Waking up to Brexit – two weeks on

In Charles Dickens’ Oliver Twist, nine-year old Oliver, fed up with the miserable gruel he and the other boys in the parish workhouse were given, walks up to the master and asks for more. The next day, there was an announcement on the workhouse gate offering five pounds to anyone willing to take Oliver off the hands of the parish.

The UK, it seems, also wants more from the European Union, not only access to the single market but also exemption from the free movement of labour. It has put not one, but two Olivers, to work on this request. Oliver Letwin is the government minister (yet another old Etonian at the top of the Conservative Party) who is responsible for a new unit (the ‘Brexit unit’) within the Cabinet Office. This unit will lead the civil service work for the Brexit negotiations and prepare options and advice for the new prime minister. The new unit will be headed by the other Oliver, Oliver Robbins, with permanent secretary status.

Whether the two Olivers will succeed in getting a more accommodating response for the UK from the EU than Oliver Twist got from the master, or whether it will be given its rebate and shown the door, remains to be seen and is the topic of this post.

Political responses: UK side. ‘Out means out’

As part of the stages of grief that followed the result of the referendum, those in favour of Remain have desperately looked for options which might prevent a Brexit outcome. The parliamentary majority in favour of Remain was urged to vote against it. It was argued Scotland had the power to prevent it. Others called for a second referendum, or for a general election in which the people would be asked to vote again, this time with the clear alternative of what a Brexit package might mean on the table. None of these options is realistic.

With Prime Minister David Cameron’s announcement that he intends to resign, the campaign to become the next Conservative Party leader and the Prime Minister who will lead the Brexit negotiations is in full swing. The first round of the contest was won by Theresa May with 165 out of 329 votes cast by Conservative MPs, followed by Andrea Leadsom with 66 and Michael Gove with 48. All have made crystal clear their Brexit strategy.

In her speech declaring her candidacy, Theresa May was at pains to stress that ‘Brexit means Brexit’, there would be no attempts to remain inside the EU, no attempts to rejoin it through the back door, no second referendum, and no general election until 2020. She also stated there would be no decision to invoke Article 50 until Britain’s negotiating strategy is clear, and not before the end of this year.

In her speech declaring her candidacy, Andrea Leadsom declared that the result is final and must be respected. “The UK will leave the EU and freedom of movement will end”. With the rather breezy indifference to reality which characterised the Leave campaign for which she was a leading advocate, she has urged a quick settlement and argued that not everything needs to be settled before Article 50 is triggered and the exit process is concluded.

Although Michael Gove must now be seen as an outsider, his statement setting out his candidacy also committed to delivering on the promise to leave the EU and to take back control of the UK’s borders. He has also said he would not trigger Article 50 until at least next year.

While the Conservative Party members get the final choice between the two leading contenders, it is clear that the UK will have a Prime Minister on 9 September next who is determined to lead the UK out of the EU.

Triggering Article 50 – legal debates

Various legal questions have been raised around the triggering of Article 50 which would start the formal process of negotiating the UK withdrawal with the rest of the EU. One debate is whether triggering Article 50 would require a resolution in Parliament or would be done by the Prime Minister under the royal prerogative. Prerogative or executive power rests with the Prime Minister and Cabinet (representing the monarch) and is the basis for the conduct by the government of foreign policy, defence and national security among other matters. Legal opinion supports the government view that this decision does not require Parliament’s assent.

As Mark Elliott, Professor of Public Law at the University of Cambridge, explains on his blog: “Just as it was the UK Government, exercising prerogative power, that caused the UK to be bound by EU Treaty obligations, so it is for the Government, using prerogative power, to extricate the UK from those obligations — including by triggering the Article 50 extrication process itself. Meanwhile, just as it was for Parliament to enact such domestic legislation as EU membership required (such as the European Communities Act 1972), it is equally for Parliament to enact any domestic legislation that Brexit may in due course require.”

