The process for exiting the European Union and the Government's negotiating objectives Contents

4Negotiating the future relationship

104.The UK’s ability to define its future relationship with the EU does not lie solely in its own hands. Both the process and content of negotiations will be matters for negotiation with EU partners and Member States, and the UK will only get what the other 27 are prepared to agree. Understanding the process of negotiations and the perspectives of the UK’s negotiating partners will therefore be crucial in defining choices about the UK’s future relationship with the EU.

The views of other parties in the negotiations

105.Michel Barnier spoke publicly for the first time about the negotiations on 6 December. He said that the deal offered to the UK outside the EU would not, in his view, be as good as membership and that the UK would not be allowed to “cherry pick” what it wanted from its relationship with the EU. The four freedoms of the EU (of movement of goods, workers, services and capital) were indivisible. He also placed a priority on preserving the unity of the EU.81

106.The Secretary of State met with Guy Verhofstadt, the European Parliament’s chief negotiator, on 22 November. It was reported that Mr Verhofstadt also confirmed that the “indivisibility” of the four freedoms would be a “red line” for him, but that he hoped that the end result “has to be a close partnership between EU and UK in the interests of citizens”.82

107.Shanker Singham anticipated a certain amount of “political grandstanding” at the beginning of negotiations, but was hopeful that this would fade in the face of an understanding of mutual self interest in a constructive deal:

as you start the process of triggering Article 50 and the withdrawal agreement, commercial interests do start to assert themselves and drive the process, because the interests between the UK and the EU are simply too big.83

108.Robin Niblett, Director, Chatham House, was less sanguine. He told us that “political grandstanding” could be a feature throughout negotiations. He was concerned that:

EU leaders will judge the deal at some level as to whether the UK is coming out of this better than being inside or not. It is very simple. If you talk to any political leaders across Europe, as I have been doing over the last few months, there is no ill will. There is disappointment, and in some cases there is a sense of opportunity, even. However, the bottom line is that they will try to impose a political solution in which the UK is not better off in terms of the deal.84

109.The Secretary of State noted the fluidity of the political scene across Europe, explaining that there were expected to be 17 “electoral events” across Europe before the scheduled completion of the Article 50 negotiations. He told us that:

the water is changing; it is flowing past and altering, so the aims may be a bit different.85

110.He also noted the complexity of the picture in terms of the views of different Member States. The “Visegrád” countries (Poland, Hungary, Czech Republic and Slovakia) placed a high priority on security and migration; the Nordic countries and Spain emphasised the importance of free trade. However, he concluded that the interests of the EU 27 would not be served by weakening the UK as an economic and security partner:

At the end of the day, we are going to have to harness two things. One is economic self-interest and maybe security self-interest. The other is persuading them that it is in Europe’s best interests to have a friend and a strong trading partner off their north-western shore.86

111.Professor Barnard, Professor of European Union Law, University of Cambridge, argued that commentators in the UK had so far underestimated the role of the European Parliament in agreeing to any negotiation. She suggested that the European Parliament was “flexing its muscles”, noting that it would have to give its consent to any Article 50 deal. She told us that the idea that the Article 50 deal would just be an inter-governmental deal “misunderstands both what article 50 prescribes and also the way the European Union works”.87

112.For the Secretary of State, the optimal UK approach lay in defining the UK’s role as being a constructive neighbour and friend of the EU:

At the end of the day, this is a turning point in our history, in which we will have lots of opportunities to seize that will give Britain a better future, in my view. With a stronger economic future, we can be a better economic, security, cultural and diplomatic neighbour. That is more than just my view; it is part of the aim.88

Negotiating the UK’s future trade relationship with the EU


113.As a Member of the EU, the UK is currently a Member of the EU Customs Union; Members of the Customs Union are bound by a set of common external tariffs with third countries and enjoy tariff-free trade with other Customs Union Members. Membership of a Customs Union does not entail the complete removal of all border checks, although these can be made “light touch”.

