What next for Brexit?

December 2017

As widely predicted (not just by us), Brexit dominated the national conversation during 2017, politically and in terms of the legislative agenda. While the snap general election and its unexpected result threw a couple of curve balls, the cynical would say that the Brexit negotiations are progressing much as expected: slowly, painfully and without much hope of timely resolution.

The process has been very 'stop-start' during 2017, with monthly meetings between the UK and the EU looking woefully insufficient to address the huge issues which need, in theory, to be agreed by 30 March 2019. In October, Michel Barnier agreed to speed up negotiations and it seems we are entering a pre-Christmas rush of activity, with a vital meeting taking place on 4 December ahead of the December Brexit talks on the 15th. This makes predictions on Brexit even more challenging than usual.

Negotiations 2018

The possibly optimistic timetable for the year ahead and beyond looks something like this:

the Prime Minister used her speech in Florence to urge the EU to treat the UK as a 'special case': more than a 'third country', less than an EEA member. The EU has steadfastly maintained that:

• the UK cannot end up better off outside the EU than in; and
• Trade negotiations cannot begin until progress has been made on:
• the exit bill;
• the border between Northern Ireland and the Republic of Ireland; and
• the rights of EU citizens in the UK.

To the outside world, there has been little movement from the UK on these issues. Things may, however, be about to change. The Cabinet approved a massive increase to the divorce settlement. The new amount, said to be at least £50bn, is not expected to be formally offered unless the EU agrees to start trade negotiations but has reportedly been offered behind the scenes. In addition, the government expects to publish proposals around EU citizens and immigration by the end of this year.

At the time of writing, it is, however, the issue of the border between Northern Ireland and the Republic, which is looking like a real barrier to the start of trade talks. Ireland insists that trade talks cannot begin without a guarantee there will be no hard border. The UK argues that it cannot settle border issues until it knows the basis on which it will trade with the EU.

The negotiations next year may or may not be helped by the continuing uncertainty of the position of Angela Merkel and the possibility of further elections in Germany. Prominent Brexiters, Jacob Rees-Mogg and Iain Duncan Smith believe that with Germany distracted, progress can be made, while many Europeans see Merkel and stability in Germany as essential to the future of both the Brexit negotiations, and even the EU itself.

A period of transition?

The government maintains that the UK will leave the EU on 30 March 2019. From a legal perspective, this looks undeniable. An exit on that date can only be prevented by unanimous agreement of the EU27 to extend the negotiation period, or, arguably, by withdrawal of the UK's Article 50 notification (see below for more on this). One of the more concrete developments in 2017, and one initially welcomed by the business community, was the apparent recognition by the UK government that a transition period would be desirable. Theresa May formally requested a transition period (which she refers to as an "implementation period") of "about two years" in her Florence speech. EU officials were reported to have set a provisional date of 31 December 2020 as the final exit date. In October, however, the Prime Minister said that there could be no transition period unless an agreement on trade was in place by October 2018.

The role of the Court of Justice

One of the problems with the concept of a transitional period is the role of the Court of Justice of the European Union (CJEU). The Florence speech did not address this directly, merely saying that for the transition period the "framework…would be the existing structure of EU rules and regulations". There has been a definite shift in the government's 'red line' on the CJEU. Having started from the position that the CJEU's influence in the UK would end on exit, there is now somewhat confusing talk about direct and indirect control, and a growing recognition that the CJEU will retain influence during any transitional period, although it is still unclear whether that would be in all areas or only in relation to EU citizens' rights. The Labour Party has gone further with Keir Starmer saying that, while the CJEU's jurisdiction would have to change, there could be an ongoing role for it even after the end of a transitional period.

While many Brexiters are appalled by compromise on the CJEU red line, it is difficult to see how the UK can continue to participate in the Single Market and the Customs Union, whether during a transitional period or beyond, if the CJEU does not continue to play a role (at least indirectly as for EFTA countries such as Norway). This is because the main function of the CJEU is to resolve questions of EU law and ensure it is harmonised throughout the EU.

