Withdrawal, transition and trade – the commercial implications of the latest milestone in the Brexit negotiations

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Introduction

The week beginning 19 March was a big week in the Brexit negotiations. First, the European Commission published a revised draft of the Withdrawal Agreement showing which provisions had been agreed, and which had not. Secondly, the European Council (EU Heads of State, less Teresa May) gave its blessing to a status-quo transition period after Brexit Day, until the end of 2020. Thirdly, the European Council published its Guidelines on the terms of a future trade relationship with the UK.

We deal with each in turn, highlighting the most important points we think our clients should understand.

The Draft Withdrawal Agreement

The Commission published the latest version of the Withdrawal Agreement between the EU and the UK on Monday, 19 March 2018. Its significance lies in the fact it is colour-coded to denote in green, those sections which have been agreed upon; in yellow, those sections where there is broad consensus on policy objectives but where the drafting needs work; and in white, EU proposals that remain subject to discussion and on which agreement has not been reached.

Reassuringly, there are swathes of green, denoting agreement in the following areas:

EU Citizens' rights

The EU and the UK have agreed that UK and EU citizens can move freely at any time before the expiry of the transition period, so the end of 2020, and afterwards be entitled to stay and work in the UK or the EU, as appropriate, in order to accrue the five years necessary to apply for permanent residency. The key thing is for an EU citizen to have arrived in the UK, or a UK citizen to have arrived in an EU-27 Member State, before the end of the transition period. The UK Government had wanted the cut-off point to be Brexit Day, 29 March 2019, but compromised under pressure from the EU to accept the expiry of the transition period as the cut-off point. Rules have also been agreed on the recognition of professional qualifications, the rights of families of EU citizens, and social security protection.

This should be of great reassurance to companies that rely on EU workers to stay competitive, as well as to their workforce - the main takeaway here is that the rules do not change until 1 January 2021. The UK Government will not publicise this aspect of the Withdrawal Agreement, so it will go unnoticed. Our advice to business is to consider how to translate the deal on EU citizens’ rights into messages of reassurance to their workforce.

Separation Provisions

These provisions are designed to provide legal certainty in certain areas where commercial activity was entered into before the end of the transition period. Many areas are not covered, however.

  • Goods placed on the market

    All but one of the relevant Articles are colour-coded green. In brief, the substance of the agreement here is that any good lawfully placed on the UK or EU market before the end of the transition period may circulate freely on the UK and EU markets until it reaches the end-user, and is put into use. This means that the EU regulatory approvals for the goods in question will still be respected after the end of the transition period.

  • Customs procedures

    There is full agreement in this area. Goods moving between the customs territories of the UK and the EU respectively will be subject to the same customs treatment as applies now, provided the movement started before the end of the transition period, including in relation to importation and exportation licensing requirements. However, except in relation to certain modes of air and shipping freight, the usual presumption that goods in the customs territory of the EU have the customs status of EU goods will not apply. Rather, proof of the start of the movement must be evidenced by way of a transport document relating to the goods for the goods to benefit from status quo customs treatment.

  • VAT and excise

    The parties agree that the status quo provisions concerning the general arrangements for excise duty shall continue to apply to goods, provided the cross-border movement of such goods began before the end of the transitional period and ended thereafter.

    Whilst there appears to be broad agreement that, similarly, the common system of VAT should continue to apply to goods dispatched before the end of the transition period, negotiators are yet to agree on the final form of the drafting.

  • Intellectual property

    Consensus is less pronounced here, but the parties have agreed on key provisions concerning the protection and enforcement of EU intellectual property rights in the UK after the expiry of the transition period. Holders of an EU trademark, Community design or Community plant variety right that have been registered or granted before the end of the transition period will become the holder of a similar right in the UK. Where an application is pending on the final day of the transition period, the applicant will be afforded a nine-month priority period in which to apply for equivalent protection in the UK - any such application will have the same filing date and date of priority as the corresponding application in the EU. (There is no agreement on the protection of geographical indications as yet.)

    Additional, comparable protections are included for international registrations of trademarks and designs designating the EU, unregistered Community designs and rights relating to databases, all of which will continue to be recognised in the UK (provided such rights arose before the end of the transition period).

  • Procurement

    There is broad consensus between the parties on procurement issues, including agreement on the wording of most of the relevant Articles. Notably, existing principles of EU law applicable to the award of public contracts will continue to apply to procurement procedures launched by contracting authorities or contracting entities from EU Member States or the UK before the end of the transition period and not yet finalised at its conclusion.