114.The EU’s Single Market involves the removal of internal regulatory barriers to the free movement of goods, services, capital and workers. This includes, as part of the EU’s “internal market”, the removal of internal frontiers, including any customs border. As noted above, the four freedoms of the Single Market have been deemed to be inseparable in order to ensure a level playing field for all participants, although the Single Market is not yet complete, notably in services. Free movement of workers is, in practice, interpreted in various ways throughout the EU. The UK is generally recognised as being at the “freer” end of the spectrum. The EU’s website itself says “Rights may differ somewhat for people who plan to be self-employed, students, and retired, or otherwise economically non-active people”.89 These differences in rights cover a larger and increasing percentage of the EU’s population. This is a point which the UK Government may wish to highlight in negotiations. Single Market regulations govern areas including product standards, provisions relating to production processes, state aid, competition, public procurement and other fields. Any country can access the EU market in the sense of exporting goods there, but they may be subject to tariffs and other non-tariff barriers to trade.

115.Norway, as a Member of the European Economic Area, is not a Member of the EU, but is a Member of the Single Market. It is bound by the rules of the Single Market (and the jurisdiction of the European Court of Justice in decisions relating to the Single Market) but has only a consultative role in their agreement. It is also bound by provisions for free movement of workers and contributes to the EU budget. However, Norway is outside the Customs Union and is, therefore able to develop its own trade policy and agree bilateral trade deals with other countries.

116.Continued membership of the Single Market would probably entail continued payments into the EU budget and continued recognition of the jurisdiction of the European Court of Justice. Given the statements of Michel Barnier and Guy Verhofstadt (noted above) that the four freedoms of the EU were indivisible, it would also mean continued acceptance of the principle of free movement of workers. Short of membership, in general, the closer a new relationship would be to Single Market membership, the greater would be the level of regulatory compliance with the EU required.

117.In her speech to the Conservative Party Conference on 2 October, the Prime Minister said:

Let me be clear: We are not leaving the European Union only to give up control of immigration again. And we are not leaving only to return to the jurisdiction of the European Court of Justice.90

118.Turkey, by contrast, is a Member of the Customs Union91 and therefore bound by the EU’s external tariffs in all but a small number of sectors. However, it is not bound by the rules of the Single Market or the jurisdiction of the European Court of Justice and provisions for free movement of workers are not applicable.

119.We have taken evidence from a number of individuals who have given us a picture of the concerns of business about the course of negotiations and the timescale for determining the UK’s future relationship with the EU. Some have given evidence on behalf of representative industry bodies and some on their own behalf. We have also met, informally, in Sunderland and Aberdeen, with a wider range of businessmen and women. We are grateful to all those who have made time to meet us, particularly on our visits. We have produced notes of our informal meetings which we publish as an Annex to this report.

120.Carolyn Fairbairn, Director General, Confederation of British Industry, outlined five principles that she believed should guide the Government during the negotiations:

The first is barrier-free access to the single market—both tariff and non-tariff barriers. The second is the access to skills and talent that our businesses need. The third is regulatory equivalence—the ability to trade under known and certain regulatory principles and laws within the European Union. The fourth is the best possible trade deals around the world [ … ]. The last is protecting the economic and social benefits that we currently enjoy from European funding.92

121.By contrast, John Longworth, Co-Chair, Leave Means Leave (and a former Director General of the British Chambers of Commerce) wanted the Government to make it clear as soon as possible that it was “minded to leave the internal market and the customs union” and give business time to plan.93 He argued for “crystallising” the benefits of Brexit in both taking the opportunity to agree new bilateral trade deals and in “deciding which particular European laws should be deregulated”.

122.However, the Secretary of State said to the House of Commons on 1 December that:

The major criterion [for negotiations] is that we get the best possible access for goods and services to the European market. [ … ] We give very high priority to both tariff-free access and access without tariff barriers [ … ] that may or may not include membership of the single market, but it is achievable by a number of different methods.94

123.The Government will undoubtedly be undertaking economic assessments of the different options for market access and trade looking both at risks and opportunities. In the interests of transparency, these should be published alongside the Government’s plan in so far as it does not compromise the Government’s negotiating hand. The UK Government’s negotiating plan should outline its position in relation to membership of the Single Market and the Customs Union.

