Brexit Update: The EC Draft Withdrawal Agreement & The Mansion House Speech

08 March 2018

Sector: Brexit


Last week we witnessed the most significant developments in the Brexit negotiations since the Phase I talks concluded in December 2017with the publication of the joint EU-UK Report.

The first key move came on Wednesday, 28 February, when the European Commission published the “draft withdrawal agreement on the withdrawal of the UK from the European Union and the European Atomic Energy Community.” Then, just two days later, in a speech at Mansion House, the UK Prime Minister poured cold water on a number of the proposals, particularly those on the divisive issue of managing the Irish border question following withdrawal. In that same speech Theresa May set out some further details on the UK government’s vision for a future partnership with the EU.

Draft Withdrawal Agreement

The comprehensive draft withdrawal agreement spans 118 pages and is the first attempt on either side to reduce December’s political agreement (the EU-UK Report) into legal form. There was no obligation on the Commission to produce the text and as such it is seen by many as a tactical move by the EU to lay the initial ground for a final agreement. Since its publication, the Commission has stressed that in its view the document should contain “no surprises”, adding that it simply reflects December's accord.

There are a number of key areas in the draft which will be of interest to those doing business in Northern Ireland:

  1. Transition period: It acknowledges that there will be a transition period post -Brexit which will end on 31 December 2020. This reflects a long held view within the EU that a transition period must end on a date that also marks the end of the EU’s seven year budgetary cycle. During this 21 month period the UK would be required to comply with EU law and continue to contribute EU budgets. Notably, the agreement proposes that the UK will not be permitted to pursue free trade agreements with third countries during this time.
  2. European Court of Justice (ECJ): it is proposed that the European Court of Justice will continue to have jurisdiction throughout the transition period, and in the longer term it will effectively serve as the jurisdiction on any disputes.
  3. Northern Ireland: a standalone 16 page protocol is appended to the draft text, dealing exclusively with Northern Ireland. In summary it proposes:
    • A Common Regulatory Area: the December report provided for three distinct options in order to avoid a hard border. “Option A” would involve maintaining a frictionless border through the overall UK-EU future relationship. “Option B” would involve the UK introducing “specific solutions” to avoiding a hard border in the event that Option A was not possible. “Option C” was the backstop. It provided that in “the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the customs union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.”

In the draft agreement, the Commission proposed that a common regulatory area would be established between the EU and Northern Ireland to which EU law on the free movement of goods would apply from the date of withdrawal. Effectively, “Option C”. This would be in place as and until a subsequent agreement was reached which (i) avoided a hard border, (ii) protected the Good Friday Agreement and (iii) maintained north-south co-operation (opening the door for “Option A” or “Option B” at a later date).

    • Extent of Alignment: it is important to stress that the Commission does not envisage the full body of EU law being applied to Northern Ireland, rather, it is suggesting alignment on specific areas on the movement of goods, with the exclusive aim of avoiding a hard border and maintaining north-south co-operation. It therefore sets down proposals for alignment in problematic areas such as agri-food, the movement of animals and the single electricity market. Notably, it does not cover free movement of services or capital.
    • Unfettered access to Great Britain: the draft proposals make no mention of the agreed text in the December report which provided that Northern Irish businesses would continue to benefit from “unfettered access” the rest of the United Kingdom.

The full text of the withdrawal agreement is available here

The Mansion House Speech

On Friday 2 March, in her Mansion House Speech, Theresa May unpacked some further detail on the UK government’s vision for its relationship with the EU post-withdrawal and challenged certain proposals in the EU’s draft agreement published on 28 February.

In this speech she re-iterated the UK government’s commitment to leaving the EU single market and customs union, and also set out the government’s position in a number of specific areas, including:

  1. Future Trading Relationship with the EU: whilst maintaining the consistent line that the UK would leave both the customs union and single market, in her speech she also provided some clarity on the type of trading relationship that the UK is seeking with the EU. It appears to be somewhere between the relationship the EU currently has with Norway (which is in the single market but outside the customs union) and that with Canada through the recently negotiated free trade agreement. Referring to the need for a bespoke arrangement, she added, “We need to strike a new balance, but we will not accept the rights of Canada and the obligations of Norway.”
  2. Northern Ireland: She claimed the EU proposals for Northern Ireland, just a few days earlier were unacceptable to the UK, citing that the UK would not agree to the break up of its own internal market. As an alternative to the “all-island regulatory area”, she referred to her government’s proposals from August 2017 (see our analysis here) where they set out two options, namely a “customs partnership” or a “highly streamlined customs arrangement”, as the basis for avoiding a hard border.
  3. EU agencies: the Prime Minister noted that the UK might seek to remain in a number of EU agencies such as those that are critical for the chemicals, medicines and aerospace industries: namely the European Medicines Agency, the European Chemicals Agency, and the European Aviation Safety Agency. This signals an intention to maintain a high degree of alignment across these areas which have heretofore been singled out as particularly problematic in the event of a “no deal” scenario.
  4. State Aid & Competition Law: she specifically referred to the need for binding commitments in areas such as state aid and competition law. She set out that this approach was necessary due to the level of integration between the UK and EU markets and geographical proximity. In her view reciprocal commitments would ensure that UK business can compete fairly in EU markets and vice versa.
  5. Passporting rights: she signaled that it is likely that the UK would losing EU passporting rights which currently allow British financial firms to sell their services right across the EU. In a later interview she suggested that access to EU financial services for the UK (and vice versa) should form part of any new trade agreement. This may represent a fundamental and somewhat seismic shift for both the City of London and for financial services that operate on an integrated basis across the island of Ireland. Although in some respects businesses in the sector have been scenario planning on this basis for some time, given the risk of no deal being reached.
  6. European Court of Justice: the UK government’s position that the jurisdiction of the ECJ over the UK must end was maintained. The Prime Minister added that a third party court would have to be established to manage disputes between the two blocks.

The full text of the Mansion House Speech is available here.

What next?

It is anticipated that both UK and EU will commence intensive negotiations on a withdrawal agreement very shortly, although this is unlikely to take place until the European Council summit at the end of this month. Northern Ireland will undoubtedly continue to be a seminal issue in terms of both a political settlement and the future trading relationship.