Brexit – what happens now?


On June 24 2016, the world woke up to the rather unexpected news that the UK is leaving the EU. This following week, the news has naturally been filled with predictions about the way forward. What will happen next, and how will this affect business and trade in the EU, the UK as well as in Norway?

First of all, from a legal point of view, there are no immediate effects of the referendum. The UK is still an EU member, and EU laws and regulations continue to apply until the UK and EU have entered into an agreement for withdrawal. Correspondingly, there are no immediate changes to the EEA Agreement. 

Pursuant to Article 50 of the Treaty on European Union, the exit process starts with a notification from the UK to the European Council that it has decided to leave the Union.  The Union and the UK shall thereafter negotiate and conclude on an agreement for UK's withdrawal. The UK will cease to be a member of the EU from the effective date of such withdrawal agreement, or failing that, two years after the UK notified the EU of its intention to withdraw. The UK has not yet sent such notification.  

What are the alternatives?

Article 50, which has never previously been invoked, does not prescribe what the results of such negotiations shall be. However, and in the light of international trade law, some potential outcomes have been more actively discussed than others:

  1. One scenario is that the UK joins the ranks of Norway, Iceland and Liechtenstein as an EEA EFTA state. In this scenario, the EU legislation on the internal market will still be applicable, and the UK will get access to the market. However, being part of the internal market also entails free movement of persons, which has been heavily discussed and criticized in the UK. The UK will also lose its formal voting rights and formal influence over EU legislation, and will have to continue to pay a fairly substantial financial contribution to the EU.

  2. Another scenario is that the UK joins EFTA but not EEA, along the lines of the Swiss model. There is, however, no free trade agreement between the EU and EFTA, and the UK must then (as Switzerland), negotiate bilateral agreements with the EU in order to get market access. The market access will in such circumstances only apply in areas covered by specific agreements. For example, whereas Switzerland has accepted the principle of free movement of workers, it has not managed to secure an agreement on free movement of services. Also, there is a growing frustration with the Swiss agreement, because it calls for constant renegotiations every time new EU legislation is adapted.

  3. The scenarios which will entail a more substantial departure from the EU, is that the UK either joins EU's Customs Union (such as Turkey), negotiates a new free trade agreement with the EU, or merely lets its future trade relations to the EU be governed by the WTO Agreement. 

    Whereas the Customs Union covers all industrial goods, and entails taking part in a common trade policy, common rules of origin and a common external tariff, important sectors such as the services sector are not covered.

    The option of a new free trade agreement implies that the UK will have to negotiate a new trade agreement from scratch. Some have already pointed to the newly negotiated EU –Canada agreement as a possible model for this. However, the ultimate benefits for the UK would naturally depend on the outcome of the negotiations with the EU, which may take time, and it is at present stage not clear whether the EU is willing to enter into such negotiations, or what benefits and obligations the UK will get from such agreement.

    Under the WTO Agreement, the UK would benefit from WTO rules such as the non-discrimination principle. However, the UK would not have access to trade in the EU on more advantageous terms than other third countries outside the EU. Also, WTO has so far not been very efficient in governing the services sector. This option will therefore most likely have major impacts on UK's competitiveness in the European market.

Impact on the trade regime between
Norway and the UK

Brexit will also necessitate changes in the legal framework between the EFTA States (including Norway) and the UK. At present stage, not much can be said with regards to the certainty for what type of agreements that will be entered into, but we assume that the EU negotiation will have a strong bearing on this. To what degree the UK will continue the application of internal market legislation, including legislation on the freedom of goods, services, capital and people will naturally be of major significance.  This may also have an impact on trade between Norway and the UK in most areas, such as the energy sector, which to a large extent today is governed by the EEA Agreement. Norway also has several bilateral protocols with the EU governing trade in fish and fish products. As a result of Brexit, Norway may have to launch bilateral negotiations with the UK on fisheries, for the first time since the 1960s.

Brexit – what now?

Britain leaving the European Union will first and foremost affect the economy in the UK, but the possible reduced economic growth in the UK, and the uncertainty that will prevail until new agreements are in place, will naturally also affect the economic life in other Member States, as well as in Norway. This uncertainty and lack of predictability as regards the future legal and economic framework, which is likely to continue for at least two years, will certainly have to be taken into account by firms doing business between Norway and the UK, especially with regards to more long-term commitments.

Wikborg Rein has the expertise necessary to advice clients on the legal consequences and how to best respond to and prepare for Brexit.

 

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