Transitional arrangements for exiting the European Union Contents

2. Objectives

The Government’s objectives: future partnership

6.The Government’s negotiating objectives for leaving the EU have been described and refined in a series of policy papers and Prime Ministerial speeches. These envisage substantive change in the UK’s eventual economic relationship with the EU. In particular, on leaving the EU, the UK will leave the EU Customs Union and cease to participate in the Common Commercial Policy, so that it can pursue an independent trade policy. It will also cease to be a member of the Single Market.5

7.In place of a trade relationship based on participation in the Single Market and EU Customs Union, the Government is seeking a “bold and ambitious free trade agreement” that achieves “the freest and most frictionless trade possible in goods and services”.6

8.The Treasury Committee in the last Parliament concluded that:7

Even under a free trade agreement that eliminated all tariffs, the costs of trading with the EU would be likely to rise as a result of non-tariff barriers to trade, including rules of origin requirements and customs procedures.

Non-tarrif barriers8 affect all trade, but are particularly pertinent in services. Services account for 80 per cent of the UK’s economic output,9 and the UK ran a trade surplus in services with the EU of £14 billion in 2016.10 The Government recognises that, to meet its objectives, the trade deal must be comprehensive;11 as the Prime Minister put it in her letter to the President of the European Council, Donald Tusk, triggering Article 50, it should be “of greater scope and ambition than any such agreement before it”.

9.Among the elements that the Government has acknowledged should form part of a future trade agreement are:

10.As the previous Treasury Committee concluded, it is likely that a comprehensive trade deal that included the elements described above would be classified in the EU as ‘mixed competence’.22 This would require it to be separately ratified by the Council (generally acting by qualified majority), the European Parliament, the national parliaments of all 28 Member States, and a number of regional assemblies. The Secretary of State for Exiting the European Union, Rt Hon. David Davis MP, has said that he expects the trade agreement to be mixed competence.23 The EU’s Chief Negotiator for Brexit, Michel Barnier, has also said that the future trade relationship will be a mixed agreement.24

The Government’s objectives: interim period

11.Despite the limited time available under the Article 50 process to conclude a comprehensive trade agreement, the Secretary of State for Exiting the European Union has maintained that the Government “want[s] to conclude the overall negotiation—whatever the outcome may be—by the end of March 2019”.25

12.However, the Government has acknowledged the need for an “implementation period” after the end of the Article 50 process, but before the new trade relationship comes into effect. The Prime Minister said in her Florence Speech that, during this period, “access to one another’s markets should continue on current terms” so that “businesses and public services should only have to plan for one set of changes in the relationship between the UK and the EU”. She added that “the existing structure of EU rules and regulations” should apply, and emphasised that the period should be “strictly time-limited” and last for “around two years”.26 The Secretary of State for Exiting the European Union has given three reasons for seeking an implementation period:27

13.Consistent with the Government’s intention to conclude negotiations within the Article 50 window, the Secretary of State has made clear that transition is not intended to give more time for the conclusion of a trade agreement:28

if we were doing a negotiation during the period of transition, I suspect what we would get offered is a year extension and then another year extension—and each time we would be paying a fee. That would solve one of the European Union’s biggest problems with our departure: money.

That would happen over and over again. It is not a good position to get into to be still negotiating during such an arrangement. That is why the sequencing as I have described it is the case.

14.The Prime Minister told the House on 11 December 2017 that negotiations on the implementation period would start “immediately” after the European Council summit of 14–15 December. She added that:29

There are some details to be sorted out, but the general agreement is that it will be agreed as early as possible in the new year. […] Michel Barnier has indicated that it could be during the first quarter.

15.The Chancellor of the Exchequer, Rt Hon. Philip Hammond MP, said in evidence to the Committee:30

It is self-evident to me, and I think it will be to members of the Committee, that a transition arrangement31 is a wasting asset. It has a value today; it will still have a very high value at Christmas and early in the New Year. But as we move through 2018, its value to everybody will diminish significantly.

The EU’s objectives

16.The European Council’s negotiating guidelines indicate broad principles for any future UK-EU trade agreement, including that it should be “balanced, ambitious and wide-ranging”; that it must ensure a “level playing field” in terms of competition and state aid (with safeguards against unfair tax, social, environmental and regulatory measures); and that it should preserve the integrity of the Single Market and the indivisibility of its “four freedoms”.32

17.However, the guidelines do not envisage the conclusion of a trade agreement within the Article 50 period. In particular, they note that “an agreement on a future relationship between the Union and the United Kingdom as such can only be finalised and concluded once the United Kingdom has become a third country”, and refer only to “preliminary and preparatory discussions” on the future relationship taking place before March 2019. Michel Barnier told the Lords European Union Committee that “the scoping of the future relationship […] will continue after 30 March 2019. We will need a few years, most likely, to continue with that negotiation on the free and fair trade agreement”.33

