EU Prepares for "No Deal" Scenario With Brexit

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July 31, 2018 - Kirsten Wallerstedt

On 19 July 2018, the European Commission published a communication on "Preparing for the withdrawal of the United Kingdom from the European Union on 30 March 2019." The communication focuses on the possibility of a "no deal" scenario in which EU law ceases to apply in the UK on 30 March 2019, with no transition period provided.

Communication of 19 July 2018

The core message of the communication document is that the UK's decision to leave the EU creates uncertainties that have the potential to cause major disruption to business. While the European Union entities continue to work towards agreements with the UK to smooth its withdrawal from the Union, the UK seems to have fallen behind on expectations, arousing deep concern in the EU. The European Commission states in this communication that "there is no certainty that an agreement will be reached."

The communication states that the withdrawal of the UK has repercussions for businesses, ranging from "new controls at the EU's (new) outer border, to the validity of UK-issued licenses, certificates and authorisations all the way to new conditions for data transfers."

The takeaway of the document is that "everybody concerned needs to be prepared" for the withdrawal of the UK from the Union on 30 March 2019.

Negotiations

The EU and the UK are still in the midst of negotiations about the state of the future relationship between the two entities. A Draft Withdrawal Agreement issued earlier in 2018 included an agreement on a transition period which would run until 31 December 2020. However, the Commission's July communication expresses concerns about a number of important issues which remain unresolved.

The communication states the EU's expectation that the Withdrawal Agreement will be finalized in October 2018 along with a political declaration which will "set out an overall understanding on the framework for a future relationship." The Commission states that the October 2018 deadline would provide "just sufficient" time for the conclusion process in the EU, which requires the approval of the Council and the European Parliament. Ratification in the UK would also be required.

However, the EU is now preparing for a scenario in which no deal is reached and the UK leaves the EU on 30 March 2019 without a ratified Withdrawal Agreement:

Scenario 1: Transition period
If the transition period is approved in the Withdrawal Agreement, the European Union rules would continue to apply to and in the UK, in general, until 31 December 2020, during which time the UK and the EU would continue to negotiate their future relationship. In this scenario, the UK will be a third country as of 30 March 2019, but EU law will continue to apply therein until the conclusion of the transition period.

Scenario 2: No agreement
However, a second scenario is that no deal is reached between the UK and the EU, in which case there will be no transition period, and EU law will cease to apply to and in the UK as of 30 March 2019. In this scenario, the EU would apply its regulation and tariffs at borders with the UK as a third country, including checks and controls for customs, sanitary and phytosanitary (SPS) standards and verification of compliance with EU norms. Transport between the UK and the EU would be "severely impacted" and there would be no specific arrangement in place for EU citizens residing in the UK, or vice versa. This is also referred to as the "cliff edge" scenario.

With this communication, the European Commission is calling on stakeholders and public authorities in the EU to prepare for a "no deal" scenario.

Business impact
In a "no deal" scenario, businesses should expect significant delays at borders between the UK and the EU, as customs, sanitary and phytosanitary controls would be enforced. Trade and regulatory issues would be governed by general international public law, including the World Trade Organization.

The takeaway message of the communication is that all stakeholders that may be affected by the UK's withdrawal (commonly called "Brexit") should take the necessary preparedness actions - and should take these actions now.

Such actions may include:

  • Economic operators with authorizations and certificates issued in the UK should apply for the same in an EU27 member state.
  • Preparations for possibly long delays in customs processes at the border between the UK and the EU beginning on 30 March 2019.
  • Familiarity with import formalities and the Union Customs Code may come in handy regarding rules on third countries.
  • Familiarity with rules that will apply when the UK becomes a third country, many of which are highlighted in the annex to the communication.

The communication makes it clear that the burden of preparedness primarily falls on private actors, business operators and professionals: "Private actors, business operators and professionals need to take responsibility for their individual situation, assess the potential impacts of a cliff-edge scenario on their business model, make the necessary economic decisions and take and conclude all required administrative steps before 30 March 2019."

Negotiations are still ongoing, and the European Commission makes it clear that this communication in no way indicates their expectation that the negotiations on a Withdrawal Agreement will not be complete in October.

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