Regulatory equivalence and access to EU markets

124.John Longworth told us that Brexit represented an opportunity to reduce regulation, describing the potential for deregulation as a “tax cut for business”.95 Although he did not identify any specific pieces of EU regulation that his Members would want to see repealed, Fergus McReynolds, Director of EU Affairs, EEF – The Manufacturers’ Organisation, noted that EEF had called for a “comprehensive regulatory review”.96 He added that there would be “a number of pieces of legislation that our members will still be bound by if we are to access the single market”, but a review would identify the potential for amending or repealing regulations “to make the business environment in the UK more attractive and competitive”.97 We note that in 2013 the Coalition Government commissioned the Business Taskforce to identify EU regulations that needed abolition or reform.98

125.Frances O’Grady noted the TUC’s concern that Brexit should not see the compromising of workers’ rights and wages. She told us that “we do not want to see workers in Britain falling behind workers in other EU member states. We don’t want Britain to become the bargain basement capital of Europe”.99

126.Carolyn Fairbairn welcomed the proposal that the Great Repeal Bill would ensure that the day after Brexit the UK would still be compliant with EU regulations. However, she warned that:

There is a difference between those regulations translating into UK law and then being recognised by our European partners [ … ]. There is a difference, because a number of the regulators of those laws sit in the European Union. We have a number of members saying to us, “We don’t know how we would trade that next day, whether our products would be legal or whether our health and safety certificates are valid. We just don’t know how we would trade.

127.Some of the businessmen we met in Sunderland echoed this. They were concerned whether certification of regulatory compliance that they currently obtained from UK authorities would still be recognised in Europe after Brexit and whether they would still be eligible for certification by EU bodies.

128.Dr Acha told us that, working in the pharmaceutical industry:

I have to make sure that the medicines that are available from day one have all the right regulatory support, the right supporting approvals, the right labels and the right patient information leaflets. This is all bound up in law, not just for the sake of doing it but because patients are depending on us to make sure that we have it right on day one.100

The Customs Union

129.The decision on whether or not to leave the Customs Union involves weighing up the potential scope for agreeing new trade deals against any tariffs and bureaucratic and logistical costs accruing from the imposition of customs controls between the UK and the EU. These costs include the time taken to clear customs and comply with rules of origin requirements. Rules of origin ensure that the correct tariff is paid on goods that enter the EU from a country with which it trades on a preferential basis (such as Norway) but originate or contain materials from somewhere with which it does not (such as China); they work to ensure that tariffs applicable on exports from a country without preferential arrangements cannot be bypassed by exporting them via another state.

130.Fergus McReynolds, told us that his organisation had surveyed its members since the referendum and found that:

There is some evidence of concerns on rules of origin calculations and understanding how they would have an impact on trade. There are also some concerns about the administrative burden of customs controls and understanding how we eliminate or reduce those as much as we can. I think it goes back to that complex supply chain. It isn’t a single trade in one direction. Our members are importing components and parts, and they are part of a larger supply chain that exists across Europe and has grown up over the years of our membership of that, and their business models are integrated into that model of trade.101

131.However, some were more positive about the scope for agreeing new trade deals if the UK were to leave the Customs Union and questioned the extent to which exiting the Customs Union would place new significant costs on business. John Elliott, Executive Chairman of Ebac, a manufacturer of domestic dehumidifiers based in the North East, told us:

We export to France and the USA and what is tariffs and what is not is not a big deal. [ … ] Tariffs, like currency changes, are a nuisance, not deal breakers. [ … ] the UK exports more to the rest of the world where tariffs come into play and it is not a big deal. The ships are not held up for several days. Those times have moved on. We just have to be realistic. [ … ] All we want is the same sort of terms as any other country that is not in the EU trading with the EU: the USA, Canada, Australia, Nigeria, South Africa. All of those countries trade with the EU and have tariffs that they can deal with.102

132.We heard contrasting evidence on the UK’s economic prospects outside the EU. Shanker Singham, Director of Economic Policy and Prosperity Studies at the Legatum Institute, told us that there was a great deal that the Government could do to provide “comfort” to business in identifying how customs clearance would operate after exiting the EU (if the UK were not to remain within the Customs Union), pointing to the efficiency of expedited customs clearance mechanisms on the US–Canada border and between Australia and New Zealand as an example of what could be achieved.103 Mr Singham also said that, following the failure of the Trans Pacific Partnership negotiations, there were opportunities to develop a “prosperity zone” with several “like-minded countries” committed to free trade, such as Australia, New Zealand and Singapore. He estimated that the reductions in trade distortions that might accrue could result in an expansion of “1 per cent year-on-year, in terms of global world product, [resulting in] a global economy 50 per cent bigger than it would otherwise be in 15 years”.104

