Brexit Withdrawal Agreement forwarded to UK

The EU Commission yesterday forwarded a draft Withdrawal Agreement to the UK authorities for negotiation. This draft builds on the initial draft submitted by the Commission for approval by the Council (Art.50) and the Brexit Steering Group of the European Parliament on 28 February last. To accompany that initial text, the Commission published a helpful Q&A as a guide to the withdrawal process which still remains valid today. Press reports have highlighted that governments tweaked the initial text in some minor ways but retained the broad thrust of the document.

Negotiators are expected to work on the draft over the weekend and in Brussels on Monday and Tuesday next week. The hope is that sufficient progress will have been made in ironing out remaining differences that the European Council, which will meet in its Article 50 formation next Friday 23 March, will approve the guidelines to start negotiations on the framework of future relationships.

The main stumbling block, according to press reports, is inclusion of the Protocol which sets out the backstop arrangement for the Irish border outlined in the Joint Report of 8 December 2017 if alternative arrangements are not agreed. The UK government, under pressure from the Democratic Unionist Party in Northern Ireland on which it depends for parliamentary support, has stated that the arrangements set out in the Protocol are not acceptable.

The backstop arrangement (Scenario 3 in the Joint Report) would keep the territory of Northern Ireland part of the customs territory of the Union, including with respect to administration of VAT and excise duties. It would also establish a common regulatory area between the Union and Northern Ireland, specifically covering the free movement of goods, agriculture and fisheries, the single electricity market, the environment and state aids.

The draft Withdrawal Agreement provides that this Protocol would cease to apply should a future agreement between the Union and the UK be agreed which addresses the unique circumstances on the island of Ireland, including by avoiding a hard border and protecting the 1998 Belfast (‘Good Friday’) Agreement in all its dimensions. The UK’s preference is to achieve these objectives through the overall EU-UK relationship (Scenario 1 in the Joint Report). Should this not be possible, the UK has agreed to propose specific solutions to address the unique circumstances of the island of Ireland (Scenario 2).

The transition arrangement

Much of the draft Withdrawal Agreement deals with the issues surrounding an amicable divorce (citizen’s rights, the financial settlement). Part Four deals with the transition period. The end date for the transition period is set at 31 December 2020.

Under Article 122(1), the draft agreement provides that “Unless otherwise provided in this Agreement, Union law shall be applicable to and in the United Kingdom during the transition period”. This means that the UK must continue to observe the Union acquis during this period. EU law will continue to have direct effect in the UK. Specifically, the UK will continue to apply the rules of the Common Agricultural Policy during the transition period until the end of 2020 (my post here discusses the significance of this for the UK’s ability to develop its post-Brexit agricultural policy).

Article 6 of the draft Agreement specifies that “For the purposes of this Agreement, all references to Member States and competent authorities of Member States in provisions of Union law made applicable by this Agreement shall be read as including the United Kingdom and its competent authorities.”

Various exceptions are listed, including that the UK will lose its right to nominate members of decision-making bodies and agencies of the Union, and will not be allowed to participate in Union decision-making. Article 123(5) provides that, exceptionally, UK experts could be invited to participate without voting rights in expert groups where this is in the interests of the Union or where the discussion concerns individual acts addressed to the UK or to persons or entities residing in the UK.

Implications for UK trade in the transition period

These provisions appear to be fairly black and white, but in my view they leave some unanswered questions regarding the implications for UK trade during the transition period. Specifically, although it now seems that the UK will remain in the Customs Union with the EU during transition, it is unclear whether it will have the status of a Member State or the status of Turkey during this period (this issue is also addressed in this perceptive post by Sam Lowe of the Centre for European Reform).

To explain this puzzle, we start with Article 122(6) of the draft Withdrawal Agreement, which reads: “Unless otherwise provided in this Agreement, during the transition period, any reference to Member States in the Union law applicable pursuant to paragraph 1, including as implemented and applied by Member States, shall be understood as including the United Kingdom”. This repeats the intention of Article 6 (quoted earlier).

I am not a lawyer, and I hope any lawyers reading this post will correct me. But there is an important difference between Article 122(1) and Article 122(6). Article 122(1) commits the UK to implement and follow EU law during the transition period. The UK would accept a set of obligations as a result. But Article 6 (as confirmed by Article 122(6)) gives the UK a continued de facto membership of the EU, which as well as obligations also gives it all the corresponding rights of an EU Member State (apart from participation in decision-making and nominating members to decision-making bodies and agencies).

Let us now apply these principles to the UK’s trade arrangements during transition. Article 28(1) TFEU provides that “The Union shall comprise a customs union which shall cover all trade in goods and which shall involve the prohibition between Member States of customs duties on imports and exports and of all charges having equivalent effect, and the adoption of a common customs tariff in their relations with third countries”. This provision sets up a Customs Union between the EU Member States.

The UK will leave the EU on 29 March 2019 and would normally be expected to also leave the EU Customs Union. This would also mean that the UK would no longer be party to the many free trade agreements (FTAs) that the EU has signed. However, Article 122(1) of the draft Withdrawal Agreement would bind the UK to apply, inter alia, Article 28(1) TFEU prohibiting tariff barriers on trade with the other EU Member States during the transition and requiring it to adopt the EU’s common customs tariff in its relations with third countries. It would have to give the same tariff preferences to third countries during the transition period as the EU currently does.

