Worldwide: An Update On Brexit And (Current) Implications On Trade

It has been a year since Article 50 was triggered on March 29, 2017, and if no extension is given, the U.K. will leave the European Union (EU) on March 29, 2019. This means that negotiations are now at the half-way point, but we are still no closer to figuring out what Brexit means Brexit actually means. This article provides an overview of the potential post-Brexit competition landscape as envisaged by the U.K. Competition and Markets Authority (CMA) and the U.K. Competition Appeals Tribunal (CAT) and outlines some of the options open to the U.K. with regards to its trading relationship with the EU and the rest of the world.

The Prime Minister has confirmed that the U.K. will leave the single market and take the 'hard' Brexit route, with no deal being considered to be a better option than a bad deal. Even though the U.K.'s future partnership with the EU is yet to be determined, in the 2017 Autumn Budget the CMA was given an extra £2.8 million to spend each year to ensure  that the U.K. has the robust and effective competition system that it needs after Brexit. The CMA, however, disputes that this funding is specifically for Brexit, as it would need significantly more funding than this, post-Brexit, in order to manage its anticipated increase in workload for both antitrust and merger cases.

ANTITRUST

In its written evidence to Parliament, the CMA stated that post-Brexit it would require additional resources to conduct parallel antitrust investigations where the European Commission (EC) is also investigating the same or similar conduct at an EU level. The CMA recognizes that the burden on businesses involved in such investigations could be minimized if the U.K. and EU practices and procedures remain the same. However, both the CMA and the CAT proposals may lead to a divergence with regards to substantive law. Currently, U.K. competition law is based on EU law. Post-Brexit, both the CMA and CAT propose that there should only be an obligation to "have regard to EU law and precedent" (rather than the current obligation where they have to apply U.K. law in a way that is consistent with EU law). Consequently, this would give the U.K. freedom to depart from EU law where it sees fit. This, however, could lead to a company being dealt with differently, for the same behavior, across the different sides of the Channel. In practice, given the CMA and CAT appetite for continued U.K.-EU cooperation, it is unlikely that there would be a significant substantive divergence in the law, but this proposal could help appease the so-called Brexiteers that are concerned with being bound by the jurisprudence of the European courts.

MERGERS

Since the U.K. merger regime is voluntary, it is likely that, post-Brexit, companies will only notify a merger to the U.K. if there could be potential competition concerns in the U.K. Assuming that the U.K. merger control rules do not change, the CMA estimates that it would need additional resources to manage approximately 30 to 50 additional phase 1 mergers each year. The CMA notes that many large companies already have to file mergers in several jurisdictions, so it does not envisage that an additional filing in the U.K.  will be cumbersome. Because the various merger filings would all have to be coordinated (both by the companies merging and the authorities), the CMA would need to have a framework for cooperation with the EU and also with non-EU countries, as the U.K. will likely no longer be able to rely on the EU's existing cooperation agreements.

STATE AID AND TRADE

The CMA has not commented on the future of State aid, because it considers this a matter for the government. The four potential options for the U.K. are:

  • Brexit with a negotiated free trade agreement where the U.K. is a member of the European Economic Area (EEA): In this scenario the U.K., like Norway, would participate in the single market as a member of EEA, which replicates EU State aid and trade rules. Therefore, this would maintain the status quo.
  • The U.K. joins the European Free Trade Association (EFTA), but not the EEA: This would be modelled on the relationship that Switzerland has with the EU. In Switzerland, there is no State aid control except in relation to the air transport sector, which means that there would have to be a negotiation on which industries should be captured under these rules. Since the U.K. has historically not been in favor of providing public funding to companies, it is not clear where the lines will be drawn.
  • There is 'no deal:' In a 'no deal' scenario, the U.K. would be bound by the World Trade Organization (WTO) rules, which would generally permit financial contributions to companies. This would involve a more 'hands-off approach' compared to EU rules, because the WTO rules are reactive in nature; this means that the rules are only triggered if a member country lodges a complaint. While the WTO rules provide more freedom for State intervention, the U.K. has in the past spent few resources supporting businesses compared to other EU countries. For example, in 2015, the U.K. spent 0.35% of GDP on State aid schemes (excluding railways), while France spent 0.62% and Germany spent 1.22%.1
  • 'Canada-Plus Plus Plus' deal: This would involve a Free Trade Agreement (FTA) modeled on the one agreed between the EU and Canada but with additional provisions such as the free movement of services. The European Council guidelines for the Brexit negotiations make it clear that the U.K. would still need to establish common ground with the EU in relation to State aid. Therefore it is likely that the U.K. would still be bound by rules controlling the granting of State support for 'Canada- Plus Plus Plus' and the other options outlined above.

When it comes to trade, the U.K.'s concept for a 'Canada-plus plus plus' deal is still evolving. But while a U.K.-EU FTA will govern arrangements between the U.K. and EU Member States, it will not give the U.K. access to any of over 30 trading arrangements that have been negotiated between the EU and third-party states. These will have to be separately negotiated once the U.K. is no longer a member of the EU.

If no deal is reached, the U.K. will revert to the default position under the WTO rules, which set out the basic international framework for the U.K. to trade with over 160 WTO members. One key difference with EU law is that the WTO does not police regulatory divergence (with the exception of intellectual property law) as it does not seek to create  harmonized national regulations to achieve market integration. Rather, the WTO rules prevent discrimination against imported products. This means that, if there is no FTA withthe EU, the EU will have to treat the U.K. the same way it treats other WTO members that also do not have FTAs with the EU. Consequently, even in a no deal scenario, EU tariffs will apply to the U.K. on a most favored nation basis after Brexit and vice versa.

Essentially, while the U.K. will have a degree of freedom to develop its competition policy after Brexit, competition and trade are two areas where it will not be able to  meaningfully take back control from the EU.

Read the 2018 Antitrust Annual Report.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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