Brexit: What Happens Now?
Dentons, the global law firm, recently released its Global Regulatory Trends to Watch in 2017. In this five-part series, we are publishing excerpts from the report focusing on public affairs and economic sanctions and trade across the world, including the US, Europe, the UK, China, Canada, and Mexico. Authors for these excerpts are Andrew Cheung, Joseph Lougheed, Adrian Magnus, James Moore, Kenneth Nunnenkamp, Michael Zolandz, and Richard Jenkinson.
Six months on from the EU referendum result, the UK Government has opted for “hard” Brexit but it has not laid out much detail of how it proposes to get there or what (if anything) might make it change its position. The vote is now spoken of in the same breath as the election of Donald Trump and the “No” vote in the Italian constitutional referendum, and is referred to as the beginning of the “populist wave” of “anti-establishment” votes.
The referendum question put to British voters was: “Should the United Kingdom remain a member of the European Union or leave the European Union?” with “Remain a member of the European Union” and “Leave the European Union” as the only options. The referendum was silent on the UK’s membership of other international agreements entered into by European countries, which (for the most part) layer themselves around the EU like an onion.
Within the EU, at the core, is the Eurozone and the Schengen Agreement (the latter, confusingly, also contains non-EU members), though the UK has never been a part of either of these. The EU itself sits within the EU Customs Union and the European Economic Area (EEA), the latter of which is also referred to as the Single Market.
The lack of clarity on the UK’s future relationship with these other bodies in the original referendum question has caused a logjam in the UK political process, exacerbated in part by the narrowness of the result (52 percent voted to Leave, 48 percent to Remain: there was no “supermajority” threshold).
Supporters of what has become known as “hard Brexit” suggest that the Leave vote has also created a mandate for the UK to extricate itself from the entire “onion” and join Kosovo, Kazakhstan, and Belarus as the only European countries outside the network of agreements centered on the EU (or as some “hard Brexit” advocates, including some of those in Government, suggest, create a series of completely new but as yet undefined bilateral agreements).
Supporters of what has become known as “soft Brexit” (who consist primarily of Remain voters) advocate keeping the UK in a similar place to where it is now, but for its EU membership. Under a soft Brexit, the UK would move out a layer and come to rest either alongside Norway (which is in the EEA but not the EU Customs Union) or Turkey (which is in the EU Customs Union but not the EEA). Others still would like a second referendum on whatever arrangement the UK enters into for the most part because they believe that enough Leave voters will have changed their minds (or even died, given the significant difference in the average age of each side’s voters) to tip the balance in favor of Remain in the event of a rematch.
The questions for the UK include:
1. Where in the “European onion” it wants to end up; and
2. Where the UK will be allowed to go by the co-signatories to the agreements that will need to be amended to accommodate a non-EU UK.
The UK may take up a position beside Turkey and remain in the EU Customs Union (a “soft Brexit” position occasionally espoused by the opposition Labour Party) as a permanent or temporary measure post-Brexit.
The UK’s current customs infrastructure is designed for an environment where around half the UK’s imports do not require customs clearance (coming from elsewhere in the EU Customs Union). Without a dramatic expansion, the UK’s customs infrastructure would be overwhelmed by the need for additional checks on goods imported from the EU. Multinational supply chains, which rely on an absence of customs checks between the UK and the other EU Customs Union countries, would also have to make allowances for the additional waiting time for products to clear customs when entering the UK from another EU Customs Union country and vice versa.
The UK remaining in the Customs Union (at least on a transitional basis) would be the simplest way of avoiding these issues.