The cross-party Committee concludes that the Government should set out what contingency planning is taking place for the risk that there is "no deal" at the end of the Article 50 negotiating period and undertake an economic and legal assessment of such an outcome – in which the UK would fall back on trading under World Trade Organisation (WTO) rules.
Hilary Benn MP, Chair of the Exiting the European Union Committee, said:
"The report we are publishing today is a detailed assessment of the Government's stated negotiating objectives as set out in its EU White Paper.
The UK is about to enter into enormously important and complex negotiations covering trade, customs rules, access to the single market, security and foreign policy co-operation and the rights of UK and EU citizens at home and abroad. We all want the best possible deal for the UK but what we are able to secure will ultimately depend on what the 27 Member States are prepared to agree to.
The Government is right to try and negotiate both the divorce settlement and a new trading relationship in tandem, but it should also be prepared for the worst case – i.e. that a new trade agreement is not reached or ratified by the day we leave – because the timescale allowed by Article 50 is particularly tight.
The Government should conduct a thorough assessment of the economic, legal and other implications of leaving the EU without a deal in place. The public and Parliament have a right to the maximum possible information about the impact of the different future trading options being considered. Without an economic impact assessment of 'no deal' and without evidence that steps are being taken to mitigate the damaging effect of such an outcome, the Government's assertion that 'no deal is better than a bad deal' is unsubstantiated. Parliament must be in an informed position to decide whether a proposed deal is, in fact, better or worse than no deal.
Leaving the EU without a future trade deal and in doing so defaulting to World Trade Organisation (WTO) rules is no less an important decision for the UK's economic future than the terms of any future Free Trade Agreement between the UK and the EU. It is therefore essential that such a step is not taken without Parliament having a vote on the matter."
Timescale for reaching agreement
Michel Barnier, the European Commission's Chief Negotiator for Brexit, has said that negotiations must finish within 18 months in order to allow time for EU institutions, governments and parliaments to ratify the agreement. There is no precedent for the conclusion of a major comprehensive bilateral or multilateral Free Trade Agreement (FTA) covering goods and services within two years. Nevertheless, there is also no precedent for the negotiation of a major FTA between countries that are already convergent in legal and regulatory terms. It may be that starting from this position enables the terms of a future trade deal to be negotiated more quickly than comparable agreements such as CETA. It is not yet evident, the report warns however, that the timetable for achieving this is realistic.
Gibraltar's Government has expressed particular concerns to the Committee about the prospect of Spain raising the issue of sovereignty in Brexit negotiations. The Committee urges the UK Government to maintain a high level of dialogue and engagement with Gibraltar throughout the negotiations.
Hilary Benn MP said:
"Gibraltar's sovereignty, the wish of its people to remain British and its rights under any deal must be protected."
Potential exit payment
Negotiations around the UK's outstanding and future financial liabilities to the EU will form a very important part of the talks and will need to consider these liabilities, assets and, potentially, payments by the UK for continued participation in certain EU programmes, such as the Horizon 2020 research programme or the Erasmus student exchange programme. It will be essential to ensure these discussions do not get in the way of simultaneous negotiations over the UK's future relationship with the EU27.
Securing an UK–EU Free Trade Agreement (FTA)
The Government should seek a UK–EU FTA which covers both goods and services and retains the mutual recognition of professional qualifications and product standards. Negotiating a good deal on trade in services must be a priority given that it accounts for 42 per cent of the UK's exports to the EU. The Government will need to provide clarity on how it will address divergence in rules and standards, and resolve trade disputes, outside of the jurisdiction of the Court of Justice of the EU (CJEU).
London is a pre-eminent global financial centre and the financial services industry supports a large number of jobs in London and even more across the rest of the UK. It is in both the UK's and the EU's interests to ensure there is minimal disruption to financial services when the UK leaves the EU. The Government should seek to secure some form of regulatory equivalence for our financial sector or a bespoke system comparable to the EU system of "passporting" that allows UK based firms to continue to provide financial services freely across Europe. Financial and professional services will require time to adjust to any new trading arrangements and we should seek to agree a phased process of implementation for the sector early in the negotiations to provide certainty for businesses in preparing for Brexit.
The digital industry is an increasingly important sector of the UK economy and relies on the stability of data flows across UK and EU borders. The Government must seek to maintain uninterrupted UK–EU data flows by securing a data adequacy agreement with the EU before the end of the Article 50 negotiations.
Hilary Benn MP said:
"Many witnesses have told our committee that an end to tariff and barrier free trade with our largest market would have a damaging impact on the economy. Falling back on WTO terms would mean not just a return to tariffs, but the reappearance of non-tariff barriers. That would mean more paperwork, border checks and bureaucratic requirements for British companies trading with the EU. For many businesses these can be far more costly than the actual tariff itself."
The Customs Union
In seeking to negotiate its own preferential trade agreements with non-EU countries, the Government has said that it will not remain within the EU customs union. However, Ministers have been vague as to the characteristics of their preferred customs arrangement. The Government must provide more clarity on this and how its preferred option will differ from the current customs union, bearing in mind a risk that the EU27 will decline to allow the UK to both leave the CCP and the CET and yet retain existing tariff and barrier free trade.
