McLARTY FIRST TAKE: Brexit – Deal or No Deal?

Key Takeaways

• We are back where we were one year ago: EU and UK negotiators have reached a deal, which must now be approved by the UK Parliament, where the matter is scheduled for a rare Saturday sitting, and then by the European Parliament.
• The outcome of the Saturday vote in Parliament is very unclear: Prime Minister Boris Johnson has a minority government and cannot secure approval of the deal with only Conservative support. He sought a single “deal or no deal” vote in the House of Commons, but it now appears that amendments will be allowed.
• If the deal is rejected by Parliament, it is also uncertain whether Britain will get another extension. Commission President Juncker said today that the EU sees no need for another extension, but Council President Tusk has refused to rule out the possibility, noting that only the leaders of the EU member states can make that decision.
• For the business community, we see great uncertainty over the next few weeks: Companies need to be ready for multiple scenarios, including passage of a deal and the beginning of a transition period on October 31; Brexit with “no deal” at the end of this month; or another extension and continued uncertainty.

The Agreement

Today, EU and UK negotiators announced a deal which maintains most of the provisions of the Withdrawal Agreement negotiated by Prime Minister Theresa May, but makes significant changes in the provisions related to Northern Ireland. The major provisions of the deal are as follows:

• UK and Ireland will maintain the Common Travel Area (in force since 1923), maintaining free movement of people between Ireland, Northern Ireland, and the rest of the UK.
• Northern Ireland will remain in the UK Customs Union by law, meaning duties applied to goods brought into Northern Ireland from outside the EU will comport with UK tariff levels, rather than the EU Common External Tariff. The agreement does not “prevent the United Kingdom from including Northern Ireland in the territorial scope of any agreements it may conclude with third countries,” including any future agreement with the United States.
• In an unusual arrangement designed to preserve the free flow of duty-free goods between Ireland, the rest of the EU and Northern Ireland, functionally, Northern Ireland will apply all EU customs rules and many EU Single Market regulations across a variety of issues including intellectual property, sanitary and phytosanitary measures, autos, machinery, medicines, and agriculture (b., services are not mentioned in the agreement, despite being a major part of the UK economy).
• No customs duty will be paid on a good brought from the UK into Northern Ireland, as long as that good is proven not to be at risk of subsequently moving into the EU, even if processed/transformed in in Northern Ireland. The clear objective is to avoid transshipments from the UK into the EU via Northern Ireland.
• While we are still reviewing the details related to trade in the deal, it appears that Northern Ireland may enjoy tariff reductions included in EU trade agreements, such as with Mexico or Japan. Further, Northern Ireland may participate in trade remedy actions instigated by the EU.
• The Court of Justice of the European Union will retain jurisdiction over matters relating to movement of goods and customs, technical regulations, VAT, state aid and other issues.
• The Northern Ireland Legislative Assembly must grant democratic consent with a simple majority vote every four years during the duration of this agreement (it should be noted that the Stormont Parliament has not sat for over two years due to disagreements between unionist and nationalist parties).

What happens next?

On Saturday, Boris Johnson will put this new deal before the House of Commons for a vote. Reports indicate that the government will present a choice between this deal and leaving the EU on October 31 with “no deal.”  Johnson does not have a majority in the Commons and it is very uncertain whether the deal will pass. The Democratic Unionist Party has already made clear its opposition, as have the Liberal Democrats, the Scottish Nationalists, and the Labour Party.

If confronted with a choice between “this deal or no deal”, some MPs may move to support the government to avoid the most disruptive option. But Parliament has also repeatedly rebelled against the government on Brexit. MPs who reject the deal will undoubtedly claim that if the deal is defeated, the Benn Bill will require that Johnson must ask the EU for an extension.

Whether the EU will again grant such an extension — after the defeat of a second deal by Parliament — is very uncertain. Some EU officials, such as Commission President Jean-Claude Juncker, seem to be supporting Johnson by dismissing the need for a further extension and thus reinforcing that this is a choice between this deal and no deal. But the decision on an extension can only be made by all the EU member states, and experience shows that they only do so at the very last minute.

The prospect of a general election also hangs over the Parliamentary vote. If Johnson wins, he will go to the country in a very strong position. If he loses, he can blame Parliament for frustrating Brexit and ask voters to give him a majority. All MPs and their parties will be calculating how their votes on today’s deal might affect the Election.

In this very uncertain and politically fraught environment, there are several scenarios for the way forward:

1. The deal passes Parliament on Saturday, and Britain leaves the EU on October 31. The agreement is also subject to approval by the European Parliament, but it is expected to pass. Britain will immediately enter a transition period until at least December 2020. Although no longer a member of the EU, the UK will adhere to all EU rules while negotiating new customs and trade agreements. Even after December 2020, Northern Ireland will continue to implement many EU customs rules and Single Market regulations.
2. The deal is defeated on Saturday, and either the British government does not ask the EU for an extension, or the EU refuses to grant one, and the UK leaves the EU on October 31 without a deal. This is perhaps the most disruptive scenario.
3. The deal is defeated, but the UK government requests an extension, which the EU grants. It is expected that any new extension will go through January 2020, but it could be longer if a general election is expected.
4. The deal is defeated, and the government refuses to apply the Benn law and does not request an extension. The legality of this stance is challenged, and the Supreme Court must intervene. The case will be considered quickly, but the outcome is unpredictable and could determine whether Britain leaves on October 31 without a deal or ends up with another extension and more negotiations.

The future of Brexit remains both murky and complex.

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