133.Carolyn Fairbairn agreed on the potential for growth in business with China, whilst noting the particular challenges of accessing Chinese markets, and noted the recent “market access enhancement” in India. She also noted that progress by the EU in trade deals with these countries had been slow. However, she called for:

a note of realism here about the scales and the arithmetic, because 50 per cent of our trade is with the European Union. Gravity laws in trade are still applicable.105 They can be proven globally. We need to understand and calibrate the pace of the ramping up of international deals if we do real damage to our European trade. Our members would say, “Let’s do both but let’s understand the calibration and how important our European markets will remain for us for many years to come.”106

Dr Robin Niblett noted the challenges in the future trading relationship with China, stating:

What will not happen is that I do not think the UK will have the same role as what Xi Jinping put in his Guildhall speech last year of Britain being the gateway to Europe.107

134.We were told in Sunderland, during our meetings with a range of businessmen and women about their concerns around the implications of Brexit. A number raised concerns about the future operation of their European supply chains: concerns raised included the possible burden and cost of customs procedures governing components that might cross borders on numerous occasions before a product was finished.

135.The Government has yet to decide on whether the UK will seek to remain in the EU Customs Union, but the Secretary of State has set out the options that he has identified for the UK’s future relationship with the Customs Union:

The four I had in mind, as I say, are not comprehensive, but cover four stages—a spectrum—and those are: inside the customs union; a partially-inside Turkish model; outside, but with a free trade agreement and a customs arrangement, as happens in some parts of the world; and completely outside.108

136.A return to tariffs and other regulatory and bureaucratic impediments to trade would not be in the interests of UK businesses and therefore the Government should strive to ensure that this does not happen.

137.It will also be important for the Government to set out clearly its policy on membership of the Customs Union as part of its plan for the negotiations.

Financial services

138.Although tariffs are not applied to trade in services, it is generally recognised that barriers to trade in services are higher than for goods due to non-tariff barriers. These arise as services markets are, in general, more heavily regulated and differences persist in areas such as recognition of professional qualifications. The UK’s access to the Single Market in services is based on a framework which recognises the UK’s regulatory regime.

139.In respect of financial services, a significant contributor to UK services exports, EU legislation gives UK banks, insurers and investment firms authorised by the Prudential Regulation Authority and Financial Conduct Authority the right to provide a range of financial services to customers and counterparties across the EU and the EEA, either cross-border or through branches, without the need for additional local authorisations. This arrangement is referred to as “passporting”. If the UK were to leave the EU without either continued passporting access or, in certain areas, recognition of continued regulatory equivalence, companies may have to move functions or staff to other EU countries in order to be able to continue to sell certain services.

140. The EU’s Single Market in services is seen as being some way behind the Single Market in goods. In evidence to the Treasury Committee before the referendum, Dr Niblett estimated that it was around 30 per cent complete.109 Dr Niblett told us that, for the very reasons that the EU’s progress in establishing a Single Market in services was limited, the obstacles to agreeing new trade deals outside the EU covering services would be significant:

There is a reason why the EU does not have an open services market despite claiming that it does. That is an area where the protectionists’ interests are the most extreme and severe. What I would say is that, yes, the UK is a great services exporter—the largest per capita and second largest in the world. However, enlarging that by ourselves in big markets that are still in the process of opening up, in many cases, their goods markets, and have not yet got to the services markets, is ambitious. It is going to be difficult and not easy.110

141.Gary Campkin, Director for Policy and Strategy, TheCity UK, outlined the particular importance for financial services of ensuring that some form of transitional or “bridging” arrangements were put in place to enable business to continue operating until they knew what the new arrangements would be after the UK left the EU:

The key thing in a regulated industry is that you need to apply for regulatory permissions and permits, and that generally is about two-plus years. Why the bridge is important and why certainty is important to the extent possible is that it allows companies to continue operating under current conditions until the new set of circumstances are known, and then have time to adjust. That is the thing to focus in on. It is about bridging from where we are now into futurescape and providing certainty, so that those fingers do not press the [re-location] button.111