  • European Atomic Energy Community (Euratom)

    Except in relation to ownership and rights of use and consumption of special fissile materials in the UK (on which agreement has not been reached), there is consensus around Euratom-related issues, with all other relevant Articles shaded green. Following the transition period, the UK will have sole responsibility to ensure all ores, source materials and special fissile materials covered by the Euratom Treaty and present in the UK are handled in accordance with all applicable international treaties and conventions.

    The UK also commits to implementing a safeguards regime that offers equivalent effectiveness and coverage as that currently in operation by virtue of its participation in Euratom. The UK will also ensure that any specific obligations under agreements concluded by Euratom with third countries and international organisations are honoured or else put in place alternative, appropriate arrangements, as agreed with the relevant counterparty.

Other areas of agreement

The parties have agreed on the means of calculating the UK’s financial settlement, estimated to be around €45 billion. They have agreed to set up a joint committee responsible for overseeing the application of the Withdrawal Agreement. They have agreed that the Common Travel Area (ensuring free movement of UK and Irish citizens between the two nations) is maintained.

Key areas where agreement is lacking

  • Northern Ireland

    This is the elephant in the negotiating room. Until a solution is found to how to maintain a soft border between Ireland and Northern Ireland when the UK is outside the EU’s Customs Union, the negotiations risk floundering. The Commission does not think such a solution is possible. It has inserted a protocol (annex) in the draft Withdrawal Agreement which would keep Northern Ireland in the EU’s Customs Union – in its view, the only way of avoiding a hard border. Teresa May has ruled this out. All eyes are on the UK Government to propose a solution. Resolving this issue is now the top priority in the negotiations. There will be a vote in the House of Commons on staying in the Customs Union, in the form of an amendment to the Trade Bill, which the Government has delayed. If the Government is defeated on the vote, its position on staying out of the Customs Union may have to change.

  • Data and data transfer

    In relation to data and data transfer, agreement is limited and what agreement there is centres on broad policy objectives only. The UK has not agreed to EU law on the protection of personal data applying to the processing of personal data of data subjects outside the UK after the transition period. Nor has the UK agreed on the extent to which EU law concerning confidential treatment, restriction of use, storage limitation and requirement to erase data and information should apply in the UK after the transition period.

  • Continuity of contracts

    There is no provision which ensures the legality of contracts entered into before the end of the transition period, which rely for their performance on an EU legal right or obligation. This is a particularly worrying issue for service contracts that really on internal market rights such as passporting, for example in the financial services sector.

  • Civil and criminal judicial cooperation

    Little agreement has been reached in respect of ongoing judicial cooperation in civil and commercial matters, and still less has been reached in respect of ongoing police and judicial cooperation in criminal matters. In relation to judicial cooperation in civil and commercial matters, the parties agree that the current provisions governing applicable law (Rome I and II) will continue to have effect after the transition period for contracts concluded or tortious damage occurring during the transitional period. However, as yet, the parties have failed to agree the extent to which EU rules on jurisdiction, recognition and enforcement of judgments (Brussels I Recast) will apply after the transition period. There is no agreement on how Court of Justice of the EU (CJEU) cases to which the UK is a party before the end of the transition period will be resolved post-transition.

  • Dispute settlement

    The parties have yet to agree how the Withdrawal Agreement should be arbitrated – a critical element of any international agreement. The EU has proposed that the CJEU should fulfil this role. The UK has conceded this role for the CJEU in relation to EU citizens’ rights, but in no other area of policy post-transition. The draft Withdrawal Agreement also reserves the right to suspend benefits owed to the UK during the transitional period if any EU competent entity (including the CJEU) determines that the UK has breached an obligation under EU law.

The transition period

Six things to know

The details of the proposed transition period are set out in Part Four of the Withdrawal Agreement. All Articles are colour-coded green, signifying full agreement. There are six things businesses should understand about what has been agreed:

  • It is a status-quo transition, meaning that all EU law applies as it did before (although the UK plays no role in any of the EU institutions and agencies). So, the UK stays in the Customs Union and Single Market. Therefore, no changes to UK-EU border procedures or to Single Market rights such as EU-wide regulatory approvals.
  • It will last until 31 December 2020.
  • Any new EU law adopted during the transition period will have to be implemented in the UK.
  • The UK will still benefit from the EU’s trade and other international agreements (so long as the non-EU countries in question agree).
  • The UK Government can negotiate and sign new international agreements during the transition period, but such agreements cannot enter into force before the end of the transition period.
  • The terms of the transition have only been agreed at a political level, meaning that they can be undone if circumstances change. They will not become legally binding:
    • In the EU-27 until the Withdrawal Agreement is ratified by the Council of the EU and the European Parliament, and
    • In the UK until the Withdrawal Agreement has been ratified by the UK Government and implemented into UK law by the Withdrawal Agreement Implementation Bill.

