139.The Government states it is seeking “the freest and most frictionless trade possible in goods and services between the UK and the EU”. The White Paper states that this will not be through membership of the Single Market, but through “a new strategic partnership with the EU, including an ambitious and comprehensive Free Trade Agreement and a new customs agreement.” The White Paper adds that:
we do not seek to adopt a model already enjoyed by other countries. The UK already has zero tariffs on goods and a common regulatory framework within the EU Single Market. This position is unprecedented in previous trade negotiations.
140.The Single Market has been described as the closest thing to a pure free trade agreement. However, the Single Market is underpinned by the “four freedoms” that EU members must abide by—the freedom of movement for goods; services; capital; and people. As a member of the Single Market the UK is part of a free trade area that:
141.Other key obligations are:
142.Although the EU Single Market is not a legal term, the customs union and single market are constituent parts of the “internal market”, which is defined in Article 26 TFEU as “an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties”. Sir Ivan Rogers told us:
Essentially, what is a single market or an internal market? It is a group of nations that agree to be bound by a single regulatory rulebook or code, which requires all its members to adhere to all four freedoms as defined in the treaties. None of these freedoms are full freedoms; all of them are qualified by all manner of qualifications in secondary legislation, and even inside the treaties.
For others, correctly—and I think the Prime Minister is correctly concluding that herself—single market membership means acceptance of supranational law and the role of the Commission. It means acceptance of supranational jurisdiction and the role of the ECJ. It means the Commission’s right of initiative and its right to infract Member States when they think they are out of line and not implementing the single market acquis properly.
143.Any non-EEA country can gain access (as opposed to membership) to the EU Single Market (i.e. trade with EU countries), but the terms of that access vary greatly depending on the extent of access negotiated:
144.The Government has been clear that it is not seeking to adopt an existing model. It has also chosen to set out certain “red lines” which the Prime Minister told the Conservative Party Conference in October 2016 were what “the people told us” they wanted with the referendum result: “Our laws made not in Brussels but in Westminster. Our judges sitting not in Luxembourg but in courts across the land. The authority of EU law in this country ended forever.” She wanted “free trade, in goods and services”, giving “British companies the maximum freedom to trade with and operate within the Single Market–and let European businesses do the same here”. While ensuring that the UK becomes “a sovereign and independent country”, she added that “we are not leaving the European Union only to give up control of immigration all over again. And we are not leaving only to return to the jurisdiction of the European Court of Justice.”
145.Subsequently, the Prime Minister also confirmed that “the days of Britain making vast contributions to the European Union every year will end.” In light of these conditions, the Prime Minister also stated at Lancaster House that what the Government is proposing “cannot mean membership of the Single Market”.
146.The Secretary of State has indicated that the Government is seeking access to the Single Market which will “deliver the exact same benefits as we have,” at the same time as adhering to its “red lines”. When asked about the feasibility of such an outcome, the Secretary of State told us that he had been “expressing an ambition.” However, the White Paper contends that this will be done through a “new comprehensive, bold and ambitious free trade agreement” which may “take in elements of current Single Market arrangements in certain areas as it makes no sense to start again from scratch”.
147.Sir Ivan Rogers suggested that this would be difficult for the EU27 to accept:
For them, they say: “That is fine. You have now accepted that you are not in the single market, and a good thing too”. Then the argument will become, “But you still may want to have large elements of your cake and eat it, by saying, ‘Effectively, our access to the market in loads of areas that matter enormously to us should be unchanged regardless of us no longer accepting supranational jurisdiction and law’”. I am sure you heard it; there is quite a large divergence between Berlin views, Brussels views and what you get here. People did say to me repeatedly, over months and years, “That is not on offer”.
148.In his December 2016 press conference, Michel Barnier emphasised that:
being a Member of the European Union comes with rights and benefits. Third countries can never have the same rights and benefits, since they are not subject to the same obligations [ … ] the Single Market and its four freedoms [free movement of goods, services, capital and people] are indivisible. Cherry picking is not an option.
149.Sir Ivan Rogers explained how access to the Single Market differed from membership. He gave three examples of how an FTA would not provide equivalent outcomes to current membership of the Single Market:
For example, on aeroplanes, access to the Single Market means planes can land at EU airports and return from them. Membership of the Single Market means you get slot, gate and lounge allocation on the same terms as local airlines—that is, not 3.00 am slots a mile away from the terminal, and the airlines can fly within the EU, not just to and from the EU.
