Brexit begins: What this means for business

A full nine months after Britain voted to leave the European Union in its historic referendum, Prime Minister Theresa May has finally triggered the exit talks. On 29 March, Britain’s Permanent Representative to the EU Sir Tim Barrow hand-delivered her six-page letter to European Council President Donald Tusk. It formally invoked Article 50 of the 2009 Treaty of Lisbon, the five paragraphs and 262 words that outline the process for terms of withdrawal from the EU. “I am writing to give effect to the democratic decision of the people of the United Kingdom. I hereby notify the European Council in accordance with Article 50(2) of the Treaty on European Union of the United Kingdom’s intention to withdraw from the European Union,” she wrote, solemnly starting the clock for two years of exit negotiations.

What was once seen as unthinkable is now happening: Britain is heading out of the door of the 28-country bloc which it joined in 1973. One way or another, it will cease to be an EU member state by 29 March 2019. And while it may pain many to see the British leave, it is now a stark, near-unstoppable reality. The challenge now is to put aside the referendum arguments over whether to stay or leave, and look instead at what Brexit means in practical terms.

Mrs May had already indicated in January her plans to pull the UK out of the EU’s Single Market for goods and services, in what she described as a “clean Brexit”. She talked of the “best possible deal” for trading with the EU, while allowing Britain to negotiate trade deals with third countries such as the United States.

But the EU-27 have been clear that the UK cannot “cherry pick” the benefits of membership with none of the responsibilities. EU officials have also warned that their own Brexit agenda is different to that of the British government, which wants to secure a new trade deal as soon as possible. For the EU-27, the Brexit priorities are to confirm citizen rights, settle outstanding bills, and remove uncertainties over the new EU borders.

Here we look at three key areas for business. We will be posting more in-depth coverage of each of these issues – and more – over the coming weeks and months.

Trade
Both the UK and the EU-27 have underlined how they want to avoid a scenario in which they fail to agree new trade terms by the end of the two-year Brexit negotiation. If no deal is reached, Britain will leave the EU in two years regardless.

Businesses fear this most of all, and describe it as driving over a cliff edge. It would mean EU tariffs on UK goods and services from the moment Britain formally leaves. Two thirds of the UK’s trade is currently enabled by the EU’s Single Market. On top of that would be the loss of trading privileges with the more than 60 countries with which the EU has trade accords.

To mitigate this, the UK and EU may seek a transitional phase in which the existing relationship remains in effect, including membership of the Single Market and the Customs Union. During this time, the UK and the EU could agree a new trading arrangement which would allow businesses time to adjust to any new rules. It may even allow the UK to open discussions on trade deals with other countries. However, as the European Commission’s Brexit negotiator Michel Barnier has said, talks on a transitional deal cannot begin until the UK gives a clear indication of the future trading relationship it wants with the EU-27.

Access to the Single Market and the ECJ
Until the negotiations are finalised, the current EU rules will continue to apply and the UK will remain under the jurisdiction of the European Court of Justice (ECJ). The situation beyond that will be subject to whatever deal the UK may strike with the EU.

The Single Market removes tariffs and reduces costs and administrative burdens by applying one set of rules across all member states. It is underpinned by the four freedoms of goods, services, capital and labour. Many British and EU businesses have called for a minimum three- to five-year standstill between negotiating exit in principle and full exit, to maintain continuity in access to the Single Market.

Officials say a transition period could last up to five years, which means remaining under the control of European courts well into the 2020s. Membership of the Single Market involves complying with unified standards which are overseen by the ECJ.

The Single Market is vital for sectors including:

• For goods: car-making, chemicals, pharmaceuticals, construction and food;
• For services: financial services, higher education, creative industries, business professional services;
• For network industries: telecommunications, energy and transport.

Can regulatory equivalence be a model for a new trade deal?
Until now, trade agreements with the EU have been signed within the framework of regulatory convergence. But this is a different situation, as the UK and the EU-27’s standards and rules are perfectly integrated at the outset of talks. For the EU-27, the issue is not regulatory convergence but the risk of regulatory divergence.

So could an equivalence deal provide the answer? This is where businesses in one jurisdiction offer goods and services in another based on the premise that their rulebooks are similar enough. It could be a way for the UK to retain access to the EU market, without having to accept EU jurisdiction or duplicate its laws.

This might be a solution in the financial sector, where banks and other financial institutions now accept that they cannot retain the EU financial “passport” that allows companies to continue to sell their services throughout the bloc. However, it would also require the UK to match EU changes, effectively meaning the EU taking decisions and the UK following these without having a say. This would run against the notion of Britain “taking back control”, and would not work in every sector.

The business impact
Brexit represents a legal, administrative and regulatory challenge of a size that has never been seen. It will dominate the UK government’s business for the next two years and beyond. There are many questions facing businesses as they adapt to the new environment, and even try to influence the process:

• What do you need to see in any post-Brexit deal?
• What effects would a clean exit from the EU with no transitionary access to the Single Market, no trade deal, no equivalence have on your business?
• Are you already looking at the business opportunities from such a drastic approach?
• Would your business be prepared for the new trade barriers that would result?
• Do you believe that jobs will need to be shifted elsewhere in the EU?
• What will it mean for your sector to lose Single Market access, and will you seek continued access?
• Will you call for access on a temporary, transitional or permanent basis? If permanent, what conditions are you prepared to accept?
• Do you need the assurances that an equivalence deal can provide beyond the UK exiting the EU?

These are all areas where Burson-Marsteller can help. Our teams of experts in Brussels, London, Paris, Berlin and our other offices across Europe are ready to provide advice and support in one of most complicated international negotiations ever seen. Contact us now for more information about how you can make the most of the situation.

Words Leo Cendrowicz, Venetia Spencer, Roland Moore and Nicholas Elles
Photo CC/vchal

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