Conclusions and recommendations
Introduction
1.On 15 January 2019, the House of Commons voted by 432 votes to 202 not to approve the Withdrawal Agreement and Political Declaration on the Future Framework for Relations between the EU and the UK. We published our response the following day, calling on the Government to hold a series of indicative votes on a series of options for how to proceed that the Committee set out. The Government has now tabled a motion in neutral terms following the rejection of the Withdrawal Agreement. The House will meet on 29 January to debate this and any amendments tabled. (Paragraph 1)
2.We welcome the Prime Minister’s undertaking to increase her engagement with Parliament in negotiations on the future partnership if a Withdrawal Agreement is reached. We also welcome her undertaking to give an enhanced role to the devolved administrations. If a deal is agreed, we look forward to seeing the PM’s proposals on this increased engagement and will undertake further work on the role that the UK Parliament and the devolved administrations might play in shaping negotiations on the future partnership. (Paragraph 7)
No deal
3.A lack of transparency and a lack of time have hampered Whitehall’s preparations for a no deal exit. The scale of the task and the short timeframe in which to put new processes and systems in place and to prepare the statute book raise significant risks—risks to the quality of scrutiny, risks to the quality of the solutions and most importantly risks that there will be points of failure for which we will not have prepared. (Paragraph 16)
4.We are deeply concerned about the readiness of business, particularly small businesses, for a no-deal exit. Brexit was always going to lead to change for business with a range of new challenges but also opportunities. However, businesses have had no certainty about what to prepare for and, in the event of a no-deal exit would face an abrupt change in trading circumstances which would represent a cliff edge for many—an abrupt change which concerned our predecessor Committee two years ago for which, it is clear, many businesses have not prepared. The Government’s belated efforts to engage with business and provide some form of guidance is unlikely to be sufficient to mitigate the worst effects of a no-deal exit for businesses because it is being provided so late in the day, many smaller businesses do not have the capacity to fully engage with what is required and because so much of that guidance is based on assumptions about how the EU might respond in a no-deal scenario which could turn out to be unjustified. (Paragraph 26)
5.Moving from trading with the EU as a member of the Single Market and the Customs Union to trading on WTO terms would be likely to mean a move from trading with zero tariffs with the EU to trade at tariff rates set in line with the EU’s current Most Favoured Nation schedule at the WTO. Whilst the average tariff rate that would apply on goods is relatively low, the rates applicable to cars are 10% and for some agricultural goods are very much higher. Tariff rates alone would have a very significant impact on the competitiveness of certain UK exports, in particular agricultural exports. (Paragraph 50)
6.The UK could decide to set a zero-tariff policy towards all its WTO partners. If it did so, the UK would lose the ability to offer tariff reductions or removal in trade negotiations, and would therefore have less leverage in future trade deals. We have previously suggested that the UK could apply a ten-year exemption within the WTO to allow it to continue to apply zero-tariffs to EU imports as part of an interim agreement. However, this is not a simple solution and, in any event, would require the EU’s consent. In the meantime, there could be a risk of challenges at the WTO to any perceived breach of MFN provisions. (Paragraph 51)
7.However, more significant for most UK exporters would be the non-tariff barriers that would be faced by exporters of goods under WTO rules, including increased product standard checks and checks on rules of origin. These would all increase the cost and reduce the competitiveness of UK exports to the EU. Many UK goods exporters, including a large number of SMEs, have no experience of customs processes and, without significant preparation and support, are likely to simply withdraw from these markets. Some will be able to find other markets but others will not. We have seen scant evidence of preparations being made by business or sufficient support being provided by Government. (Paragraph 52)
8.A no-deal exit would also lead to an abrupt change in circumstances for those exporting services, half of which go to the EU. For many, barriers to trade will not be mere frictions, but a loss of authorisation to conduct business. Some larger operators have been able to prepare for a no deal outcome, in part by moving operations to the EU. Smaller operators may not have had the capacity to take such steps. (Paragraph 53)