FTAs with non-EU countries
The UK is party to over 50 Free Trade Agreements through the EU. Seeking clarity on whether the UK can continue to trade through those agreements – known as ‘grandfathering’ – should be a priority. The UK urgently needs to develop resources and expertise for the trade negotiations to come.
Cooperating in the fight against crime and terrorism
The UK has been a leading force in Europol's development. If negotiations progress in a spirit of goodwill, there should be scope for an imaginative solution to enable the UK to continue some level of involvement with Europol for the benefit of all European citizens. The value of maintaining participation in the European Arrest Warrant – or at least securing an analogous agreement – has also been commended to the Committee. There is also a strong operational argument, in the interest of both UK and EU27 law enforcement, for the UK to continue to participate in programmes for data sharing in the fight against terrorism and international crime. The technical obstacles that will need to be overcome for continuing cooperation in these areas will be significant, but not insuperable. However, it is unlikely that the UK will be able to retain the leading role that it currently enjoys.
The UK's own new arrangements for migration from the EU will need to be flexible enough to meet the needs of the economy across the UK. This includes a broad range of sectors, both high and low skilled, including scientists, bankers, vets, care workers, health professionals and seasonal agriculture workers.
On visits around the country, the Committee heard from many businesses about the need for flexibility in a future immigration system to ensure that sectors currently reliant on EU workers do not face a sudden shortage of labour. The Government should also consider whether immigration could be managed on a geographic basis. The design of a new system must not make it difficult for the UK's successful Higher Education sector to attract international skills and talent.
Consultation with devolved administrations
The Government must establish a more effective process for engaging the devolved administrations in developing the UK's negotiating position through the Joint Ministerial Committee for EU Negotiations (JMC (EN)). And the Committee recommends that the UK Government respond formally to the Welsh, Scottish and Northern Ireland legislatures regarding each of their options papers as a matter of urgency.
Hilary Benn MP said:
"There are significant differences in the negotiating priorities of the different parts of the UK. If the future deal is to be acceptable to the whole of the UK, then these differences will need to be discussed, negotiated and common ground agreed upon. Ministers must share more information with the devolved administrations and discuss options before decisions are reached."
Northern Ireland and the Republic of Ireland
The UK and Irish economies are deeply integrated with over £43 billion of annual trade between the UK and the Republic of Ireland. In the event of no UK–EU deal, the UK would revert to trading on WTO terms with the Republic of Ireland. The high tariffs that would be imposed on dairy and agricultural produce as a result, would have an extremely serious impact on the agri-food industry on both sides of the border.
The border between Northern Ireland and the Republic will become one of the EU's external borders when the UK leaves the EU. There is particular concern in the Republic of Ireland about any return of customs checks at the border with Northern Ireland because this would provide an opportunity and focal point for those who wish to disrupt the peace. It is important to ensure that in implementing Brexit everything is done to maintain and build upon the considerable progress made as a result of the peace process and the Good Friday Agreement. With the goodwill that currently exists on both sides of the border, we hope that a mutually acceptable solution can be found. This must be at the top of the list of the Government's negotiating priorities.
Minimising disruption to business when we leave the EU
The extent of disruption caused by leaving the EU is likely to vary across sectors, depending on the terms of the final withdrawal agreement. In some areas, adjustments are likely to be minimal. Where changes in trading arrangements or market access may be more substantial, however, the Government should seek to establish frameworks for implementation phases as early as possible in the negotiation process. It should communicate the terms of those agreements promptly and clearly to businesses and the public, in order to ensure adequate time for planning.
- When the Secretary of State for Exiting the EU David Davis gave evidence to the Committee on 15 March 2017 he confirmed that, should the UK leave the EU without a deal, the UK would face a number of consequences including the imposition of tariffs (of up to 30–40 per cent on some agricultural products) and customs checks (including between Northern Ireland and the Republic of Ireland), an end to UK participation in the US–EU Open Skies Agreement, "probably" an end to participation in the EHIC health treatment card scheme, an end to "passporting" rights for the UK financial services sector and uncertainty around data transfer rights for the digital sector. He also confirmed that there had been no assessment of the implications of no deal since before the referendum.
- After over 40 years as a member of the EU, the UK will enter into negotiations with identical product and regulatory standards and, on the day the UK leaves the EU, these standards will have been incorporated into domestic law through the "Great Repeal Bill".
- UK goods and services that comply with EU standards before Brexit will still be compliant on the day the UK leaves the EU. However, on day one after Brexit, the UK will become a third country, and as a third country would operate in a different legal position, unless a separate agreement has been reached.
- The WTO's 164 members are all bound to observe the "most favoured nation" (MFN) principle. This means that they must offer each other the same trading terms as those they have granted to their most favoured trading partner.
- Countries like the US or Australia, that do not yet have FTAs with the EU, have nonetheless negotiated equivalence and mutual recognition agreements in a range of sectors. As such, if the UK were to exit the EU without any kind of deal, it would be in an inferior position compared to other third countries in trading with the EU.
Image: Flickr – Jeff Djevdet