The EU has taken a tough stance in the mandate for negotiation adopted on Tuesday, February 25, 2020.
Our analysis of the UK negotiating mandate published on Thursday, February27, 2020, can be read here.
Setting the Brexit Table
The UK officially left the EU on Friday, January 31, 2020. Brexit took place on the basis of the final version of the Withdrawal Agreement negotiated in October 2019 and endorsed by the British Parliament and the European legislators. A Political Declaration accompanies the Withdrawal Agreement, setting an overall framework for the future of the relationship.
A transition period is now ongoing until December 31, 2020. During this period, EU regulation will continue to fully apply in the UK. For businesses, investors and individuals, this period will be "business as usual," but with an imperative to prepare for and manage the legal, commercial, and operational impacts that inevitably will result once the transition period ends.
The UK Government and the European Commission will use the transition period for the establishment of a legal framework that is intended to avoid a "cliff-edge" Brexit. However, eleven months is commonly seen as a short period to negotiate a comprehensive free trade agreement. While the UK and the EU could, in theory, agree to an extension of the transition period to allow more time for negotiations, UK Prime Minister Boris Johnson has made clear that he would not support extending the transition period past the currently-established deadline in December 2020. In any event, an extension would need to be agreed by both sides before July 1, 2020.
The Ambitious and Challenging Road Ahead
Negotiations between the EU and the UK are planned to begin in early March. The EU adopted today its formal negotiating directives (the EU Mandate). The Mandate sets out the EU's level of ambition for the negotiations, the linkages made between issues, and the "red lines." The contents of the EU Mandate already highlight fault lines with the UK on the envisaged structure and content of any future EU-UK relationship.
The text envisages an ambitious new partnership between the EU and the UK encompassing trade and economic cooperation, law enforcement and judicial cooperation in criminal matters, foreign policy, security and thematic areas of cooperation (such as data protection, environmental protection and action against climate change).
Achieving agreement on such a range of issues, which go well beyond the content of standard FTAs, may require negotiating several different legal texts.
Negotiation of separate legal texts may have implications for how interested stakeholders in the private sector can protect their interests, such as prioritizing and focusing attention on specific negotiating agendas. Key areas to watch which affect goods include highly regulated areas such as chemicals, food, electrical, and transport, as well as treatment of intellectual property and services.
At the same time, the EU Mandate in effect signals that, for the EU, "nothing is agreed until everything is agreed."
The EU moreover insists that the whole should form "a coherent structure and be embedded in an overall governance framework." This is code for a robust dispute settlement procedure, including a role for the EU Court of Justice in so far as any interpretation of EU law could be concerned.
The EU's further "red lines" include any UK proposals that might jeopardize security in Northern Ireland, and, more generally, any attempts by the UK to obtain the rights and benefits of an EU Member State. The EU Mandate creates cross-linkages between such things as judicial cooperation and continued UK adherence to the European Convention on Human Rights.
The UK government is expected to make public its negotiating terms on Thursday of this week. It published a statement on February 3, 2020 presenting its proposed approach in the negotiations. In a speech in Greenwich on the same day, Prime Minister Boris Johnson emphasized the will of the UK to "maintain the highest standards" while arguing that there was "no need for a free trade agreement to involve accepting EU rules […] any more than the EU should be obliged to accept UK rules." He also recalled his ambition to agree on an FTA comparable to the one the EU recently concluded with Canada and referenced the trading relationship with Australia, a country that has no free-trade agreement with the EU. This is perhaps best understood as an indication that the UK is prepared to accept a "no agreement" scenario and move to what would be, in effect, a "no deal" Brexit. Ironically, Australia currently is engaged with the EU in FTA negotiations, with a view to improving its current levels of access to EU markets.
In short, there is a long way to go in the negotiations and the possibility of a cliff edge Brexit at the end of 2020 cannot be ruled out. Given the limited time available and imperative of avoiding this situation, the involvement of interested stakeholders in helping to shape a mutually-beneficial final agreement is critical.
Some Potholes in the Road Ahead for Industry
- The stage is set for a trade-off between UK willingness to agree "level playing field" commitments in the area of labour, environmental rights, and state aid rules, versus EU willingness to grant "duty-free, quota-free" access to the EU market for UK exports of goods. A positive outcome in this regard is not a given, in that the UK has stated its firm intention to make a point of diverging from EU rules, while the EU is concerned about potential dumping onto the EU market of subsidized UK products.
- Regardless of any outcome on "level playing field" commitments, and even if the UK and EU are able to negotiate an FTA in 10 months, UK businesses will experience regulatory checks, as well as tariff and VAT issues at the UK-EU border. This also will pose a challenge to UK-based businesses integrated with EU supply chains and whose majority customer bases are in continental Europe. Continental European-based businesses face similar issues in relation to the UK.
