Timelines and Pitfalls in the Brexit Process

The timeline for the negotiation of both the EU27/UK transitional trade arrangement and the long term framework for future EU27/UK relations are now clearer. What remains unclear is the legal basis for the transitional arrangement under EU and UK law as well as under WTO rules. This could lead to delays and a hiatus in trade relations.

Similar uncertainties arise in relation to transitional UK ‘roll-over’ trade arrangements with groupings of ACP countries engaged in EPA processes with the EU. This is not solely a UK issue but will require the agreement of the EU given the UK will continue to be subject to EU rules and regulations during the transition period. In addition there is the question of the WTO compatibility or acceptability of any transitional UK trade arrangements with groupings of ACP countries. Considerable technical and political challenges will need to be addressed in the coming months if the UK governments’ commitment to ACP countries in regard to ensuring continuity of market access is to be realised in practice.

A review of the December EU27/UK agreement on first phase issues by Professor Alan Mathews has sought to set out the timeframe and potential pitfalls in the Brexit process (1).

He notes how the immediate aim is to draw the conclusions on phase 1 issues together into a formal Withdrawal Agreement by the end of January 2018 (1).

At the EU Council meeting on the 29th of January 2018, the European Commission is looking to secure formal Council approval of its Draft Negotiation Directive for the negotiations on establishing a transition period. A draft of this negotiation directive was prepared by the EC on the 20th December 2017 (1).

The EC aims to have prepared a draft negotiating instruction for the negotiations on the long term framework for EU27/UK relations by March 2018 (1). While initially it was hoped the transitional arrangement could be pinned down swiftly, perhaps as early as the end of March, the Guardian has reported Senior EU officials stating ‘they were only cautiously confident of getting agreement by “the first half of the year – if we don’t run into substantive difficulties”.’ This suggests the transition arrangements are unlikely to be finalized by the end of March 2018 (3).

Prof Mathews highlights how ‘in the absence of transition arrangements, trade between the UK and the EU would revert to ‘WTO terms’ and tariffs would be re-imposed on bilateral UK-EU27 trade’. In addition ‘customs procedures and heath checks would apply to exports and imports’ (1).

Professor Mathews warns of the distinct prospect of ‘chaos for trade in goods’ given:

  1. the lack of preparedness of the customs administration and other relevant authorities on both sides to manage border controls’;
  2. the lack of familiarity of most UK exporters to EU27 markets and EU27 exporters to UK markets with the customs clearance process which would need to be followed in the case f ‘no deal’ outcome;
  3. the almost certain congestion at major ports of entry and exit because of the extra time required for these controls (1).

This would be particularly serious for trade in agro-food products given the perishable nature of many of these products and the dependence of existing supply chains on ‘just-in-time’ delivery. Professor Mathews notes the aim of the transitional arrangement is to ‘avoid this disruption’ (1).

However averting disruption in EU27/UK trade will face some serious challenges given the established positions of the UK and EU27. The EU has made it clear:

  • There should be no “cherry picking”: The United Kingdom will continue to participate in the Customs Union and the Single Market (with all four freedoms). The Union acquis should continue to apply in full to and in the United Kingdom as if it were a Member State.
  • Any changes made to the acquis during this time should automatically apply to the United Kingdom’.
  • All existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures will apply, including the competence of the Court of Justice of the European Union’.
  • The United Kingdom will be a third country as of 30 March 2019. As a result, it will no longer be represented in Union institutions, agencies, bodies and offices’.
  • ‘The transition period needs to be clearly defined and precisely limited in time. The Commission recommends that it should not last beyond 31 December 2020’ (1).

While the UK government appears to have accepted the necessity of a transition period, the EU requirements for the transition are likely to stir up serious opposition from the ‘hard’ Brexit wing of the Conservative Party, since during the transition period the UK would be subject to all EU rules without having any further say in their formulation. The fact that during the transition period the UK would have to apply in full any new rules adopted subsequent to the UK’s formal departure from the EU is likely to be particularly unpalatable. In exchange for this arrangement the Conservative government would buy 21 months to conclude long term negotiations to avert a ‘cliff edge’ in business relations with the EU27 (1).

According to Professor Mathews this implies that during the transition the UK will continue to participate in the CAP until December 2020 and will ‘continue to participate in the Union programmes financed by the MFF 2014-2020 until their closure’. However the ‘UK Secretary of State for the Environment Michael Gove had previously indicated that it would be a matter for negotiation whether Britain’s farmers were subject to the EU’s Common Agricultural Policy in any transition period after the UK leaves the EU’ (1).

