Brexit Bulletin: Leaving the Single Market and the Customs Union

October 06, 2016

The Prime Minister has set out key principles for the government’s policy on Brexit, which indicate that the UK will not remain fully in the EU Single Market or the Customs Union, but will be negotiating a bespoke trade deal with the EU. This will put each sector of the economy into the negotiating mix. Following the close of the Conservative Party Conference, Dechert looks at the consequences for businesses, and the planning they should be doing now to protect their interests. 

In her speech to the Conservative Party Conference on 2 October, the Prime Minister addressed five issues: the timing of the negotiations, the future status of EU regulations, the jurisdiction of the EU court, free trade with the EU but not free immigration, and expanding trade with the rest of the world. 

1) Timing of Negotiations 

What the Prime Minister said: 

The UK government “will invoke Article 50 no later than the end of March next year”. 

What this means: 

Once a Member State has communicated its decision to leave the EU, Article 50 of the Lisbon Treaty provides that “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”. The UK will cease to be a member of the EU from either the date of entry into force of the withdrawal agreement or, failing that, two years after the notification of withdrawal: i.e., by the end of March 2019. 

There are two distinct agreements to be reached: one on the terms of the UK’s withdrawal, which primarily concerns defining the UK’s share of the assets and liabilities of the EU, and the other on the terms of its future relationship with the EU. The latter is likely to take considerably longer than two years, particularly if it is decided to negotiate a UK-EU Free Trade Agreement, although Article 50 requires that, in concluding the withdrawal agreement, the EU and UK must take account of their future relationship. Nonetheless, a transitional arrangement is likely to be needed to cover the period from Brexit until any future relationship is agreed and in place. If no other arrangement is in place, by default UK-EU trade would fall back on the rules of the World Trade Organisation (WTO) and its associated tariffs. 

2) EU Regulations 

What the Prime Minister said: 

“we will convert the ‘acquis’ – that is, the body of existing EU law – into British law…. Parliament will be free – subject to international agreements and treaties with other countries and the EU on matters such as trade – to amend, repeal and improve any law it chooses”. 

What this means: 

Assuming that Parliament enacts the government’s proposed Great Repeal Bill, on the day that the UK leaves the EU, all EU regulations then in force will become UK law. This will provide a degree of continuity and certainty for businesses and workers. However, Ministers are already identifying changes they would like to see to current EU regulations, and some significant changes will be necessary in order for these EU laws to make sense when applied in a non-EU country. Ultimately, the result could be a wholesale revision of regulations affecting a wide range of sectors. 

Such revision would have serious implications for the UK’s continued access to the Single Market, since non-EU countries that have secured some access to it are required to enforce rules that are equivalent to those in the EU in the sectors where they have access. Regulatory harmonisation is a core part of the Single Market to promote free movement of goods and services within the EU by reducing non-tariff barriers such as requirements for additional documentation, differing technical, packaging and labelling requirements, and cross recognition of professional qualifications. Where goods have been certified as compliant for one EU Member State, they are automatically compliant for sale across the whole of the EU. Any significant divergence in UK regulations could result in such access being restricted. 

3) Jurisdiction of the Court of Justice of the EU 

What the Prime Minister said: 

“The judges interpreting those [UK] laws will sit not in Luxembourg but in courts in this country. The authority of EU law in Britain will end”. She repeated the point: “we are not leaving only to return to the jurisdiction of the European Court of Justice.” 

What this means: 

This statement excludes the option for the UK to remain a full part of the EU Single Market since the Court of Justice of the EU is a cornerstone of its operation, enforcing the rules of the Single Market and settling disputes between its members. The Prime Minister did not specify how future trade and investment disputes between the UK and the EU would be resolved; this remains to be negotiated. There are alternatives that do not involve the Court of Justice of the EU (e.g., the Joint Committees established with Switzerland) although they each inevitably require a degree of submission to the jurisdiction of a body that is international rather than purely national. 

4) UK-EU Trade and Immigration 

What the Prime Minister said: 

“We will decide for ourselves how we will control immigration … But we will seek the best deal possible as we negotiate a new agreement with the EU … I want it to involve free trade, in goods and services. I want it to give British companies the maximum freedom to trade with and to operate in the Single Market – and let European businesses do the same here.” 

What this means: 

The Prime Minister was clear that she would not make a trade-off over controlling immigration from Europe. In their public statements, other EU leaders have been equally clear that the UK cannot retain full access to the EU Single Market without also accepting the free movement of people. Since the current treaty conditions for full participation in the Single Market include the free movement of people, this statement also supports the message that the UK will not remain a full part of the Single Market. 

5) UK-Rest of the World 

What the Prime Minister said: 

“Countries including Canada, China, India, Mexico, Singapore and South Korea have already told us they would welcome talks on future trade agreements. And we have already agreed to start scoping discussions on trade agreements with Australia and New Zealand”. 

What this means: 

The UK government has already indicated its intention to negotiate free trade agreements with other states after the UK leaves the EU; this statement confirms that policy. The freedom of non-EU countries to negotiate such agreements is not directly constrained by being in the Single Market: the members of the European Economic Area (e.g., Norway) have trade agreements with a range of other countries. 

But such freedom is heavily constrained in practice for non-EU states inside the Customs Union, as distinct from the Single Market, such as Turkey. While Turkey is in principle free to negotiate trade agreements with other countries, as a member of the Customs Union its external tariffs must remain aligned with EU tariffs. When the EU signs a trade agreement with a third country, Turkey must give that country access to its market on the same terms. But this obligation is not reciprocal: the third country is not required to open its market on the same terms to Turkish exports, unless Turkey is able to negotiate this in a separate agreement. 

If it remained within the Customs Union (but outside the EU), the UK would similarly have no role in the negotiation of new EU trade deals but would be obliged to grant access to third countries’ goods on the basis of whatever is agreed by the EU without acquiring reciprocal access. Since such an arrangement would be incompatible with the Prime Minister’s statements on UK sovereignty, it is clear that the UK will leave the Customs Union. 

What does this mean for businesses? 

Companies need to analyse and to understand how the scenarios for future UK trade relationships with the EU and non-EU would impact their business, and plan to manage the risks and maximise the opportunities. While this has been difficult to conduct in detail while a wide range of options remained open, that range has now significantly narrowed. Planning should focus in particular on: 

  • the impact of the UK leaving the Single Market and instead negotiating access to it, sector by sector; 
  • closely-related to that, the risks and opportunities of UK regulations diverging from those of the EU; 
  • the impact of the UK leaving the Customs Union, not only in terms of the potential imposition of tariffs, quotas and anti-dumping duties but also the transaction costs of customs procedures, particularly Rules of Origin requirements for companies in complex supply chains. 

Companies and trade associations should engage with the government to ensure that their concerns are fully understood by Ministers, and as far as possible, factored into the government’s priorities and objectives for the negotiations, as well as its plans for future trade agreements and for regulations in areas previously regulated by the EU. 

If the impact on their business is likely to be significant, companies should also consider contingency planning. This may include the options of mitigating the risks while continuing to do business in the UK or of relocating some operations to other EU Member States. 

How Dechert can help 

Dechert’s International Trade and EU Law Team is ideally placed to help you through this process. In addition to the UK and EU legal expertise you would expect, our team has practical, legal and policy experience (including in trade negotiations) including in the European Commission, the Prime Minister’s Office, the Bank of England, HM Treasury, the Foreign Office and the Attorney-General’s Office.

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