Access means that your banks can only lend via a local subsidiary. Membership means there is no need for your banks to be separately supervised, regulated, managed and capitalised subsidiaries in other countries. One can operate through branches, and home state rules and supervision suffice. Access means that Scotch can be sold into France or Germany; membership of the Single Market means that all taxes and duties for comparable products to Scotch must be the same as for Scotch, and if they are not, we can take them to the ECJ and say, “Why are they not?” We will not be able to take them to the ECJ.
150.UK goods and services that comply with EU standards before Brexit will still be compliant on the day the UK leaves the EU. However, as Sir Ivan Rogers explained, the UK would on day one after Brexit become a third country and, as a third country, would operate in a different legal position, unless a separate agreement has been reached:
We are saying—[ … ] “Come on guys. You know the day before you used to take our accreditation and inspection regimes. They were perfectly fine the day before; why the hell are they not the day after? Do not be ridiculous”. The EU is perfectly capable of saying, “It is not a matter of being ridiculous; it is a matter of the law. In the absence of any law, given that you have now left the Union and left the single market, there is nothing. You have not signed any other agreement with us, and unless there is a legal agreement between the two of us, we no longer recognise your accreditation, conformity assessment bodies, abattoirs or slaughterhouses. We do not recognise any of it”.
Of course in this situation EU exporters would face a similar situation in trading into Britain.
151.Professor Jim Rollo, UK Trade Policy Observatory, University of Sussex, told us that the UK would need to introduce some form of conformity assessment to continue to sell its products to the EU:
It seems to me that the first thing that goes, with all the EU standards that are applied here through direct effect of EU law, is that we no longer get that recognition that what we produce is automatically and by law consistent with the EU standard. There are currently no administrative barriers based on standards that apply to UK exports to the EU, or on EU exports to us. That would, in principle, change on day one of Brexit if there is no other deal done.
Since Sir Ivan gave evidence on 22nd February 2017, the WTO Trade Facilitation Agreement has come into force. This requires ratifying countries–including the EU–to take all practical measures to facilitate trade and reduce administrative obstacles.
152.Becoming a third country without any agreement, Professor Rollo added, is like moving into “a legal void” where you would not be “on the list” of countries permitted and approved to export to the EU market.
153.In our First Report, we stated that it would be in the best interests of both the UK and the EU27 to negotiate the UK’s future relationship with the EU in parallel with the Article 50 negotiation. The Government responded that it expects the future relationship to include an FTA and it “wants to have reached an agreement about a future partnership by the time the two-year Article 50 process has concluded.” Some have argued that the two-year period for concluding Article 50 negotiations is an ambitious timetable for agreeing a trade deal. However, as the White Paper points out, the UK is in a unique position:
The UK already has zero tariffs on goods and a common regulatory framework with the EU Single Market. This position is unprecedented in previous trade negotiations. Unlike other trade negotiations, this is not about bringing two divergent systems together. It is about finding the best way for the benefit of the common systems and frameworks, that currently enable UK and EU businesses to trade with and operate in each others’ markets, to continue when we leave the EU through a new comprehensive, bold and ambitious free trade agreement.
154.The Secretary of State explained how the trade deal negotiations would be expedited:
when two countries come together to arrange a trading arrangement between themselves, the first stage is to be able to understand each other’s structures and standards, so that takes time too. None of that do we have to do. Neither do we need an entry-into-force period, which is the other issue that takes time in these things. It is not just the sign-off; it is the actual period of industry coming to meet the new standards.
155.He added that other Member States wanted a “constructive outcome” to maintain the strong trading links already in existence with the UK. By comparison, the CETA deal with Canada had required detailed sector by sector analysis which would not be necessary in this negotiation.
156.As a member of the Single Market, the UK trades with the EU on a tariff-free basis. The White Paper outlines the Government’s ambition that the UK’s new partnership with the EU should allow for “tariff-free trade in goods that is as frictionless as possible”.