In terms of the UK’s preparations for withdrawal, domestic legislative changes are working their way through Parliament, most notably the ‘EU Withdrawal Bill’. This de facto ‘takes a snapshot of EU law as it exists on ‘exit day’ and transposes that law into domestic UK legislation in order to provide legal certainty and continuity at the point of the UK’s exit from the EU’ (1).

Significantly Parliamentary amendment of this Bill appears to have narrowed the UK governments’ room for manoeuvre in terms of accommodating any transitional arrangements which may be agreed between the EU27 and the UK. This is particularly the case in regard to defining both when the UK will no longer be a member of the EU and when the UK will be fully independent of EU rules and regulations. This Parliamentary amendment appears to have led the UK government to abandon the option of operationalising the transitional period arrangements via an extension of the deadline for the UK’s formal departure from the EU (1).

According to Professor Mathews a key issue arising with reference to the transition period is what legal basis such an arrangement would have in EU law. This is an important issue since it affects the procedures which must be followed in the EU in order to give legal force to any agreement reached. If the transitional trade arrangements are treated as a trade agreement with a third country (i.e. are concluded under Article 2018 of the TFEU) any agreement will need to be ratified by all EU member states and the European Parliament, potentially delaying the establishment of the transitional period (1).

If the transitional agreement is seen as part of the withdrawal agreement (i.e. as falling under the provisions of Article 50) the approval procedure is simpler.  However the question arises how can an agreement which covers EU27/UK relations after the UK has withdrawn from the EU be part of the withdrawal process? (1)

The EC currently maintains that since it will be transitional and time limited it can be treated as part of the Withdrawal Agreement. However legal academics from Cambridge University have argued ‘the more that such an agreement merely perpetuates membership subject to minor modifications, the less easy it is to characterise as a ‘withdrawal’ agreement within the meaning of Article 50’. This issue may need to be resolved in the European Court of Justice, a process which ‘would be likely to delay the eventual ratification of any Withdrawal Agreement on the European side’ (1).

Similar legal complications arise on the UK side. Professor Mathews notes: ‘while any new EU laws introduced during the transition would have to be implemented during this transition, they would not form part of ‘retained EU law’ which would automatically transfer to the UK statute book unless this was specified in the Withdrawal Agreement and Implementation Bill’. Against this background legal specialists have expressed concerns this could give rise to ‘different categories of UK law’, with a lack of clarity over the ‘status of EU legislation introduced on the statute book during the transition period when that period expires’ (1).

This potentially carries commercial consequences. Enterprises may be reluctant to invest in compliance with news laws which may lapse within less than two years? However in this context they may face exclusion from the EU27 market on technical grounds, regardless of the transitional agreement reached (1). With a new EU Plant Health regulation being roll over the 2015-2019 period this issue could prove particularly complicated (see companion article, ‘New EU Plant Health Regulation Could Carry Important Implications for Smaller Scale ACP Exporters’, 6 November 2017).

Professor Mathews notes the EU Council is unlikely to soften the EC’s draft negotiating directive. The European Council see’s the ball as being in the UK’s court, with UK proposals how ‘to secure continued access to each other’s markets on the same terms as today’ keenly awaited. Only when UK proposals are on the table will clarity emerge on the extent of divergence in EU and UK positions (1).

Comment and Analysis

The clarity of the EU’s stipulations of what the transition period must entail in order to ensure the integrity of the EU customs union and single market appears to leave no ambiguity as to what the UK must accept during the transition period.  However it remains unclear how these conditions can be reconciled with Prime Minister May’s re-assertion in the UK Parliament in October 2017 that the UK would leave the EU customs union and single market on 29th March 2019.  This is the first issue which will need to be addressed is a ‘hard’ Brexit is to be avoided.

Leaving this looming issue aside, from an ACP perspective it can be argued that during the transition period the UK should be required to fully respect  the international obligations it has taken on while a member of the EU.  This is implicit in the speech delivered by Dr Liam Fox in support of the second reading of the Trade Bill in the House of Commons on the 9th January 2018 (2).

In this speech Minister Fox emphasised how before forging new trading relationships the UK must ‘must act to prevent disruption to our existing trade environment’. In this context it was highlighted how the UK government was seeking powers through the Trade Bill for ensuring ‘the continuity of EU trade agreements into a UK-only context’, without this needing to go through further parliamentary scrutiny, since the Parliament’s EU Committee had already reviewed these agreements (2).

