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The Future after Brexit – an Update

14/08/2020

Negotiations between the EU and the UK regarding their future relationship are ongoing. The framework for the negotiations was set out in the Political Declaration on Future Relations that was agreed alongside the Withdrawal Agreement.

So far, talks between the parties have been slow. Even if the parties succeed in reaching an agreement covering all the areas contained in the Political Declaration, it is already clear that the future relationship will be fundamentally different from the UK's current membership of the EU internal market. There will be a customs border between the EU and the UK from 1 January 2021, which means customs rules will have to be followed.

Our latest Update provides you with information about the current sticking points in the negotiations and what happens if no agreement is reached. We have included links to official Brexit resources published by the EU and the German and UK governments at the end of this document.

Content

  1. Is there going to be a free trade agreement (FTA)?
  2. Other key issues and equivalence decisions
  3. Implementation of the FTA
  4. What happens if an FTA is not agreed?
  5. Indicative Brexit timeline
  6. How are the EU, Germany and the UK preparing for the end of the transition period?
  7. Our Brexit resources 

1. Is there going to be a free trade agreement (FTA)?

The UK and EU have to agree on and ratify an FTA by the end of the transition period, i.e. in less than six months' time.

Both the EU and the UK have published draft proposals for their future relationship. The EU is aiming for a comprehensive free trade association agreement to maintain a close relationship with the UK. It wants to keep as many parts of the existing framework and regulations as possible.

The UK is proposing multiple agreements (in addition to an FTA on trade, there would be separate agreements covering fisheries, aviation, energy, nuclear energy cooperation, law enforcement and judicial cooperation in criminal matters and illegal migration), following the approach taken in FTAs the EU has entered into with other third countries (notably Canada).

The international press has repeatedly reported that negotiations are about to fail, and the negotiators (Michel Barnier for the EU and David Frost for the UK) have stressed the differences between the negotiating parties' positions. There is, however, still time and room for an agreement to be reached.

The main points of contention between the parties are:

a) Level playing field

Both parties are pursuing a future trading relationship in which no customs duties, levies, quotas or other restrictions apply. The EU, however, also wants to prevent unfair competition which disadvantages European citizens and companies, e.g. through lowering standards. To achieve this, they are seeking a so-called "level playing field", which means that the parties agree not to undercut each other’s protective rules in areas such as state aid, taxation, labour standards and environmental protection. Particularly in the area of state aid, the EU believes clear rules are necessary to open the internal market for UK products without the risk of being undercut by lower standards. The UK does not accept this. They have made clear that they object to being bound by EU rules and standards beyond the transition period, as one of the promises of the EU referendum in 2016 was to end the application of EU laws in the UK.

b) Governance

The negotiations are also stalling on implementation of the future relationship (governance). The parties disagree on the establishment of a dispute settlement mechanism, specifically on the role of the European Court of Justice.

The EU wants the European Court of Justice to retain its jurisdiction in disputes over areas of EU law. In its draft FTA, it proposes the establishment of an arbitration tribunal, but with the European Court of Justice continuing to decide on all questions of EU law.

The UK has repeatedly stated during the negotiations that it will not accept the jurisdiction of the European Court of Justice.

c) Fisheries

Fishing rights play an important role in the negotiations. In the UK, the EU's Common Fisheries Policy, which gives EU Member States equal access to waters for fishing vessels and provides for a quota system to share catches, has been a controversial issue for many years. The promise of becoming an "independent coastal state" was part of the Brexit campaign during the EU referendum.

Fishing rights are also an important issue for the EU as many EU fishermen (e.g. in Spain, France, Portugal and Denmark) depend on access to UK territorial waters. The EU wants fixed fishing quotas as part of the FTA; the UK, on the other hand, wants absolute control over its fishing waters, proposing that the parties hold annual discussions on fishing rights governed by a fisheries framework agreement without giving firm commitments on quotas. The UK is also seeking free access to the EU market for its fisheries products.

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2. Other key issues and equivalence decisions

a) Financial services

The EU does not want market access rights for regulated financial services included in the FTA. Instead, it suggests they should be regulated by equivalence decisions, which are a tool employed by the EU in providing market access for third-country financial services providers. The UK likewise carries out equivalence assessments with regard to the financial services industries of other countries. In the Political Declaration, close cooperation on regulatory and supervisory issues was agreed, with reference made to equivalence decisions. The equivalence assessments should have been completed by June 2020 but have not been published yet.