But because Article 122(1) only concerns obligations and not benefits, it alone would mean that the UK would lose its reciprocal preferential access to the FTA partner markets. In effect, this is the situation in which Turkey finds itself today in its customs union with the EU.

But Articles 6 and 122(6) of the draft Withdrawal Agreement give de facto EU membership to the UK, including membership of the Customs Union. This would seem to allow the UK to continue to benefit from the many FTAs that the EU has signed.

This approach was favoured by the UK government in its Technical Note on International Agreements during the Implementation Period published on 8 February 2018. Here it noted: “the UK view is that the best approach would be for the parties to confirm that, for the duration of the implementation period, these agreements continue to apply to the UK and that the UK is to be treated in the same way as EU Member States for the purposes of these agreements. This would be achieved by agreement of the parties to interpret relevant terms in these international agreements, such as “European Union” or “EU Member State”, to include the UK”. This is exactly the purpose of Articles 6 and 122(6) of the Withdrawal Agreement.

However, it seems an open question whether the FTA partner countries will be willing to accept this sleight of hand – on the one hand, the UK leaves the EU, but on the other hand, the EU unilaterally (or, more accurately, bilaterally, with UK agreement) proclaims that, actually, we consider the UK is still an EU Member State for all intents and purposes and therefore should continue to benefit from the preferences we have negotiated with you.

FTA partners that will continue to benefit anyway from preferential access to the UK market under the terms of the draft Withdrawal Agreement may feel they are under no obligation to keep their markets open to UK exports, or may attempt to extract a higher price for doing so. Presumably, the extent to which they might carry out this threat would depend on the degree of arm-twisting the EU is willing to engage in on behalf of the UK to keep these markets open to the latter’s exporters.

Certainly, it appears that the EU institutions have some doubts on this question. A briefing note prepared by the Commission’s Article 50 Task Force in January 2018 noted that The Withdrawal Agreement can oblige the UK to respect “the obligations stemming from the agreements” (as formulated in the Supplementary Negotiating Directives agreed by the Council on 29 January 2018). However, it goes on to note that “… the Withdrawal Agreement cannot guarantee the extension of the benefits from those international agreements to the UK“.

The European Parliament resolution of 14 March 2018 on the framework of the future EU-UK relationship is even more explicit on this issue (Paragraph 61):

Recalls that, as from the date of the UK’s withdrawal from the EU, the UK will no longer benefit from the international agreements concluded by the EU, or by the Member States acting on its behalf, or by the EU and the Member States acting jointly; takes note that, during the transition period, the UK will remain bound by the obligations stemming from these agreements; stresses that it is principally for the UK to seek arrangements with those third countries where an agreement is in place should it wish to maintain the effects of existing agreements as regards the UK, and that the UK will not be able to participate in the governance structures and decision-making procedures provided for by these agreements.

The Parliament thus suggests that, as and from the date of withdrawal and not from the end of the transition period, it is up to the UK to maintain the effects of existing agreements as regards the UK by entering into bilateral arrangements with third countries. As noted earlier, this is effectively the Turkish option with respect to a customs union arrangement with the EU.

This does not square with the previous analysis that, by giving the UK de facto EU membership as a result of the Withdrawal Agreement, third countries will be bound to continue to give the UK the same preferential treatment as it has today as an actual EU Member State.

Finally, these doubts are also shared by the UK House of Commons International Trade Committee in its report earlier this month on the continuing application of EU trade agreements after Brexit.

In the event of a post-Brexit transition period involving a temporary EU-UK customs union, it would seem to follow that without any action being taken to prevent it, the UK would still be bound by the EU’s common external tariff but would no longer be a party to the EU’s trade agreements. This would mean that third countries would be able to benefit from the terms of their trade agreements with the EU when exporting to the UK, but the UK would no longer enjoy the reciprocal benefits. This would leave the UK in a position analogous to that of Turkey in its current “asymmetrical” customs union with the EU.

The Committee in its conclusions on this issue noted:

We cautiously welcome the Government’s new policy to seek agreement of all parties to interpret relevant terms of EU free trade agreements, such as “European Union” or “EU Member State”, to include the UK during transition, while continuing to seek to roll over those agreements….[However], it is still far from clear that it will be possible to secure continued application of EU trade agreements during the post-Brexit transition period. The Government must urgently clarify the nature and form of the trilateral (UK-EU-third country) agreements whereby it is intended that the UK will remain a de facto party to the EU’s trade agreements during a transition period. It must also evaluate and set out the potential risks and benefits attached to this approach.

There is a sort of Lewis Carroll Alice-in-Wonderland feeling about the UK’s status in the transition period –both outside the EU and yet fully recognised as an EU Member State when it comes to Union law. Whether other countries will be willing to keep up the pretence remains to be seen. To avoid the Turkish outcome for the UK during the transition period, they will need to do so.

This post was written by Alan Matthews

Photo credit: Sam Neill

Update 19 March 2018: In the joint colour-coded draft Withdrawal Agreement agreed by both negotiators and circulated by the Commission today, a footnote has been added to Article 124(1) stating that “The Union will notify the other parties to these agreements that during the transition period, the United Kingdom is to be treated as a Member State for the purposes of these agreements.” While third countries will have an incentive to agree and not to rock the boat, it remains to be seen how they will react.

Update 17 March 2018: Earlier references in this post to Article 1 have been corrected to Article 122(1). Also, the views of the Commission’s Article 50 Task Force as well as the references to the House of Commons International Trade Committee report and to Sam Lowe’s paper have been added.