9.The absence of any agreement on the transfer of data will be particularly significant, as the Government has acknowledged, and will create a substantial and costly burden for many businesses. The fact that UK data protection provisions will be aligned with those of the EU on exit day will not be sufficient. Without either a comprehensive agreement or an adequacy decision from the Commission, it will be illegal to transfer personal data from the EU to the UK without separate contractual arrangements. This is essential in a range of services, from sales of financial products to the management of client data in all aspects of the digital economy. Solutions may be possible but they will be burdensome and costly compared to the current position and will have a significant, as the Government has acknowledged, impact on the competitiveness of UK businesses involved. (Paragraph 54)
10.The rules of the Single Market and the Customs Union are enforced by the European Commission under the jurisdiction of the Court of Justice of the European Union. Any trade agreement will include dispute resolution provisions. The dispute resolution provisions of the WTO are not comparable—any dispute could take years to resolve, with the only remedy available for the UK to impose punitive tariffs on EU imports, a measure that would increase costs for UK consumers. In practice, a reversion to WTO rules would leave UK trade reliant on continuing goodwill with the EU. (Paragraph 55)
11.There is scope for major disruption at the UK’s borders from a no-deal exit. Changes to trading arrangements, requiring increased checks, could lead to very significant delays, creating serious disruption to supply chains, particularly those that are time critical—fresh produce; pharmaceuticals; and components in just-in-time manufacturing processes. We are not convinced that the steps being taken by the Government to mitigate the worst effects of this disruption will be sufficient. Equally importantly, the avoidance of disruption will be dependent on steps that are taken in Calais and other cross-channel ports to prepare for any increased checks. However successful the Government’s preparations are on this side of Channel, they will not avoid major disruption if reciprocal effective steps are not taken by EU Member States to ensure that trade continues smoothly. (Paragraph 69)
12.The UK Government accepted the need to avoid a hard land border in Ireland in December 2017, committing to no new infrastructure and no related checks and controls. We supported that commitment and continue to do so. It is clear that the Republic of Ireland and the EU also have no desire to re-create a border. However, a no-deal outcome poses questions as to whether it would be possible to maintain an open border. Given the EU’s expressed concerns about maintaining the integrity of the Single Market and the Customs Union, it is difficult to see the EU, in the long-term, accepting a soft land border in Ireland whilst the UK maintained an independent regulatory policy and independent trade policy. (Paragraph 79)
13.Co-operation in policing and law enforcement are of vital importance for the security of the UK and highly valued by the police and law enforcement bodies. An aspiration to maintain many of the advantages of the current arrangements, or mitigate the effects of their ending, has been included in the non-binding Political Declaration. However, were the UK to leave the EU without an arrangement in place, there is a risk that the UK would lose both the current arrangements for cooperation and exchange of information and the trust that has accrued over decades. Alternative and mitigating measures would be more difficult to negotiate following such an exit and this could risk harming the security of both the EU and the UK. (Paragraph 88)
14.In the event of a no-deal exit, it is possible that solutions could be worked out to maintain co-operation on security and other matters which would be in the interests of both the EU and the UK, from exchanges of information on food health to educational exchanges. However, there is no guarantee that, in an acrimonious separation these arrangements could be established in the short to medium term. Even in a relatively harmonious no-deal separation, it may take time to establish the legal structures necessary to reconstruct these arrangements. (Paragraph 89)
15.The negotiated Withdrawal Agreement provides for a transition period of 21 months, during which EU citizens in the UK will be able to make an application for Settled Status and free movement of people will continue. If the UK leaves without the agreement, the Government has said there would be a 21 month period for EU citizens in the UK to apply for Settled Status, but it is not clear when the rules on free movement will end—the UK does not expect its new immigration system to be in place before 1 January 2021. At the same time, there is no way of knowing, with any confidence, how quickly the 3 million EU citizens in the UK will be able to apply and receive Settled Status. In a no deal, there will be large numbers of EU citizens in the UK with no certainty as to their legal status nor evidence to prove it. There is a clear risk that EU citizens in the UK could face a hostile environment—where immigration law is applied by the landlord, the employer, or the service provider—because there would be confusion as to how they demonstrated their legal status, and landlords, employers or service providers may not know what would be required of them. (Paragraph 95)