This implies these agreements would be incorporated into UK law unaltered. However this may not be possible for without some significant level of amendment a simple transposition of the text of EU agreements into bilateral arrangements with the UK may make the new agreements impractical.

Initial analysis suggest changes are likely to be required to address issues in the following areas:

· securing agreement on the TRQ arrangements to be applied to the territory of the UK in the light of the likely contested nature of inherited EU27 TRQ bilateral trade agreement obligations;

· the introduction of references to new independent UK institutional structures  for the implementation of the agreement, many of which may not yet be in existence;

· new provisions dealing with the UK’s inherited financial obligations in the light of existing EU commitments to providing trade adjustment support in the context of EPA implementation (e.g. in West Africa);

· new provisions on SPS, food safety and trade documentation and administration requirements which are specific to a UK bilateral trade agreement;

·  the rules of origin to be applied to UK exports, once the UK can no longer ‘cumulate’ with EU27 suppliers in claiming the ‘originating’ status which is necessary for preferential tariff treatment to be extended.

Against this background it is clear that fulfilling the UK’s policy commitments to avoiding a disruption of trade relations with third countries which have concluded trade agreements with an EU of 28 member states is likely to be a far from straight forward task.

This is likely to be particularly the case if within UK thinking priority continues to be accorded to ‘maintaining the market access for UK companies’.

The assertion that the UK Trade Bill will enable the UK to ‘continue those existing trading arrangements’ (2), thereby proving certainty and reassurance to the UK’s international partners, businesses and investors, largely ignores the issue of ensuring any such arrangements are either compatible with WSTO rules or at least are tolerated by WTO members.

In this context it should be noted the lack of clarity on the legal basis for the proposed transition period under EU law and UK law also applies to WTO rules. WTO members have already warned the EU there can be no special deal for the UK which violates WTO principles on the treatment of third parties and that they would seek an extension of any special treatment accorded the UK into their own trade relations with the EU.

This is also potentially an issue of concern to ACP governments.  If ACP governments  were to ‘roll-over’ existing EU negotiated reciprocal trade arrangements  for the UK outside of the framework of a WTO compatible FTA, then  they may find themselves faced with requests from other WTO member for treatment equal to that  accorded the EU.

If EPA provisions on tariff standstill commitments and the prohibition of quantitative restrictions are rolled over for the UK outside of a WTO compatible FTA framework this could pose real challenges for poultry producers In the CARIFORUM and SADC EPA groupings.  The extension of such arrangements to the UK under such conditions and subsequent extension to the USA, Brazil and other major WTO poultry sector players, would then pose major challenges for the future financial sustainability of local poultry producers in the CARIFORUM and SADC EPA regions.

While certain UK Ministers have expressed a lack of concern over having to revert to WTO rules, it appears that the full scope and implications of WTO rules for the process of establishing a transition period has not yet been acknowledged or addressed. Equally the UK government appears either oblivious or indifferent to the WTO complications a poorly managed transition from EU to UK bilateral trade arrangements could give rise to for partner countries.

Against this background, with a view to minimising WTO complication, ACP governments any want to consider calling on the EU to ensure:

o the inclusion of a formal agreement on the extension of current ACP terms and conditions of access to the UK market in the transitional arrangements to be agreed between the EU27 and the UK;

o any transitional extension of current ACP terms and conditions of access to the UK market will run until such time as the UK has concluded and ratified new WTO compatible bilateral trade agreements with ACP countries engaged in an EPA process;

o any extension of the current terms and conditions of access to the UK market for CARIFORUM exporters would apply regardless of the state of play in UK-EU27 negotiations on future trade relations.

This would enable ACP governments to side-step any direct challenges in the WTO to any transitional arrangements set up to ensure continuity of access to the UK market despite the Brexit process.

While it can be argued that averting any challenge in the WTO to transitional EU27/UK trade arrangements is essentially a political issue, this should not lead to an underestimation of the economic concessions which the UK government may need to make to avert any WTO challenges.

These concessions could then pre-empt a range of UK policy decisions in regard to the future basis of its independent trade policy.  It is unclear to what extent these issues are being effectively addressed within the UK Department of International Trade’s ongoing bilateral dialogues with third party non-EU government.

(1) CAPReform.eu, ‘Pitfalls on the way to a Brexit transition period’, 30 December 2017
(2) DIT, ‘Speech delivered by Dr Liam Fox in support of the second reading of the Trade Bill in the House of Commons’ (9th January 201),  10 January 2018
(3) Guardian, ‘May faces tougher transition stance from EU amid Norway pressure’, 15 January 2018