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Brexit update: Supreme Court rules on its constitutional implications

24.01.2017 Competition, Commodities & trade

January 2017 has produced two landmark events in the Brexit process: the first was the UK Prime Minister’s speech on 17 January, outlining the British government’s strategy for the Brexit negotiations with the remaining 27 EU Member States (“EU27”) and the second was the UK Supreme Court’s ruling on the constitutional aspects of Brexit procedure issued on 24 January.  

This Ince & Co update analyses the implications of these two events which will have a profound influence on the negotiations between the EU and the UK over the next two years.

The UK Prime Minister's Brexit strategy speech of 17 January 2017 

Prime Minister Theresa May’s speech on Brexit strategy received extensive coverage in the press and we do not propose to summarise its contents again here. However, the PM’s speech clarified the UK government’s strategic priorities as including:
 
1.  Rejecting the jurisdiction of the EU Courts;

2.  Reserving full freedom for the UK to negotiate trade agreements with other States and setting its own customs tariffs and other trading conditions; and

3.  Having complete national control over immigration. 

As the Government acknowledged, these three priorities make it impossible for the UK to retain access to the EU Single Market or the EU customs union on present terms. Instead the UK will seek to negotiate a comprehensive Free Trade Agreement (FTA) with the EU27, including customs arrangements to come into force by the date of the UK’s exit from EU membership, (although, for certain sectors, the UK will seek to negotiate “transitional” arrangements to ease the process of severance from EU rules). Mrs. May stressed the desire of the UK to have as close and cooperative a relationship with the EU as possible, and the UK’s desire for the greatest access for its goods and services in the EU market (and vice versa); she also stressed that the UK would be prepared to reject a deal it considered unsatisfactory and, if necessary, change its regulatory and fiscal system to ensure its economic competitiveness in the future. 
 
To a very large extent, the success of the UK-EU27 negotiations will be dictated by political forces and events. Instead, in this Brexit update, we hope it will be helpful to our readers to have a summary of the negotiation steps (and potential obstacles) to achieving a harmonious parting between the UK and the EU27. 

A major surprise in Mrs. May’s speech was the timeframe proposed by the UK Government: a mere two years for both the agreement regarding the UK’s exit from the EU and the FTA (i.e. the UK’s future trading agreement with the EU). If, as expected, the UK sends the Article 50 notice of withdrawal from the EU by the end of March 2017, this would mean a UK exit from the EU in March 2019. 
 
The general view is that the timescale is very challenging indeed. In fact, it is difficult to think of another example of such complex trade negotiations being done in such a short space of time. To summarise what has to be achieved in the UK’s proposed two year negotiations (intended to start in March 2017), the two sides will have to agree on the following:
 
1.    The agreement for the withdrawal of the UK from the EU: under Article 50 of the EU Treaty, there has to be a withdrawal agreement between the            departing Member State and the remaining EU. This agreement is largely an accounting exercise, covering:

a.  The UK’s payment of budgetary allocations and expenditure to which it has already committed itself as an EU Member State (e.g. EU aid programmes, EU research programmes, etc.). This has been variously estimated at between €40 and €60 billion;

b.  Border arrangements between Ireland and Northern Ireland, and between Gibraltar and Spain;

c.  Future arrangements for UK nationals currently working in the EU Institutions (i.e. their pension rights etc.); and

d.  The relocation of the EU agencies currently situated in the UK (the European Banking Authority and the European Medicines Agency) including the re-allocation of numerous research contracts to UK universities in the case of the latter.

The EU27 have (so far) been firm that no future trade relations negotiations can start before the withdrawal agreement is agreed. A further factor is that the withdrawal agreement has to be approved by a qualified majority of the EU27 and a simple majority of the European Parliament’s MEPs. 
 
