Brexit – Are we “out” or “not in”?

By Michael Oberreuter, Senior Research Executive

 

The Brexit Deal

On 15 November 2018, the negotiators of the UK and the EU agreed a Brexit deal or Draft Withdrawal Agreement. In a nutshell, a transition period until December 2020 has been agreed, to be followed by another agreement which is slated to set out what is commonly referred to as the “future relationship” between the UK and the EU. For this, and for pre-existing spending commitments, the UK will be billed £39bn. The European Council (i.e. the 27 remaining EU Member States) passed the agreement within 30 minutes on 25 November 2018.

Are we out or not in?

So far, so simple? The large controversy now engulfing the political landscape of the UK of course suggests otherwise. Indeed, in contrast to David Dimbleby’s “We’re out”, the more accurate description of the situation is “We’re not in”. Let’s first turn to Theresa May’s points on what the deal delivers to respect and implement the Brexit vote of 2016.

Immigration will no longer be free for EU citizens and the UK will no longer be part of the EU agriculture and fisheries policies. Assuming no extension of the transition period (which is currently not on the table), payments to the EU will cease by 2020 and the UK will be able to agree its own trade deals. This comes at the price of a “backstop” for Northern Ireland, but no-one would like to see it implemented. Also, the European Court of Justice would no longer have jurisdiction over the UK[1]. A UK-EU Joint Committee will provide a forum for discussion and dispute resolution[2].

Brexit sorted? It is and it isn’t, depending on who you talk to. Therefore, a closer look at the fine-print won’t hurt.

 

Backstop does not mean Backstop[3]

One of the many issues currently beleaguering the government, is what is now commonly referred to as the “double backstop”. This is a bit of a misnomer. First, the EU prefers “protocol”, but that is beside the point. Second, both arrangements work differently and would be applied under very different circumstances. Key to the matter and controversy is thus how these solutions would work in practice.

The original backstop, the “Protocol on Ireland and Northern Ireland”, would come into force, once the UK leaves the EU Single Market and Customs Union, which are the key to frictionless trade within the Union. If no mutually-agreed alternative is found, this will mean customs checks at the Northern Ireland/Eire border. To avoid this, the backstop says that Northern Ireland would remain in the EU Single Market and Custom Union, thereby erecting a customs border in the Irish Sea – as the rest of the UK would have left both. Both sides have, however, repeatedly declared that they would do their best to avoid this becoming a reality and indeed there could be solutions, such as no Brexit, re-joining the Single Market and Customs Union (i.e. no Brexit) or No Deal. The latter would mean a border between Ireland and Northern Ireland full stop – no backstop would be possible.

The other backstop is the “Single Customs Territory”, which has been bestowed with all kinds of descriptions, including “vassalage” or “trap”. Under this backstop, the UK and the EU will stay in the same customs territory except for agriculture and fisheries. If no “future relationship” agreement is reached by the end of 2020, to ensure continued frictionless trade, the UK will need to align its customs policy and commercial policy with the EU’s common commercial policy, the EU generalised system of preferences (GSP) and trade defence system. There is also a provision that the EU would consult the UK before taking any action. In addition, customs controls will apply to agricultural goods and fisheries[4].

How this would work in practice is difficult to predict. As a positive, all other goods from the UK would have access to the EU Single Market and Customs Union without checks. Technically speaking, the common commercial policy gives the EU the mandate to negotiate trade agreements. This gives the EU the right to lower tariffs, etc. with its trade partners[5]. This would mean that the UK would have to follow suit, but the extent to which the UK would be consulted or would have influence on the negotiations through the Joint Committee is not clear.

Nevertheless, the UK would be significantly restrained in concluding its own trade agreements. The single customs territory would guarantee that “Under no circumstances can the UK apply a lower customs tariff to its customs territory than the EU Common Customs Tariff for any good imported from any third country or apply different rules of origin”[6]. In plain English, this means that the UK would not be able to offer potential trade partners any concessions going beyond what the EU has agreed with or applies to the same country, at least with regard to tariffs.

The single customs territory provision is designed to be temporary, but can only be replaced if both sides agree on a different arrangement. The Protocol on Ireland and Northern Ireland has to be borne in mind as well, which would come into effect if both sides agreed to replace the single customs territory with an arrangement that would not provide a viable alternative for a border between Ireland and Northern Ireland.

In addition, the Draft Withdrawal Agreement provides for the creation of a level playing field, which guarantees that the UK will not be able to undercut or take a significantly different direction from the EU guidelines and regulations regarding social protection, environment, taxation, competition and state aid[7]. In short, the UK will be restrained in making its own laws on these issues.

In addition to the backstops, the Brexit deal’s transition period foresees the UK still being bound by EU regulations, including any new regulations until the end of 2020. The UK could, however, request an extension of the transition period by 1 July 2020 at the latest, following which UK contributions to the EU budget would have to be determined[8].