Scotland’s First Minister Nicola Sturgeon has raised the question whether the Scottish Parliament would be required to give its consent to triggering Article 50 under the Scotland Act. Elliott’s response to this is again that the “Article 50 process — whereby the UK’s departure from the UK would be negotiated — falls to be triggered by the Government exercising its so-called prerogative powers to conduct foreign policy, rather than by Parliament enacting legislation. This means that when (or if) Article 50 is invoked, that could happen without any legislation being enacted by the UK Parliament”. As a result, for this and other reasons, the issue of Scottish consent does not arise.

Triggering Article 50 – timing

As noted, there are differences between the three leading candidates for the position of Conservative Party leader on when Article 50 should be triggered, with Mrs Leadsom being the most gung-ho. Mrs May suggests it should not be triggered until at least the end of the year, with Mr Gove saying even later. However, the longer the new UK government would delay the decision, the more foolish it would look, not least in the eyes of those who voted for Brexit.

The most reasonable assumption is that the exit process would be triggered perhaps at the December European Council meeting. This would then mean the UK would have left the EU by the time of the next European Parliament elections scheduled for May 2019.

How Article 50 will work

In negotiating its exit from the EU, the UK will actually engage in two sets of negotiations. One concerns the process of withdrawal. The other concerns the future relationships (trade, economic, security) between the two parties. These are separate negotiations with their own timetables.

Article 50 envisages two sets of negotiations but the relationship between them is left unclear. Article 50(2) says:

A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union…….(bolding added)

This paragraph makes clear that two distinct objectives are foreseen: one is the set of transitional arrangements on things that have to be done to extricate the UK from its EU rights and obligations; and the other is its future relationship with the Union. Some have seen these negotiations proceeding in parallel and reaching their end-point at the same time. However, in the words of the Commissioner for Trade Cecilia Malmström “First you exit, then you negotiate”.

Let us look at the exit negotiations first. As explained in this Commission Q&A, the exit negotiations would be handled as for a trade agreement. Following the triggering of Article 50, the Commission will propose a set of negotiating guidelines to the European Council which must be agreed by unanimity. The European Council would also be asked to nominate the Union negotiator. The negotiated agreement would need to be adopted by a qualified majority of 72% of the remaining 27 Member States, representing 65% of the population. The final agreement would also need to be approved by the European Parliament, voting by a simple majority.

As the withdrawal agreement simply involves cutting the ties that bind the UK to the EU legal order, the Commission’s Q&A sheet makes no mention that national parliaments should be involved in this process. However, if extricating Britain from the EU requires changes in the EU Treaties, then national parliaments are definitely involved with all the uncertainty implied by that (including possible referenda in other Member States).

Article 50 clearly envisages that, in the withdrawal negotiations, there could be a commitment to start on a process of negotiations for some mutually-agreed future trade relationship. But this is not the same as agreeing to conduct these negotiations at the same time.

The process of negotiating a new trade agreement is spelled out clearly in the EU Treaties which say that “Where agreements with one or more third countries or international organisations need to be negotiated and concluded, Article 218 shall apply…” Under Article 218, “The Council shall authorise the opening of negotiations, adopt negotiating directives, authorise the signing of agreements and conclude them.” Again, the Parliament must give its consent. Where a trade deal touches on matters that are not strict EU competencies, then it must also be signed off by all national parliaments. After some initial wavering, this is how the free trade agreement recently negotiated with Canada will be ratified.

The opinions of the EU institutions seem unambiguous. The informal European Council 29 June statement reads that “Any [future] agreement, which will be concluded with the UK as a third country, will have to be based on a balance of rights and obligations”. The European Parliament’s 29 June 2016 resolution on Brexit “Recalls that any new relationship between the UK and the EU may not be agreed before the conclusion of the withdrawal agreement”. (bolding added)

Legally, these statements are correct because EU countries cannot make separate trade agreements with individual member states or third countries. However, there is a small let-out in both statements. Both refer to concluding a trade agreement with the UK as a third country. They do not exclude that the ‘future relationship’ negotiations could proceed in parallel, provided only that they would be concluded with the UK as a third country.

