Brexit Scenarios for South Africa
Following the United Kingdom’s (UK) vote to leave the European Union (EU) on 23 June 2016, the UK is faced with a few possible scenarios. These scenarios would then also affect South Africa.
Under Article 50 of the Treaty on the European Union the UK will formally have to notify the European Council of its intention to withdraw from the EU. Thereafter the EU will have to negotiate the terms of its withdrawal from the EU with the EU. All of the EU treaties will cease to apply to the UK from the date that the withdrawal agreement enters into force or, failing that, within two years from the date of the UK’s formal notification of its intention to withdraw from the EU unless this period is extended by unanimous consent. This implies that there are three possibilities:
- The UK and the EU fail to agree on a withdrawal agreement, which would mean that all of the EU treaties will cease to apply to the UK. The UK will thus no longer enjoy preferential access to the EU market or to any other market with which the EU had a preferential trade arrangement.
- The UK and the EU fail to agree on a withdrawal agreement, but all EU member states and the UK agree to extend the two year period for negotiating a withdrawal agreement. If such an extension is agreed, the EU treaties will continue to apply to the UK during this extension period and as such the UK will continue to enjoy preferential access to the EU market or to any other market with which the EU had a preferential trade arrangement.
- The UK and the EU agree on a withdrawal agreement. In this instance some of the scenarios outlined below will become possibilities.
The UK’s withdrawal from the EU will thus only formally begin once it has notified the European Council of its intention to withdraw. The outcome of the Brexit vote does not satisfy this requirement and hence the two year period has not yet commenced. Although a number of remaining EU members have stated that they would like to hasten the Brexit process, there is no legal mechanism under Article 50 for them to force the UK to formally start the process. Of course, the longer the process drags on, the longer legal uncertainty will prevail in respect of the UK’s trading relationship with its trading partners.
Broadly speaking the UK faces the following possibilities:
EEA and EFTA – The UK could join the European Economic Area (EEA) and the European Free Trade Association (EFTA). This will allow the UK to retain its access to the EU market. This scenario would still require the UK to adopt EU regulations and standards. Importantly EFTA does have preferential trade arrangements with other non-EU countries, however, it is not the same as the preferential trade agreements that the EU has with other countries. In South Africa’s instance, trade with the UK is currently regulated by the SA EU Trade Development and Cooperation Agreement (TDCA) which is set to be replaced by the SADC EU Economic Partnership Agreement (SADC EU EPA) once it has been ratified. South Africa, as part of the Southern African Customs Union (SACU), has a preferential trade arrangement with EFTA, the SACU-EFTA Free Trade Agreement. The SACU-EFTA Free Trade Agreement is by no means a carbon copy of either the TDCA or the SADC EU EPA and as such regulates trade differently. Businesses should explore the differences between these preferential trade agreements in developing its strategy to deal with Brexit.
Customs Union – The UK could negotiate to enter into a customs union with the EU. This would imply that within the UK and the EU there will be no internal customs duties. It would however require the UK to comply with various EU regulations. The main disadvantage is that a customs union only applies to trade in goods and thus services may not be covered and hence UK services providers may find that accessing the EU market becomes problematic. This possibility also does not allow the UK to have access to any of the EU negotiated preferential trade regimes applicable to trade between the EU and non-EU countries. This scenario could still allow South African exporters to export under our preferential trade arrangements to the UK, however the UK exporters will no longer enjoy preferential access to the South African market.
FTA – The UK could decide to negotiate free trade agreements (FTAs). This scenario could take several forms. One being that the UK could negotiate a comprehensive FTA with the EU regulating all aspects of its access to the EU market. The other possibility is to agree on a set of bilateral agreements regulating various, but not all aspects, of trade between the UK and the EU. In both these possibilities, the UK will have to negotiate its own FTAs with its non-EU trading partners. This scenario could imply that South African exporters would not enjoy preferential access to the UK market for some time. This is likely as this scenario will take considerable resources to pursue and the UK is likely to want to ensure access to the EU market whilst only focussing on lesser trading partners once negotiations have been concluded.
WTO – The UK may decide not to negotiate preferential access to the EU market. In this instance, the UK will enjoy MFN (Most Favoured Nation) access to the EU. This is the same access as all members of the WTO enjoy who do not have a preferential trade arrangement with the EU. The UK will thus face the EU’s common external tariff. Again, under this scenario, South African exporters would not enjoy preferential access to the UK market and it would be reliant on the conclusion of a preferential trade arrangement in the future. This scenario would further require the UK to repeal numerous EU regulations and international treaties between the EU and non-EU countries.
For assistance in planning your business’ Brexit strategy, kindly do contact our offices.
© Trade Law Chambers 2016