Insights

Terms Agreed for UK’s Withdrawal from the EU but Risk of Disorderly Brexit Remains

Firm Thought Leadership
The path to Britain’s withdrawal from the EU has been rocky and uncertain since its beginning in June 2016. While the UK will leave the EU and all of its institutions on March 29, 2019 (Brexit day), there has not been common ground between those who favor a "soft Brexit", where the UK stays aligned with the EU’s Single Market and remains part of the Customs Union and thus continues with close economic ties versus those who want a "hard Brexit", where the UK has a solid break from common tariffs and regulatory alignments and has the possibility to enter, in its own right, in wide-ranging Free Trade Agreements internationally.

After a lengthy and difficult negotiation, the EU and the UK finally concluded on Sunday November 25, at a special EU summit, the agreement setting out the terms of the UK’s withdrawal from the EU and adopted a high-level political declaration setting out the framework for their future relationship. The short political declaration envisages an ambitious, wide-ranging and balanced trade and economic partnership as well as broad security cooperation covering, amongst other things, law enforcement and judicial cooperation in criminal matters and close relations in foreign policy, security and defense. Negotiations on the future EU-UK partnership will begin after Brexit.

The Withdrawal agreement still needs to be approved by the European Parliament (Member State ratification is not required) and the UK Parliament. However, there is considerable uncertainty whether there is a majority in the UK Parliament to approve the terms of the Withdrawal agreement given Theresa May’s small majority and the entrenched position of many Brexit supporting politicians. Theresa May only secured Cabinet approval at high political cost: a number of cabinet ministers quit, including the Brexit Secretary of State. The last two weeks have shown that it will be extremely difficult to find a solution that is politically acceptable to all sides in the UK with the risk of a disorderly Brexit.

Even if the 585 page Withdrawal agreement in its current form does not ultimately become law (with potentially catastrophic consequences in post Brexit UK-EU trade relations at least in the short to medium term), the content is still likely to be a blueprint in many areas for regulating future relations between the UK and EU.

This alert highlights some of the main elements of the Withdrawal agreement and briefly discusses what’s ahead as a disorderly Brexit appears more likely.

Withdrawal Agreement’s Content

The Withdrawal agreement including the Protocol on Ireland/Northern Ireland (NI) sets out in great detail the terms on which the UK will exit the EU.
The Withdrawal agreement covers a wide range of matters including citizens’ rights, separation issues (e.g. relating to cross-border trade in goods and customs, intellectual property protection, on-going judicial cooperation in civil and commercial matters), financial settlement and governance arrangements.

Importantly, the Withdrawal agreement provides for a 21 month transition period that will run from March 30, 2019 until December 31, 2020.

During the transition period, the UK will remain bound by EU laws (including remaining part of the Single Market and the Customs Union) and the rulings of the Court of Justice of the EU, but will have no formal say in decision-making at the EU level, including in the Commission, EU Parliament and EU agencies and other bodies. This at least ensures that the UK authorities, companies and individuals can continue to trade, operate and live in the EU without undue disruption, and vice versa for EU entities and individuals in the UK, and that the EU and the UK can negotiate the terms of their future relationship.

One Possible Extension Request Allowed

The Withdrawal agreement also foresees the possibility for the UK to make a one-time request for an extension of the transition period of up to one or two years, which can only be done by mutual agreement between the EU and the UK, and which must be approved by a joint committee before 1 July 2020.

Extending the transition period will require a fair financial contribution from the UK to the EU budget, which will have to be decided by the Joint Committee established by the Withdrawal agreement. This ensures that the UK continues to shoulder some of the EU’s financial obligations while continuing to benefit from access to the Single Market and EU Customs Union.

Will The “Backstop” Lead to the UK Remaining in the EU via the Backdoor

The question of how to avoid the return to a hard border, or resume physical checks at the border between NI, which is part of the UK, and Ireland, which will remain an EU member, has been particularly complex and contentious.

In order to avoid physical checks at the end of the transition period, the UK has agreed that the whole of the UK, including NI, will be part of a single EU-UK customs territory (the so-called “backstop” solution) until the EU and UK have reached an agreement on an alternative to avoid customs checks, passport controls and ensure frictionless trade (the UK had proposed using novel technology or the UK collecting customs duties for the EU to avoid such an outcome, but these solutions were rejected by the Commission as unworkable). Finding an acceptable solution is likely to be a costly, complex and lengthy process.

To limit the risk that regulatory divergence between NI and Ireland could create a barrier between the two territories, the UK has also agreed that many Single Market rules will continue to apply on an on-going basis to NI (e.g. legislation on goods, veterinary checks, VAT rules, state aid regulations, etc.). NI will also apply all the rules of the single market for electricity, which is in the interest of both the economy of NI and Ireland as there is currently a single integrated electricity market for the whole of the island. Politically, the backstop is a highly sensitive issue because NI (notwithstanding that it will retain unfettered market access to the rest of the UK) will have to apply a number of EU rules which do not apply to other parts of the UK.

In addition, in order to avoid the UK gaining an unfair competitive advantage from being part of a customs union with the EU, while theoretically being able to water down some of the Single Market regulatory obligations, the UK has committed to maintain for the whole territory a level playing field in many areas (such as state aid, competition, taxation and labor and social protection) during the operation of the backstop. This is subject to an enforcement mechanism; generally disputes will be addressed by a joint committee with the possibility of arbitration.

What’s Ahead As Disorderly Brexit Appears More Likely

Due to the ongoing uncertainty about the fate of the Withdrawal agreement, many commentators are warning of an increasing risk of a disorderly Brexit with far reaching consequences for business if the UK has to trade on WTO terms. On Twitter, #brexitchaos and #brexitshambles were among the top hashtag trends when the draft of the Withdrawal agreement was first released in mid-November.

In some sensitive sectors, such as air transport, the EU and UK may find a stop gap solution by putting in place bare bones agreements to ensure continuity of supply. This is unlikely to be an option for many sectors.

Germany, France and the Netherlands have also recently increased their preparations for the UK to leave the EU without an agreement.

Continued uncertainty about what will happen makes many US, UK and continental European executives increasingly anxious. Companies in Europe are accelerating the roll-out of their Brexit contingency plans if they have operations in the EU and UK that would be impacted by a hard or no deal Brexit. This may prove to be a costly exercise if the Withdrawal agreement enters into force, but in the current climate, companies need to plan for a hard Brexit.

Related Professionals