Brexit. Triggering Article 50: what now?

Transcription

1 Brexit Triggering Article 50: what now? 29 March 2017

2 Triggering Article 50: what now? The UK Prime Minister, Theresa May, has today formally triggered the process of the UK s departure from the EU by serving notice under Article 50 of the Lisbon Treaty. As set out in Article 50, the Treaties of the EU will cease to apply to the UK in their current form or at all when the withdrawal agreement enters into force, or failing that, two years from today, unless there is a unanimous agreement with the other 27 Member States to extend the process. In the six page letter to European Council President Donald Tusk, May states her aim to agree a deep and special partnership between the UK and the EU, taking in both economic and security cooperation. She outlines her plan to bring forward legislation, on which a White Paper is expected tomorrow, to repeal the European Communities Act 1972 and convert the existing body of EU law into UK law, with effect from the UK s exit. May also emphasises the need to agree the terms of the UK s future partnership alongside those of its withdrawal from the EU within the two year period foreseen by Article 50. A key theme of the letter is security cooperation, which she warns would be weakened in the event of a hard Brexit and reverting to trade on WTO terms. Crucially, the letter makes clear that the UK s objectives for negotiations remain as set out in May s Lancaster House speech and the White Paper published in February. Freshfields Bruckhaus Deringer LLP 1

3 Next steps Article 50(2) provides for negotiation of the exit agreement for a departing Member State taking account of the framework for [the UK s] future relationship with the Union. The provision does not go into any detail about what the future relationship agreement between the UK and EU will look like. However, the other Member States can be expected to be parties to it alongside the EU. This could make for a long negotiation and ratification process, as we have seen with the EU s attempts to conclude CETA, the free trade agreement with Canada. But there is still room for some creative thinking in relation to provisional implementation of those parts of any agreement that fall within the exclusive competence of the EU. As to the process for concluding the UK s exit, Article 50(2) directs us to another provision of the Lisbon Treaty Article 218 which contains a framework for negotiations with third party countries. Article 50(2) states that a withdrawal agreement shall be negotiated in accordance with Article 218(3). In addition Article 218 will also govern the process for agreeing the EU/UK future relationship. It provides some clarity on the roles of the EU institutions in this although voting levels for approving a final agreement on the future relationship qualified majority or unanimity of the Member States, for example will turn on the content of that agreement but are likely to require unanimity. As the scope of the arrangements for the EU/UK future relationship become clearer, Article 218 will be closely scrutinised on both sides of the Channel. 2

4 Will parallel exit and future trade agreement negotiations be possible? The UK Government s position underlined by May in the Article 50 letter is that the future relationship agreement can and must be negotiated in parallel with the exit agreement, complemented by transitional arrangements. May expresses confidence in the letter that this can be achieved in the two year time period. The EU has repeatedly stated that the exit agreement the terms of the divorce must come first. This point was reiterated by the European Council immediately after the Article 50 letter was served with a reference to the starting point for the negotiations being key arrangements for an orderly withdrawal. We expect that this issue will be strongly contested by both the UK and the EU but we would expect a way through it to be found in time. It is clear that the focus of Article 50 is on negotiating a withdrawal agreement governing the terms of the UK s exit from the EU (covering the payments due to the EU, the relocation of EU agencies, the rights of EU and UK citizens living or working abroad, the place of the UK under existing EU free trade agreements and various other administrative matters). There has been some speculation that the Commission s Chief Brexit negotiator, Michel Barnier, will try to limit the negotiating remit initially to financial matters, in order to try and strengthen the EU s hand. After months of conjecture around the EU s likely approach to exit discussions, some clarity looks to be forthcoming. Although the EU s official mandate setting out the political priorities for the negotiations is due to be approved by the 27 Member States on 29 April, the EU is expected to publish draft guidelines for the talks in advance, possibly as early as this Friday. Regardless of the approach taken in relation to the exit negotiations, there will be considerable practical difficulties to organise, co-ordinate and successfully conclude an agreement on the UK s future relationship (which will likely be subject to the unanimous approval of all Member States) in parallel with the exit negotiations. 3

5 If no trade agreement is negotiated alongside the withdrawal agreement, then the WTO rules would apply by default. The WTO rules are relatively well developed so far as concerns trade in goods: under the General Agreement on Tariffs and Trade (GATT 1947) tariffs would kick in between the UK and the rest of the EU at the present level of the EU external tariff. While tariffs will be unwelcome, particularly for those with complex supply chains that cross and re-cross the EU/UK border, it is non-tariff barriers such as border inspections and conformity assessment requirements with standards (on both sides of the Channel) that risk being of greater concern. One could also envisage tighter border controls on immigration at the border, particularly in the UK. To do this without triggering headline-grabbing photographs of long queues of people, lorries and ships will require extensive new infrastructure (facilities, personnel, new IT systems) which is unlikely to be fully ready and tested by March Those practical considerations may result in a more pragmatic approach to enforcement at least for some period. The UK Government has also made clear in the Article 50 letter that it wishes to avoid a hard border between the Republic of Ireland and Northern Ireland. The position is more troublesome for trade in services: the General Agreement on Trade in Services (GATS) has only one basic rule, the MFN ( most favoured nation ) rule, and for financial services there is a significant prudential carve-out from that rule. The Article 50 letter refers to a free trade agreement to cover sectors crucial to our linked economies such as financial services and network industries but does not mention other areas. Under WTO rules, favourable terms of trade which do not cover substantially all trade between the two WTO members have to be offered to all WTO members. 4

