277.In her Lancaster House speech, the Prime Minister made clear that the Government would like to negotiate the Article 50 exit agreement and the terms of the future UK–EU relationship in parallel. The White Paper repeated this proposal, suggesting that it would help to avoid a “cliff-edge”:
It is [ … ] in no one’s interests for there to be a cliff-edge for business or a threat to stability, as we change from our existing relationship to a new partnership with the EU. Instead, we want to have reached an agreement about our future partnership by the time the two-year Article 50 process has concluded.
278.The EU27 and the EU institutions, however, have said that they will not be willing to begin talks on the future relationship between the UK and EU until after the terms of the exit deal are finalised. In evidence to this Committee, the Secretary of State said:
The range of views, just to remind you, range from the views taken by some members of the Commission that we will do the “divorce”, the departure deal, and then after that have a transitional arrangement while we are still paying money and there is still the free movement of people. There are all of these things going on and we will do the longterm deal in slow motion. That is plainly not what we are after.
He also confirmed that, as at 15 March, neither the EU27 nor the Commission had agreed that negotiations on the exit deal and the future relationship could take place in parallel.
279.Sir Ivan Rogers, however, also pointed out that “Nobody knows” exactly how the negotiations will be sequenced in practice. He said:
I would expect us probably to take until at least the summer before there is an agreement about negotiating structures and modalities, and the coverage of what we are going to negotiate. I hope that is not too complex. None of us knows. I would have thought there will be a bit of a stand-off at the outset. They will say, “We think of this as primarily around divorce terms”. [ … ] I am sure we will say, “That is not an acceptable ambit for the negotiation, and we want to cover the future relationship. Unless you are looking at the future relationship at the same time, how on earth can you decide the divorce terms?”
280.Even if the EU will agree to the UK’s proposal to negotiate a future agreement alongside the exit deal, Sir Ivan noted that this may not be possible within the two-year timeframe. Negotiating the EU–Canada CETA agreement, for example, took over seven years from the launch of talks to ratification. Asked how long a UK–EU FTA might take to conclude, he told us:
It obviously depends on the ambit of the FTA, and how wide you go, and how difficult it is—it will be much more difficult on financial services, because it is unprecedented, than it is on aviation, where the answer is fairly obvious and ought to be in everyone’s interest but it might be quite difficult to do it by a date, certainly, in October 2018. Then in some areas, what happens on energy or agriculture and phytosanitary, or competition law etc., is very hard to judge. You would have to open, as I say, like an accession process, chapters. [ … ] If your question is, could you in principle agree with them that by date certain there would have to be an agreement, and that is a definitive cut-off, you probably could. The question is, as ever for negotiators like me, what is the reality of that, or would you just reach that cut-off point and find you were not quite there and have to have another cut-off point? How do you avoid that situation? How do you make it a definitive cut-off point that everybody does sign in blood? It is very hard to judge.
I think [ … ] we should not accept and do not have to accept that there is this stately round of FTA negotiations, and with the Americans we reached round 15 of TTIP—I assume it has now bitten the dust—and they were happening at a regular rhythm of about four or five a year. We would presumably be saying, “We do not have to do four or five a year. We could do two a month, and we get all our negotiators across all the sectors”. You have to be realistic; a lot of work emerges during a negotiation that you had never thought of before the negotiation, and then people have to go away and do their homework, and they have to consult their Ministers and their Commissioners, and they have to consult the 27, and it all takes longer than you think possible.
281.Sir Ivan also noted, however, that the EU27 may be open to moving more quickly than would typically be the case in negotiating an FTA with a third country. He said:
They are, in principle, persuadable that an FTA with the UK is a good thing. They might regret that it was not a closer relationship than an FTA, but they would be up for negotiating an FTA. As to whether they are then persuadable that that can be done on your continuity and convergence argument and can all be done and dusted by October 2018, we can only see when it starts. That is not the doctrine in Brussels or in the key capitals I dealt with, but if you say, “Look, we are up for a really quick process. We start convergent; we are able to give you a very good account of where we shall remain convergent. We want a governance process for what happens when we cease to be convergent. We recognise your sovereignty such that in those areas where you argue we are not convergent enough there will be market-access consequences for us. You will have to accept that if that is what you choose to do to us, there will be market access consequences for you in return”. Your proposition, if you are the Prime Minister, will undoubtedly be, “We could all do this much more rapidly than you all say”.
282.It appears clear that negotiations will have to take place in a timeline shorter than the two years provided for in Article 50 TEU. Michel Barnier has said that, once Article 50 is triggered, the UK would have just 18 months to negotiate its exit from the EU in order to give the EU institutions enough time to ratify the agreement within the two-year period afforded by Article 50. On both occasions he has given evidence to us, the Secretary of State has agreed with this timetable.