As we have commented before, regardless of any legal issues, from a practical perspective, if the UK wants to trade with the EU, it will be obliged to take note of relevant CJEU decisions in any event.

The EU Withdrawal Bill

A major development in 2017 was the publication of the EU Withdrawal Bill (formerly known as the 'Great Repeal' Bill). Before the General Election, it was assumed that the Bill would have a fairly smooth passage to enactment. With the loss of the Tory majority, however, the Bill is currently delayed in committee stage in the House of Commons. Further time for debate is likely to be scheduled in January and the government seems poised to make compromises in order to get the Bill through.

In its current form, the Bill will:

• repeal the European Communities Act 1972 from date of exit;
• preserve the rights in EU treaties that can be relied on directly in court by individuals;
• convert existing EU law (as it applies to the UK) into national law;
• preserve all laws made in the UK to implement EU obligations;
• give pre-Brexit CJEU law the same binding precedent status as Supreme Court decisions. There will be no requirement to consider CJEU law decided after the date of exit (although David Davis remarked to the Commons that the Supreme Court “often looks at what is done by other courts around the world”). The Supreme Court will be expected to depart from applicable CJEU law in the same way that it has discretion to depart from its own decisions i.e. “sparingly…when it appears right to do so”;
• create powers to make secondary legislation in order to enable corrections to be made to laws which would no longer work appropriately and allow domestic law to reflect the content of any withdrawal agreement – these are the controversial Henry VIII clauses which allow the government to amend primary legislation through secondary legislation;
• set out the order of precedence after exit, from which point:
• new UK legislation will trump EU-derived law;
• EU-derived law which applies at the time of exit will trump non-EU derived law in force at the time of exit; and
• give Parliament a vote on a commons motion relating to the final Brexit deal before it is voted on by the European Parliament (although this is likely to change – see below).

A final vote?

Under pressure from both houses, the government now looks set to restrict the use of the 'Henry VIII powers' and to give Parliament a vote on a new Act of Parliament which will put the terms of any withdrawal agreement and exit terms, as well as the detail of transitional arrangements, into law. The government argues that this is a meaningful vote on Brexit but if there is no deal on which to vote, and we simply fall out of the EU on 30 March 2019, then there is currently no option for Parliament to have any further influence. Moreover, the government suggests the vote would be 'take it or leave it' so if Parliament were to vote down the new law, we would be leaving on a 'no deal' basis. The government recently announced the Withdrawal Agreement and Implementation Bill, which is intended to put the terms of any withdrawal agreement with the EU and any transitional arrangements into statute.

A second referendum and withdrawal of Article 50 notification?

There are sporadic calls for a second referendum which would give the UK the option to reject any Brexit deal and either stay or leave, or to accept the deal and leave. That presumes we have a deal to either accept or reject. If negotiations fail to progress and we find ourselves peering over the cliff this time next year, we may see calls increase for a re-run of the original referendum. Legally there is nothing to prevent the UK from doing this but how the EU might choose to deal with any decision to change the outcome, is still open.

Confusion reigns over whether or not Article 50 notification can be withdrawn should the UK change its mind. Donald Tusk, President of the EU Council, has said that it can be, as has the author of Article 50, Lord Kerr. Chief negotiator for the UK, David Davis, is non-committal on the subject. The likelihood is that if there were political will from the EU27 and the UK, the notification could be withdrawn, whatever the legalities might be. The reality, however, is that time is running out to withdraw it given the two year time limit on negotiations, and there are currently no indications of a sufficient swing of public opinion within that time.

At the time of writing, there is no mainstream political appetite expressed (beyond the staunchest Remainers) for a second referendum but this could change if progress is not made next year and public opinion shifts dramatically. It's also worth mentioning that a general election during 2018 cannot be ruled out, although there is considerable incentive for the Conservative Party to avoid one, given the outcome would be far from certain. A Labour government could significantly change the course of Brexit.

Stranger things have happened so we hesitate to rule out either a further election or a second referendum in 2018, however unlikely either may look at the moment.

Trade policy

For the majority of business, the legal niceties are all very well but what really counts is the impact Brexit has on their ability to trade. The government recently introduced a Trade Bill 2017-19 into Parliament which provides the legal framework to put in place trade policy outlined in its white paper on future UK trade policy (TWP).

