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No. 58

BREXIT

Latest Developments

The clock is ticking: UK has little time to wrap up negotiations with the EU if it wants to leave the bloc with some benefits.

On March 29, 2017, the U.K. Prime Minister Theresa May submitted the official withdrawal notification to the EU and received a two-year period to negotiate the divorce terms. The exit plan has to be ratified by the British Parliament and also by the European Parliament, so it should have been ready until October 2018. But now the due date is most likely to be postponed.

With November emerging as the new deadline for a divorce agreement to be signed, sealed and delivered, the next days will be crucial.

It is worth mentioning that, after March 29, 2019, the U.K. will get the *third world country status.

U.K. Prime Minister Theresa May has prepared an exit plan, but there are still many important aspects that are not addressed. And also, she is facing a huge backlash at home: pro-Brexit lawmakers are not happy with the current situation; former Foreign Secretary Boris Johnson said that May's plan is going pear shaped because she didn't put serious efforts into it; and 20 Tory lawmakers started a campaign called #StandUp4Brexit, in order to "raise MPs’ awareness of the discontent amongst members of the public, Conservative activists, Chairmen and party members over the Conservative government’s" plan.

Specifically, those 20 Tory lawmakers are criticizing the following topics:

  • The common rule book allows the European Court of Justice (ECJ) to overrule and severely hampers new free trade deals
  • The backstop allows Northern Ireland to be separated from the rest of the UK
  • Free movement of labour permits EU citizens to collect benefits whether in or out of work, without making UK contributions
*Source: http://standup4brexit.com/

On the other hand, neither the EU chief negotiator Michel Barnier is a fan of this plan: "The British have a choice. They could stay in the single market, like Norway, which is also not a member of the EU. But they would then have to take over all the associated rules and contributions to European solidarity. It is your choice. But if we let the British pick the raisins out of our rules, that would have serious consequences. Then all sorts of other third countries could insist that we offer them the same benefits. That would be the end of the single market and the European project. Moreover, the British proposal is not practical. It is impossible to tell exactly where a product ends up, on the UK market or in the internal market. The British proposal would be an invitation to fraud if implemented." said Barnier, as quoted by the German media.
 
That being said, Bloomberg reports that the deadline for finishing negotiations between the two parties is not going to be October. Now it could be November.

“There is some measure of leeway,” Brexit Secretary Dominic Raab said last week. An emergency EU summit in November to sign the deal could be on the cards. Remember that Brexit is in two parts: first the divorce agreement to make sure the exit is orderly, and then the future trade deal, which won’t be negotiated until after the UK leaves. This means some of the trickiest decisions about the future relationship can be postponed until after Brexit has happened.

Source: Bloomberg

Two Scenarios

The European Commission stressed that the ongoing negotiations could lead eventually to a good deal for both parties, but it has its reserves. So, the EPTDA's members have to be prepared for whatever comes next.

According to the EC, if the draft Withdrawal Agreement is agreed by the European Union and the United Kingdom, then "it would provide for a transition period between the withdrawal date (i.e. 30 March 2019) and 31 December 2020; during the transition period, the Union rules, as they continue to evolve, would in general apply to and in the United Kingdom, although the United Kingdom would no longer participate in the governance or decision making of the EU institutions, bodies or agencies; a transition period would thus give another 21 months to prepare for the day when EU law would cease to apply to and in the United Kingdom".

Companies and National and EU administrations need to prepare for two possible main scenarios: A “Soft Brexit” whereby the UK ceases to be a Member State of the EU but continues to have access to the single market as a member of the European Economic Area (EEA) or under a bespoke arrangement, and a "Hard Brexit" whereby the UK has no form of associate membership or other tailored trading relationship with the EU and relies on its membership of the World Trade Organisation (WTO) as a basis for trade with the EU.