142.This echoed the views of Mark Carney, Governor of the Bank of England, who, in evidence to the Treasury Committee in November, noted the importance of a transitional period for businesses, particularly in the financial services sector, to adjust to new arrangements. Agreement that there would be some transitional period would ensure that business did not need to pre-empt the outcome of negotiations:

When there is a financial reform it takes a period of time: the Basel reforms phased in over eight years. The Vickers reforms phased in over four to six years. I will not go on about financial reforms, but the shortest transition period I have ever seen in a trade deal is two years, which was the Swiss–EU deal on insurance. Normally, it is in the range of four to seven years. If that is part of the agreement or the intent, and I would stress it would be in the interests of those remaining in the European Union, not least in the financial sector, to have some transition, then that really informs what businesses need to do today or six months from now because you transition and restructure during that restructuring window. You do not need to do it in advance in anticipation of what agreement the Government ends up striking.112

143.Given the importance of the financial services industry to the UK economy in terms of jobs and tax revenues, the Government should seek to ensure continued access to EU markets in financial services for UK providers whether by way of a continuation of passporting or mutual recognition of regulatory equivalence or some other means. What will be important is that the industry has confidence that any new arrangements will enable them to carry on doing business. Both the UK and the EU-27 benefit from the presence in London of a world class financial services hub and ensuring that there is minimal disruption to services from Brexit will be important for broader European financial stability.

Free movement of workers

144.One of the four freedoms of the EU Single Market is the free movement of workers. As noted above, the Prime Minister has made clear that it is one of her priorities in leading negotiations for the UK’s exit from the EU to ensure that “we will be able to decide for ourselves how we control immigration”.113 The Secretary of State told us that:

we have to pay respect to the outcome of the referendum, and there has therefore got to be clear control by this Parliament.114

145.There is not absolute clarity over how free movement of workers is defined. Free movement of workers is more difficult in practice in some EU Member States than in others. Carolyn Fairbairn told us:

I would like to hope that there is scope for some negotiation about that, because I think that would make a lot of things possible.115

146. John Longworth said that free movement of workers contributed to low levels of skills in the UK economy driving low productivity:

one of the reasons why we have a low-productivity, low-wage economy is that we have an unlimited supply of cheap labour from the European Union. The fact is that, while that persists, we are unlikely to develop a high-wage, high-productivity economy, because there is no incentive for businesses to invest.116

147.Ross Smith, Director of Policy at North East England Chamber of Commerce, told us that:

if you are talking about the basic skills, that is not largely where we see the need to bring people into the region. It is higher-level skills required for our software development industry, our pharmaceuticals industry.117

148.He acknowledged that:

We need to increase the numbers of people with those skills in the region. Part of the answer to that is clearly training more within the region. Part of the answer to that is attracting more to come and study and to remain in the region from elsewhere in the UK.118

149.On our visit to Aberdeen, the businessmen and women we met there painted a picture of a local economy that was heavily reliant on EU migrant labour at many different levels including the care sector and health service, food processing and agriculture and hospitality and tourism, in part because of difficulties in recruiting locally. We were told of the important role played in particular by Spanish vets in local abattoirs and highly skilled EU and non-EU engineers in the subsea engineering industry.

150.Carolyn Fairbairn emphasised the importance of ensuring that any system for controlling EU migration recognised international companies’ need to be able to move staff around easily. She told us that:

That is incredibly important, particularly in a service economy. The moving of skilled people around to work on projects—critical intra-company transfers—is something we need to protect, or we will be less attractive to those multinational companies.119

151.The Secretary of State told us that decisions around the levels of EU migration that would be permitted after the UK left the EU would not be a matter for discussion during the course of negotiations. The decisions would be made independently by the UK Government:

I think that the operation of that decision after we have left the European Union will be in the national interest, and that will affect all levels of skills. The Government will come to a judgment as to what is necessary for universities, for business and for fruit picking.120

152.In deciding on a new system for controlling EU migration, the Government will need to take full account of the importance of workers from the EU, including the highly skilled, and the ability to undertake intra-company transfers to a large number of sectors of the UK economy.

