The Internal Market Bill and Brexit: What Happens Next?

The Internal Market Bill and Brexit: What Happens Next?

Commentary
Posted on: 11th September 2020
Anton Spisak
Policy Lead, Trade and Productivity

This week, the Government has said that it intends to break its international commitments under the Brexit withdrawal agreement – the same deal that it negotiated last year – because it was done “at pace”, “contains ambiguities” and has “unforeseen consequences”. The government argues that its new legislation – the Internal Market Bill – would make changes to domestic law that would make the treaty obligations clearer.

The bill is controversial because it would give UK ministers powers to make regulations about two aspects of the Northern Ireland protocol – state aid and customs – which will put the UK in breach of the agreed commitments under the withdrawal treaty. The legislation also asks UK courts to interpret controversial parts of the protocol without following the case law of the European Court of Justice, causing further difficulty.

Whether it is a negotiating tactic or not, the bill has seriously damaged trust with the EU

The proposed legislation could amount to a negotiating tactic as the UK and the EU try to find a last-minute compromise in the trade talks. If it was a tactical choice, it has backfired. EU leaders and negotiators have watched with disbelief as the government openly stated its intention to break the treaty that it signed less than a year ago. The withdrawal treaty, for the EU, is a precondition to the future deal, not something that could be traded off other future issues.

If this wasn’t a negotiating tactic and was driven by a genuine concern about tidying up the withdrawal treaty, it is difficult to understand why the government has chosen such a radical step. If the UK government had a different interpretation of specific parts of the Northern Ireland protocol, it could have raised those problems through existing dispute resolution mechanisms under the treaty. One of the functions of the UK-EU joint committee is to discuss and resolve disagreements and, if that fails, there is an independent arbitration. Instead, the government has chosen a nuclear option – unilaterally legislating to alter how the withdrawal agreement is treated by UK ministers and courts without seeking to denounce the treaty itself.

It is, therefore, either that the government knows that the strategy is bound to fail in the House of Lords – which will no doubt flex its muscles in scrutinising this piece of legislation – or because it is completely serious about its intention to break the withdrawal treaty even at the cost of a disruptive no-deal. The former is a gamble which risks a deal with the EU; the latter threatens the UK’s credibility in the world and assumes that the government can handle the economic pain, as well as political cost, of no-deal in the middle of a deep recession.

The EU isn’t yet pulling the plug on the trade talks, but it will take legal measures later on

The EU has already made clear that this represents a breach of the withdrawal treaty. Yet, it hasn’t pulled the plug on the ongoing trade negotiations. EU officials know that if they walk away from the negotiations, they will be seen in London as having undermined the trade deal. Brussels, well aware of this risk, will likely aim to continue the trade negotiations until the mid-October deadline, by which an agreement must be done. Following the UK’s announcement this week that it will not have a robust state-aid regime in future and scrap EU state aid rules from its rulebook after the end of the transition period, the chances of a deal look slim.

The EU also knows that the bill might not pass unamended through Parliament in time for the end of the transition period. Therefore, the political cost of suspending or terminating the talks now would be far greater than pursuing concrete legal measures once the risks materialise.

What is clear, however, is that the EU will not shy away from taking legal countermeasures. If the bill passes, the EU will most likely open a formal dispute against the UK under the withdrawal treaty. The dispute will be submitted to an independent arbitration panel but, under the terms of the treaty, the ECJ will have a final say on the dispute.

Ignoring legal repercussions would lead the EU to retaliate in critically important areas to the UK, such as financial services and data

If this happens, the UK is extremely likely to lose the case. The question, in that situation, is whether the government chooses to accept the ECJ’s ruling and, if it refuses to do so, what remedies Brussels chooses to take in response.

In these circumstances, the EU will be able to retaliate by asking the UK government to pay a financial penalty, or by suspending some of the other commitments under the withdrawal treaty. It is unlikely that the EU will want to undermine the integrity of the Northern Ireland protocol by retaliating in that area; instead, it is far more likely that Brussels will hit the government whether it hurts most: for example, access of UK firms to European financial markets or a decision on data adequacy, which is critical for data exchange with the bloc of 27 states.

These would be extremely damaging consequences for a small gain – the government’s discretion to choose how it interprets narrow parts of the Northern Ireland protocol. The UK’s trust with the EU can be repaired only if the government withdraws some of the controversial clauses in the bill. Do not mistake for the EU’s cool-headedness on display this week for its intention to compromise on the fundamentals. The EU’s priorities are clear: give the UK government a chance to explain; try to secure a deal until the mid-October deal; and step up preparations for no-deal if the talks are unsuccessful.

We are yet to see whether the UK’s priorities, having taken the gamble on the Internal Market Bill, are just as clear as the EU’s, or whether the UK prime minister has chosen political brinkmanship.

Find out more
institute.global