The pieces of the Brexit puzzle are slowly falling into place. At the end of April, the European Council adopted the guidelines establishing the overall positions and principles that the Union will pursue during the negotiations with the United Kingdom (UK) under article 50 TEU. Moreover, the European Commission has recently published a recommendation for a Council Decisionauthorising the Commission to open negotiations with the UK and setting the directives to the negotiations. The two documents shed some light on the EU negotiating position and shows that the Union and the UK have different negotiating objectives.
Article 50 TEU negotiations: the old versus the new relationship
In its guidelines, the European Council established a phased approach to the negotiations. The arrangements concerning the withdrawal of the UK from the EU would be discussed in the first phase, with the aim to provide clarity and legal certainty to citizens, businesses, stakeholders and international partners as well as to disentangle the UK from its rights and obligations as an EU Member State. The second phase would be dedicated to preliminary talks about the future relationship. However, the European Council made clear that the future relationship would only be discussed if sufficient progress is made on the first phase of the negotiations and that, in any case, the conclusion of a future Free Trade Agreement with the UK would only be possible after the UK leaves the Union. On this respect,the directives for the negotiations state that the UK will become a third country on 30 of March 2019, unless the European Council and the UK unanimously decide to extend the deadline of Article 50 negotiations. This means that, from 30 of March 2019 onwards, without an EU-UK FTA in place, WTO rules would apply to trade between the UK and the EU, unless the two parties agree to an extension of the negotiations or to transitional trade arrangements towards a future FTA, in the framework of the withdrawal agreement.
Withdrawal agreement and trade
The UK and the EU have different negotiating objectives. The UK is focusing on the new relationship and expects to negotiate and conclude an FTA with the EU within the 2-years deadline, together with the withdrawal terms. The EU aims at resolving the withdrawal first, negotiating citizens’ rights and financial aspects before engaging efforts in the construction of the new relationship. The UK strategy does not find support in the EU treaties since Article 50 cannot serve as a legal basis for the conclusion of an FTA. Article 50 regulates the negotiations between a Member State which decides to withdraw and the Union, whereas the conclusion of an FTA can only take place between a third country and the EU. Therefore, the UK needs to withdraw from the EU – with or without an agreement - before any FTA is concluded between the two parties.
Furthermore, the recent Opinion of the European Court of Justice in case C-2/15 about the EU competence to conclude the EU-Singapore FTA dealt a hard blow to the UK strategy. The Court concluded that non-direct foreign investment and dispute settlement between investors and States fall under the scope of shared competences between the EU and the Member States. Consequently, the Court ruled that the EU-Singapore FTA, which contains provisions on these matters, could only be signed and concluded by the EU and the Member States acting jointly. The impact of this decision on the UK strategy is that the signature and conclusion of a future EU-UK FTA would require the approval of the 27 Member States, adding a considerable amount of time to the ratification process until any agreement could come into force. One way to circumvent this would be to exclude non-direct foreign investment and dispute settlement between investors and States from the negotiations of a future EU-UK FTA.
However, to what extent the withdrawal agreement could contain transitional provisions regulating the trade relationship between the EU and the UK, which would serve as a bridge between the old and the new relationship, is rather unclear. The wording of Article 50 states that an agreement negotiated under this provision shall set out the arrangements for the withdrawal of the concerned Member State, taking into account the framework for its future relationship with the Union. Based on this text, one could argue that transitional provisions to smoothen the progression towards the new relationship fall under the scope of the withdrawal agreement. The difficulty here is to establish the limits between such transitional provisions and the provisions that would amount to a new trade regime for the EU and the UK.
This loophole is likely to be exploited during the 2-years negotiations, especially by the UK. Each side will engage in an arm wrestling battle to make its strategy prevail. The EU will push to obtain better withdrawal commitments from the UK, in exchange for negotiating the framework of the future relationship. The UK will pressure the EU to negotiate the new trade regime under article 50, extending the interpretation of that provision, although non-direct foreign investment and dispute settlement between investors and States are likely to be left out. A compromise solution would likely include transitional provisions on trade, providing some clarity and time for businesses on both sides of the channel to adapt.