On June 12th., an Opposition Motion to allow Parliament to consider stopping a “no deal” Brexit was defeated. While this might not have got a significant amount of press, the defeat of the motion is very likely to have significant implications for business.

In Spring-early Summer of this year, there were a series of Parliamentary debates and votes designed to elicit the will of Parliament on Brexit. One of the those votes, on the 13th. March resulted in a small majority against a “no deal” Brexit. This vote was significant because the European Union (Withdrawal) Act 2018 (“the Act”), passed in 2018, in effect, has “no deal” Brexit as the default option. In accordance with the Act, unless Parliament agrees on a different outcome, a “no deal” Brexit happens on Exit Day (now 31st. October 2019). Notwithstanding the Act, it is interesting to note that Article 50 of the EU Treaty also produces the same result: a withdrawing Member State leaves two years after serving a notice of withdrawal with or without a deal.

Given the Parliamentary vote against a “no deal”, many took the view that the Opposition Motion would pass, permitting Parliament to amend the Act to avoid a “no deal” default, or otherwise legislate against a “no deal” Brexit. As it failed, the likelihood of a “no deal” Brexit has significantly increased.

However this conclusion that the likelihood of a “no deal” Brexit has significantly increased has to also factor in two other issues.

First, are there any other ways in which Parliament can give effect to its earlier “no deal” stance?

Second, does the election of a new Conservative Party leader (and likely the new Prime Minister) affect the issue?

As to the first question, the respected Institute of Government has written on the issue of whether Parliament can stop a “no deal” Brexit and has concluded that Parliament cannot stop a “no deal” Brexit if a new Prime Minister decides that a “no deal” outcome is preferred. As a general overview of the IoG’s analysis, a new PM could simply stop Government legislative activity until after Exit Day, thus robbing Parliament of any opportunity to intervene. In the most extreme version of this view, the new PM would prorogue Parliament until after Exit Day, ruling out any Parliamentary activity whatsoever.

The only possible way to avoid this would be engineer a General Election. A General Election raises at least two issues: (i) a significant number of Conservative Party MPs would have to agree to call a General Election or vote against the Government in a vote of “no confidence”, and they are unlikely to; and (ii) it is not clear that a General Election could be held sufficiently quickly so as to allow for any new Government to change Exit Day, or otherwise avoid the “no deal” outcome. It is also clear that a General Election would rule out any meaningful dialogue with the EU-27 before Exit Day.

As to the second question, as noted above, if the new Conservative Leader and PM wants to achieve a “no deal” Brexit, or at the very least will not rule a “no deal” Brexit out, then there is very little Parliament can do to stop that. Several candidates have said that they would keep “no deal” as a negotiating tool, and so will of course want to avoid “no deal” being ruled out by Parliament.

Given that the prospect of a “no deal” is increasing, let’s recap the position on trade.

The most important consequence for business is current failure of HMG to have prepared for a “no deal” Brexit. While some preparation has been done on both sides of the Channel, it is clear that leaving the EU on 31st October with “no deal” will result in a high degree of disruption. Many businesses prepared for a “no deal” Brexit on March 29th, but the Exit Day was extended by mutual agreement. However, it is important that businesses continue to focus on what disruption a “no deal” Brexit might cause to their business and supply chains.

Even if both sides were perfectly prepared for a “no deal” Brexit, an important consequence for business is the imposition of a customs border, and where appropriate tariffs (or other non-tariff measures such as quotas) between the UK and EU-27. This is a consequence of both the UK and EU-27 having to comply with the WTO Most Favoured Nation principle.  Put simply, all goods flowing into the UK from the EU-27 and the EU-27 to the UK will undergo controls which currently do not exist. These controls will relate to: (i) customs checks; and (ii) product conformity. In relation to a number of goods, customs duties will be imposed which will add to the landed costs of those goods. In some limited cases, those goods will also be subject to quotas, which may be accompanied by punitive tariffs once the quota is exceeded. While it is hard to be specific about the costs associated with these tariff and non-tariff barriers, our report here looks at the costs for several goods sectors.

The UK has sought to mitigate the tariff costs by proposing an interim period in which many, but not all tariffs into the UK would be suspended (see earlier post here). This would have to be temporary, otherwise the UK runs the risk that the suspension in fact becomes permanent, thus affecting the UK’s ability to re-impose protective tariffs at some point in the future. As of the date of writing, there is no equivalent offer from the EU-27.

However, it must not be forgotten that a “no deal” Brexit also means that service trade between the UK and EU-27 will also lose the benefit of Single Market treatment, also reverting to the WTO MFN treatment. Whether this position is significantly worse than under the Single Market position varies from service sector to sector.

“No deal” also means that UK businesses lose the benefit of trade agreements between the EU and third countries. This means that if a supply chain into or out of the UK relies on one of these agreements, then it will be affected by a “no deal” as the third country under the agreement cannot now give UK goods (and services) the same treatment as it offers the EU.

The UK has sought to reduce the impact on these third country agreements by negotiating bilateral agreements with these (and other) third countries. The results have been limited:

  • the UK has currently only negotiated 12 agreements covering 31 countries, which is far less than the number of agreements the UK will lose the benefit of;
  • a number of these deals only give very limited protection, or in some cases, no protection, in a “no deal” scenario;
  • most only cover goods and do not cover services.

Author

Ross Denton is a Partner in the Firm’s EU, Competition and Trade Department in London. Ross was the former head of the Firm’s International Trade and WTO Practice Group, and now serves on the Firm’s Cartel Task Force. Ross also heads up the European Trade practice for the Firm. Ross routinely advises US and Japanese multinational corporations on competition law, export controls and sanctions, customs, bribery and corruption, and public procurement. Ross is a key member of the London office Anti-Bribery and Corruption Unit. Ross regularly speaks on trade and cartel issues, and has published widely on compliance related issues. He is a member of the UK Customs Practitioners Group.

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