157.The Committee met representatives from a number of businesses on its visits across the UK that operated with international supply chains. Concerns were expressed that those supply chains could be subject to multiple tariffs and administrative delays. However, John Longworth told us that these concerns were inflated and that “there is a huge amount of supply chain activity in Asia for UK manufacturing and service sector businesses”.The White Paper emphasises the integration of supply chains as important for both UK and EU businesses, inferring that this mutual dependence will aid agreement for tariff-free trade. The White Paper gives the example that “the wings for the Airbus A350 XWB are produced in the UK. The wings are made from many parts, drawing from expertise and excellence across the UK and EU. Although the wings are assembled in North Wales, they are designed and produced through cooperation between specialist teams in Germany, Spain, France and Filton, near Bristol.”
158.Given the political will, reaching an agreement on tariff-free trade should be straightforward. However, “frictions” the Government is seeking to minimise may come from non-tariff barriers. The UK Trade Policy Observatory highlighted examples of non-tariff barriers in written evidence to us:
The need for Rules of Origin (ROOs), and possibly tests to demonstrate compliance with EU norms. Each of these barriers could be as costly as the tariffs that are abolished. An FTA arrangement would also allow the introduction of anti-dumping, countervailing duties and safeguard actions (collectively known as Trade Defence Instruments (TDI)) into UK–EU trade. It follows from this that, despite their name, FTA variants are likely to result in higher barriers and lower trade than currently govern UK–EU trade.
159.The White Paper explains how non-tariff barriers are dealt with within the EU:
Free movement of goods within the EU is secured through a number of mechanisms, including through the principle of mutual recognition (which means that goods lawfully marketed in one Member State can be sold in all Member States), the harmonisation of product rules (where the same rules apply for a range of goods, such as for fertilisers, in all Member States) and agreement that manufacturers can use voluntary standards as a way of demonstrating compliance with certain essential characteristics set out in EU law (such as for toy safety). In a number of sectors covering typically higher risk goods (such as chemicals or medicines), the EU has also agreed more in-depth harmonised regulatory regimes, including for testing or licensing.
160.After over 40 years as a member of the EU, the UK will enter into negotiations with identical product and regulatory standards and, on the day the UK leaves the EU, these standards will have been incorporated into domestic law through the “Great Repeal Bill”. Roderick Abbott, former Deputy Director-General, The World Trade Organisation and European Commission Directorate-General for Trade, told us that the negotiations would not be over the question of common standards:
The EU will approach this as, ‘We have got our standards; we have got our Single Market regulations. If you want to discuss whether you adopt those and have a continuity and so forth, that is up to you. On our side, we are not putting forward a negotiation about our standards’.
[ … ] The key is [ … ] how can you get a close association to the single market in terms of some deal where the EU accepts that you are able to pragmatically comply with Single Market regulations as you have in the last 30 or 40 years?
161.Others have noted that following the UK’s exit, unless the UK actively decides to maintain compliance with EU standards, divergence will be inevitable. Sir Ivan Rogers explained to the Committee the perspective of his former EU counterparts.
[What my EU colleagues] said to me was: “The problem is not day one. It is day two, or day 200, or day 2,000. What have you recaptured your sovereignty and autonomy for, if you are now saying that you will line up via the “Great Repeal Bill” [ … ] to repeat exactly what you had when you were in the European Union?”
[ … ] If you were a foreign counterpart to me, you are saying, “Hang on, you are likely over time to diverge really quite substantially from the acquis, because otherwise you would not have done this, and you must think that you can reap material advantage from divergence from the acquis. However, then you are asking us to sign up to a deal where everything is enshrined in UK law, but you are no longer subject to supranational jurisdiction. We need a governance process to know how far you are going to diverge, and on what, and then what happens when you do diverge”.
162.Other trade agreements involving harmonisation of standards also have to incorporate resolution mechanisms to deal with possible divergence (after they have achieved the far more difficult task of converging standards). So there should be precedents to build on.
163.Given the UK’s strength in trade in services, which account for 42 per cent of the UK’s exports to the EU, negotiating a good deal in this area will be a priority. The UK has a surplus on trade in services with both EU and non-EU countries. Although the possible impact of Brexit on the financial services industry has dominated media commentary, the UK’s total exports of non-financial services to the EU, including professional services, digital, media, transport and education, stands at £62.9 billion, and is much higher than financial services exports at £26 billion.