16.We welcome the Commission Communication encouraging Member States to be ready to issue temporary residence permits in the event of a no deal, and to take a generous view as to whether UK nationals in their territory could be given long term residence status, and the public proposals that several Member States have put forward to give UK nationals a legal status. If giving these proposals legal effect requires legislation in each Member State, then it will take time, may lead to inconsistency between different countries, and there are strong indications from some EU Member States that they are waiting to see how the UK will manage EU citizens in the UK in the event of no deal before deciding on the rules that they will apply to UK nationals on their territory. The UK is asking EU citizens in the UK to make an application for Settled Status, which can be refused. In a no deal scenario, there will be considerable confusion as to the legal status of EU citizens in the UK before they all have secured Settled Status. (Paragraph 101)
17.We recommend that the Government provide to this Committee a written summary setting out the healthcare provision for UK nationals currently resident in each EU27 Member State, in the event of the UK leaving the EU without a Withdrawal Agreement. (Paragraph 102)
18.The aggregation of contributions made in more than one Member State and the ability to draw on benefits in another as a result is a benefit of free movement enjoyed by many UK and EU citizens, and clearly for many pensioners. Such co-operation would continue, for those citizens covered by the Withdrawal Agreement, in the event of a deal. In the event of leaving without a deal, this co-operation would be lost. (Paragraph 107)
19.The Government states that some UK nationals may be forced to return to the UK in the event of a no deal depending on the approach taken by their current host EU country. This would raise a number of questions around access to services, especially healthcare, but also how quickly they could access housing and social security. In the absence of the reciprocal arrangements that enable contributions in one Member State to be aggregated and relied upon in another State, there is a clear risk that the onus for providing documentary evidence of contributions in another Member State will fall on the individual. (Paragraph 110)
20.Both the UK and the EU have said that resolving the issue of citizens’ rights were priorities for the withdrawal negotiations and are contained in the Withdrawal Agreement text. The importance placed on how EU citizens are treated in the UK will not change. The UK leaving the EU without a deal would cause real anxiety both for UK citizens living in the EU and EU citizens in the UK. (Paragraph 113)
21.In the event of the UK leaving the EU without a deal, the UK should offer to the EU that it is ready to ring-fence the citizens’ rights contained in the Withdrawal Agreement, and agree the relevant sections as a separate Treaty under Article 50. It should call on other Member States to respond positively to this proposal. (Paragraph 114)
22.The Government’s no-deal technical notices place significant weight on assumptions about how the EU will respond in the event of no-deal. This is at odds with the assumptions of most of our witnesses that the scope for side deals will be quite limited and will focus on areas of the EU’s greatest interest rather than the interests of the UK. It is also clear that any side deals also require the maintenance of a degree of goodwill between both sides. This will require some settlement of financial obligations and a generous guarantee of the rights of EU citizens. It is also difficult to see goodwill being maintained without an indication of the path that can be followed to ensure that a hard border in Ireland can be maintained while the UK maintains the right to establish an independent trade policy and pursue policies that may entail regulatory divergence. (Paragraph 122)
Renegotiation of the deal
23.The House could decide that the Political Declaration, which offers no certainty on the UK’s end state relationship with the EU, should be amended to provide clarity on a shared understanding between the UK and the EU about a mutually agreeable end state. This would require re-negotiation which would, most likely, require a limited extension of the Article 50 process. We would expect that, within reason, the EU would accede to any such limited request, although such a decision does require the unanimity of the 27. The pronouncements of the EU indicate that any request to re-open negotiations on the legally binding Withdrawal Agreement would not receive a positive response. (Paragraph 151)
24.If the House decides to accept the Withdrawal Agreement but to amend the Political Declaration in a way that sets out a clear end state for the future UK-EU relationship, there will inevitably be trade-offs between the level of UK regulatory autonomy and the level of market access and opportunities for future EU/UK co-operation in a range of fields. (Paragraph 152)
25.We note that the Government is seeking an economic relationship that would enable frictionless trade to continue. This would not be possible under a CETA-style free trade agreement with the EU. Furthermore, under this arrangement, Northern Ireland would not be included and would trade under different rules from the rest of the UK, as set out in the backstop Protocol, resulting in a trade and regulatory border in the Irish Sea. (Paragraph 153)
