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Brexit: What it means for traders
In a popular referendum, the United Kingdom voted June 23 to terminate its more than 40-year membership in the European Union. Withdrawal from the EU is unprecedented and fraught with uncertainty and will continue to have rippling effects for years to come for the UK, the EU and the rest of the world. It is important understand that while financial markets reacted immediately, the Brexit itself will not take effect for some time. A great deal of work lies ahead, during which time it will be important for companies to conduct thoughtful analyses and make reasoned decisions concerning potential impacts, future business operations and continued trade compliance.
When will the UK cease being a part of the EU?
The UK must formally notify the European Council that it intends to withdraw, which may not take place for several months, if at all (only a domestic vote to leave has occurred; it has no automatic affect). Once notification occurs the UK and the EU, comprising the remaining 27 members, have up to two years to negotiate an agreement establishing the terms of the UK’s withdrawal and its relationship with the EU thereafter. The UK’s membership will automatically terminate at the end of that two-year period regardless of whether such an agreement has been reached unless it is extended by unanimous agreement of the remaining 27 EU members. By many accounts, the withdrawal should take more than two years to resolve, but the parties could accelerate the process.
What is the status of EU law in the UK during the negotiation period?
The UK will remain a member of the EU and its single market, party to all EU treaties and subject to all EU law. It will also be bound by any new EU legislation up to the moment the withdrawal is effective. The UK has a plethora of national legislation implementing EU directives (as opposed to EU regulations, which have direct effect on EU members without national implementation) as well as regulatory schemes that will remain in effect until or unless repealed or modified.
What happens during the negotiation period?
As withdrawal from the EU has never occurred before, it is difficult to outline the order of play. The parties will presumably devise a schedule covering all relevant and appropriate topics and then commence negotiations. Concurrently, the UK would need to undertake the task of reviewing legal, judicial and regulatory schemes that have been ceded to the EU for the last 40+ years. The UK could choose to replicate a number of EU laws for expediency, or it may opt to develop its own laws. In any case, UK-based companies or branches trading with the EU will still need to comply with EU requirements and standards to sell products or services within the EU common market.
How will Brexit affect UK-EU trade?
The UK will remain part of the EU single market at least until the effective date of its withdrawal. The UK will continue to use EU customs rules and tariffs, and goods from both sides will continue to have duty-free access to each other’s markets. Businesses and individuals will continue to enjoy freedom of movement within the EU and will remain subject to operational requirements and benefits under all EU single market trade programs, such as authorized economic operator and outward processing, until withdrawal.
Successor trade arrangements between the UK and EU will have to be negotiated, likely with a goal to maintain some form of preferential access to each other’s markets. There are several existing models of EU trade relations with outside parties that may be considered, each of which imposes its own conditions, some of which are inconsistent with the principles of sovereignty that many UK citizens sought to achieve, or regain, by leaving the EU. The UK could ultimately develop separate rules from those it currently follows as a member of the EU with respect to a wide range of issues; e.g., customs procedures, trade remedies, export controls, value-added tax, standards, and the movement and employment of foreign nationals. However, it is too early to surmise what specifics a successor arrangement will entail given that this process has never taken place before and there are any number of practical and political considerations that may influence it.
How will Brexit affect duty rates?
The UK will need to adopt its own national tariff schedule establishing duties on imported goods that, even if modeled on the EU’s TARIC, could result in higher duty rates if the UK reverts to its WTO most-favored-nation duty rates. Unless otherwise agreed by the UK and EU, those rates would apply to both EU and non-EU origin goods. Similarly, UK exports to EU countries may be subject to non-preferential duty rates. Successor arrangements will therefore have a substantial impact on any supply chain that involves the UK.
How will Brexit affect VAT?
As with its duty regime, the UK may want to adopt new laws, regulations and rates concerning value-added tax.
Will Binding Tariff Information rulings remain valid?
BTIs, which are valid throughout the EU regardless of which member issued them, will remain in effect at least until the UK formally withdraws from the EU. Thereafter, it is not yet known if EU-27 issued rulings will remain applicable in the UK or if UK-issued rulings will remain applicable in the EU. It is reasonable to assume the parties could agree to honor existing BTIs until their respective expiration dates. However, differences of interpretation that may currently exist between the UK and other EU members could have greater impact and will likely lead to greater interpretive divergences over time.
How will decisions and judgments of the Court of Justice of the European Union be treated?
The CJEU is the final arbiter on interpretation of EU law, including customs and trade matters. The UK will need to address how CJEU decisions and judgments will impact its domestic jurisprudence and administration moving forward. Given the many years of EU influence and the obvious need for stability, UK courts may give deference to CJEU decisions and judgments for years to come, though divergences with EU practice may develop over time. In general, however, it remains highly uncertain what direction the UK may take or what the impact of pending or future litigation may be.
How will Brexit affect UK and EU trade with non-EU countries?
The UK is a member of the World Trade Organization in its own right and thus will retain WTO membership after its withdrawal from the EU, subject to certain formalities. The UK will need to determine what tariff schedule it will use and submit its schedule and concessions for approval by other WTO members. It may also need to renegotiate terms agreed to on its behalf by the EU. As noted above, absent new agreements, many presume UK tariff rates will default to the WTO MFN rates.
Until its withdrawal is effective, the UK will generally remain party to EU free trade agreements with other countries, though there is not yet a consensus on the status of agreements executed by the EU prior to the 2009 Lisbon Treaty. After the withdrawal is effective UK goods exported to these countries may be subject to tariffs until or unless negotiated otherwise. In addition, the UK will no longer be a party to the EU’s ongoing FTA negotiations, such as those with the U.S., Canada and Japan, and would need to negotiate with those countries in its own right. These changes will require traders to consider issues such as the impact of FTA qualification for goods manufactured with UK other EU member inputs as well as the cost of lost FTA eligibility and to effectively communicate with all governments involved to ensure their needs are met.
What does this mean for TTIP?
The Trans-Atlantic Trade and Investment Partnership is still being negotiated between the United States and the EU and both sides have been pressing to conclude an agreement by the end of 2016. That was already an ambitious timetable that now appears unlikely to be met, and it would be reasonable to expect the next few rounds of negotiation to be postponed. In the longer term it is difficult to say at this point what effect the UK’s withdrawal from the EU may have on the prospects for concluding TTIP.
Where can I find additional information?
The situation is very fluid and potential outcomes are uncertain. As global trade leaders, Sandler, Travis & Rosenberg and STTAS are keeping abreast of developments and can answer additional questions about the challenges and opportunities that the UK’s withdrawal may offer for your company. Please contact Deb Stern at email@example.com or (305) 894-1007.