2.    The agreement on future EU-UK trade: The FTA with the EU will need to cover the whole range of goods and services traded between the UK and            the EU27, from aviation services to farm products. Thus the FTA will need to cover the following:

a.  Tariffs and other duties levied on EU27 exports to the UK and UK exports to the EU;

b.  Access to the EU single market for certain types of services, including so-called “passporting” rights (i.e. the right to trade and establish on similar or other basis as EU nationals). In the case of air services, access to airports and transit rights in EU27 territories are subject to Air Services agreement which are notoriously complex. In addition, there is the potential application of nationality restrictions in Regulation 1008/2008 which confers “Community Carrier” status to airlines with majority EU control and a principal place of business within the EU: negotiating appropriate arrangements for UK air operators is a key requirement for the aviation industry in the FTA negotiations, (including reciprocal access for EU airlines to UK hub airports);

c.  Non-tariff barriers, such as technical standards recognition, quantitative restrictions, IP and TM rights, origin appellations and other regulatory features that affect trade; and

d.  The status of UK nationals resident in the EU27 and vice versa. 

The problem of timing 

A key issue in the negotiation timetable proposed by the UK Government and as affected by EU internal requirements, is that the FTA would need to be approved within the EU27 and by the parliaments (including regional assemblies) of the each of the 27 EU Member States. These processes will take considerable time and make the Government’s two year timetable challenging, to say the least.
 
Even if the Brexit process is launched in March 2017 by the UK sending the Article 50 notice of withdrawal, it is unlikely that the EU27 will be in a position to respond quickly and for negotiations to begin shortly after the Article 50 Notice is received.
 
1.  While it is no doubt the case that informal consultations have already taken place between the UK and various governments of the EU27, the remaining Member States have shown an impressive degree of cohesion, refusing to engage formally in negotiations unless and until the UK sends the Article 50 Notice.

2.  Once sent, the EU27 will have to agree their negotiating position in light of the terms of the Article 50 Notice. This response will need coordination by the EU Council and the Commission, in close consultation with the European Parliament. Formally the European Parliament does not have an active role in the Article 50 process in terms of negotiations, and this has revived the traditional tensions between the Council (representing the Member States governments) and the assembly which sees itself as the democratic parliament of the EU. During the preparations for the negotiations with the UK, there has been a considerable degree of political tension between the Council and the Parliament, particularly with the Parliament insisting on being integrated in the strategic thinking of the EU27: since the assembly must approve any UK withdrawal and future FTA by a majority based on voting by the various blocs with it, the Parliament has considerable power to make the negotiations even more complicated than they will certainly be, and even to block any agreement with the UK.

3.  In addition, the Netherlands, France and Germany are holding general elections between March and September 2017: whether the EU27 will be ready for serious negotiations before these important Member States have new governments selected is a serious question. If the EU Council decides to wait until the results of these elections are known, a collective EU27 negotiating stance may only reliably emerge in October 2017, thus already ‘losing’ six months of the 2 year period in Mrs May’s proposed timetable. 

4.  Finally, the EU’s Chief Negotiator, Mr. Michel Barnier, recently suggested that six months would be required to achieve ratification of a UK-EU FTA by the 27 Member States in accordance with their constitutional procedures.
 
The above suggests that serious negotiations between the UK and EU27 will be conducted in a very short “window”: they would start in October 2017 and conclude in October 2018, with six months left to meet the deadline of March 2019. Whether the momentous and complex set of negotiations that are required to achieve the withdrawal agreement, the FTA and transitional periods of implementation can be completed in such a short period is open to doubt. 
 
If the two year period is extended by mutual agreement, this would make it likely that the final FTA package would be agreed in 2020 and quite possibly beyond that date. This would make the Brexit negotiations coincide with the next UK general election which is scheduled for 7 May 2020. The Prime Minister announced that the UK Parliament would be asked to vote on the final agreement with the EU but, if the negotiations continue beyond 7 May 2020, the acceptance or rejection of the EU-UK agreement would be certain to become the main battleground in the next general election. If the Conservative government is defeated in the 2020 election, it is possible that a future government might seek to reverse the process of the UK’s exit from the EU. 
 
