26 September 2017,

L. Alan Winters CB, Professor of Economics and Director of UKTPO. Dr Peter Holmes Reader in Economics at the University of Sussex and Fellow of the UKTPO, Erika Szyszczak is a Professor of Law at the University of Sussex, independent ADR Mediator and a Fellow of the UKTPO.

Now it’s official. More than a year after the UKTPO said that it would be necessary (see Briefing Paper 2 and NIER paper), the Prime Minister has announced that the UK wants a transitional deal that preserves the status quo. Namely, membership of the Single market, a customs union with the EU, free mobility of labour, jurisdiction of the Court of Justice of the European Union (CJEU), budget payments and no external trade deals. Sad to say, this seems like progress.

Despite the language and some of the press commentary, Britain is not ‘opting for’, still less ‘agreeing to’, a transitional deal; it is asking for one in the negotiations. The Florence speech still uses the language of an ‘implementation period’. This implies that between now and 2019 the UK can both negotiate a final settlement to be implemented after the transition and the transition itself.  But the Prime Minister has made no proposals about how to construct such a deal, other than that the UK leaves the EU on 29^th March 2019, so that the transition requires agreement(s) between the EU (27 remaining members) and an independent UK.

Once you start to think about how to do it, however, it becomes clear that negotiating a transition on UK terms will be nearly as complex as negotiating full Brexit. So complex, in fact, that it looks more or less impossible in the time available. Our analysis suggests that the only practical approach is to remain within the EU for the transitional period – that is, to extend the period of Article 50 by at least two years.  Even this has to be agreed with the rest of the EU, but it will be easier to agree than a ‘bespoke’ transition.

What are the problems in negotiating a bespoke transition agreement?

• The UK will leave the EU Customs Union as it will no longer be a member of the EU and will have to negotiate a new one, which will last only for the transition. As good citizens of the World Trade Organisation, the UK and EU will want to notify the WTO, which could potentially lead to protracted negotiations with our WTO partners.
• The UK and EU will need to design an agreement whereby all EU Regulations and Directives continued to apply in the UK with complete certainty. This includes all the mutual recognition of testing and certification elements of the Single Market and the free mobility of labour.
• The status of such an agreement under EU law is not certain, but because it would cover issues on which EU member states retain competence, it seems very likely that it would require ratification by member states before it could be implemented. Recall how the Wallonian Parliament held up the trade agreement with Canada.
• The Single Market depends fundamentally on all members having identical laws and interpretations of those laws. Hence, the newly independent UK will need to find a way of guaranteeing that all CJEU rulings continue to apply in the UK during the transition phase. One approach to this requires explicitly recognising the continuing supremacy of EU law in the UK courts, including the application of any rulings that the European Courts deliver. An alternative is to agree on an over-arching dispute settlement system that ensures that EU law prevails, whilst UK courts nominally stay independent of the CJEU. However this is achieved, the outcome will inevitably be weaker than the current situation, and so the enforcement of all Single Market rules will become at least slightly less secure, especially if individuals lose access to the CJEU, and national courts no longer ask for preliminary rulings.
• At a political level, all the current derogations that the UK has such as the budget rebate and exemption from the Social Chapter will have to be agreed again. This will create many opportunities for each side to propose prima facie insignificant adjustments, which nonetheless disturb the current balance and have the capacity to delay or derail the process.
• On exit, the UK will fall out of the thirty-plus Free Trade Agreements that currently affect it via its membership of the EU. UK policy is that these should be rolled over anyway, but there are serious complications with the way in which any roll-over handles rules of origin (see: Grandfathering FTAs and Rules of Origin). Besides, maybe the fifty-plus countries involved in these agreements will have views about how Brexit affects their deals with the EU and these being rolled over. Hence at least some roll-overs will entail formal renegotiations, on top of those with our EU partners.
• If Mrs May’s idea of “implementation” is followed, the UK will have to negotiate its final end status at the same time as the transition.

Moreover, and perhaps fatally, the EU thinks it has a perfectly satisfactory way of perpetuating the benefits of the Single Market – staying in the EU! Why would member states go to all this trouble just for a couple of years?

Whilst extending Article 50 for a few more years may not be desirable to some, the referendum never specified the date or the details for exiting the EU. Furthermore, the government could pass an Act of Parliament to guarantee it would leave the EU by 2021.

The UK would still need to negotiate an extension of Article 50, and this must be agreed by all EU member states. However, it will be easier than negotiating a bespoke transitional deal and it avoids the danger of either party wanting something a little different from the status quo, in which case the whole bargain could unravel. Moreover, if the UK takes this cheaper and easier course, it will have more time to negotiate the long-run relationship with the EU that it desires.

Disclaimer:

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory. 

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