164.Free trade in services within the EU is enabled through a complex regulatory framework. However, as the White Paper points out, the EU Single Market for services is “not complete”, as the regulation of services remains a shared competence between the EU and its Member States. At present, UK service providers benefit from certain horizontal and sector-specific EU legislation for:
165.The White Paper states that the Government will aim for “the freest possible trade in services” between the UK and the EU. To reach an agreement including services liberalisation across borders would, according to Sir Ivan Rogers, be “the biggest free trade agreement ever struck”. Dr Federico Ortino, The Dickson Poon School of Law, King’s College London, told the Committee that for services:
outside the Single Market we have not been able to liberalise trade in services, particularly when it comes to, where it is relevant, non-tariff barriers. Look at even the most ambitious FTAs, such as Canada. What that gives in terms of the commitment in financial services in CETA is very marginal [ … ] Overall, it is not much different from what you get from the GATS schedule of WTO members.
166.Sir Ivan Rogers stressed the importance of ensuring the UK–EU FTA covered services:
The slight danger for us is that, given the goods surplus for them is so great and the services surplus is so great, they would pocket the goods agreement and say, “Good; we have tariff-free access; we do not really need to bother about your services”. I would not buy that pig in a poke; I would want a full and comprehensive FTA that covered goods and services.
167.The importance of mutual recognition of standards and professional qualifications, and non-discrimination, has been highlighted by a number of witnesses. Gareth Horsfall, a British citizen resident in Italy told us:
I work in financial services. I use the EU passport of qualifications, as do legal professionals and accounting professionals, into another EU state. If that were taken away from me, the reality is that I may have to sit examinations—in my case, in Italian—and there would be an additional cost to me of that. My understanding of the Italian language is very good, but to actually sit examinations, it would have to be at a very advanced level. There would be a massive cost to me as a business, and it might even put me out of business for a period. Mutual recognition of qualifications is of paramount importance.
168.The International Trade Committee has recommended that a UK–EU FTA should seek as far as possible to reproduce the right of establishment and mutual recognition of professional qualifications from which the UK currently benefits as a member of the EU.
170.The Government should seek a UK–EU Free Trade Agreement (FTA) which covers both goods and services and retains the mutual recognition of standards and conformity assessments. The Government should also seek to maintain the right of establishment and mutual recognition of qualifications in a UK–EU FTA. The Government should maintain the maximum possible flexibility in its negotiating approach to achieve these outcomes.
171.Notwithstanding the Government’s plans to enshrine EU law into domestic law through the “Great Repeal Bill”, over time the two bodies of law may diverge as the Government seeks to change or repeal regulations. The Government should provide clarity on how it will address divergence in rules and standards and disputes that may arise as a result, outside of the jurisdiction of the CJEU.
172.A key concern for the financial sector is the potential loss of “passporting” rights when leaving the EU. Passporting currently gives UK firms the ability to sell financial services across the EU and EU firms to sell financial services in the UK without establishing a subsidiary. According to the White Paper, both UK and EU firms benefit from the UK’s passporting rights, with “over 5,000 UK firms that utilise passports to provide services across the rest of the EU, but around 8,000 European firms that use passports to provide services into the UK”.
173.The Mayor of London has said that the loss of passporting rights would be “a disaster”. He said: “I’ll be pushing the Treasury to make sure passporting is top of their priority list”. He told us that some financial institutions have already decided to move staff outside the UK, while also pointing out that London has “underlying strengths” as a city, in particular in its talent and infrastructure which London will still have once the UK leaves the EU.
174.Recognition of regulatory equivalence would provide UK financial services providers in some sectors with opportunities to run operations in the EU. In a letter to the Treasury Committee, Andrew Bailey, Chief Executive of the Financial Conduct Authority (FCA) said that, for financial services, “in the absence of passporting rights, UK firms would need either to seek access under “equivalence” frameworks where possible, to use “third country” passports where available under specific pieces of legislation, or alternatively to seek authorisation from each regulator of the jurisdiction into which they aim to do business.” The FCA subsequently wrote:
we do not have a measure of the value of financial services that may be impacted in the event that passporting arrangements were no longer applicable to UK financial firms after the UK’s withdrawal from the EU. However, [ … ] I reiterate that global standards and trade agreements do not, at least currently, provide for the recognition of authorisations in the way that the single market directives do.
