‘Brexit’: What happens now?

EU flags in front of European Commission

Sticking with the maritime metaphors that have been used by both the British prime minister and the Chancellor of the Exchequer as they come to terms with the seismic vote by the UK electorate, in a referendum on June 23, 2016, to leave the European Union (EU), it is fair to say that the UK is currently a rudderless ship in some very choppy political waters.

With volatility in the markets and the resignation of the British prime minister in the few days since the result, and the lack of any clear contingency plan as to what sort of future relationship the UK can expect with its European neighbours, it is too early to speculate as to what might happen to jobs, the economy and our laws in the long-term, as a result of the vote.

The Exit Process

The immediate focus has to be on the process for exit and the two-year timeframe for negotiations over the UK’s withdrawal. Article 50 of the 2007 Lisbon Treaty on the European Union permits any member state to notify the European Council of its decision to withdraw, following which “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.”

With PM David Cameron’s resignation announcement the morning after the vote was counted, we know that the notice of the UK’s intention to withdraw will not be served on the EU until October 2016 at the earliest, when a new prime minister will be in place. This will then set the clock ticking for the two-year period during which negotiations should be concluded or the UK will leave the EU, unless an extension can be agreed unanimously with the heads of all the remaining 27 member states sitting in the European Council.

The agreement for withdrawal needs the consent of the European Parliament and the approval of at least 20 countries with 65% of the EU population in the European Council acting by a qualified majority.

Withdrawal will not automatically lead to a repeal of those UK employment laws or immigration rules that were influenced by the UK’s 40-year membership of the EU. The UK Parliament will need to repeal the European Communities Act 1972, by which the UK joined the EU, and other domestic laws derived from Europe, for example in relation to employment rights, will have to be amended or repealed.

The Single Market

In leaving the EU, the UK withdraws from the largest economic area in the world. The single market created by the union of 28 member states is underpinned by the four “freedoms”: free movement of goods, people, services and capital. It is a market of 500 million citizens consisting of a single customs area without import duties, customs checks or quotas. It relies on standard regulations and technical specifications for goods and services, thus removing non-tariff barriers, ensuring a level playing field for all member states. In return, all member states make a contribution to the EU budget as a percentage of GDP and the VAT levied by each country.

All member states play a part in the decision-making process in relation to 36 policy areas ranging from agriculture to transport, including competition, digital security, employment, human rights, health and safety and taxation. Legislation arising from these policies are binding on the member states, who must implement regulations and incorporate directives into national laws. EU law overrides national legislation and to ensure the law is interpreted and applied equally across the EU, the Court of Justice of the EU gives rulings on its interpretation and ensures that both national governments and the institutions of the EU take action to comply with the law.

The Future Relationship between the UK and EU: The Options

Before the UK enters negotiations to leave the EU there has already been speculation as to the form any future relationship will take. The following are some of the options:

  • The EEA “Norway” option. If the UK manages to negotiate to remain within the European Economic Area (EEA), along with Iceland, Liechtenstein and Norway, it will still be part of the EU’s single market, but at a price. The UK would have to contribute funds to the EU budget and also accept free movement of persons, freedom to provide services and freedom of establishment from other EEA states. However it does not include EU policies on agriculture and fisheries; customs union; common trade, foreign and security policies; justice and home affairs or monetary union.

Given concerns raised by those who voted to leave the EU, it seems unlikely this is the preferred political option, as in reality little would change except that the UK would no longer have a say in the rules and regulations imposed upon it.

  • The EFTA “Swiss” option. The European Free Trade Association was formed in 1960 to provide a framework for the liberalisation of trade in goods, as a counterbalance to the more politically driven EEC, the forerunner to the EU. The UK was one of the founder members but left in 1973 to join the EEC. Today it consists of the three countries of the EEA, and Switzerland. Switzerland is therefore neither a member of the EU nor the EEA but is part of the single market, to an extent, under the free trade agreement which was extended to include trade in agricultural products; and in return has to accept the free movement of persons to and from the EU. In 2014, the Swiss narrowly voted in favour of a referendum to renegotiate their agreement with the EU in order to impose quotas on EU migrants. To date the EU has refused to negotiate with Switzerland, insisting that this was part of the package that the Swiss signed up to. Its access to the single market is restricted in some sectors, and it contributes billions of Swiss francs in funding to EU projects.

Again the trade-off of allowing free movement, in return for free trade, may prove a sticking point for the UK government, as many UK voters based their decision on concerns about the free movement of EU citizens, and the inability to control immigration.

  • The Free Trade “Canadian” option. The Comprehensive Economic and Trade Agreement between the EU and Canada took 10 years to negotiate and is still not in force, but it gives Canada preferential access to the whole of the EU single market eliminating trade tariffs on most items except “sensitive” food items, such as eggs and chickens. Any goods exported to the EU must still comply with EU product standards and technical requirements.
  • The Customs Union “Turkish” option. A customs union, such as the agreement between the EU and Turkey, allows free trade between the member countries, and agrees a common external tariff to countries outside the zone. Turkey’s agreement covers all industrial goods but does not include agriculture, services or public procurement.
  • The World Trade Organisation (WTO) option. The WTO is the global international organization dealing with the rules of trade between nations. As an existing member of the WTO the UK could control its trade policy and borders according to WTO rules. There would be no need to negotiate agreements with the EU or individual EU states, but UK goods and services exported to the EU would be subject to tariffs and EU product and technical standards. If the EU and UK do not reach agreement before the end of the two year period and the withdrawal takes effect, the trade arrangements would default to WTO rules.

UK Relations Beyond the EU

As well as negotiating its future relationship with the EU, the UK Government will have to renegotiate agreements with other non-EU countries. Such negotiations are often complex and protracted.

For example, the EU and US have been in negotiation for three years over the Transatlantic Trade and Investment Partnership (TTIP), to eliminate tariffs worth €3.6 billion and reduce the duplication of inspections and red tape in terms of regulation covering the goods and services traded. The process has so far involved 12 rounds of discussions which are often highly technical and involve a team of negotiators as well as 16 independent experts representing varied interests.

Due to its long membership of the EU, the UK has few skilled trade negotiators of its own, and has even received offers from New Zealand to supply trained personnel to forge new trade deals with over 50 other markets with which EU members currently enjoy trade agreements.

The UK’s Secretary of State for Business has been reported as saying that it has already received offers to begin negotiations post-exit from Australia, South Korea, Canada, India and Mexico. The work that lies ahead for the UK in negotiating its future relations with the EU and beyond should not be underestimated, and will take many years to conclude.

Uncertainty

As John F. Kennedy said, “The one unchangeable certainty is that nothing is unchangeable or certain.” The people of the UK and Europe are learning this the hard way! Until the process of withdrawal is complete, little will change in terms of the functioning of the UK and the EU, but the result will reverberate beyond their borders in the months and years to come.

Fiona Coombe

Fiona Coombe
Fiona Coombe is Director, Legal & Regulatory Research at Staffing Industry Analysts She can be reached at fcoombe (at) staffingindustry (dot) com

Fiona Coombe
Fiona Coombe is Director, Legal & Regulatory Research at Staffing Industry Analysts She can be reached at fcoombe (at) staffingindustry (dot) com

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