If the UK pursues a Full Brexit approach:
- It would fall back to trade relationships governed by membership of the WTO and bilateral trade treaties (BITs), although it would need to accede to some of these agreements.
- Exports to the EU would be subject to the EU’s common external tariff. Imports would attract whatever tariffs the UK imposes.
- Trade between the UK and the EU would be governed by the General Agreement on Tariffs and Trade (GATT), and trade in services by the General Agreement on Trade in Services (GATS). Again, this is subject to accession.
- The UK would need to comply with EU product standards for exports to the EU.
The UK would be forced to implement a Full Brexit if, as some are predicting, the two-year negotiation period (triggered by the service of notice under Article 50) expires without: (a) a withdrawal agreement being finalised; or (b) an extension to the negotiation period being unanimously agreed by the 27 Member States.
As Philip Hammond, the then Secretary of State for Foreign and Commonwealth Affairs, stated: “This would lead to the UK leaving the EU with no immediate replacement agreed, without any protection under EU law for the rights of UK business to trade on a preferential basis with Europe or the EU’s free trade agreement partners, UK citizens to live and work in Europe, or UK travellers to move about freely in Europe.” (The Process for withdrawing from the European Union, presented to Parliament in February 2016.)
The key differences between the two models are the level and terms of access the UK would have to the single market in return for allowing the largely unrestricted operation of each of the Four Freedoms, as well as significant budgetary contributions. European leaders have been quick to assert that one cannot enjoy full membership of the single market without accepting the latter, and that the UK will be prevented from having ‘single market a la carte’.
Origins of European influence and the status of existing legislation
The UK rail market is regulated by a combination of EU and domestic laws which are given primacy over domestic legislation by the European Communities Act 1972 (ECA 1972). Two important features of EU law are Regulations and Directives, each split between ‘vertical’ legislation (applying directly to a particular sector) and ‘horizontal’ (affecting multiple sectors).
Regulations are binding on the UK from the date specified within them, and so are automatically effective without the UK being required to enact its own legislation. There are currently 12 Regulations applying directly to the rail sector.
Directives set out a goal that all EU countries must achieve, and are implemented domestically through the introduction of domestic legislation. There are currently nine rail-specific pieces of such legislation in force in the UK. There are also a large number of horizontal Regulations and Directives which affect many aspects of the industry.
On leaving the EU, domestic legislation made to implement Directives would remain in effect, but Regulations (unless Government acts to the contrary) would cease to bind the UK.
A Partial Brexit would largely preserve the existing arrangements, so it is likely that Government would act to adopt the Regulations which would otherwise cease to have effect. On a full Brexit, Government may be content to let Regulations cease to be effective and to take steps to repeal domestic legislation, but it will need to consider what is to fill the void.
Europe’s growing influence in the UK’s rail industry is most clearly seen in the regulatory framework introduced piecemeal by the four EU Railway Packages. In the UK, these packages were subject to phased implementation largely via secondary legislation, and involved:
- Opening the rail freight market; setting out the framework for the relationships between State, infrastructure manager and operators; introducing licensing conditions for freight; and a defined policy for capacity allocation and infrastructure charging (the First Railway Package).
- Establishing a framework for the legal and technical integration of the European rail network (interoperability, the Second Railway Package).
- Opening up international passenger services to competition within the EU and enshrining passenger rights (the Third Railway Package).
- Simplifying and consolidating clear rules for the funding and management of infrastructure, access to rail-related facilities and independence and competence of regulatory bodies (the re-cast of the First Railway Package).
Legislation yet to be implemented
The Fourth Railway Package is in the process of being implemented, with the objective of:
- Simplifying certification procedures across the EU (the technical pillar).
- Opening of domestic rail passenger markets in Member States and the strengthening of the independence of rail infrastructure managers to ensure effective and non-discriminatory access to infrastructure (the market pillar).
The technical pillar comprises two Directives and a Regulation which came into force on May 11 2016. The market pillar comprises two Regulations and a Directive, on which provisional agreement was reached between the European Commission (the Commission), EU Parliament and Council on April 19 2016, and which are expected to come into force later this year.
Common commercial considerations
There is uncertainty surrounding existing contractual obligations. For those with existing contracts in the UK, or with UK entities, a Brexit raises a number of issues, including:
- Foreign Currency risk - for cross-border contracts, risk for foreign currency fluctuations are often allocated. There may also be connected rights to negotiate changes or even terminate.
- Change in law - many commercial contracts will refer to European legislation and allocate responsibility for any additional costs incurred in complying with any changes to those laws. The Full Brexit could lead to the introduction of new legislation and so this could be a real consideration.
Of particular interest in the rail industry would be whether the ‘Change in Law’ provisions in franchise agreements would be invoked. Franchisees are typically required to take responsibility for: (a) non-discriminatory changes in Law (those of general impact and not specific to the rail industry); and (b) discriminatory changes in Law (those which are specific to the rail industry), which are foreseeable at the date of signature. As a result, those entering into new contracts need to consider what contractual protection regarding the impact of Brexit is required.
- Interim Review - under many track access arrangements for passenger services, the Office of Rail and Road is entitled to carry out an access charges review where it considers that there has been, or is likely to be, a ‘material change… in relevant financial markets’.