175.Sir Ivan Rogers highlighted the limitations of recognition of regulatory equivalence, including that recognition could be “politicised” and withdrawn at short notice and only covered certain sectors. These limitations represented:
a very serious problem, unless we get a bespoke financial services deal with equivalence that really works for us. [ … ] but this would be something the EU27 have not done for any other partner. It did not do that for the States, and it has not been prepared to do it for any other partner.
We would have to say, on financial services, “We are big, and you need access to us. There is a massive interest to you in still having London as a kind of centre in our time zone, but we need a totally different type of agreement with you from any that has previously been negotiated”.
176.The White Paper states that it is in the interests of the UK and the EU that the UK financial services sector should continue “in order to avoid market fragmentation and the possible disruption or withdrawal of services”, while adding that:
The fundamental strengths that underpin the UK financial services sector, such as our legal system, language and our world-class infrastructure will help to ensure that the UK remains a pre-eminent global financial centre.
177.London is a pre-eminent global financial centre and the financial services industry supports a large number of jobs in London and even more across the rest of the UK. It is in both the UK’s and the EU’s interests to ensure there is minimal disruption to financial services when the UK leaves the EU. As part of negotiations on a UK–EU FTA, the Government should seek to secure stable and predictable equivalence arrangements or a bespoke system comparable to the EU system of “passporting” which will ensure the stability of cross-border financial services between the UK and the EU.
178.Financial and professional services will require time to adjust to any new trading arrangements. The Government should seek to agree a phased process of implementation for the sector early in the negotiations to provide certainty for businesses in preparing for Brexit.
179.The White Paper states that the Government is “committed to making the UK the best place in the world to do business” by looking to establish a stable and predictable regulatory environment, while also looking to reduce the cost of unnecessary regulation to support innovation. One aspect of this business environment is the importance of data transfer to many trade sectors. The White Paper states:
The stability of data transfer is important for many sectors–from financial services, to tech, to energy companies. EU rules support data flows amongst Member States. For example, the EU data protection framework outlines the rights of EU citizens, as well as the obligations to which companies must adhere when processing and transferring this data. [ … ]
As we leave the EU, we will seek to maintain the stability of data transfer between EU Member States and the UK.
180.When the Committee held a roundtable with representatives of the digital and tech sector in London in January 2017, a common priority was the need to ensure that there are uninterrupted data flows between the UK and the EU once we leave, and that there is legal certainty that that would be the case on the day the UK left the EU. According to the trade association for the digital sector, techUK’s report on The UK Digital Sectors after Brexit:
Failure to secure adequacy may force the “localisation” or redirection of data flows on EU citizens (that requires storage and/or processing outside the UK), risking fragmented communications links and data flows between the UK and European partners. In addition, many UK businesses will need to implement costly alternative legal mechanisms, many of which are subject to ongoing legal challenge and uncertainty. Continued uncertainty over EU–UK data flows could also see companies restrict the amount and type of data processed in the UK. Such an outcome could impact data infrastructure and in particular data centres in the UK, which are among the region’s and the world’s most active.
181.The Secretary of State highlighted the challenge made by Austrian Max Schrems against Facebook on data protection and safe harbour status as the kind of challenge the UK could be subject to once we leave the EU. He told us that:
One of the strategies I am arguing inside Government is that we make ourselves extrarobust in that respect. That has security implications, commercial implications for other industries because data is so important there and of course enormously important implications for the digital industry and the tech industry itself.
182.The digital industry is an increasingly important sector to the UK economy and relies on the stability of data flows across UK and EU borders. The Government must seek to maintain uninterrupted UK–EU data flows by securing a data adequacy agreement with the EU before the end of the Article 50 negotiations.
183.The White Paper states the following in relation to the broadcasting sector:
Content that is carried over electronic communication networks is regulated in the EU by the Audiovisual Media Services Directive. This underpins the operation of the internal market for broadcasting by ensuring the freedom to provide broadcasting services throughout the EU. The UK is currently the EU’s biggest broadcasting hub, hosting a large number of international broadcasting companies. In the course of the negotiations, we will focus on ensuring the ability to trade as freely as possible with the EU and supporting the continued growth of the UK’s broadcasting sector.
More than 650 different TV channels use the UK to broadcast to countries across the EU, more than double the number based in its nearest rival France.
