Written by: Wojciech Lewandowski, GTM Governance, Europe
For the first time since it was formed, the European Union (EU) will lose one of its member states. On May 29th, Theresa May, the United Kingdom (UK) Prime Minister, triggered Article 50 of the Treaty on the Functioning of the European Union (TFEU), thereby beginning the process to withdraw the UK from the EU. In the absence of a unanimous agreement to extend negotiations, the UK will cease to be part of the EU by March 2019. The consequences of this breakup are far-reaching. International traders conducting business in the UK will have to adapt their plans for the many critical process and cost impacting developments to come.
Looking at the priorities, from both sides.
Over the next two years of negotiations, the UK will remain subject to EU laws and continue to participate in other EU affairs. During this time, the UK is prohibited from signing any trade agreements of its own.
The EU’s top priority is the withdrawal settlement. If good headway is made on that front, the EU will then entertain discussion on their future relationship with the UK under Article 218 of the TFEU. What constitutes “good headway”? This hadn’t been clearly defined, but the European Council did draw up definitive negotiating guidelines in response to the notification under Article 50. The withdrawal negotiations will need to be completed by October 2018. This will allow the European Parliament’s consent procedure to be finalized well before the 2019 European elections. There will be a lot of pressure to negotiate effectively during the two-year time frame.
The UK is aware that the average negotiation process for a free trade agreement lasts between four to seven years. Therefore, in order to ensure that customs controls and barriers to trade are not enforced on day one of Brexit, a transitional agreement extending beyond 2019 is one of the options on the table. But, according to a EU guideline for negotiations, this arrangement should not exceed three years, and will be limited in scope, so that the UK doesn’t enjoy all of its former advantages as a EU member state in good standing.
Once consent from the European parliament is obtained by a simple majority, a withdrawal agreement will need to be accepted by a qualified majority of 72% of Council Members representing at least 65% of the total population (i.e., 20 of the remaining 27 Member States).
An agreement, after the exit.
A future comprehensive trade deal would be a “mixed agreement” requiring ratification by the national and regional parliaments of the 27 EU states (38 parliaments), plus consent by the EU Parliament. Experience with the procedure under Article 218 shows how easily the approval for the agreement could be vetoed. In 2016 for example, the EU-Canada Comprehensive Economic and Trade Agreement (CETA) was nearly foiled by the regional parliament in Wallonia, Belgium.
Various models for a new agreement will be considered; the most favored is one that’s similar to CETA. Other models discussed include “softer” alternatives, such as having the UK become a member of the European Economic Area (EEA) made up of Norway, Iceland, and Liechtenstein and the European Free Trade Area (EFTA), which consists of the EEA countries and Switzerland.
Without an agreement on trade, the UK will have to operate under World Trade Organization (WTO) rules, which are less beneficial compared to the EU single-market or the other models under review. The same result applies if an exit agreement is not reached or any one of the negotiating parties breaks the exit negotiations.
Under WTO rules, trade between the UK and EU will be subject to customs duties, import and export formalities, security procedures, and preferential origin calculations would also be impacted. This will lead to increased financial and bureaucratic costs for UK companies and EU companies doing business with the UK.
The UK also will need to ratify the outcome by its own national procedure. As this must also be completed by March 2019, the time available for negotiations could be as short as 16-18 months. At that point, the negotiations for a free trade agreement will be based on the progress in the withdrawal negotiations. The implementation of such an agreement may extend until 2020 or 2021.
The United Kingdom after the European Union.
Finally, the UK also needs to think about its own bilateral free trade agreements with other countries once it’s out of the European Union. It’s clear under the EU law that the UK, as a current Member State, can’t conclude any trade deal with a third country. However, nothing in the TFEU prevents an exiting member state from engaging in trade negotiations as long as the deal isn’t finalized. In any event, a third country may be reluctant to negotiate in an environment of uncertainty.
Despite potentially opposing objectives, both parties are expected to put forth good faith efforts to move beyond Brexit and negotiate a new relationship. Nonetheless, the transition will be difficult for the UK and the EU, and the international trade community must avoid becoming collateral damage along the way. To ensure this, close monitoring of the developments, flexible business plans, communication with suppliers and customers, trade program “what if” analyses, etc., will be necessary.