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More Brexit-related turbulence is on the way: here's what to expect

More Brexit-related turbulence is on the way: here's what to expect

Overview

There is significant disagreement between the UK and the EU over the Northern Ireland protocol, with much speculation that the UK will shortly seek to introduce "safeguard measures". Meanwhile, it has been suggested that the EU could respond to such a move by terminating the UK-EU Brexit trade deal (or at least threatening to do so). We explain below why the EU may be considering what some might see as a "nuclear" option – but as we also point out, even if the UK and the EU manage to settle their differences, changes scheduled for 1 January 2022 mean that there is a risk of trade disruption in any event over the coming months.

What is due to change in January 2022?

From 1 January 2022, customs declarations on goods imported from the EU will be required "upfront" (as opposed to "in arrears" at present) – and any applicable tariffs must be paid "upfront" as well (although VAT-registered businesses will still be able to use postponed VAT accounting to avoid having to pay import VAT at the point of import). There is also likely to be a higher level of physical checks. 

Why might there be disruption?

A failure to provide the correct paperwork from 1 January 2022 will mean that goods cannot clear customs and enter the UK market (whereas currently, because the paperwork can be provided in arrears, most goods from the EU can continue to flow into the UK with relatively little in the way of impediments at the border – though the same is not true as regards UK exports to the EU). A recent National Audit Office report concluded that "trader and haulier readiness remain significant risks." In particular there is a concern that it may be difficult for the UK Government to communicate the changes to EU traders and that some may have been lulled into a false sense of security by previous postponements.

For more detail on these changes and how you can ensure that your business is in a position to mitigate any risks, see our briefing "Be prepared: new border requirements on EU imports are coming in from January 2022."

What are safeguard measures under the Northern Ireland Protocol?

The UK Government believes that the Northern Ireland Protocol is unworkable in its current form and needs to be renegotiated. Under Article 16 of the Protocol, a party can take "safeguard measures" in response "to serious economic, societal or environmental difficulties that are liable to persist, or to diversion of trade." If it invokes Article 16, the UK will argue that this threshold has been met and that it is therefore entitled to deviate from what has been agreed in the Protocol. The UK Government's aim may be to put pressure on the EU to accept more significant changes to the Protocol than it has been prepared to countenance in negotiations to date.

What is the likely timing of any safeguard measures by the UK?

Under Annex 7 of the Northern Ireland Protocol, the UK would need to notify the EU of its proposed safeguard measures. Both parties would then be required to "immediately enter into consultations in the Joint Committee with a view to finding a commonly acceptable solution". Although there are some exceptions, the general rule is that the UK would not be able to proceed with safeguard measures until 1 month has elapsed since its initial notification. Assuming this procedure is followed, safeguard measures are unlikely to be immediate and there may be scope to resolve the issue by negotiation.

If no agreement can be reached via consultations in the Joint Committee, the UK would be entitled to implement safeguard measures. In response, the EU would be entitled to take "proportionate rebalancing measures" – although it is unclear precisely what these would involve (and it would depend on the nature and impact of the UK's safeguard measures). It may also initiate proceedings under the dispute resolution provisions of the Withdrawal Agreement, arguing that the UK was not entitled to invoke Article 16 and/or that its measures go further than what is "strictly necessary in order to remedy the situation". However, there has been speculation recently that the EU might go further and look to terminate or suspend some or all of the UK-EU Trade and Co-operation Agreement (TCA), with a view to putting pressure on the UK to back down from its current stance on the Protocol.

Can the EU suspend or terminate the TCA?

The short answer to this is yes – but much of the current speculation surrounds rights which would require the EU to give notice (of between 9-12 months) to terminate parts or all of the TCA. It is therefore unlikely that there would be any immediate termination/suspension (and during any notice period, the TCA would continue to operate) – but as we highlight in Section 4 below, this may be a factor which makes the EU more inclined to "pull the trigger" on termination.

What suspension/termination rights does the EU have?

The TCA contains a number of rights to terminate (or at least suspend) the agreement in response to a breach by the other party. Of particular note in the context of the Northern Ireland Protocol (which is part of the Withdrawal Agreement, not the TCA) is that large parts of the TCA can be suspended if there is persistent non-compliance with an arbitration ruling under an "earlier agreement" between the parties. So if the UK were found by an arbitration panel to have breached the Withdrawal Agreement and failed to comply with its ruling, suspension of parts of the TCA would be an option for the EU. The EU could also terminate or suspend the TCA on the basis that the UK's actions with regard to Northern Ireland breached "essential elements" of the agreement such as respect for the rule of law (but the alleged breach would have to be of an "exceptional" nature – so the threshold here is high).