283.There is no precedent for the conclusion of a major, comprehensive bilateral or multilateral FTA covering goods and services within two years, although there is also no precedent for the negotiation of a major FTA between countries that are already convergent in legal and regulatory terms. It may be that starting from this position of convergence enables the terms of a future trade deal to be negotiated more quickly than comparable agreements such as CETA. It is not yet evident, however, that the two-year timetable for achieving this is realistic.
284.The White Paper did not mention the possibility that the UK will pay an exit “fee” to the EU to cover what the EU sees as the UK’s outstanding financial liabilities under the current Multi-Annual Financial Framework. As the Foreign Affairs Committee recently noted, however, this is likely to be among the first issues on the table during the negotiations. It has been reported in the press that the Commission has indicated it will not begin negotiations on the future relationship until agreement is reached on the so-called exit “fee”, which it apparently calculates at €50–60 billion.
285.The Secretary of State told us:
The first thing to say is that this bill has not been presented. I have not seen any rationale behind it. I have seen the Financial Times’ surmised rationale, but we have not seen anything. The other thing I would just remind people of is that we are at the beginning of a negotiation. Positions will be taken in all of this. Our stance is pretty straightforward. We are a lawabiding nation. We believe in international systems of rules. We obey them, and we have rights and obligations. We will insist on one and meet the other. That is the first thing to say.
286.The House of Lords European Union Committee recently concluded that “Article 50 allows the UK to leave the EU without being liable for outstanding financial obligations under the EU budget and related financial instruments, unless a withdrawal agreement is concluded which resolves this issue”. The Committee said that it was “questionable” whether any international court could have jurisdiction in this case. However, the Secretary of State indicated to us that the Government has not yet reached a view on the extent, if any, of the UK’s legal obligations or on the formula it will use to calculate those obligations. He said that:
the House of Lords report on this was interesting, because it laid out the competing arguments quite well. From the Committee’s point of view, it is a very good starter in this exercise, but we do not recognise the numbers that you are talking about. [ … ] There is ongoing work on all of the legal aspects. The reason that I point you to the House of Lords report is that it makes clear that there is an interaction between these two things. At the end of the day, anybody who has been a Minister in the Council of Ministers knows that the European Union is about getting answers to solve the problems. It will be a problem solving/negotiated/legalbased outcome, and that is a woolly answer, but I suspect it will be a woolly exercise, at least in part.
287.Sir Ivan Rogers told us that the question of UK liabilities would be a point of contention in the negotiations because of its implications for the EU budget. He said:
[The EU27] are all looking ahead to the next two years, thinking, “We have a hell of a budgetary negotiation coming up in 2019”. Now, as far as they are concerned, we have lobbed a grenade into the budgetary mess, because they now have to start examining whether their funds go around for the period up until 2020 now, rather than waiting until 2019. We all have a problem.
288.He later added that:
it could get pretty bitter and twisted on money. Nothing gets more bitter and twisted than EU negotiations on money, and I have lived a few of them. Sometimes it can be over beans rather than large sums, and these are very large sums, if you were to believe the rhetoric from the other side.
289.Negotiations around the UK’s outstanding and future financial liabilities to the EU will form a very important part of the negotiations which will need to consider liabilities, assets and, potentially, payments by the UK for continued participation in certain EU programmes. It will be essential also to ensure that discussions about money do not get in the way of simultaneous negotiations on the UK’s future relationship with the EU27.
290.The White Paper stated:
We are confident that the UK and the EU can reach a positive deal on our future partnership, as this would be to the mutual benefit of both the UK and the EU, and we will approach the negotiations in this spirit. However, the Government is clear that no deal for the UK is better than a bad deal for the UK. In any eventuality we will ensure that our economic and other functions can continue, including by passing legislation as necessary to mitigate the effects of failing to reach a deal.
291.In evidence to this Committee, the Secretary of State said that the Government has not yet undertaken a study of the economic impact of leaving the EU without a deal in place. He told us that:
The Prime Minister said, in terms, that no deal is better than a bad deal. Why did she say that? She said that because, in the emotional aftermath of the referendum, there were lots of threats of punishment deals and all the rest of it. Let me be clear that we could manage this in such a way as to be better than a bad deal, and that is true. I cannot quantify it for you in detail yet. I may well be able to do so in about a year’s time, but it is certainly the case. Frankly, Mr Chairman, it is not as frightening as some people think, but it is not as simple as some people think. [ … ]It is not as good an outcome as a freetrade frictionfree open agreement, which is why we are trying for it.