The government has reiterated its commitment to forging a new trading relationship with the EU and transitioning existing EU trade agreements with non-EU countries. It intends to pursue future agreements between the UK and non-EU countries during any transitional period after leaving the EU, but these will not come into effect during that time unless consistent with the terms of the exit agreement.

While a member of the WTO in its own right, the UK will need to develop its own WTO goods and services schedules. The TWP confirms that:

• the government will, as far as possible, replicate its existing commitments set out in the EU schedules and submit these for certification by the WTO ahead of Brexit;
• the government will maintain current levels of market access and keep changes to a technical nature;
• the UK is prepared to participate in plurilateral (involving only some WTO members) arrangements where multilateral ones are not possible;

Other priorities include:

• remaining a party to the Governmental Procurement Agreement;
• participation in a finalised Environmental Goods Agreement;
• becoming a member of the Trade in Services Agreement in its own right once finalised;
• putting mechanisms in place to deal with trade disputes and setting up an independent trade remedies framework if necessary.

The government has also set out position papers on other areas which are vital to cross-border trade including preserving the free flow of personal data post-Brexit: cross-border civil judicial co-operation, enforcement and dispute resolution, confidentiality and continuity in availability of goods.

Of particular note is the position paper on post-Brexit customs arrangements. UK government policy is that the UK will leave the customs agreement when it leaves the EU. In its paper, the government sets out the following objectives:

• UK-EU trade arrangements should remain as frictionless as possible;
• a ‘hard border’ between Northern Ireland and the Republic of Ireland should be avoided; and
• the UK should be free to establish an international trade policy.

Two broad approaches are outlined:

• a highly streamlined customs arrangement which would set up trade facilitation with the EU and improve the UK’s domestic regime. The EU and UK would trade with each other as third countries but with an efficient process which would need to be reciprocal, although the government recognises this would still be more cumbersome than current procedures; or, preferably,
• a new customs partnership with the EU. This would involve the UK aligning its import regime with the EU’s external customs border for goods crossing into the EU. Goods would be treated in the same way as they are now but the UK would still be able to apply its own tariffs and trade policy to UK exports and imports from other countries that are to be consumed in the UK provided that there is a system to ensure such goods did not enter the EU market.

The government also proposes an interim agreement which would continue the customs union but this would be time-limited. This would enable the UK to negotiate preferential trade agreements with other countries which could only be implemented after finally leaving the EU customs union.

The EU is likely to resist the government’s preferred approach as it leaves the UK with the benefits of the customs union without having to participate in it. In its own position paper, the EU focuses mostly on what should happen to goods which are already in transit at the time of withdrawal, suggesting that rules which apply at the start of an operation should continue to apply until its end.

While businesses (and their lawyers) have scanned the position papers for clues as to how easy it will be for them to carry on uninterrupted by Brexit, on the whole, the UK papers do not present much new information. They have been criticised, both in the UK and the EU, for lacking detail and realism. The EU’s regular accusation of ‘cherry picking’ has been levelled at the UK in some areas although in others, such as cross-border civil judicial co-operation, the players seem to be closer to agreeing the rules of the game. Of course, these papers are opening negotiating gambits or wish lists but they are worth noting, at least as a possible starting position from the UK. The gulf between the parties is illustrated by the corresponding EC position papers which focus much more on the withdrawal agreement and measures around exit than on the ongoing relationship between the UK and the EU.

One year from now?

As events over the last two years have shown, predicting anything in relation to Brexit is brave. While many large multi-nationals have started to plan for Brexit, the majority have held off putting plans into action – it has been very much a waiting game so far. If there is no move towards a trade deal or confirmation of a transitional period by this time next year, we expect to see businesses putting contingency plans into action and, potentially, setting up elsewhere in the EU, moving their operations or HQs, or, at the very least, making provision in their budgets for currency fluctuations, increased labour costs and import/export issues. Businesses need a degree of certainty and if this is not provided, they will begin to take action in 2018.

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