Legal Intricacies Complicate May's Two-Year Brexit Transition Period

It cannot be emphasized enough that the European Union is not really a political project so much as a legal one.

Of course, the EU tries to find political solutions to its members states' common political problems. But those solutions have to comply with the EU's legal order, which is based on the EU treaties. Sometimes, the only solution is to change the treaties themselves -- but that process is complicated, and even then any changes need to be consistent with the rest of the legal order. That can sometimes make it impossible to find a political solution even when the solution may seem obvious or the consequences of failing to do so stark. Just ask David Cameron, whose failure to secure significant curbs on the free movement of EU citizens is blamed by some for Brexit.

Now Mr. Cameron's successor is making her own demands for a political solution to the problems caused by Brexit. Prime Minister Theresa May wants a transition deal -- what she calls an "implementation period" -- to enable the U.K. to continue to trade with the EU "on current terms" for around two years after the U.K. quits the EU in March 2019 while the UK's new trading relationship with the EU is agreed to and arrangements put in place. The EU also needs time to prepare for the change. Yet devising a legally watertight way for the U.K. to continue to trade with the EU "on current terms" while no longer an EU member is likely to prove fiendishly difficult -- some would argue impossible. Both British and EU officials acknowledge that they are at an early stage of grappling with the complexities.

The first challenge is that to preserve frictionless trade, the transition deal will need to find a way to replicate the UK's existing commercial relationship with the EU in its entirety. That means that the U.K. will not only need to negotiate a temporary customs union with the EU that matches the existing customs union, but also a new regulatory relationship that allows full mutual recognition of testing and enforcement processes across all sectors, says Peter Holmes, reader in economics at the University of Sussex. The moment exceptions are introduced, there will need to be border checks, whether for customs or regulatory purposes. That could be tricky because there are some sectors where the U.K. may want to exempt itself from EU rules immediately. For example, environment minister Michael Gove says he wants to take back control of U.K. fisheries to avoid remaining subject to annual EU quotas set by Brussels. Yet if fisheries are excluded, "then every lorry will face random risk-based checks to see if there is a fish in it," says Mr. Holmes.

A second issue concerns the 40 free trade agreements the EU has with third countries. These also need to be replicated in their entirety to avoid new barriers to trade. (Again any divergence from the EU's commercial policy will lead to new trade barriers.) Yet rolling over these agreements, as the U.K. says it wants to do, isn't straightforward. The problem is that once the U.K. itself becomes a third country, British goods containing substantial EU components may no longer count as British under the complicated rules of origin that govern world trade -- and vice versa.

To change these rules to enable pan-European supply chains to remain in tact will require a three-way negotiation involving the U.K., EU and each of the countries with which the EU now has an free-trade agreement. As the U.K. is already discovering after running into opposition from the U.S., New Zealand and others over a deal reached with the EU at the World Trade Organization to divide up current EU agricultural quotas, other countries will robustly defend their interests.

A third issue is that whatever the EU offers to the U.K. by way of a temporary treaty also risks creating a precedent. In the British public debate, there is an assumption that the EU wants to punish the U.K. to deter others from leaving. But the EU is equally concerned that whatever it offers the U.K. doesn't lead to demands from other non-EU countries for similar terms. The EU-Korea trade agreement contains a most-favored-nation clause that obliges each side to offer each other the same terms on access to their services markets that they offer in future trade deals to other third countries. A transition deal that allowed the U.K. full access to its financial-services market could become the basis for a demand for similar treatment from Korea.

The reality is that the only legally watertight transition deal that is guaranteed to enable trade to continue on "current terms" is an agreement to extend the Article 50 deadline. This can be done by unanimous decision of the member states. Of course, extending the UK's EU membership beyond 2019 would be politically fatal for the current government, though it's possible a majority would support it in parliament. It would also be politically toxic in the EU: There is a growing consensus that this is a bad marriage that just needs to end, says one senior EU diplomat. And extending Article 50 raises serious practical issues, including whether the U.K. would participate in EU parliamentary elections in 2019 and the next EU budget.

But those obstacles may yet prove easier to overcome than devising a way to replicate in full the EU customs union, the single market and 40 free-trade agreements from scratch in one year.

(END) Dow Jones Newswires

October 11, 2017 13:06 ET (17:06 GMT)