292.The Secretary of State also indicated, however, that some contingency planning for the possibility of leaving the EU without a deal in place was underway. He said:
In the event that we do not get that or that there is no conclusion, we will have a fairly extensive contingency plan, which is already under way, as I said to you. Whatever happens, we will have sharply improved access to the rest of the world, off the back of a large number of free trade agreements, which will be coming into effect shortly after we leave—or some of them will be. You do not have to have a piece of paper with a number on it to have an economic assessment. I spent most of my working life before I came into politics dealing in business; you often knew what was a good deal, even though you did not have the numbers.
293.We note the Foreign Affairs Committee’s recent conclusion that a ‘no deal’ scenario “represents a very destructive outcome leading to mutually assured damage for the EU and the UK”. We share that view. It is, therefore, very important that both the UK and the EU avoid reaching the end of the two-year negotiating period without an agreement. The Government has talked about walking away from a bad deal, but has not yet explained what terms would be demonstrably worse for the UK than ‘no deal’. The Government should therefore conduct a thorough assessment of the economic, legal and other implications of leaving the EU at the end of the Article 50 period with ‘no deal’ in place. This should be published. The public and Parliament have a right to the maximum possible information about the impact of the different future trading options being considered, including the possibility of no FTA being reached.
294.Without an economic assessment of ‘no deal’ having been done and without evidence that steps are being taken to mitigate what would be the damaging effect of such an outcome, the Government’s assertion that “no deal is better than a bad deal”, is unsubstantiated. Parliament must be in an informed position to decide whether a proposed deal is, in fact, better or worse than ‘no deal’.
295.In our previous Report on the process for exiting the EU and the Government’s negotiating objectives, we concluded that “The Government must make clear from the outset that a period of adjustment to any change in trading arrangements or access to EU markets for UK service industries will be sought as part of the negotiations.” This reflected the views of several of our witnesses, who expressed concerns about the need to minimise disruption to trading relationships and complex supply chains in particular sectors.
296.Since then, the Government has indicated that it aims to put in place “a phased process of implementation, in which the UK, the EU institutions and Member States prepare for the new arrangements that will exist between us, will be in our mutual interest”. According to the White Paper:
This will give businesses enough time to plan and prepare for those new arrangements. This might be about our immigration controls, customs systems or the way in which we cooperate on criminal and civil justice matters. Or it might be about the future legal and regulatory framework for business. For each issue, the time we need to phase in the new arrangements may differ; some might be introduced very quickly, some might take longer. And the interim arrangements we rely upon are likely to be a matter of negotiation. The UK will not, however, seek some form of unlimited transitional status. That would not be good for the UK and nor would it be good for the EU.
297.Asked to explain the difference between “transitional arrangements” and the Government’s proposal for an “implementation period”, the Secretary of State told us:
What we do have around Europe among Member States is an understanding that we are going to need some time to put into effect whatever it is that we agree afterwards. Last time [I appeared before the Committee], I resisted being drawn on what that—I do not like “transition arrangements”—implementation phase would be for a very simple reason. What the implementation phase needs to be is dependent on what the final outcome is—what the end structure is. If it is very similar to now, and arguably a comprehensive free trade agreement would be quite similar to the effect in terms of accessing the single market, then less transition is required. If it is a big difference, more transition is required.
298.Later, the Secretary of State elaborated further:
We have been talking to people about what they would want out of these things and it does vary. Every single person wants something different. That is part of the issue. This is why I say that what we need to do is first work out what the end state will be and then work out whether there is a need, whether there is a disruptive effect of some sort in the change, and whether there is a need to allow people to accommodate to that. That is one part of it. When I talk about the implementation stage or implementation phase, it is the Government implementation. It may also be corporate implementation as well. We may need to think this through. Bear in mind again, as I keep reiterating to the Committee—the Committee quite reasonably asked me for hard answers—that starting a negotiation is sometimes hard to do. It will be on both sides’ interest to make sure that there is a smooth and orderly transition to the new state, and we will try to do that on an industry-by-industry basis, if need be.
299.As the Government has suggested, the extent of disruption caused by leaving the EU is likely to vary across sectors, depending on the terms of the final withdrawal agreement. In some areas, adjustments are likely to be minimal. Where changes in trading arrangements or market access may be more substantial, however, the Government should seek to establish frameworks for implementation phases as early as possible in the negotiation process. It should communicate the terms of those agreements promptly and clearly to businesses and the public, in order to ensure adequate time for planning.
309 Financial Times, “Brussels focuses on UK’s €60bn exit bill before trade talks”, 19 February 2017
316 Foreign Affairs Committee, Ninth Report of Session 2016–17, Article 50 negotiations: Implications of ‘no deal’, HC 1077, para 21
317 Politico, “What happens after Theresa May triggers Article 50”, 14 March 2017
326 Exiting the EU Committee, First Report of Session 2016–17, The process for exiting the European Union and the Government’s negotiating objectives, HC 815, para 163
3 April 2017