This is how the European Commission is describing the two scenarios:
  1. If the Withdrawal Agreement is ratified before 30 March 2019, so that it can enter into force on that date, EU law will cease to apply to and in the United Kingdom on 1 January 2021, i.e. after a transition period of 21 months, the terms of which are set out in the Withdrawal Agreement.
  2. In the absence of an agreement on a withdrawal agreement, or if the Withdrawal Agreement is not ratified in time by both parties, there will be no transition period and EU law will cease to apply to and in the United Kingdom as of 30 March 2019.
According to the EC, these are the main consequences of scenario 1:
  • The United Kingdom will be a third world country.
  • Continuation of the application of EU law in and to the United Kingdom: In general, EU law would continue to apply during the transition period.
  • Exit from the institutional set-up: The United Kingdom would, starting 30 March 2019, no longer participate in EU decision-making, EU institutions, governance of EU bodies and agencies.
  • Management of the transition period: The role of EU institutions in the supervision and enforcement of EU law in the United Kingdom would continue.
  • Negotiation of the future relationship: The European Union should negotiate with the United Kingdom an agreement on the future relationship which should ideally be in place (agreed, signed and ratified) at the end of the transition period and apply as from 1 January 2021.
According to the EC, these are the main consequences of scenario 2:
  • The United Kingdom will be a third world country and Union law ceases to apply to and in the United Kingdom.
  • Citizens: There would be no specific arrangement in place for EU citizens in the United Kingdom, or for UK citizens in the European Union.
  • Border issues: The European Union must apply its regulation and tariffs at borders with the United Kingdom as a third world country, including checks and controls for customs, sanitary and phytosanitary standards and verification of compliance with EU norms. Transport between the United Kingdom and the European Union would be severely impacted. Customs, sanitary and phytosanitary controls at borders could cause significant delays, e.g. in road transport, and difficulties for ports.
  • Trade and regulatory issues: The United Kingdom becomes a third world country whose relations with the European Union would be governed by general international public law, including rules of the World Trade Organisation. In particular, in heavily regulated sectors, this would represent a significant drawback compared to the current level of market integration.
  • Negotiations with the United Kingdom: Depending on the circumstances leading to the withdrawal without an agreement, the EU may wish to enter into negotiations with the United Kingdom as a third world country.
  • EU funding: UK entities would cease to be eligible as Union entities for the purpose of receiving EU grants and participating in EU procurement procedures. Unless otherwise provided for by the legal provisions in force, candidates or tenderers from the United Kingdom could be rejected.

What This Means for EPTDA Members

Stating the obvious, in this point, no one knows for sure how Brexit will turn out to be. So, EPTDA's Members should be prepared for addressing these possible issues:

  • A decrease in revenues: If your company has operations in the UK or strong ties with this country then you should expect at least a slight decrease in revenues as a result of the decline of consumption because of uncertainty and increased inflation;
  • Economic unpredictability means that you should consider to opt for putting a hold on those projects that might be related with the U.K;
  • The UK will not be a gate to the EU”s business environment anymore, so it will become less interesting as a headquarter location;
  • Increased tariffs, trade complications regarding supply chains, border controls, changes in immigration could drive up labor costs - this aspect is important if you have operation in the U.K.
  • In the worst-case scenario -” Hard Brexit” - the U.K. will exist instantly from the single market in both goods and services, and the Customs Union. As such, the U.K. will be treated as a third world country, which means that all U.K. trade will become subject to the EU common external tariff and rules of origin checks, which are higher. It would also mean a re-negotiation of the World Trade Organization’s schedules, which has 163 members.
  • ”The impact would be immediate: tariffs on all goods entering the EU would be required, with varying rates across product lines. Rules of origin would apply once the UK left the Customs Union, increasing the time, paperwork and cost required to ascertain the national origin of any product. The UK would no longer fall under the EU regulatory regime, meaning British products such as chemicals, pharmaceuticals or food stuffs would not be authorized for sale. UK financial firms would lose their ‘passporting’ rights, and airlines would lose their EU flyover privileges”, according to Deloitte.

Sources and Further Reading

European Commission
BBC
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