Equivalence decisions are unilateral decisions. As such, they can be withdrawn unilaterally at any time. As the financial industry is a key sector for the UK, it wants to see a binding commitment on market access in the FTA, including a dispute settlement mechanism.

b) Data protection

The EU and the UK plan to obtain a decision of adequacy from the EU Commission regarding UK data protection laws during the current transition period.

The European Data Protection Board, which is the decision-making body on questions of adequacy, set out its concerns in a letter to the European Parliament on 15 June 2020, questioning the compatibility with EU primary and secondary law of the 2019 agreement between the UK and the US facilitating access to electronic evidence in criminal investigations.

It is, therefore, unclear whether the UK will obtain a decision of adequacy.

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3. Implementation of the FTA

The FTA must be ratified in the UK and the EU. In general, the ratification procedures involved are as follows:

a) UK

The agreement will be negotiated and signed by the UK Government. An agreement, however, can only be ratified after it has been submitted to the UK Parliament and neither the House of Commons nor the House of Lords have voted against it within 21 days. Considering this three-week period and the usual winter recess of the UK Parliament, which normally begins in mid-December, a signed agreement must be submitted to Parliament by mid-November if it is to become legally binding on 1 January 2021.

b) EU

The EU's ratification process depends on the final form of the agreement.

The EU wants to conclude a single association agreement that goes beyond trade cooperation and includes "mutual rights and obligations, common action and special procedures" (Art. 217, TFEU). This requires the approval of the European Council and the consent of the European Parliament. If the parties agree on a mixed association agreement, which regulates matters falling within the exclusive competence of the Member States, each individual Member State would also have to give its consent. This is a time-consuming and risky process. The EU does, however, have the option of bringing into force all parts of the FTA which are within its exclusive competence before the ratification procedure in the Member States is completed.

The UK, on the other hand, proposes several separate agreements, which would require a separate ratification procedure for each one.

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4. What happens if an FTA is not agreed?

If no FTA is agreed by the end of 2020, the separation provisions in the Withdrawal Agreement will apply. The areas not covered by the Withdrawal Agreement will be governed by any applicable multilateral treaties and agreements, such as the WTO.

For example, all goods traded between the EU and the UK will be subject to customs duties and quotas from 1 January 2021 and the EU will apply "most-favoured nation" tariffs to goods coming from the UK. According to the WTO's most-favoured-nation principle, the benefits given to one trading partner must also be granted to all other WTO members; an exemption is only possible in the form of a preferential arrangement such as a free trade agreement.

Earlier this year, the UK Ministry of International Trade introduced a new customs tariff system for products that will be imported into the UK from 1 January 2021. The tariffs will apply to imports from countries with which the UK has no trade agreement, which will include the EU.

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5. Indicative Brexit timeline

These are the most important Brexit milestones up to mid-2021:

Brexit Update Timeline

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6. How are the EU, Germany and the UK preparing for the end of the transition period?

a) The EU

The EU has published a draft agreement regarding its future relationship with the UK. It is available here

The European Commission has created a new website setting out what has already been agreed with the UK government and what is currently being negotiated. It can be found here

To prepare for the end of the transition period, the EU Commission published several preparedness notices to stakeholders on 9 July 2020, which are available here, as well as here and here.

b) Germany

The German Foreign Office has set up a website with information on the Brexit negotiations and further links.

The Federal Ministry of Finance has created a website covering the preparations for Brexit.

There are also links to more specific information about Brexit with regard to tax, customs and financial services.

c) UK

The UK Government has also published a draft EU/UK FTA. The draft and other negotiating documents can be found here and here

In addition, the UK government has published notices on its website setting out measures which may be implemented now and which do not depend on the outcome of the Brexit negotiations.

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7. Our Brexit resources

We recommend our “The Future after Brexit” series, part of the CMS To Go podcasts, on the new relationship between the EU and the UK, with interesting guest speakers. The first episode will go live within the next two weeks.

If you have any questions around Brexit, our Brexit team will be happy to help. You can find us here and you can also contact our team on the Brexit hotline: +49 711 9764 930

Our Brexit website provides information about Brexit and checklists by area of law setting out the possible legal consequences of Brexit. We also encourage you to check out our Brexit Blog.

Authors

John Hammond
John Hammond, M.A. (Oxon)
Partner
Stuttgart