184.The Audio Visual Media Services Directive (AVMSD) governs market access in the EU. The AVMSD employs a ‘country-of-origin’ approach, meaning that firms which satisfy regulatory requirements in the EU Member State in which their services originate can operate throughout the EU without having to apply for additional licences, so UK channels granted an Ofcom licence can broadcast freely across the Single Market. Adam Minns, the Executive Director of the Commercial Broadcasters Association (COBA) is reported as saying “The UK’s status as Europe’s leading international broadcast centre is at risk. [ … ] It’s black and white. Either those licences are valid or they aren’t.” We heard similar concerns at a roundtable discussion with the creative industries on our visit in London. The recent House of Lords report on Brexit: trade in non-financial services, also addressed concerns in the industry.
185.One option would be for broadcasters based in the UK to apply for a licence in an EU Member State, which would require the broadcaster to have a “significant part” of their workforce (compared to the UK) and editorial decisions in the EU. Another would be for the UK to seek to include provisions on broadcasting in a UK–EU FTA. The recent EU-Canada FTA (CETA) excluded broadcasting. The EU-South Korea FTA granted some access for animé. There is no precedent for a third country securing Single Market-equivalent access for broadcasters. When asked about the AVSM, the Secretary of State told us that “equivalence mechanisms are going to be of incredible importance, particularly in service industry areas, whether it is film, video, any of the creative arts.” He also said he had “explicit work going on” in relation to broadcasting and would write to the Committee with further detail.
186.The broadcasting industry, like many aspects of the UK creative industries, is a success story. International broadcasters base themselves in the UK to broadcast across the EU and the Audio Visual Media Services Directive enables broadcasters in one Member State to do so if they have a licence from the domestic regulator—Ofcom in the UK—and comply with the regulatory requirements in that Member State. This has helped the UK to become Europe’s leading broadcasting hub. In the event of an exit without alternative arrangements in place, international broadcasters could fall back on the Council of Europe’s Convention on Transfrontier Television (CTT). However, it is an inadequate replacement: on-demand broadcasting is not covered, six Member States are not signatories, and it cannot be effectively enforced. International broadcasters could seek to access the EU market through subsidiaries, but this would require them to relocate a significant proportion of their workforce to the EU and for most of their editorial decisions to be made there. Neither of these options are attractive to the sector. The Government must therefore ensure that a future FTA between the UK and the EU retains the ability of broadcasters based in the UK to continue to operate across the Single Market to the same extent once the UK is no longer a Member State. Securing continued access to this market is a priority.
187.A customs union is an extension to a conventional free trade agreement. In addition to reducing or removing internal tariffs on goods, members of a customs union apply a common external tariff. The EU customs union has a Common Commercial Policy and Common External Tariff. Customs unions are recognised by the WTO as a form of regional trade agreement. As such, they need to meet certain conditions set out in Article XXIV of the General Agreement on Tariffs and Trade (GATT) and Article V of the General Agreement on Trade in Services (GATS). These stipulate that customs unions or free trade agreements must liberalise “substantially all the trade” in goods or have “substantial sectoral coverage” for trade in services.
188.The Government has stated that one of its key negotiating objectives is for the UK to be able to negotiate its own trade agreements without being bound by the Common Commercial Policy and the Common External Tariff, effectively ruling out the customs union option. In her Lancaster House speech, the Prime Minister said that she wanted cross-border trade to be “as frictionless as possible”, suggesting this could be done through a customs agreement with the EU:
Whether that means we must reach a completely new customs agreement, become an associate member of the Customs Union in some way, or remain a signatory to some elements of it, I hold no preconceived position. I have an open mind on how we do it. It is not the means that matter, but the ends.
189.What is meant by a “customs agreement” is not clear. Roderick Abbott suggested that the term had been “deliberately chosen to be vague”. He told us that it could be anything that has a customs duty component of any kind. Witnesses to the Committee expressed the view that it would not be possible practically to run a free trade agreement and a partial customs union in parallel. Professor Jim Rollo told us that:
This will run into problems at the WTO, if nowhere else, because it will get on the wrong side of rules about free trade areas or customs unions meeting substantially all trade rules. That rule itself is deeply ambiguous as to what is the criterion for that, but if we put that to side for one moment, people could argue if it was quite small, with one or two sectors covered by the customs union, that probably would not be substantially all trade. If there were still not quite enough sectors left in the free trade area, that might not qualify to be substantially all trade either, so there is an issue there.
