be taken for granted, hence businesses need to plan for possible disruption.

What will happen to UK law following exit?

The UK government is preparing the so-called Great Repeal Bill, the intention of which being to replicate into UK law, as of the moment of EU exit (ie. 30 March 2019 on current timetable) all existing provisions of EU law that have underpinned the legal system in the UK, but in a purely UK context and with UK enforcement. In many areas of EU law (eg. Directives) that have already been implemented into UK law anyway this should not be overly difficult, although even in those cases thought must be given as to replacement enforcement agencies for every example that relied on an EU institution previously. For other directly effective EU laws such as Regulations, this means enacting entirely new laws to reflect the previous EU instruments. It is likely to mean creating some new institutions where obvious UK counterparts to EU institutions do not yet exist.

What should businesses do now?

Although the political leaders on both sides are making optimistic noises that an exit deal and new FTA will be concluded for the good of all, this cannot at all be guaranteed. As noted above, UK government has now acknowledged that businesses need to learn to live with some uncertainty here. The chances of "no deal" happening, ie. reversion to WTO rules at best, are so high that contingency planning is essential (and UK government has acknowledged this now too). This means planning for "no deal". It is of course generally to be hoped that some sort of FTA will be agreed to facilitate undisrupted EU/UK trade, and if that is achieved, then having made some contingency plans for no deal, there should only be upside.

Set out below are some of the things UK businesses might consider (albeit noting the different sectors and organisations will all have their own very individual concerns):

  • Consider existing trade flows with EU – check what the tariffs might be (see https://www.gov.uk/trade-tariff) and consider are you ready both for export charge into the EU and import charge for goods you might currently be buying?
  • Consider rules of origin and classification: what tariffs may or may not apply to different trade in goods will depend on originating status (EU, UK or third country) and what the goods are properly classified as.
  • Consider trade protection issues: anti-dumping rules protecting domestic EU producers from unfairly priced imports from third countries have been applied at EU level only (eg. steel, solar panels, bicycles). On exit from the EU this will need reconsidering, which may be an opportunity for some importers as well as a threat for some UK producers.
  • Based on the above consider are there opportunities for domestic sourcing and sales of products previously imported from the EU? Remember, EU businesses will be doing the same. This is a matter of hedging your supply chain opportunities.
  • Consider what opportunities exist for sales outside the EU? The devaluation of sterling has certainly made UK goods more competitive across the world. Trade with non-EU countries should be able to continue as before.
  • Consider what non-tariff barriers you might face in future? Whatever barriers you perceive, make sure government understands them.
  • Participate in your trade associations and government relations. Government can only deal with what it knows about.
  • Consider your contractual arrangements. Those that will last beyond 2019 may or may not make provision for issues such as who is liable for import duties not envisaged at the time they were written. 

Conclusions

Article 50 is here and the UK's exit from the EU is happening. Whatever one's feelings about that it is incumbent on businesses to plan for it, which for now means being alive to the possibility of "no deal" and how best continuity can be assured, and indeed opportunity can be exploited, in such a situation.

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.

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Jonathan Branton

Partner - Head of EU/Competition

I lead the firm in EU/Competition issues, specialising in behavioural antitrust, merger control, public procurement and State aid, and all related issues of public funding, including the UK’s Regional Growth Fund, ERDF and ESIF. I also head up the firm’s Brussels office and the firm’s cross-discipline Public Sector group.

Dominic Watkins

Partner - Head of Food Group

I am Head of DWF’s internationally renowned food sector group as well as being Head of Regulatory in London.

Hilary Ross

Executive Partner (London) - Head of Retail, Food & Hospitality

Recognised by The Lawyer as one of the UK’s Top 100 lawyers, I advise clients on compliance and challenges across the EU in relation to products, systems and safety.