The timing of the Brexit negotiations and their outcome is therefore fraught with uncertainty, making strategic business decisions very difficult. 
 

The UK Supreme Court's ruling of 24 January 2017 

On 24 January 2017, the UK Supreme Court issued its landmark ruling on the constitutional requirements of Brexit.

Key points of the Supreme Court ruling
 
The Supreme Court ruled that the UK Government must obtain Parliament’s approval before sending the Article 50 Notice and triggering the process of negotiations for the UK’s withdrawal from the EU. The Supreme Court ruling means that a vote in favour of sending the Article 50 Notice must be obtained in both the House of Commons and the House of Lords. The Supreme Court stated that “The fact that withdrawal from the EU would remove some existing domestic rights of UK residents also renders it impermissible for the Government to withdraw from the EU Treaties without prior Parliamentary authority”. The Supreme Court also ruled that the UK Government did not need to get the consent of the devolved regional assemblies of Scotland, Wales and Northern Ireland but that the relationship between Westminster and regional governments was a political matter. 
 
Implications of the Supreme Court ruling 
 
The Supreme Court ruling is a historically significant judgment reinforcing Parliamentary sovereignty in the British constitution, but it is unlikely to prevent the sending of the Article 50 notice triggering the negotiations between the UK and EU27 for withdrawal from the EU. While approximately 75% of MPs are known to be pro-EU, a substantial majority have declared their intention not to oppose the results of the Referendum of June 2016 and not frustrate the Brexit process. 
 
However, opposition parties and pro-EU members of Parliament are very likely to impose conditions on the way the UK government conducts the negotiations with the EU27. This has wide-ranging implications for the future EU-UK negotiations and their timing:
 
1.  The UK government’s strategy is to launch Brexit negotiations by the end of March 2017, a two-year process aiming to take the UK out of the EU by April 2019. The objective is to ensure that the UK will no longer be an EU Member State by the time of the next UK general election in May 2020. However, should the process of obtaining Parliament’s approval take time (and both Houses of Parliament must vote in favour) the Government’s timetable may be delayed by many months – possibly by as much as a year. This opens the possibility that the next UK general election will be fought on the results of the Conservative Government’s Brexit deal with the EU (assuming that any such deal is achieved by 2020).

2.  The Conservative Government’s official Brexit strategy is to take the UK out of the EU Single Market and Customs Union, seeking to have a trade agreement with the EU27 instead. This is strongly opposed by the Labour, Liberal-Democrat, and Scottish Nationalist parties. While the Conservative Party and its allies currently have a working overall majority of 15, it is vulnerable to defeat by pro-EU Conservative rebels voting with the opposition against a “hard Brexit” (i.e. taking the UK out of the Single Market and Customs Union). As a result, it is possible that obtaining Parliamentary approval for the launch of Article 50 exit negotiations will only be achieved if conditions are placed on the Government’s scope for negotiations. For example, a majority of Parliament may only agree to exit negotiations if the UK remains in the Single Market, which would lead to very different outcome of the Brexit negotiations with the EU27.

3.  The Supreme Court’s ruling that the UK Government did not require the consent of the regional parliaments will prevent the Brexit process facing obstacles in particular in Scotland, which is the most pro-EU region of the UK (voting 63%-38% to remain in the EU in the Referendum). Scottish Nationalists have repeatedly threatened to hold a second independence referendum if Scotland is taken out of the EU by the Brexit process and the Supreme Court ruling does not remove the possibility of such a second referendum.

Next steps 

The immediate steps that will be taken in the next two months are the UK Government’s tabling of a Bill to Parliament for the triggering of the Article 50 process. Both Houses of Parliament will have to approve and one can expect heated political debates over the coming weeks.

We will keep Ince & Co clients informed of developments as they unfold.