Brexit begins: the triggering of Article 50 and what comes next

The two-year countdown to Britain’s exit from the European Union has officially begun. On March 29, 2017, UK Prime Minister Theresa May sent a letter to Donald Tusk, the President of the European Council, to inform him that the UK wishes to leave the EU under the terms of Article 50 of the Lisbon Treaty.

Over the following 24 months, the UK government and the EU will need to agree on the terms of a new trade relationship. Of course, depending on how the negotiations go, the two-year deadline may not be achievable, and the parties will have to put in place arrangements to deal with that possibility.

Now that Article 50 has been triggered, the UK economic and business landscape is likely to experience a continued period of uncertainty as the UK government and its EU counterparts conduct formal negotiations. Our perspective is that the key areas of concern for businesses operating in, and dealing with, the UK are:

  1. Negotiating single market access for UK-based businesses

    May confirmed in her speech on January 17 that the UK would leave the Single Market and probably the Customs Union. The UK’s future trading relationship with the EU will be determined through a negotiated free trade agreement and possibly through a new customs agreement.

    It is unclear at this stage what this will mean in terms of the possible emergence of tariffs or non-tariff barriers, although it is the UK’s government’s stated intention to ensure “frictionless,” tariff-free trade with the EU.

  2. A no-deal exit

    There remains a chance that the UK leaves the EU without a new arrangement in place. This could happen if negotiations concerning future trading relationships, as well as legal and regulatory frameworks, are not completed within Article 50’s two-year timeframe, and the parties can’t reach an agreement over a transitional period beyond 2019. It could also happen if one of the parties walks out of negotiations, and trade between the two reverts to WTO rules.

    Although this outcome may not seem likely, the very nature of negotiations will mean that the “best alternative to a negotiated agreement” (i.e., walking away) remains a potential outcome for the UK and a real risk for businesses.

  3. The end of freedom of movement and the status of EU nationals

    The current status of EU nationals in the UK (and vice versa) is uncertain. This should be an immediate concern for many businesses, with its potential impacts on staffing and recruitment.

    The legal status of citizens living in the other’s territories is a priority for both sides, and the UK and EU will seek to settle that as quickly as possible.

    At a broader level, the UK government has been clear that “control of immigration” is a priority for the UK. The precise shape of the UK’s future immigration policy (and how businesses/key sectors will be able to access the people they need) has yet to be determined.

  4. The shape of UK’s future regulatory environment post-Brexit

    Most of the rules and regulations currently governing the UK business environment derive from laws made in Brussels. There is now an opportunity for UK authorities to reshape the regulatory environment, which creates both opportunities and threats to UK and EU businesses.

    Although any meaningful changes to the UK’s policy and regulatory landscape can only take place after the UK’s exit in 2019, speculation on what a future regulatory regime might look like is likely to start well before then.

    The introduction of the “Great Repeal Bill” (which will translate the body of European law into domestic regulations) in the UK Parliament will prompt debate about the competing priorities of a UK future regulatory regime, including the relative merits and desirability of maintaining regulatory equivalence with the EU, or ensuring a more competitive and less intrusive regulatory regime for doing business in the UK.

  5. The prospect of political, business and market uncertainty

    There remain a great many questions and concerns about the wider effect of uncertainty for UK and EU businesses and organizations.

    For the next two years, and possibly beyond, prolonged uncertainty will undoubtedly have an impact on investment decisions, business planning, and markets. This affects both local companies and those invested in and trading with the UK.

    External political and economic developments may also play an important role. These factors include—but are not limited to—the outcome of the German federal election, the new US administration’s actions, geopolitical and global security issues, issues concerning the Irish border, the prospect of a second Scottish independence referendum, rising inflation and interest rates, and threats to financial stability.

Faced with these uncertainties, businesses should ask themselves the following questions:

    • What’s the risk to revenue, and when?
    • How resilient and agile are our operations in the face of demand fluctuations in demand?
    • What’s the risk to product cost and working capital requirements?
    • What’s the workforce risk?

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