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Brexit

Gary N Horlick

Law Offices of Gary N Horlick

Wednesday 22 August 2018


The formal beginning of Brexit was the notification by the UK to the EU on 29 March 2017 of its intention to leave the EU, effective at the end of the two-year period in article 50 of the Treaty of Lisbon. The two-year period is extendable with the unanimous consent of all the EU member states including the UK (which makes it one more thing to potentially bargain about).

The subsequent year and a few months have been spent on various parts of the four negotiations that, from this trade lawyer’s point of view, make up Brexit (I hasten to note that the resulting UK legislation will have significant constitutional, political, economic, social and human rights impacts for a long time).

The negotiation between the UK and the EU of the terms of the UK’s withdrawal

From the EU’s point of view, the most important aspect of this negotiation is that the UK does not receive a deal so favourable to the UK that it leads other EU members to depart as well. At the same time, EU member states sell a lot of goods and services to the UK, so a massive loss of market access is not desirable. From a UK point of view, the goal, as distinctly stated by one of the pro-Brexit politicians, was ‘to have our cake and eat it’. In some sense, this was early on thought to be the maintenance of access to EU markets and reciprocal access to UK markets, without freedom of movement of persons (which had been the political lever driving the Brexit campaign). This massive negotiation (one British lawyer called it ‘the largest corporate de-merger in history’), still under way at the time of writing, has headlined three items:

  • the size of the UK exit ‘bill’. The UK as an EU member state has assumed certain financial obligations going into the future, most obviously the pensions of EU employees since the UK joined. In addition, there are budgetary commitments for the remainder of the budget cycle through 2021, and numerous other costs. The UK government has agreed to assume its fair share of those costs, and the negotiation is about what that amount should be – apparently in the range of £40–60 billion. This has become a highly emotive number in the UK, where the media have consistently measured the cost and benefit of UK membership in the EU by the amount the UK contributes on net to the EU budget (the German public, by contrast, seems to realise that the much larger German net contribution to the budget is insignificant compared to the commercial benefits Germany derives from selling throughout Europe);
  • the reach of European judicial bodies, notably the Court of Justice of the European Union (CJEU), in the future. The underlying argument for many Britons voting for Brexit was that the UK should ‘take back control’, which meant that the CJEU would no longer have any sway over UK decisions. In practice, this has turned into a very difficult negotiation, as the UK desire of mutual recognition of numerous UK standards and practices in the EU once it leaves the EU requires some decision-makers to determine whether those rules and practices in fact are sufficiently comparable. Negotiations are ongoing for a standalone dispute settlement mechanism, but that is no easy matter. The current system of references from national courts to the CJEU presumably would no longer exist for the UK, so there is some question as to how equivalence with EU law and practices will be resolved in a way acceptable to the EU. In addition, many of these cases will require at least some degree of speed, and, linked to that, some form of retroactive relief for those injured; and
  • even more difficult, and not solved as of this writing, is the issue of the border between Northern Ireland and the Republic of Ireland (note that there is one other land border involved, between Gibraltar and Spain, which will also have to be resolved, and for many decades that has been a sore point), with occasional delays and so on.

Simply put – and there is nothing simple about this issue – everyone agrees there should be no hard border between Northern Ireland and the Republic, both for reasons of the 1998 Good Friday Belfast Agreement ending the violence in Northern Ireland, and because the potential for renewal of the violence is quite clear (the chief law enforcement officer of Northern Ireland in early 2018 pointed out that any physical aspect of the border, even radio frequency identification readers, ‘would be blown up’). While there are possibilities under article XXIV:3 of the General Agreement on Tariffs and Trade (GATT) for a ‘frontier zone’ where World Trade Organization (WTO) rules can be set aside, that does not solve the ‘rule of origin problem’ (and it is a safe bet that very few if any English voters voting to leave the EU gave any thought to rules of origin, if any of them knew what they were, much less their application to the border with Ireland). A great deal of Irish trade with Europe operates with the UK as a ‘land bridge’ of cargo carriers crossing over to the UK and then continuing on to Europe with a single carriage, rather than loading and unloading at several points. So the EU understandably seeks to make sure that whatever is coming through the UK from Ireland is in fact of Irish origin rather than from a third country subject to EU tariffs which would not be collected if they were treated as of Irish origin. Similarly, the UK (assuming it retains some form of free trade in goods with the EU) will not want non-EU goods subject to tariffs coming in from Ireland through Northern Ireland and being treated as duty-free Irish goods. There are numerous possible variations in the scheme, none of them completely hypothetical (even though Northern Ireland has 1.8 million inhabitants).

These three headlined items should not obscure the vast number of details that have to be worked out before the UK can exit. For example, the UK, along with all the other EU member states, supports a large infrastructure of regulatory bodies parallel to those found in many other countries. These tend to be spread around the EU for a variety of reasons (most appropriately, perhaps, the European Food Safety Agency is in Parma, Italy). All of these regulatory agencies have buildings and staff (often highly specialised), and so on. Several of these are in the UK, including the important agency for approving medicines. Obviously, those in the UK will move, leading to a bidding war for their numerous sites. More importantly, however, it makes little sense for the UK to replicate them. To take the medicines safety example, it takes more or less the same number of scientists to approve the safety of a new drug whether it is for the EU as a whole, or just for the UK. Obviously, the UK could maintain full control of the issue by establishing its own agency, but economies of scale suggest continuing to pay for the right to use the EU agency (and UK producers of pharmaceuticals need EU approval in any event to sell their products in the much larger European market). How much should the UK pay? Would there be UK employees? Most importantly, what role would the CJEU have if there were challenges to the agency’s decision? Would the CJEU decision also govern in the UK? And so on. This first, very large, negotiation covers literally thousands of such issues and the UK has set up a new government department, the Department for Exiting the EU, to deal with them.