However, for a number of reasons, neither of these routes is likely to be straightforward from the EU's perspective – hence the focus on other termination rights, particularly those which the EU could exercise without cause. These include the right to terminate the entire TCA on 12 months' notice and separate rights to terminate some or all of the following provisions of the TCA on 9 months' notice:

  • Trade
  • Road transport
  • Air transport
  • Fisheries (although termination of this part of the TCA results in automatic termination of the provisions on trade, road and air transport).

How likely is it that the EU would terminate or suspend the TCA?

Termination or suspension of the TCA in response to problems relating to trade with Northern Ireland might appear to some as a "nuclear" option, to be used only a last resort – and it may be that this is ultimately how the EU decides to use it. However, there are a number of reasons why the EU may well be seriously considering deploying this option at this juncture:

  • Northern Ireland is a major issue for the EU:  First, the EU may suspect that the UK's real objective is that, rather than placing a goods border in the Irish Sea, there should be checks at or around the land border between Northern Ireland and the Republic of Ireland (for example, the UK's lead negotiator, Lord Frost has recently endorsed a Policy Exchange report advocating precisely this solution). Such an approach has so far been a red line for both the Republic of Ireland and the EU. Meanwhile, if no agreement can be reached with the UK about changes to the Protocol, the EU faces a situation where there will effectively be a "hole" in the Single Market through which goods from the UK can enter without (as the EU would see it) the appropriate levels of safeguards at the border.  The EU is therefore likely to view the UK's approach as a threat both to the Single Market and to a key strategic interest of one its Member States – hence its willingness to consider options that some might regard as "nuclear" such as termination/suspension of the TCA.

  • Patience may be running out with the UK's approach: Second, the EU's view is that the UK agreed to the Protocol and should implement it - and patience may be running out with the UK's hardline approach. In particular, the EU would probably argue that it has recently offered the UK significant new flexibilities in this area, which provide a basis for compromise. There may also be a wider concern that the EU needs to demonstrate – not only to the UK but also to counterparties to its numerous other international agreements – that it expects commitments made in those agreements to be upheld (and if they are not, the EU will not be afraid to flex its muscles in response).

  • Termination/suspension is unlikely to be immediate: Third, as explained above, giving notice to terminate some or all of the TCA would not have an immediate impact, but it could reasonably be expected to concentrate minds on finding a negotiated solution so as to allow the notice to be withdrawn (and the TCA to continue). Indeed, the periods in question e.g. 9-12 months, ought to provide sufficient time in which to find such a solution. Although termination or suspension of the TCA would have an adverse impact on the EU, there seems little doubt that its relative impact on the UK would be as great, if not greater – and the EU would be banking on this to encourage the UK to reach an agreed solution. 

What does this mean for business?

The possibility of the TCA being terminated or suspended in say, 9-12 months' time would create another potential Brexit "cliff edge," similar to the one which existed in the run up to the expiry of the transition period on 31 December 2020. If this happens, business would face a potentially extended period of uncertainty and there would probably be a need to reactivate "no deal" contingency planning as the deadline approached – particularly if negotiations over the future of the Protocol go up to the wire, as they did with the TCA.

Other options

The EU will not necessarily limit its response to the potential termination or suspension of the TCA (either as a whole or in the areas highlighted above). For example, there has also been speculation that the EU is considering a range of other options relating to issues such as the transfer of personal data to the UK, the UK's participation in the Horizon Europe scientific research programme and the extent of border checks on UK exports to the EU (as France threatened to do in relation to the recent fishing dispute with the UK). However, as with termination or suspension of the TCA, there are pros and cons to all these potential courses of action and much will depend on how strong a message the EU wants to send to the UK at this stage.

How else could Brexit-related developments affect business in the coming months?

Other Brexit-related developments to look out for include:

  • Regulatory reform: a reasonable proportion of the UK Government's regulatory reform programme is driven by a desire to "do things differently" after Brexit. Of particular note from a general perspective are proposals to change the approach to retained EU law. For more detail, see our briefing "A blizzard of regulatory reform: did you miss anything?"

  • Freeports: with the first tax sites having recently received Government approval, implementation of freeports policy is now well underway. Our view is that for some businesses, these may present a Brexit opportunity – for more detail, see our recent webinar and related briefings on freeports.

  • Levelling up: recent Budget announcements (e.g. the allocation of £2.6 billion to the UK Shared Prosperity Fund) underlined the Government's determination to pursue its levelling up agenda. As we discuss in our briefing "Where to invest: the geographic impact of Brexit," these initiatives may present opportunities for some businesses.

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