190.The advantage of a customs union is not having to prove origin of goods. In a trade agreement between two or more countries, participants agree to the Rules of Origin principle. This requires them to be able to demonstrate that traded goods benefitting from the trade agreement originated in their country. This is designed to prevent trade deflection, whereby a third country chooses to export to that free trade area through the country with the lower external tariff. Were the UK to agree an FTA with the EU without a customs union, then rules of origin would apply and a customs border would consequently exist between the UK and the EU.
191.We heard from John Longworth that companies which export around the world, have to comply with different regulations. He told us that “standards and regulations were becoming global, not simply concerning individual nations or blocs of nations”. He explained:
In relation to the customs union, curiously [ … ] all the export and origin documentation issued in the UK is issued by chambers of commerce. There is a 1922 treaty whereby goods can be transported globally without containers having to be broken open and the goods examined. They carry a chambers of commerce certificate, which enables the free movement of goods, in customs terms, around the world. That is already in place.
192.The Secretary of State confirmed that we will “almost certainly have to have rules of origin arrangements and there will be some sort of inspection arrangement to go with that”. He suggested that the “frictions” of rules of origin could be reduced with a system of trusted traders and electronic arrangements, an aspiration also expressed in the White Paper:
As we look to build our future customs relationship with the EU and the rest of the world, we start from a strong position. As a large trading nation, we possess a world-class customs system which handles imports and exports from all over the world. We already have highly efficient processes for freight arriving from the rest of the world–the vast majority of customs declarations in the UK are submitted electronically and are cleared rapidly. Only a small proportion cannot go through so rapidly, for instance where risk assessment indicates that compliance and enforcement checks are required at the border. The World Bank’s Logistics Performance Index shows that HMRC operates one of the world’s most efficient customs regimes.
193.In response to the House of Lords’ EU Committee report on Brexit: the options for trade, the Government suggested that the customs arrangements between the US, Canada and Mexico and between Norway, Sweden and Finland provide examples for how high volumes of trade flow across borders without the need for a formal customs union. The Government confirmed that it is examining examples from across the world, while the Department for Exiting the EU, in conjunction with the Department for International Trade, HM Revenue and Customs, HM Treasury, the Department for Business, Energy and Industrial Strategy, and other departments, have been undertaking a wide range of studies on different aspects of the UK’s trading relationship. However, the UK’s efforts to facilitate “frictionless” trade with the EU through customs systems can only be as effective as the corresponding efficiency of the customs systems in EU Member States and the treatment UK exporters might expect at EU borders.
194.Sectoral customs arrangements are a means to eliminate rules of origin, whereby countries co-ordinate their external trade policy. In a customs union, this is done through the external tariff. Sectoral customs arrangements require that any agreements those countries enter into with third countries would have to have the same coordination, as is the arrangement between the EU and Turkey. We heard from Dr Federico Ortino that:
If the agreement between the EU and the UK is to coordinate in terms of cars and car parts on what the tariff will be coming in, it will restrain the ability of both the UK and the EU in their third country arrangements. The UK has a clean slate and it can do that. The EU already has treaties [ … ] In any event, even if both countries started with a clean slate, that cooperation agreement would have to be respected in the relationship with third countries. That is not practical.
195.When the car manufacturer Nissan UK announced that it would continue to invest in the UK following the referendum result, by building two new models at its Sunderland plant, some speculated that it had received assurances from Government that there would be some sort of sectoral arrangement specifically for the automotive industry. In evidence to the Committee on International Trade, the Senior Vice President of Nissan, Colin Lawther, said that what would benefit Nissan and the industry was not grant money but “free import duty for parts coming from the customs union, for example, in and out” or “an automotive-specific trade deal”. To date, the Government has not released full details of the assurances given to Nissan UK.
196.The nature of complex EU supply chains means that even if sectoral customs arrangements were envisaged, these would need to include not just the finished product (e.g. cars) but all the components that go into that product. Since such components would typically be used in several industries (i.e. not just in the automotive industry), sectoral customs agreements, even if legal, would run into practical difficulties in determining where a sector began and ended. As the International Trade Committee noted:
It is unclear, though, whether this would be legal under WTO rules. In addition, it is hard to see how it could be reconciled with the Government’s policy of pursuing an independent UK trade policy. The adoption of a CET [Common External Tariff], albeit only a sectoral one, of necessity limits the UK’s negotiating position as regards third-country FTAs, since these would have to be aligned with the EU’s FTAs in respect of automotive trade.