Inability to agree any trade deal with the EU: the WTO fall back

153.If the UK were to leave the Single Market and the Customs Union and not agree a free trade agreement with the EU, its market access would be determined by its membership of the World Trade Organisation (WTO). Underpinning the WTO is the principle of non-discrimination and the “most favoured nation” provision. WTO members may not treat any member less favourably than any other except as part of a preferential trading agreement. Therefore, if it were to exit the EU without any formal trade agreement, the UK’s exports to the EU could not face higher tariff rates than those applicable to other third countries.

154.The average tariff imposed by the EU on imports is only 3.5 per cent but the rates are higher in respect of particular products. EU external tariffs on dairy products are 36 per cent; on cars are 10 per cent; on food and drink are 20 per cent; and on clothing and textiles are between 10 per cent and 20 per cent.121 By contrast there is no tariff on trade in civil aircraft, including complete parts.122

155.The UK is a member of the WTO in its own right but would need to establish its own schedules of tariffs and import quotas with the WTO. As a member of the Customs Union it currently operates under the schedules applied by the EU. The Secretary of State for International Trade has recently confirmed that it is the Government’s intention to adopt the EU’s schedules and import quotas.123 Stephen Booth told us that, as long as the UK did not seek to set a higher rate for tariffs on imports than that set by the EU, the process of establishing tariff schedules at the WTO should be relatively straightforward.124 Roberto Azevedo, Director General of the WTO, said of the UK’s transition back to independent membership of the WTO “I will be working hard – I will work very intensely to ensure that this transition is fast and is smooth”.125

156.Stephen Booth emphasised that the EU also had an interest in ensuring a smooth transition to WTO rules in the event that the UK left without agreeing any trade deal. The EU market would be shrinking by 15–18 per cent and the EU would need to re-examine its WTO commitments as a result. There would be a negotiation involving the UK, the EU and other WTO members to resolve questions such as the share of existing EU-wide quotas to be divided between the UK and the EU-27.126 The process of establishing the UK’s long term offer to the WTO would therefore need to be done in co-operation with the EU:

That requires the UK to be very clear from the outset about what kind of deal it is seeking to get. That comes to the earlier question about certainty. We need to know from the Government before Article 50 is triggered what decisions it is going to take on the customs union and the single market. Those decisions have to be made at the outset rather than throughout the Article 50 process. 127

157.Shanker Singham told us that, in the course of negotiating a future free trade deal with the EU, the UK could for a limited period and as part of a transition to a free trade deal, unilaterally apply zero tariffs on imports from the EU.128

A transitional arrangement

158.The process of exiting the EU will bring opportunities for many businesses, but for many it will bring risks. Several of our witnesses advocated some form of transition or adjustment period to enable businesses to plan for any change in trading arrangements that may occur in the wake of the UK exiting the EU.

159.Fergus McReynolds was concerned to minimise disruption to trading relationships and minimise the impact of exiting the EU on complex manufacturing supply chains:

for us what is key is to achieve an orderly and smooth exit from the EU. If that requires a transition period to allow us to answer and understand in a timely fashion where those impacts are and how they are best managed over time, that is something we would support.129

160.Shanker Singham noted the need for potential interim measures or transitional arrangements that would need to be put in place for particular sectors while the process of negotiating new arrangements with the EU was underway:

The things that are more difficult to deal with, which is where you would need your interim measures, are things like those specific areas within financial services where you need some equivalence measure or mechanism going forward, or in the digital single market. There are certain, very specific things that in two and a half years we have to know exactly what they are, and we have to have interim measures in place.130

161.The Prime Minister told the Liaison Committee that, for some, the concept of a “transitional arrangement” represented either a proxy for putting off actually leaving the EU or an expectation that two years would be insufficient to negotiate (or to negotiate and fully implement) a deal to leave and a further transitional period would be needed. However, she did acknowledge that

there will of course be a necessity for adjustment to those new arrangements, for implementation of some practical changes that may need to take place in relation to that. That is what business has been commenting on and arguing for when, as you say, they use the phrase about not having a cliff edge. They don’t want to wake up one morning, having had a deal agreed the night before, and suddenly discover that they have to do everything in a different way. There is a practical aspect of how you ensure that people are able to adjust to the new relationship, which is not about trying to delay the point at which we leave and is not about trying to extend the period of negotiation.131

Conclusion on UK’s future relationship with the EU

162.The Secretary of State has said that he wants to secure the best possible access for goods and services to the European market. The Prime Minister has made it clear that she places top priority on controlling the UK’s borders and extricating the UK from the jurisdiction of the European Court of Justice. The pronouncements of the EU’s chief negotiators on the indivisibility of the four freedoms seem to indicate that achieving all these objectives will be difficult.