18.The preliminary and preparatory discussions referred to in the guidelines have not yet begun, but are likely to commence in the first quarter of 2018. As the Chancellor told the Committee, the long-term relationship “has not yet even begun to be discussed”.34 A distinct mandate to discuss the framework for the future relationship will only be provided after the Council has judged that “sufficient progress” has been made on three areas deemed to be “necessary to ensure an orderly withdrawal of the United Kingdom from the Union”: citizens’ rights, the Irish border and the UK’s financial obligations.35 On 8 December 2017, the Commission recommended that the European Council conclude that sufficient progress has been made in the first phase. The European Council will make a decision on 15 December 2017, and if it agrees with the Commission’s recommendation, it is likely to adopt new negotiating guidelines at a subsequent meeting. This will include a distinct mandate for the second phase.

19.The Legatum Institute has noted that the structure of the negotiations “leave[s] a much shorter timeframe, which increases the likelihood that by March 2019, there will be no free trade agreement in place”, adding that “in this event, there will have to be some interim measures in place to make sure that trade is not disrupted upon leaving the Customs Union and the EU”.36

20.The negotiating guidelines also require that a “sufficient progress” determination is made before discussion of transitional arrangements. However, the guidelines envisage a particular form and design for the arrangements, stating that:37

Should a time-limited prolongation of Union acquis be considered, this would require existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures to apply.

They also state that the arrangements must be “clearly defined, limited in time, and subject to effective enforcement mechanisms”, and that the same principles that apply to the future trade relationship must also apply to transition.

21.Asked by the Committee whether the EU side’s conception of transition was the same as the UK’s, the Chancellor said “they are broadly the same […] the starting point has to be the existing structure”.38 Sir Ivan Rogers, former UK Permanent Representative to the EU, said that there was “appreciation” in the rest of the EU for the fact that the Prime Minister had articulated in her Florence speech “a conception of transition that seemed to chime, at least in some respects—maybe in most respects—with the kind of thing that the 27 thought they had said on 29 April [the date that the guidelines were issued]”.39

Business views

22.At the end of the last Parliament, the Treasury Committee took evidence on transitional arrangements, including through a call for evidence that asked specifically about the desirability of a time-limited ‘standstill’ arrangement, during which the same or similar rules of trade apply immediately after the UK leaves the EU. Much of the evidence received at that time reflected the more recent support given to a ‘standstill’ transition by five UK trade associations in an open letter to the Secretary of State for Business, Energy and Industrial Strategy, which called for an arrangement that “maintain[ed] the economic benefits of the Single Market and the Customs Union”.40

23.For instance, in oral evidence to the Committee, Xavier Rolet, then Chief Executive of London Stock Exchange Group called for “nothing less than a grandfathering41 of the existing conditions of trade”.42 Elizabeth Corley, Vice Chair of Allianz Global Investors, stated that “there will be some sort of agreement that you have to just grandfather the status quo”.43 In written evidence, the International Underwriting Association stated that “the insurance industry fully supports ‘standstill’ arrangements in respect of financial services for a minimum of five years or until such time as the replacement arrangements have been clarified”.44 The UK Trade Policy Observatory stated that “this approach [standstill] would allow management of negotiating resources while providing continuity and certainty in the early years of the UK’s withdrawal from the EU”.45 The Futures Industry Association described standstill as “critical”.46 The Society of Motor Manufacturers and Traders (SMMT) wrote that “should at the end of the negotiating period there not be an agreement on a future relationship, current arrangements should continue to apply to ensure continuity and certainty”.47 The Airport Operators Association wrote that an agreement should be sought “to extend current arrangements until such time as a new agreement is concluded”.48 In written evidence to the Committee’s current inquiry, Honda wrote that “a meaningful transition would see the UK remaining within the Customs Union and Single Market”.49

24.A number of respondents to the Committee’s call for evidence drew a distinction between a ‘bridging period’, during which a trade deal remained under negotiation, and a subsequent ‘adaptation period’ once the terms of the future trade relationship were unconditionally agreed, during which firms adjusted to the new relationship.50 Many were also sceptical that details of the long-term relationship would be known with certainty by March 2019. Sir Ivan Rogers said “it takes years; I have always made that clear. I do not say this in order to be gloomy; I just say it as a pretty experienced person who has been around lots of trade negotiations”.51 The UK Trade Policy Observatory stated that “deep trade negotiation will take longer than two years […] it is more likely to take five years or more”.52 The US-UK Business Council stated that “the complex approval process of the EU-Canada Comprehensive Economic and Trade Agreement should serve as a cautionary tale for those who believe it will be easy for Britain to negotiate a free trade agreement with the EU”, adding that securing ratification from “38 national and regional parliaments will be extremely difficult, especially in the face of increased trade skepticism in many Member States”.53 The Association of Chartered Certified Accountants stated that “40 years of being a member of the EU cannot be undone in just two years”, and that “there is a strong risk of a period of several years after exit from the EU before any new agreement takes effect”.54 The Personal Investment Management & Financial Advice Association wrote that “the Government is currently at risk of greatly underestimating the time it will need to negotiate a final EU/UK Agreement or Treaty, and of failing to understand the complexity and expense of the issues that may arise for businesses in adapting to the new environment”.55 Similar doubts have been expressed to other Parliamentary committees.56

25.The Committee will continue to take evidence on the UK’s future economic relationship with the EU, and will seek a diverse range of opinions to ensure all voices in this debate are heard.

