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The terms of an orderly Brexit transition are now known but remain uncertain

23 March 2018

Jurisdictions: United Kingdom

By Charles Brasted and Andrew Eaton

The EU27 have agreed the terms of the UK's transitional period with the EU following its exit on 29 March 2019 and adopted guidelines setting out the EU's negotiating position on the future relationship.

With the lead-up to Brexit about to enter its final 12 months next week, now is a good time to reflect on what we now know about the transitional arrangements and the negotiation of the framework of the future relationship after the European Council summit on 23 March 2018.

In summary, despite significant progress in recent weeks, businesses need to continue their preparations on three fronts, taking account of all possible outcomes:

(a) prepare for the transition period to begin on 29 March 2019;

(b) continue to follow through on contingency plans for a 'no deal' scenario; and

(c) redouble efforts to shape the framework of the future relationship in the next phase of negotiations.

Transition: membership in all but name?

The agreement of transitional arrangements as part of the Withdrawal Agreement is testament to the ability of businesses to shape the terms of Brexit where they seek actively to engage with policy-makers.  It was the repeated calls of businesses on both sides of the English Channel for legal certainty and more time to prepare that put transition on the political agenda.

After political agreement of the detailed terms of the transition at the EU summit, businesses now know what the terms of that transition will be and can plan accordingly.  Under the proposed transitional arrangements:

(a)  EU law continues to apply to and has the same legal effect in the UK as in other Member States during the transitional period, subject to the terms of the Withdrawal Agreement.  This means that, for almost all intents and purposes, EU law will continue to be interpreted and applied, and the UK – and individuals and businesses residing or established in the UK – will be treated, as if the UK remains an EU Member State.  This will be significant for businesses based in the UK who operate cross-border in the EU by virtue of the mutual recognition of their regulatory licences and product certifications.  During the transitional period, they can continue to do so broadly as if nothing has changed.

(b) The EU's institutions and agencies will continue to have jurisdiction in the UK, including the Court of Justice of the EU (CJEU), who will remain the ultimate arbiter of EU law, including in respect of the UK.  The CJEU will also be responsible for the interpretation and application of the Withdrawal Agreement during the transitional period.

(c)  Notwithstanding the continued application of EU law to the UK, once the UK has left the EU on 29 March 2019, it will no longer be entitled to participate in the decision-making of EU Institutions.  The UK will only be allowed to participate as a non-voting observer in the various EU bodies and agencies, and only where the EU invites it to do so.

(d) The EU has agreed to allow the UK to negotiate, sign and ratify international agreements in its own capacity, provided those agreements do not enter into force or apply until the end of the transition period, unless authorised by the EU.  The transitional arrangements also provide that the UK will continue to be bound by the obligations of agreements entered into on its behalf by the EU with third countries, but that the EU can only notify those other parties that the UK should be treated as an EU Member State for the purposes of those agreements; the EU cannot guarantee third countries will agree to this.

The overall effect of the transitional arrangements is to delay almost all the effects, if not the formal realisation, of Brexit.  This will provide more time for the parties and businesses to prepare for the significant changes that will be necessary when the transitional period ends. 

In addition, despite political agreement, the transition is not yet legally binding.  As the EU has reiterated, "nothing is agreed until everything is agreed".  A number of significant issues still need to be resolved before the Withdrawal Agreement can be signed by the parties, including, most notably, the status of the Northern Irish border.  It is by no means certain that this will be achieved, meaning that businesses cannot discount the fact that there remains a significant risk that the UK could still leave the EU with no deal. 

It is also worth noting that the implementation of the transitional arrangements may itself give rise to legal change at a domestic level.  The UK must implement the Withdrawal Agreement by adopting an Act of Parliament (and possibly secondary legislation) to give effect to it in domestic law.  This will need to provide, in respect of the transition period, a new domestic legal basis for the continued application of EU law in the UK, which will replace the mechanisms provided under the European Communities Act 1972, soon to be repealed by the EU Withdrawal Bill. 

Future relationship: let the negotiations begin

Following the adoption of the Guidelines, the EU27 have signalled that they are now prepared to begin negotiations with the UK on the framework of the future relationship.  Whereas agreement of the future relationship can only be finalised and concluded once the UK has left the EU, the EU27 have stated that the framework of the future relationship will be elaborated, as required by Article 50 TEU, in a political declaration accompanying and referred to in the Withdrawal Agreement.

As such, the European Council has set out its political mandate to the EU Commission to negotiate this framework, which it says will be to work towards a "balanced, ambitious and wide-ranging free trade agreement". 

We outlined in our previous blog Theresa May's invitation to economic pragmatism – to accept the UK's partial participation in the Single Market where it is in the interests of both parties – and the choice for the EU as to whether to build on or reject this offer.

The Guidelines state that the European Council is determined to have as close as possible a partnership with the UK in the future, but it has to take into account the "repeatedly stated positions of the UK, which limit the depth of such a future partnership".  They state that being outside the Customs Union and Single Market "will inevitably lead to frictions" and this "will have negative economic consequences, in particular for the United Kingdom".  As such, the Guidelines are a clear reiteration of the EU's mantra that the integrity of the Single Market and the indivisibility of the Four Freedoms come before offering the UK a deal that would provide preferential access to each other's markets on any kind of partial basis.

Nevertheless, there remains scope for negotiation.  The EU has suggested there are areas in which it is willing to consider enhanced integration post-Brexit, notably in relation to fisheries and aviation.  The EU also recognises that the UK's "geographic proximity and economic interdependence" with the EU27 means it would prefer the UK to remain aligned to the substantive rules of the EU.  This is not dissimilar from what was proposed by the UK Prime Minister in her Mansion House speech, albeit the EU is not currently willing to offer the UK preferential access to EU markets in exchange for such alignment. 

The next 12 months will be vital to setting the right course for the UK's future relationship with the EU.  Businesses will need to ensure that solutions that work for them are not ruled out in the preliminary stages of the negotiations and that both sides of the negotiations understand, and their negotiating positions are informed by, the realities of business in Europe.