163.A “cliff edge” change in circumstances could be extremely disruptive in some sectors to businesses both in the UK and in the EU 27, whether it be the need to adjust to new provisions for regulatory approval, new customs requirements, or the need to adjust to new costs or restrictions in employing EU workers. The risk of a cliff edge – ie the absence of transitional arrangements – might also push some businesses to pre-empt the result of negotiations and minimise the risks to their business. For some, this could involve re-locating out of the UK or investing elsewhere in future. A period of transition, or adjustment, is a factor in most trade agreements. 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.

164.If final agreement is not possible by the time that the UK leaves the EU, it would be in the interests of both sides of the negotiations for an outline framework, with appropriate transitional arrangements, for the UK’s future relationship with the EU to be agreed in respect of access to the Single Market for goods and services and future trade policy.

165.In addition to the economic aspects of the relationship, it is essential that cooperation in defence, foreign policy, security and the fight against terrorism, which is of benefit to both the UK and the EU-27, is not lost when the UK exits the EU. If it is not possible to conclude an agreement on all areas of cooperation in Justice and Home Affairs and Common Foreign and Security Policy before the UK leaves the EU, transitional arrangements to ensure that mutually beneficial cooperation is not brought to an abrupt end by Brexit will be needed.

The role of Parliament in approving the final deal

166.Section 20 of the Constitutional Reform and Governance Act 2010 (the “CRAG Act”) sets out the procedure for ratification of treaties by Parliament, putting on a statutory basis the convention previously known as the Ponsonby Rule. The CRAG Act 2010 therefore gives the House of Commons (although not the Lords) the opportunity to veto the ratification of Treaties. This is, however, different to giving Parliament a positive role in agreeing a new Treaty on exit from the EU.

167.The European Parliament will have a vote on any deal. The Prime Minister was asked in evidence to the Liaison Committee whether Parliament would also be given a vote on a final deal once it had been negotiated. She replied that Parliament “should have every opportunity to consider these matters”132 but did not confirm whether a vote would be scheduled or not.

168.Although the Constitutional Reform and Governance Act 2010 provides the House of Commons with powers to withhold ratification of Treaties, this is not a satisfactory way of dealing with such an important Treaty. We therefore call on the Government to make it clear now that Parliament will have a vote on the Treaty and that the timetable for this vote will allow for proper consideration of any deal that is negotiated.

81 European Commission, First Press Conference with Michel Barnier, 6 December 2016

82 Politico, Verhofstadt to Davis: ‘Welcome to hell’, 22 November 2016

89 European Commission, Free Movement – EU nationals, accessed 11 January 2017

91 Turkey is a Member of the Customs Union for industrial but not agricultural products.

94 Official Report, 1 December 2016, columns 1648 and 1665

98 Government puts business at helm of EU regulation review, Department for Business, Innovation and Skills and Prime Minister’s Office press release, 28 June 2013. For the findings of the Taskforce, see Cut EU Red Tape: Report from the Business Taskforce, October 2013

104 Qq83–84 and Brexit can enrich not just Britain, but the world, Legatum Institute, 13 December 2016

105 In 2015, UK exports to the EU were £230 billion (44 per cent of all UK exports). UK imports from the EU were £291 billion (53 per cent of all UK imports). Statistics on UK–EU Trade, Briefing Paper 7851, House of Commons Library, January 2017, page 3

109 The economic and financial costs and benefits of the UK’s EU membership, First Report of the Treasury Committee, HC 122, Session 2016–17

122 HL Select Committee on the European Union, external affairs sub-committee, Oral evidence, 3 Nov 2016, Q88

132 Liaison Committee, Oral evidence from the Prime Minister, 20 December 2016, Q93

13 January 2017