by Ian McDougall – Executive Vice President and General Counsel of LexisNexis
In Europe, at least, Brexit is the ongoing major news story. There is hardly a week that goes by without a Brexit story. Either the European Union complains about the UK Government, or the UK Government makes some comment about post Brexit arrangements.
With regard to international relations between the UK and the European Union, we are about to enter new territory and it is complicated by the way that the EU was set up. One important aspect of the existing, and soon to be new, relationship is the issue of trade. But before we get to that, it may be worth spending a little time on the background.
The European Union
The EU is a creature of the post-World War 2 reconstruction of Europe. It was/is an attempt at unifying countries that had repeatedly fought wars against each other; each one more devastating than the one before. The idea of creating a Union, was in itself, not a new one. Politicians for many years had dreamed about the unification of European countries. Some tried to bring it about by force, and some through diplomacy. For many, a mechanism by which this might happen was trade. By aligning trading conditions, it was argued, there would be an opportunity to gradually align and integrate economies. As economies became more integrated, this would create the environment for eventual full political union (in other words, a single country). Winston Churchill, in a speech on 9 September 1946 at the University of Zürich, Switzerland, suggested the notion of a “United States of Europe” as a post war European settlement.
In pursuance of this ambition, 1952 saw the creation of the European Coal and Steel Community, which was declared to be a first step in the federation of Europe. In 1957, Belgium, France, Italy, Luxembourg, the Netherlands and West Germany signed the Treaty of Rome, which created the European Economic Community (EEC) and established a customs union. Effectively, a barrier free trade zone where laws and regulations would be aligned to enable trade to take place as if within the same country. Other structures, institutions and, indeed, countries followed.
The Treaty of Rome was modified on a number of occasions until the current EU. The European Union as we know it today with 27 countries and many more law-making powers, was formed by the Treaty of Maastricht in 1992 and then amended by the Lisbon Treaty in 2009. For the purpose of this article, many of the political implications of that Treaty are not relevant. However, the Treaties comprise two key elements that have led to the current situation.
Firstly, the European Union establishes primacy of law. European Law is superior to, and overrides, the law of the Member State where that law conflicts with EU law. For those unfamiliar with this, let me give a regional analogy: imagine the laws of the UAE being overridden and rendered invalid by judges from countries outside the UAE. An interesting thought. I once asked a person in the United States what he would think of a US law rendered invalid by Judges from Mexico, Guatamala, Costa Rica and Honduras. He found the idea incomprehensible. That seems to be the common reaction when I ask the question around the world.
Secondly, the European area is a tariff and barrier free zone for trade. Provided that the rules of the EU are followed by the member state, trade can move freely from one state to another within the Union.
The Problem of Brexit
These two elements: supremacy of Law and conduct of Trade, have led directly to the issues that are now faced as a result of “Brexit” (A portmanteau word from “Britain” and “Exit”).
Firstly, when the Treaties were drafted, it would appear that not much thought was given to the idea that a country may want to leave the EU. As a result, no detailed mechanism was established to allow such a thing to happen. Effectively it was imagined the EU is a one-way journey with a single destination.
Secondly, the idea that a Member State may eventually resent the fact that it no longer had ultimate law making power was also never considered. The subsuming of a nation State’s law making power (what many would refer to as it sovereignty) into the greater EU was considered to be a logical and necessary requirement. For a number of reasons, this view has come to be challenged more often in recent times leading to campaigns in different member states to leave the EU.
Surprising many, the UK held a referendum on continued membership. Surprising many more, the UK voted to leave the EU. The UK formally notified the EU of its decision to leave on 29 March 2017 initiating the “formal withdrawal procedure” for leaving the EU, committing the UK to leave the EU on 29 March 2019. Although I use the expression “formal withdrawal procedure” that is a description of a process that doesn’t actually exist! Article 50 of the Treaty states, inter alia:
- Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.
- A Member State which decides to withdraw shall notify the European Council of its intention…..the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union.
- The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification …….. [The clock is ticking!]
This means the process is “to be agreed” on a case by case basis. Or, to put it into legal terms, Article 50 might be considered an “agreement to agree”. Interestingly, in many courts, such a thing might be considered unenforceable if it was included in a simple commercial contract.
An interesting prospect arises as a result; namely that the withdrawal from the EU must also “take account” (whatever that means) of the framework for the leaving Member State’s future relationship with the EU (also to be agreed).
The big question, therefore, is on trade. If the laws are not the same, and if the State concerned is no longer prepared to abide by all the internal EU laws, then trade barriers are erected on the same basis as those in place for any other non-Member country.
Many argue, as a result of the change in trading relationship, that Brexit could reduce the UK’s real per-capita income in the medium and long-term. The extent, or even realisation, of this is currently unknown and leads to an increased desire to formulate an agreement with the EU to facilitate a trade agreement before the time limit in Article 50 expires.
Free Trade Zones
Having had the opportunity to live in Dubai, I see it as a good regional example to use, as a comparative analysis, of where Britain could be heading.
Free Trade Zones (FTZs) are a very interesting concept. These special economic zones are set up with the objective of offering tax concessions, customs duty benefits and other concessions to expatriate investors. There are more than 30 Free Zones operating in Dubai. FTZs in Dubai (and the wider UAE) are governed pursuant to a special framework of rules and regulations. A Free Zone Authority offers business licenses to foreign-owned businesses.
The interesting point about this is that they are trade zones where special, and different, rules apply even though they are administered by the same State that administers the non-free trade zones. In fact, the EU has a precedent for this on a different subject matter. The Union has strict Data Protection laws which prohibit the transfer of personal data to countries not offering the same level of protection.
The United States is a country designated by the EU as not having sufficient protections for personal data. To facilitate the movement of personal data (important for the conduct of trade!) the EU-US “Privacy Shield”, agreed on 2 February 2016, creates a system where US companies, operating in the US, are subjected to EU rules.
Brexit – EU Trade Zones
Perhaps the opportunity exists to use the UAE model as an example of best practice in this field?
It would seem that the precedent, and opportunity, exists for the UK and the EU to come to a trade arrangement in a very speedy and effective manner. We could imagine a situation where the UK sets up a number of commercial “EU Trade Zones” in different locations around the country; probably connected to ports in some way, where companies could choose to locate.
The zones would be subject to the trade (and other) rules of the EU, while still being located within the UK. Those areas, currently under EU law, where the member state has law-making discretion (for example taxes), would also apply in the zone. So the UK could set the tax rates for the zone as it sets its own tax rates now. The police would be UK police. The UK courts would have jurisdiction, etc. The zone would be administered in every respect by the UK government.
Whatever customs arrangements are necessary (as a result of the UK no longer being within the EU customs union, would take place at the Zone’s perimeter (I have avoided using the emotive word “border”!) much as happens now. For example, the UK us not a member of the EU passport free (“Schengen”) zone. When travelling to France on the Eurostar train from London, one must pass through French customs at Euston Station in London.
In all of the press coverage of the Brexit “negotiations” that have taken place so far, the idea of EU trade zones within the UK does not appear to have been raised. Perhaps the UAE has found a model that can be a solution in many areas of the world? Perhaps this modest article can raise that question for consideration?