It may be hard to envisage the Alice-in-Wonderland situation where the EU Council would give a mandate to negotiate a trade agreement with a country that was still a member and that already had full trade access. However, if there were the political will to do this, perhaps it could be done. The UK could argue that, once it had triggered Article 50, it now had a different status to an ‘ordinary’ EU member. Because this is an unprecedented situation, how it plays out is still very uncertain.

However, the important implication is that there would be a period, however short, in which the UK has left the EU but has only third country status with no special trade relationship. In practice, negotiating the new trade relationship would likely take much longer than negotiating the withdrawal agreement which will mainly be about the technical details of any divorce (how to deal with the finances, who gets to look after the children).

Also, it would take some months into the Article 50 negotiation period before there could be an agreement on the nature of the future trade relationship that both sides want to pursue. Would this be a European Economic Area-type relationship, or a free trade agreement like Canada, or something different altogether? Even when this strategic objective is agreed, the EU Council would then have to agree a mandate on a proposal from a Commission to pursue these negotiations.

Let us leave aside whether legally the EU Council would have the power to approve such a mandate before the Article 50 negotiations were concluded. All of this could easily eat up the first 12 months of the two year period envisaged under Article 50 for the withdrawal negotiations to take place.

It is thus hard to avoid the conclusion that trade, including agricultural trade, will face third country tariffs in both directions for at least a period (though of course we do not yet know what tariff structure the UK will put in place). It would take an awful lot of goodwill, as well as a lot of creative legal thinking, to avoid this outcome.

Political responses: EU side

Whether this goodwill would be forthcoming or not depends on the political response from the EU side. There are two main positions within the EU on how to negotiate with the UK after Brexit.

One is represented by a ‘French axis’, consisting of the French President, the Belgian Prime Minister and President Juncker of the Commission and supported by President Schulz of the European Parliament. This axis favours a quick triggering of Article 50 and a quick exit. They cite the need for certainty. They see UK exit as an opportunity to push ahead with further wide-ranging integration options. They favour a ‘hard line’ in negotiating a future relationship with the UK to send a signal to other doubters that it is not possible to have the benefits of EU membership without the obligations.

The other view within the EU, voiced by the Dutch, Danes and central European countries and supported by Chancellor Merkel until now, is that the UK should be given time to resolve its internal political difficulties. However, whether these leaders are prepared to take a softer approach on the terms of negotiating a future trade relationship is less clear.

Relevant to this is that there will be elections in important EU countries next year, beginning with the Dutch general election before March 2017, the French Presidential elections in April and May, and German elections in September or October. Depending on the outcome of these elections, the UK could be negotiating with a rather different EU in twelve months’ time.

In my view, it is in the EU’s interest to maintain as close an economic relationship with the UK as possible. This means that it should be willing to enter into the two sets of negotiations with the UK in parallel as soon as this is feasible. However, I fear that even with this goodwill, we will not avoid a situation in which tariffs will be re-imposed on trade between the UK and the EU after their absence for over 40 years. We know the EU tariffs that would apply to UK exports. For EU exporters to the UK, the impact will depend on the MFN tariffs the UK chooses to apply once it has the freedom to do so.

This post was written by Alan Matthews

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8 Responses to “Waking up to Brexit – two weeks on”

  1. Deborah Mallender
    July 7, 2016 at 10:00 #

    Where Britain leads others will follow. History tells us that has always been the way. I predict all remaining EU countries will want a different arrangement. And out of chaos will come order.

  2. Jack Thurston
    July 8, 2016 at 13:54 #

    Interesting post, Alan.

    The politics of the Tory leadership election and the pro-Brexit views of party members means that all candidates must say ‘Brexit means Brexit’ at least until they’re elected and can take office and ‘have a proper look at the books’. Time is the critical factor here. Should the UK begins to slide into recession, the pound devalue further, and are some really bad news announcements from major employers, the political climate could change dramatically. In short, people may come to realise that Project Fear was really just Project Reality.