Conclusions

26.The Committee supports the Government’s proposal for a time-limited arrangement after the Article 50 negotiations conclude, and welcomes the alignment between the UK and EU27 on the core objective of this arrangement; namely, that the same common rules of trade should continue to apply in the UK and the EU as existed at the point of the UK’s formal exit.

27.This ‘standstill’ transitional arrangement must be sufficiently simple to negotiate within a matter of weeks, to provide early certainty about the legal framework for trade from 30 March 2019, and maximise the time available for subsequent discussions on the future framework for trade.

28.There remain differences between the two sides as to the purpose of transitional arrangements. The EU27 use the term “transition” and envisage negotiations on a long-term trade deal continuing during the interim period, while the UK is a ‘third country’. The Government uses the term “implementation”, and maintains that the purpose of this period is to provide time to adapt to a trade relationship that will be known and agreed by the end of 2018, when the Article 50 talks are expected to conclude.

29.The Committee strongly supports the Government’s objective of maintaining, “the freest and most frictionless trade possible” through a “bold and ambitious” trade deal with the EU.57 However, it considers it very challenging for the completed details of the ‘bespoke’ free trade agreement envisaged by the Government to be fully agreed within the Article 50 process, particularly when negotiations on the future framework for trade are not yet underway. More importantly, businesses do not have confidence that the future relationship will be known and agreed by March 2019. The Government should seek, by the end of the Article 50 process, an agreed framework for the future trade agreement and a clear direction of travel.

30.Taking this into account, it is highly likely that, for certain sectors, including financial services, the ‘standstill’ transition period will have to be followed by an adaptation period that provides time to adjust to changes to the legal and operational environment under the future trade relationship, once it is known with clarity. At this stage, the Committee makes no recommendations about the design or duration of this subsequent period, except that, unlike the ‘standstill’ period, it need not involve the UK applying the existing framework of EU rules across all sectors.

Taking into account the challenges of concluding a trade agreement during the Article 50 process, and the alignment between the two sides on the objectives for the interim period, there are in practice two broad categories of outcome for the UK’s economic relationship with the EU on 30 March 2019: a reversion to a trade relationship based on WTO commitments (sometimes called a ‘no-deal’ scenario), or the preservation, on a temporary basis, of the status quo. In terms of their economic impact on both the UK and the EU27, the difference between these two outcomes is dramatic. The next chapter considers the impact of an unplanned ‘no-deal’ scenario in more detail.

31.There is also scope for differences between the two sides on the governance of the interim period, and in particular how “the existing structure of EU rules and regulations” can be given effect in the UK after the EU Treaties have ceased to apply and the European Communities Act 1972 has been repealed. This is considered further in Chapter 4.


6 Ibid, Chapter 8

7 Treasury Committee, Economic and financial costs and benefits of the UK’s EU membership, First Report of Session 2016–17, HC 122, para 168

8 Non-tariff barriers are any obstacles to international trade that are not import or export duties. For goods trade, they can include import licensing, rules for valuation of goods at customs, pre-shipment inspections and rules of origin. For services, they can include restrictions on the ability of a service provider to establish itself or operate in a different country, and requirements for service providers to possess certain qualifications before being allowed to provide a service.

9 House of Commons Library, Industries in the UK, Briefing Paper 06628, August 2016

10 House of Commons Library, Statistics on UK-EU trade, Briefing paper 07851, November 2017

11 See, for instance, Secretary of State for Business, Energy and Industrial Strategy, HC Deb 7 November 2017, col 1319: “It is essential for our trading relationship with the European Union not only to be tariff-free, but to allow the continuation of a means of production that involves multiple components going back and forth, often at very short notice.”

12 HM Government, Northern Ireland and Ireland: position paper, August 2017, para 45

13 See, for instance, the Financial Secretary to the Treasury (HC Deb 20 November 2017 col 759): “At the point at which we leave the European Union, we will gain further control over VAT, although that depends on the precise nature of the deal that is negotiated. It might be that we move from acquisition VAT to import VAT depending on where that negotiation lands, which remains to be seen. The general principle is that the Government are entirely committed to ensuring that burdens on businesses are kept to an absolute minimum and that trade flows are maintained”.