In addition, this does not begin to cover the complexity of rewriting vast numbers of private legal documents in the UK that have previously been based in part or exclusively on EU law.

Needless to say, there is a similar negotiation going on within the more established procedures of the EU as the 27 remaining member states decide what their positions are.

One agreement which has been reached in principle, but itself is not yet completed, is an agreement to have a transition period, from 30 March 2019 (when the UK officially leaves the EU) to 31 December 2020, when the UK really leaves the EU (a unanimous agreement can extend that). During this 21-month period, the UK would not be a member of the EU, but would fully participate in all of the common commercial policies: it would charge the same external tariffs, it would not apply any tariffs or new customs formalities to trade with the EU member states, and so on. In theory, this should give enough time to better prepare for the inevitable shock when additional pieces of paper or electronic forms may be required (at present, for example, trade between the UK and EU involves no customs formalities or rules of origin once a product has been ‘put into free circulation’).

The future trading relationship of the EU and the UK

This has unleashed a passionate debate within the governing Conservative Party, whose majority is secured by the precarious support of the 10 Members of Parliament of the Northern Irish Democratic Union Party (which explains the importance of the Irish border question). There is no agreement at this point on whether the UK should remain in the single market, the Customs Union, a different type of customs union, the European Economic Area, a Swiss model with more than 100 separate treaties, or just a free trade agreement (FTA), or no agreement at all, presumably reverting to WTO rules.

Under the likely transition agreement – not yet concluded – the UK will remain subject to the common commercial policy of the EU until 1 January 2021. This means that the UK will charge the same tariffs as the EU, and will not put in effect any agreements to the contrary before that date (although it is understood that the UK will be allowed to negotiate (but not sign or put into effect) agreements before then with other countries). The EU has hundreds, possibly thousands, of agreements with other countries (the Rest of the World or ROW), ranging from FTAs (around 40 of them, depending on how you count them) through the agreements on exchange of passenger data that permit passenger flights to take off after security precautions. Logically, each agreement represents a compromise within the EU to protect the interests of the different member states, so an agreement between the UK alone and an ROW country would look very different. For example, the UK is a large net food importer and a large exporter of financial services, so its standalone FTA would be very different in both aspects from the EU one.

Renegotiation of all of them would be a daunting task, so the first priority is probably a rollover of existing agreements so that they apply identically between the UK and the ROW country as they did to the UK as an EU member state. It appears at present that a rollover of some sort must occur before 29 March 2019; on 30 March 2019, the UK, even if still subject to the common commercial policy of the EU, will not legally be a member of the EU. While that will not prevent the EU and UK by statute from treating the ROW countries’ exports to the EU and UK identically after 29 March 2019, it will not guarantee that the legal regimes of the ROW countries can automatically treat the UK as having the same status as an EU member state once it no longer is. Each ROW country may well have its own legal mechanisms for doing so, and some of those might require legislative or complicated regulatory action. Hundreds of people, mainly in the UK Department of International Trade are even now hard at work at that exercise.

The UK’s relationship with the World Trade Organization

The UK was a founding member of the GATT and then of the WTO in its own right (EU member states, governed by the EU Common Commercial Policy in the WTO, cannot take any initiatives without EU agreement, except in the Budget Committee).

It is widely thought – though not without some dissent – that the UK upon leaving the EU conditionally maintains the same schedules as the EU. This is not without problems. First, the EU’s schedules have never been formally certified in their current form, which could lead to some procedural issues. More important, the WTO and GATT schedules on services often will not work very well with the UK as a separate entity, and that will take some sorting out. More dauntingly, existing EU quotas (mainly in agriculture), tariff rate quotas and permitted subsidy limits under the WTO Agreement on Agriculture must now be divided up in a way that achieves consensus of the 160-plus WTO members so that it preserves the balance of concessions negotiated by the EU and signed in 1994. For example, assume that the EU negotiated a 1,000 ton quota of permitted imports each year into the European Union of Vegemite (if you have to look it up, don’t try to taste it!). Probably 999 of the 1,000 tons were intended to be sold to the expatriate Australian community in the UK. When the UK leaves, even if it maintains the same schedule, that schedule now has to have a separate quota for the UK. Does that mean that both the UK and the EU each have a 1,000 ton quota of Vegemite (in effect, doubling the quota, which may not matter for Vegemite, but would certainly matter for beef, cheese, butter and other ‘conflictive’ imports for supply into the EU and UK)? Negotiations are already under way on that issue and an answer is nowhere in sight, but will eventually be reached – perhaps aided by horse trading by the UK and the EU as they redo their agreements with the ROW countries (which in practice could solve a lot of the issues). That does not begin to match the complexity of figuring out what exchange rate to deploy for the permitted UK subsidies (currently denominated in ECU, the notional European currency in effect at the time of the Uruguay Round signing of 1994 – there is an administrative rate decided by the EU for current British use of ECU, but there is no reason why ROW countries would necessarily agree that it maintains the balance of concessions negotiated back then).

Conclusion

Lawyers will be kept busy in the UK and elsewhere as Brexit is worked out, as it must be in some form – if only a transition agreement – by 29 March 2019. Beyond the legal challenges, lawyers should be aware of the need to alert their clients (companies, governments, universities, port authorities) to the massive logistical challenges of Brexit (hint: consider importing through Teesport the first few days after Brexit), not least updating thousands of lines of computer code.


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