26.A Norway Plus relationship between the UK and the EU, or a variation of this option, would enable frictionless trade on the condition that the UK continued to adhere to EU rules. Along with following Single Market rules, the UK would need to be in a UK-EU customs union, which would further constrain its trade policy. The Government has not faced up to these trade-offs. (Paragraph 154)
A second referendum
27.A second referendum is logistically and politically complex, but not out of the question if political will existed in the UK Parliament. It should not necessarily be seen as an alternative to the other options discussed in this report but could be combined with any one of them. Even if there was the political will, however, there would not be time for the UK to hold a referendum before 29 March 2019. If the UK chose to hold another referendum before the UK left the EU, then it would need to make a request to the European Council for an extension to the Article 50 period. (Paragraph 159)
28.The UK notified the EU on 29 March 2017 that it would leave the EU and, in accordance with Article 50, unless the process is extended or revoked or earlier exit is agreed, the UK will cease to be a Member State of the EU on 29 March 2019. (Paragraph 164)
29.It is possible to extend the Article 50 period beyond 29 March 2019. The UK cannot do this unilaterally but would need to ask the European Council for an extension which could only be agreed by unanimity. (Paragraph 165)
30.There have been indications that the EU27 would look favourably on a request for an extension if it was to allow time for the ratification process to be completed, for a second referendum, or for a general election. The EU27 appear unlikely to look favourably on a request for an extension to allow more time for negotiations, although it has been suggested that there would be a greater chance of allowing some further negotiations on the Political Declaration. If the EU were to agree an extension, it is likely to be time limited rather than open ended. (Paragraph 166)
31.It is possible for the UK unilaterally to revoke the notification to leave under Article 50. However, in the Wightman judgment, the CJEU said that revocation must be unequivocal and unconditional—it is not a mechanism to buy time—and it brings the withdrawal process to an end. The CJEU also said that the decision to revoke should follow a democratic process and comply with domestic constitutional requirements. The CJEU declined to define what this requires but it is likely that either a resolution of the House of Commons or primary legislation would be sufficient. (Paragraph 170)
Conclusions
32.There is no majority in the House for the Prime Minister’s deal in its current form. We repeat our recommendation from our January 2019 Report that “It is vital that the House of Commons is now given the opportunity to identify an option that might secure a majority”. (Paragraph 171)
33.There appears to be no majority in the House of Commons in favour of a no deal exit, although that remains the default outcome if the House of Commons is unable to approve the deal that has been reached or pass the legislation required to implement it in domestic law. While the EU might agree to side deals to mitigate the worst of the disruption of a no deal outcome, this cannot be guaranteed, and we are concerned by the extent to which assumptions of an ongoing cooperative relationship underpin the Government’s no deal planning. Since these assumptions cannot be guaranteed, a “managed no deal” cannot constitute the policy of any responsible Government. (Paragraph 172)
34.Any co-operative relationship with the EU following a no deal exit will likely require the UK to come up with a reasonable offer on settling its outstanding financial obligations, undertake some guarantee of the rights of EU citizens in the UK, and provide some indication of how a hard border in Ireland will be avoided in the event that the UK pursues an independent trade policy and a policy of regulatory divergence. Without guarantees in these three areas, which have been the EU’s priorities since the beginning of the process, expectations of maintaining cooperation to minimise disruptions to trade, security co-operation and a whole range of areas of mutual interest could be misplaced. (Paragraph 173)
35.However, there are options to pursue if the Government is able to identify a course of action that will be supported by the House of Commons. The UK has the right to revoke Article 50 and, if there is a majority for such a course of action, Parliament could, if necessary legislate for a referendum. This would most likely require an extension of the Article 50 process which, for this purpose, we are confident would be granted. (Paragraph 174)
36.Another option is re-negotiation. There is little to suggest that a request to the EU to re-open negotiations on the legally binding provisions of the Withdrawal Agreement would be welcomed. However, a majority in the House of Commons may be able to accept the terms of the Withdrawal Agreement if it has a greater degree of confidence that the Government is on track to negotiate a future relationship that it would find acceptable after exit. None of the future relationship options that have been discussed are “off the shelf” and it may be necessary to request an extension for further negotiations on the Political Declaration to seek to define before exit a future relationship that the House of Commons can accept. (Paragraph 175)
Published: 28 January 2019