    What’s more, there is something of a stalemate in terms of starting the Article 50 process. Once the 2 year clock is ticking the UK is in a very poor negotiating position, as the alternative to a negotiated agreement is being out in the cold. Yet the EU institutions are saying there’ll be no pre-negotiation before Article 50, yet they can’t force the UK to start Article 50 negotiations as a referendum result has no legal status at all. The UK Parliament is firmly pro-Remain so you won’t get any pressure from there, though there will of course still be pressure from UKIP and the leaders of Leave campaign.

    It’s also unclear whether the idea of putting a negotiated agreement to the people via a General Election or 2nd Referendum can work. Once the Article 50 process has begun, it must end with an exit unless every MS agrees on UK ‘rejoining’ should it not like the look of the deal it has negotiated.

    Separately, would you mind elaborating on the issue of MFN status?

    If the UK wanted to give tariff free access to the UK market for EU exporters, would it follow that it would have to give them to all other WTO trading partners with the MFN designation, e.g New Zealand? Is that how MFN works? Forgive my ignorance!

  3. Alan Matthews →
    July 9, 2016 at 21:25 #

    @Jack

    You make some good arguments as to why the next UK Prime Minister might not want to follow through on the referendum result (to which one could add possible legal challenges as to whether it is the PM or Parliament which has the right to trigger Article 50 which could delay matters further). I wish you were right, but having listened to the speeches of the two candidates to become the next Prime Minister I fear the Brexit route will be followed. But of course only time will tell.

    On the MFN issue, there is first the no small matter to be resolved if Brexit goes ahead of what the UK’s WTO commitments will be, including what ceilings might apply to its tariffs (these would be its bound tariffs). Let us assume that the tariffs the UK would wish to apply (its applied tariffs) are less than or equal to these bound tariffs. Under WTO rules (Article 1) these have to be applied on a non-discriminatory MFN basis, with just two permitted exceptions (a) it can discriminate in favour of least developed countries (where presumably it would continue the 0% tariff that it currently applies as part of the EU) and (b) it can discriminate in favour of countries with which it has a preferential trade agreement. So assume for illustration that the UK decides to apply a 20% tariff on agrifood imports on an MFN basis, it could only offer duty-free access to the EU as part of a preferential trade agreement.

    The point of my post is that negotiating such an agreement (under Article 218) is a different process to negotiating exit (under Article 50) with very different timelines. There is even a legal doubt whether the EU27 could start the process of negotiating an FTA under Article 218 as long as the UK was still a member negotiating its exit (as under the Common Commercial Policy, an individual member state (in this case, the UK) is not allowed to conduct trade negotiations (even if, in this case, the negotiations would be with the rest of the EU). Even if clever legal minds got around this, the time scale to negotiate a full-blown trade agreement of whatever kind is likely to take longer than the exit negotiations. Hence my conclusion that trade between the UK and the EU27 after Brexit would have to take place on MFN terms at least for a period of time..

  4. neil ridley
    July 18, 2016 at 12:39 #

    There is big trouble at present.

    In essence this is down to the failure of the business system to adapt to a new world order post 2008.

    Brexit will be a mess, as 2 years is in reality no time to implement change of this magnitude.

    The reality of food is: we are a net importer of food, and a reasonably wealth nation. Agentina, Australia and others will be delighted with this.

    I voted to stay… the foreboding of the future is tempered with a degree of excitment. As expressed for so many, like the poor people of Greece, how bad can it get? Ireland for example is growing by 30% due to a big comapny shifting headquaters, and this is within the EU.

    Things have to change. The regret for Brexit voters is they want a small world, where as UK has for many hundreds of years traded on a global position – and will continue in the vein. The bigger challenge to EU is either of Clinton or trump and teppee. We can no matter change the globalisation of the economy that has run riot since 1945 even in use of the ace of trumps that is the Donald.