6 Beyond that, liberalisation of services is on the basis of schedules of concessions granted by individual WTO members. And concessions on services, by the EU, are extremely limited and given on a country-by-country basis. Interested WTO members are working on an enhanced agreement on international trade in services (Trade in Services Agreement (TiSA)), but the future of this agreement has been thrown into doubt with the announcement by the Trump administration that it may withdraw from multilateral negotiations and concentrate on bilateral negotiations. Services businesses are overwhelmingly demand led and exist in order to serve their clients and customers. Any major disruption of services can be expected to have implications for the wider economy throughout Europe, not only for the service providers themselves but also for their clients. This is particularly the case for professional services such as law, accounting and architecture, which rely on mutual recognition of professional qualifications and which get very limited assistance from GATS. The challenges faced by many service businesses should therefore be a concern for all businesses in the EU, not just those based in the UK. 5

7 Phased implementation Barnier has not ruled out a phased implementation of the EU/UK future relationship during a transitional period but whether as part of (or alongside) the withdrawal agreement, is not clear. It may be possible to devise an implementation agreement as part of the withdrawal agreement based on the reference to the future framework. However, a far-reaching implementation agreement could be challenged in the European Court of Justice (CJEU) by any Member State or the European Parliament. One obvious area of potential friction would be over whether the implementation agreement extended beyond matters of EU competence, thus necessitating Member State participation, unanimity and national ratification requirements, as in the Singapore case. Another would be whether the UK is subject to the jurisdiction of the CJEU during this implementation period. The EU has stated that the UK will remain under the CJEU during transition. While public sentiment among Leave voters has focused on immigration, bringing an end to CJEU jurisdiction on exit is believed to be the key point for the pro-brexit lobby of the Conservative Party. May has promoted this view herself, arguing that we will not have truly left the European Union if we are not in control of our own laws. There is also the question of whether the UK would continue to pay into the EU budget during this time. May s Lancaster House speech and the February 2017 White Paper referred to the possibility of a phased process of implementation across a broad range of activities, including immigration controls, customs systems, criminal justice cooperation and the future legal and regulatory framework for financial services. May suggested that the time period for each could vary and would be a matter for negotiation, but the common theme would be to avoid a disruptive cliff-edge. Building on these principles, in the Article 50 letter she calls for early agreement on implementation periods to adjust in a smooth and orderly way to new arrangements. 6

8 For a number of sectors, including financial services, a broad principle of equivalence ( equivalence-plus ) is being suggested. In principle there is no reason why such an arrangement would need to be purely provisional: it could be included in the exit agreement taking account of the framework for its future relationship with the Union. For the reasons explained above, the requirements for adopting the future relationship agreement are much more onerous than for the withdrawal agreement, which only requires a qualified majority approval. There may be advantage, therefore, in trying to obtain agreement on as comprehensive a withdrawal agreement as possible, albeit at the risk of possible legal challenge. 7

9 Getting the deal through A final word on negotiating a future relationship or trade agreement. A number of commentators have pointed out that negotiation of traditional free trade agreements can take many years and certainly longer than the two years which are available under Article 50, failing any extension. We agree that this has been the case for traditional arm s length free trade agreements, like CETA. Time will be constrained, certainly. The EU is not expected to commence negotiations until June Barnier has repeatedly talked of October 2018 as the deadline for a deal to allow for ratification in the European Parliament and national legislatures before the two-year anniversary of the Article 50 notice in March However, an EU/UK deal would not be an arm s length deal: the EU s and the UK s current standards are already identical. May emphasises this in the Article 50 letter and acknowledges that UK companies trading within the EU in the future will have to follow EU rules this raises the possibility of a double layer of standards, EU and UK. May s calls for deep, broad and dynamic cooperation as regulatory frameworks evolve could ease concerns about future divergence, but how this cooperation will work in practice remains to be seen. Assuming the UK is happy to continue applying standards which are broadly congruent with the EU s and, with goodwill on both sides, an agreement within 18 months from service of the Article 50 notice may be achievable. Many commentators talk of the cliff-edge faced by the UK in the absence of a deal; however, potential ramifications across Europe mean that there will be incentives on both sides of the table to avoid this. European politicians will need to balance a tough negotiating stance by the EU with the need to preserve political currency and stability at home and the fact that their countries own economic and business interests will be affected by Brexit. Similarly, the UK Government will have to contend with hard Brexiteers who may find it difficult to compromise on their own red lines. The coming months will tell; however, with so many competing interests and so many factors at play, there remains a risk that a deal is not reached on all relevant issues before the UK leaves the EU. 8

10 What should you do now? Businesses in the EU and the UK need to engage with governments now to make sure they fully understand the implications of an exit without an agreement, and how an implementation period could operate to minimise the impact of a cliff-edge. A common view between businesses on both sides of the Channel could be highly influential as negotiations develop. In parallel, businesses should be working hard on contingency planning for a possibly prolonged period of trading under WTO rules alone. Hopefully, the outcome will be better than that. Your usual Freshfields contacts will be very happy to discuss any of the points raised in this briefing, or visit for more information. 9

11 freshfields.com This material is provided by the international law firm Freshfields Bruckhaus Deringer LLP (a limited liability partnership organised under the law of England and Wales) (the UK LLP) and the offices and associated entities of the UK LLP practising under the Freshfields Bruckhaus Deringer name in a number of jurisdictions, and Freshfields Bruckhaus Deringer US LLP, together referred to in the material as Freshfields. For regulatory information please refer to The UK LLP has offices or associated entities in Austria, Bahrain, Belgium, China, England, France, Germany, Hong Kong, Italy, Japan, the Netherlands, Russia, Singapore, Spain, the United Arab Emirates and Vietnam. Freshfields Bruckhaus Deringer US LLP has offices in New York City and Washington DC. This material is for general information only and is not intended to provide legal advice. Freshfields Bruckhaus Deringer LLP, March 2017, 06155