Brexit: Take it or leave it?

Charles Proctor is a Partner at Fladgate LLP, London

The contents of European treaties do not generally achieve public notoriety. But – after acrimonious parliamentary debates, Supreme Court challenges and yards of press coverage – everyone has now heard of Article 50 of the Lisbon Treaty.

As part of a deal to secure Parliamentary approval to trigger the EU withdrawal process under Article 50, Prime Minister Theresa May conceded that the deal negotiated with the Council of Ministers would be placed before MPs for approval before it goes to the European Parliament, which must consent to any Article 50 deal before it can be formally signed off.

The Shadow Brexit Secretary, Keir Starmer, immediately welcomed this move as “… a huge and very important concession…”. However, it took but a short period of debating time for reality to dawn. If the deal were voted down by the UK Parliament, then the Government could, in theory, return to Brussels to renegotiate any areas that have proved to be contentious. But, no doubt, exasperation on the continental side of the Channel will be at its highest point; the welcome mat will remain firmly rolled up and firmly locked in the cupboard. They will say that any deal negotiated under Article 50 is a complete package and that it is not open to the UK to start unpicking bits of the agreement. And, frankly, who could blame them?

The prospect of a chilly reception in Brussels obviously lacked appeal to government ministers, who then confirmed that the vote would be on a “take it or leave it” basis. In other words, if MPs reject the deal, the UK will leave the EU without any form of exit agreement – the hardest of all possible Brexits.

The political parade therefore goes on but it’s doubtful whether this has really advanced matters from a commercial or trading perspective. So where does this leave UK business, and how can trading links be maintained in the face of these uncertainties?

In the absence of an Article 50 deal, or at least a transitional arrangement, UK businesses will have to consider their marketing methods post-Brexit. What can they do?

It has been widely reported that the financial services industry will be seriously affected by the loss of the EU single passport system. The impact will depend on the size and nature of the business, but it is perfectly possible to service EU-resident clients form a UK office. Given that the service will be provided from within the UK, no passport would be required for that purpose. Financial services institutions must therefore review the extent to which they can adequately service their EU client base from the UK. If that is not feasible, then they may have to establish separately-capitalised local subsidiaries in an EU Member State, and passport from there.

Manufacturing and other industries may face different challenges. They will have to continue to adopt EU standards applicable to their products and will still be able to export to EU customers. However, the UK’s departure from the single market and the customs union will add paperwork costs (e.g. in relation to third country content) and will also subject such exports to the EU’s common external tariff. Some of those costs may be offset if the realities of Brexit lead to a permanent depreciation in the value of sterling. For some companies, the loss of tariff-free access to the single market could be seriously prejudicial to their competitive position, and some may feel compelled to move manufacturing capacity to the continent. This, of course, will be one of the real tests of the success – or failure – of Brexit.

If no EU deal can be struck, then the UK may need to adopt a more aggressive approach. For example, it could unilaterally declare the UK to be a free trade area and seek to encourage other countries to trade on a reciprocal basis. And Mrs May has already noted that deep corporate tax cuts could be used to attract inward investment. These initiatives would also be consistent with the UK’s strategy to reassume sovereignty over its own affairs, and to strike out into the world as an open free trading nation. These are high-risk strategies, but they could conceivably bring high rewards.

Charles Proctor is a Partner at Fladgate LLP, London

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