Two caveats

Agreement on a status-quo transition is a significant achievement, which will help to quell anxiety about the prospect of a 'cliff-edge' Brexit come 29 March 2019. However, it would do to be mindful of Donald Tusk's cautionary words: "nothing is agreed until everything is agreed". Provisions relating to the transitional arrangement will only have legal effect on the ratification of the Withdrawal Agreement – see point vi) above - and there are a number of thorny issues to be surmounted before this can happen, not least, that concerning the Irish border.

Our advice to business is this: if your business model is badly affected by the effects of a cliff-edge Brexit, it would be wise to consider implementing contingency plans now. The motto remains: “hope for the best, but prepare for the worst.” Moreover, work undertaken now to prepare for Brexit will be relevant not just to safeguard against the impacts of a cliff-edge Brexit; it will also be a relevant preparation for UK-EU trade under a free trade agreement (FTA).

Secondly, there is no provision for the deadline of 31 December 2020 being extended. This will become significant if the UK and EU are unable to agree a trade deal in time, and the prospect of a further cliff-edge Brexit looms. Again, this leads to the recommendation that preparatory work done now will pay off later.

Outlines of an EU-UK trade agreement

On Friday 23 March the European Council published its Guidelines on the outlines of an EU-UK trade agreement.

Key commercial implications

Frictions in trade inevitable

The EU emphasised that the trade relationship between the EU and the UK will be affected by the UK's decision to leave the Single Market and Customs Union, which will have negative economic consequences, particularly in the UK. For example, there will inevitably be frictions in trade in the form of checks and controls to uphold the integrity of the Single Market. If, however, UK policy changed, the EU is ready to reconsider the scope of the trade agreement.

Elements of a free trade agreement

The EU will initiate work towards a “balanced, ambitious and wide-ranging free trade agreement” insofar as there are sufficient guarantees for a level playing field. The agreement will be finalised and concluded once the UK is no longer a Member State. “Such an agreement cannot however offer the same benefits as Membership and cannot amount to participation in the Single Market or parts of it”. In other words, access under an FTA will not be the same as the UK’s current access to the Single Market as an EU Member State. The FTA should include:

  • Trade in goods, with the aim of covering all sectors and seeking to maintain zero tariffs and no quantitative restrictions with appropriate accompanying rules of origin;
  • Appropriate customs cooperation;
  • Rules on technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) measures;
  • A framework for voluntary regulatory cooperation;
  • Trade in services, with the aim of allowing market access to provide services under host state rules, including as regards right of establishment for providers, to an extent consistent with the fact that the UK will be outside the EU and will no longer share a common regulatory, supervisory, enforcement and judiciary framework;
  • Access to public procurement markets, investments and protection of intellectual property rights, including geographical indications, and other areas of interest to the EU.

The Guidelines stipulate that there should be ambitious provisions on the free movement of people between the EU and UK based on full reciprocity and non-discrimination between States.

Road and air transport

In terms of transport, there should be “continued connectivity between the UK and the EU after the UK withdrawal. This could be achieved, inter alia, through an air transport agreement, combined with aviation safety and security agreements, as well as agreements on other modes of transport, while ensuring a strong level playing field in highly competitive sectors.”

Participation in EU funding programmes

In terms of participating in EU funding programmes, e.g. in the fields of research and innovation and of education and culture, “any participation of the UK should be subject to the relevant conditions for the participation of third countries to be established in the corresponding programmes.”

Unfair competition

The EU warned against the UK gaining unfair competitive advantage apply in competition, state aid, tax, social, environment and regulatory measures and practices.

EU financial stability

“Any future framework should safeguard financial stability in the Union and respect its regulatory and supervisory regime and standards and their application.”

Data sharing

The FTA should cover “rules on data. As regards personal data, protection should be governed by Union rules on adequacy with a view to ensuring a level of protection essentially equivalent to that of the Union.”

Commentary

The EU Guidelines make clear that life under an FTA will be very different from life as an EU Member State – in short, market access will be reduced. Businesses would be well advised to understand the difference between the two. They would also be well advised to lobby the negotiators in Brussels and London to ensure the best deal in terms of market access for their sectors.

On a similar note, the EU has confirmed that trade in services will be on “host State rules”. This means a business having to understand national restrictions in place in a particular country, rather than relying on uniform EU-wide rules.

The EU Guidelines provided no further indication of the future of trade in financial services, other than stating that frameworks of voluntary regulatory cooperation could be established.