14 Secretary of State for Exiting the European Union (HC Deb 2 February 2017, col 1230): “We will have to have a good rules of origin scheme, just as any other free trade area has.”

15 HM Government, Northern Ireland and Ireland: position paper, August 2017, para 57: ”An agreement on regulatory equivalence for agri-food, including regulatory cooperation and dispute resolution mechanisms, would allow the UK and the EU to manage the process of ensuring ongoing equivalence in regulatory outcomes following the UK’s withdrawal from the EU.”

16 See, for instance, evidence from the Secretary of State for Health to the Health Committee, 31 October 2017: “we would be very willing to look at systems of mutual recognition so that we recognised EMA accreditation and they recognised ours and so on”.

17 See, for instance, the Secretary of State for Exiting the European (HC Deb 5 December 2017 col 900): “alignment isn’t harmonisation. It is not having exactly the same rules; it is sometimes having mutually recognised rules, mutually recognised inspection, and all that sort of thing. That is what we are aiming at”.

18 See, for instance, speech by the Chancellor of the Exchequer at Mansion House, 20 June 2017: “cooperation arrangements must be reciprocal, reliable, and prioritise financial stability. Crucially they must enable timely and coordinated risk management on both sides”; and Margot James, Oral evidence to the Lords Internal Market Sub-Committee from Margot James (Minister for Small Business, Consumers and Corporate Responsibility), 2 November 2017: “We think it is important to establish […] close co-operation with the EU post Brexit on competition enforcement […] it would be mutually beneficial for the CMA and its European partners to be able to share confidential information for the purposes of competition enforcement”.

19 HM Government, Collaboration on science and innovation: a future partnership paper, September 2017, para 16: “The UK is seeking to agree a continued system for the mutual recognition of professional qualifications”.

20 HM Government, The exchange and protection of personal data: a future partnership paper, August 2017: “After the UK leaves the EU, new arrangements to govern the continued free flow of personal data between the EU and the UK will be needed, as part of the new, deep and special partnership.”

21 HM Government, Enforcement and dispute resolution: a future partnership paper, August 2017, para 25: “Establishing a deep and special partnership with the EU will require a new dispute resolution mechanism to address any disagreements between the UK and the EU on interpretation or application.”

22 Treasury Committee, Economic and financial costs and benefits of the UK’s EU membership, First Report of Session 2016–17, HC 122, para 147

25 See also the Prime Minister’s letter to Donald Tusk triggering Article 50, 29 March 2017 (“we believe it is necessary to agree the terms of our future partnership alongside those of our withdrawal from the EU”); and HC Deb 9 October 2017, cols 51–2, Statement by the Prime Minister on UK plans for Leaving the EU (“I expect, and we are working on, having that future arrangement negotiated by 29 March 2019”).

26 Prime Minister’s Florence speech, 22 September 2017

28 Ibid, Q34

29 HC Deb 11 December 2017, col 52 [Statement on Brexit Negotiations]

31 The Chancellor referred in this session to “transition” and a “transition period”. The term “implementation” was not used. By contrast, the Secretary of State for Exiting the European Union told the Exiting the EU Committee that “transition period” was “their [the EU’s] phrase”, adding that “ours [the Government’s] is ‘implementation period’”.

36 Legatum Institute, The Brexit Inflection Point: The Pathway to Prosperity, November 2017, p16

39 Q5

40 Letter from British Chambers of Commerce, the CBI, EEF, the Federation of Small Businesses and the Institute of Directors to Rt. Hon. Greg Clark MP, 22 June 2017

41 “Grandfathering” generally refers to provisions that allow actions taken before a certain date to be subject to a previous set of rules.

44 International Underwriters Association (FCR0014), para 2.3

45 UK Trade Policy Observatory (FCR0040), para 5.1

46 FIA (FCR0012), para 2.3.1

47 Society of Motor Manufacturers and Traders (FCR0002), p.1

48 Airport Operators Association (FCR0019), para 23

49 Honda Motor Europe (EUN0011)

50 See, for instance, City of London Corporation (EUN0008), para 2

51 Q40

52 UK Trade Policy Observatory (FCR0040), para 1.3

53 U.S.-UK Business Council (FCR0004), para 5

54 ACCA (FCR0034), p.3

55 PIMFA (EUN0009), para 5

56 For instance, in evidence to the Lords EU Select Committee, Raoul Ruparel, then Director of Open Europe and now Special Adviser to the Secretary of State for Exiting the EU, said that “it will probably take more than two years”. Luiz Gonzalez Garcia of Matrix Chambers said that “it is highly unlikely that in two years you can negotiate it”. Dr Markus Gehring of Cambridge University said that “it is not very realistic […] to hope to conclude those negotiations within the two years”.




13 December 2017