  5. Andrew Chapman
    July 24, 2016 at 12:14 #

    The FTAs between the EEC and 5 EFTA states were negotiated in 7 months between Dec 1971 and July 1972. They were on a deadline because the UK and Denmark were about to join the EEC. They already had free trade with (the future) r-EFTA, and wanted to continue that way – which I seem to remember was the incentive to getting these FTAs done in time. I believe they came into force on 1 Jan 1973, the same day as we joined the EEC. Isn’t this a bit similar to the current case?

    If there were a general desire to achieve a no-tariff FTA with the UK post-Brexit, it can hardly be in anyone’s interests to impose tariffs for a period and then remove them again. So why not aim for some kind of simple EU-UK FTA including at least zero tariffs on industrial goods and an MRA to enable the Notified Bodies to continue to certify products re safety legislation? And aim for it to come into force on the same day as the UK exits. If some way could be found to allow such a parallel negotiation, then it could be agreed by the Council by QMV, as I understand it. Perhaps more could be achieved, in regard to agriculture, and IP say, and services, and again this could I think be a simple agreement, but now requiring unanimity in the Council.

    And surely some kind of more or less basic FTA would be simpler to achieve when starting from a free trade situation, rather than going in the opposite direction?

    Andrew

  6. Alan Matthews →
    July 24, 2016 at 22:27 #

    @ Andrew

    I completely concur with your view that “If there were a general desire to achieve a no-tariff FTA with the UK post-Brexit, it can hardly be in anyone’s interests to impose tariffs for a period and then remove them again”. The question is how to reach that point given the legal and constitutional constraints on the EU’s freedom of action. Your suggestion of going for a simple tariffs-only FTA indeed has the merit that it could probably be negotiated quickly. However, it would not cover services including financial services, transport services, business services etc where the UK will surely want to also reach an immediate agreement with the EU, even if negotiations on other issues such as IP, government procurement etc were left until later as you suggest. Hence you get into issues which are both more complicated to negotiate and also more complicated to ratify. Let us hope that some clever legal minds can find ways around these constraints over the next couple of years.

  7. Andrew Chapman
    July 25, 2016 at 13:05 #

    Thanks, Alan, that’s very helpful. People constantly say it’s impossible to negotiate a modern FTA, with its many chapters, in two years. I don’t know if that’s true or not. Life experience suggests that things happen much more quickly when there is a deadline than where there isn’t.

    But say that they are right, and it’s too much for two years. So then rather than saying it can’t be done, why not aim for a medium-sized FTA, and ask what are the minimum requirements the UK should aim for. You have added financial services, transport services and business services. I would be interested to know what you would put in your ‘etc’ of things that the UK would surely want in an immediate agreement, and also in your etc. of things beyond IP and government procurement that you might be inclined to leave out. Presumably, one would steer clear of anything that would make the agreement mixed.

    I don’t know how important it is to avoid unanimity in the Council, which could give leverage to a single country. This would mean leaving out trade in services, commercial aspects of IP and FDI, as I understand it. (TFEU 207(4)). Perhaps it would be hard for one country to stand against something agreed by the big powers.

    Would there be something to be said for a modular approach, if I can call it that, a bit like the Swiss agreements, and especially Bilaterals II, where I think there is no linkage between the separate Agreements. I suppose that some linkage may be necessary (of things which are in the UK’s interest, but not in the EU’s; with things that are in the EU’s interest, but not in the UK’s); but in general I would have thought that there are a lot of things that are in the mutual interest.

    Where the topics are delinked, I would have thought that the number of topics covered is not too important, since one can just have more parallel negotiating teams. If one or a few get stuck, then one could agree on the rest before the 2 years is up. Presumably, interim agreements with joint working parties to handle arrangements for a short period are a possibility too.

    Andrew

  8. Andrew Chapman
    July 25, 2016 at 13:26 #

    Postscript: I have just realised that transport services are outside the EU’s exclusive competence, and so would have to be left out if the Agreement were to be simple, so far as I can see. (Review of the Balance of Competences: Trade and Investment, 2.5). Andrew