Game, Set and Match for EU?

It is clear that the Draft Withdrawal Agreement’s provisions effectively lead to either Single Customs Territory or equivalent or an even closer relationship to EU, including re-joining the EU as the only viable options. If the UK parliament ratifies the agreement, a No Deal scenario after the transition period will become technically impossible, as the single customs territory backstop will apply. Secondly, ideas of a Canada-style deal will have to be shelved as any relationship outside the mechanics of the Single Customs Territory or anything similar would lead to the enforcement of the Protocol on Ireland and Northern Ireland.

 

Would the UK be ready for No Deal?

By contrast, crashing out of the EU on 29 March 2019 may be preferable for some politicians, but would cause significant disruptions for both sides[9]. In short, the UK is not ready for such a scenario, as the National Audit Office Report “The UK border: preparedness for EU exit” of 24 October 2018 has confirmed, stating that “Infrastructure identified by government departments cannot be built before March 2019” and “Businesses do not have enough time to make the changes that will be needed if the UK leaves the EU without a deal”[10].

Furthermore, the UK post-Brexit immigration system has not progressed past a Home Office statement of intent[11]. Similarly, the Agriculture Bill[12] and the Trade Bill[13] have not yet received royal assent. The Taxation (Cross border trade) Act of September 2018 gives a legal basis for a UK customs system[14], but HMRC is unlikely to have it in place by March 2019[15]. Not having any clarity or working solution in place by then would therefore be severely damaging and the situation could take a dynamic of its own. Even if the UK and the EU would do their best from January until March 2019 to mollify related impacts, implementation will be difficult. After all, as the EU Commission has stated, “Preparedness is primarily for private actors, business operators and professionals”[16]. It is therefore sound to conclude that a no deal scenario is less preferable than the deal of Mrs May or reverting Brexit. This leaves the option of another Brexit deal.

 

Another Deal?

Should any re-negotiation be possible at all, it is highly unlikely that the EU would significantly deviate from the Draft Withdrawal Agreement, unless any closer arrangement is sought, such as a permanent customs union or no Brexit. With the time left, further negotiations would mean extending UK membership beyond March 2019 and continued membership payments. It will also mean many protagonists on the EU side will change during the course of the negotiation, following the European Elections in 2019, in which the UK would have to participate under this scenario.

Therefore, if there is to be a Brexit in the envisaged time, then “not in” is the only present way to avoid damaging consequences and to preserve the mutually beneficial partnership between the EU and the UK. Or, as Margaret Thatcher would put it, “There is no alternative”, at least if you want to have Brexit on 29 March 2019 at 11pm.

[1] https://www.independent.co.uk/news/uk/politics/brexit-deal-theresa-may-speech-in-full-read-cabinet-approve-eu-draft-withdrawal-agreement-a8634266.html

[2] https://ec.europa.eu/commission/sites/beta-political/files/draft_withdrawal_agreement_0.pdf, p.274ff

[3] https://ec.europa.eu/ireland/news/brexit-protocol-on-ireland-and-northern-ireland_en

[4] http://europa.eu/rapid/press-release_MEMO-18-6423_en.htm

[5] https://institutdelors.eu/wp-content/uploads/2018/02/RightsRoleofEPinCommonCommercialPolicy-Kreilinger-January18.pdf

[6] http://europa.eu/rapid/press-release_MEMO-18-6423_en.htm

[7] https://ec.europa.eu/commission/sites/beta-political/files/draft_withdrawal_agreement_0.pdf, p.354ff

[8] https://ec.europa.eu/commission/sites/beta-political/files/draft_withdrawal_agreement_0.pdf, p.207ff

[9] http://www.cbi.org.uk/cbi-prod/assets/File/pdf/17%2009%2011%20No%20Deal%20write%20up_FINAL.pdf; https://www.handelsblatt.com/today/politics/compromise-dammit-reach-a-brexit-deal-or-face-disaster-german-business-warns/23583582.html?ticket=ST-14687233-HlyGlbgbpHfSfDbIDtm2-ap3

[10] https://www.nao.org.uk/wp-content/uploads/2018/10/The-UK-border-preparedness-for-EU-exit.pdf

[11]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/718237/EU_Settlement_Scheme_SOI_June_2018.pdf; https://www.independent.co.uk/news/uk/politics/sajid-javid-immigration-plan-brexit-meaningful-vote-home-office-a8664456.html

[12] https://services.parliament.uk/bills/2017-19/agriculture.html

[13] https://services.parliament.uk/bills/2017-19/trade.html

[14] http://www.legislation.gov.uk/ukpga/2018/22/contents/enacted

[15] https://www.instituteforgovernment.org.uk/sites/default/files/publications/brexit-six-months-to-go-final-WEB.pdf

[16] https://ec.europa.eu/info/sites/info/files/communication-preparing-withdrawal-brexit-preparedness.pdf

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