- In terms of policing any agreement, the UK will want to avoid any role at all for the EU Court of Justice while the EU will insist that the court remains the final arbitrator on any issue of EU law.
- The implementation of the special arrangements for Northern Ireland could prove difficult. Under the Withdrawal Agreement, in order to avoid the emergence of a "hard border" on the island of Ireland it was agreed that Northern Ireland would remain simultaneously part of the UK and EU customs unions, and that Northern Ireland would de facto remain within the EU regulatory sphere with regard to issues of product and plant and animal goods safety. This raises the need to put in place various checks on goods moving between Great Britain and Northern Ireland. While Prime Minister Boris Johnson has insisted such checks will not happen, the UK Government to date has not clarified how they may be avoided. The EU Mandate makes clear that Northern Ireland security conditions are non-negotiable.
- An agreement on services will be complicated because FTAs typically address more basic market access issues (such as discriminatory barriers to entry by non-residents), rather than the far deeper level of mutual recognition UK service providers have enjoyed to date under the EU Services Directive. Even if the UK achieves its ambition of concluding a "Canada-style FTA" with the EU, UK services providers will - absent a special arrangement - experience a significant loss of access to the EU services markets relative to that enjoyed while an EU Member State. The EU Mandate at several points makes clear that the UK "as a non-Member of the Union, that is not subject to the same obligations as a member, cannot have the same rights and enjoy the same benefits as a member."
- The general position on cross-border trade in services will be more specifically reflected in financial services, where the EU has stated that UK business no longer will benefit from "passporting" after the Withdrawal Agreement period. The EU instead will assess the possibility of granting equivalences to the UK in the area of financial services. However, it is clear that these will be "autonomous" EU decisions: i.e. unilateral decisions by the EU which may be withdrawn on short notice. While the granting of equivalence determinations in financial services will not formally be part of the negotiations, it is expected that such outcomes will be linked to the broader outcome of the negotiations and to the UK's willingness to accept regulatory alignment in financial services more generally. The Mandate expressly provides that "[e]quivalence mechanisms and decisions remain defined and implemented on a unilateral basis by the European Union."
- Data protection and the free flow of valuable information for cross-border commerce will have to be addressed by an EU decision on the "adequacy" of UK rules with reference to the GDPR (similar to the 'Privacy Shield' agreement with the US). The Mandate in this regard links the granting of EU adequacy decisions to other forms of cooperation, notably law enforcement and judicial cooperation.
- Fisheries will be a highly contentious issue with the UK wanting to retain maximum control over its own territorial waters after Brexit while the EU will seek to preserve as far as possible pre-Brexit fishing rights for EU vessels, bearing in mind that nearly 70% of fish caught in the UK is exported to the EU. Although representing only a small percentage of GDP, this issue is politically-charged on both sides and has the potential to cause serious roadblocks.
- Other key issues will be addressed throughout the negotiations, such as the future of EU-UK cooperation in the field of foreign and security policy, mechanisms for resolving conflicts between regulatory regimes in key areas of UK-EU industrial and commercial engagement, and the UK access to European research and education programs.
What Happens Next?
The two sides will open formal negotiations next week with rounds alternating between Brussels and London.
The discussions are bound to be tough, with a lot of political rhetoric from the side-lines.
It will be a real challenge to reach agreement on the full range of issues by the end of the year, especially given the ratification procedures needed. On the EU side, it is likely (depending on the final content of any agreement) that ratification could be needed not just by the Council of Ministers and the European Parliament but also by the national parliaments of all 27 Member States.
About Steptoe's Brexit Team
Our Brexit team offers our clients a multi-disciplinary approach to advising our clients on the regulatory preparedness for the end of the transition period for the UK withdrawal from the EU. We have extensive experience in advising on trade and investment agreements and policy, as well as in cross-border work in environmental law, competition, employment law, international regulatory compliance, and financial services, including insurance. That experience, and our presence in Brussels, London, and Washington, enables us to provide an analysis of the impact of Brexit and practical strategic and tactical advice to companies in different sectors and areas of law.
Our Brexit team is led by David O'Sullivan, who as EU Ambassador to the United States, oversaw the EU's bilateral relationship with the United States including political, economic, and commercial affairs. It also includes lawyers involved in negotiating recent EU bilateral Free trade agreements: a former senior counsel to Canada in the negotiation of the Canada – European Union Comprehensive Economic and Trade Agreement (CETA), and a former official of the Ministry of Foreign Affairs of Japan engaged in the negotiation, drafting and legal verification of the Japan–EU Economic Partnership Agreement.