197.Sir Ivan Rogers told us that the EU was likely to shy away from individual sectoral deals for fear of breaking the solidarity of the EU27. He added:
Could you have an automotive carve out and say these arrangements do not pertain or do pertain. I do not think that is very likely. Can I envisage some sort of customs co-operation agreement formally as part of an FTA? Yes, I am sure there could. I do not think any customs co-operation agreement when you are outside the customs union can exactly replicate the benefits of the customs union.
198.In seeking to negotiate its own preferential trade agreements with non-EU countries, the Government has said that it will not continue to observe the Common Commercial Policy (CCP) and Common External Tariff (CET) of the EU customs union. However, it will seek to negotiate a new customs arrangement with the EU to minimise the “frictions” in cross-border trade between the UK and the EU27. The Government has been vague as to the characteristics of such a customs arrangement. The Government must provide more clarity as to the features of its preferred customs arrangement with the EU and how it will differ from a customs union.
200.The WTO’s 164 members are all bound to observe the “most favoured nation” (MFN) principle. This means that they must offer each other the same trading terms as those they have granted to their most favoured trading partner.
201.Deviation from this principle is only permitted where an FTA or customs union has been negotiated with one or more trading partners, or where unilateral or non-reciprocal trade preferences are granted by a developed country to developing countries in order to support the latter’s development. WTO members must also make specific commitments, listed in schedules, which reflect specific tariff concessions and other commitments offered in the context of trade negotiations. The White Paper states:
Our WTO membership will form the bedrock on which we build our future trade relationships [ … ]
As part of leaving the EU, the UK will need to establish our own schedules covering trade in goods and services at the WTO, providing clarity for UK businesses about their access to overseas markets around the world and also providing a clear basis for negotiating new trade agreements, not just with the EU, but with old friends and allies from outside Europe too [ … ]
Our aim is to establish our schedules in a way that replicates as far as possible our current position as an EU member state, thus creating a mutually beneficial, simple and inclusive outcome, so that the interests of the UK and other WTO members are protected.
202.The Government has repeatedly stated that it is confident that it will negotiate a positive future relationship with the EU, including an FTA, as that would be in the interests of both the UK and the EU. However, the Government has also been clear that “no deal for the UK is better than a bad deal for the UK”, under which eventuality ‘no deal’ would mean having to trade with the EU under WTO rules alone.
203.Sir Ivan Rogers made the point that countries like the US or Australia, that do not yet have FTAs with the EU, have nonetheless negotiated equivalence and mutual recognition agreements in a range of sectors. The UK, if it were to exit the EU without any kind of deal applicable from the first day after exit, would be in an inferior position compared to other third countries in trading with the EU. According to Roderick Abbott:
on the day after you exit, businesses will face the common external tariff on their trade to the EU, unless, of course, you have made some kind of a trade deal by then. [ … ] If you assume there is ‘no deal’, then the common external tariff would be applied on the next day, because you are a nonEU country and that is what the EU does.
The second consequence would be that, unless you are very quick to introduce a UK customs tariff, businesses would have no protection against imports. You would have to have a tariff, so presumably that would be perhaps based on the common external tariff or on something else. You cannot just go back to 1972 and bring a tariff down from the shelf. That would be a second consequence.
Whether all of this would be destructive to business is an open question, as you said. My belief is that if you are out, under those conditions, and you are trading under WTO, it is perfectly feasible. Trade is not going to stop. There will be areas where you will face barriers that you did not face before. You perhaps will make less profit, but trade will flow.
204.While trade in goods would continue to flow under tariff regimes, Dr Federico Ortino told us that services were much less predictable because there are fewer liberalising obligations under the WTO when it comes to services. He also noted that there are no national treatment obligations in many sectors, whereby any supplier of services is treated the same as any domestic supplier. In those sectors the EU could simply prohibit the UK from providing services in the EU.
205.We heard from the Secretary of State that, should the UK leave the EU without a deal, the UK would face a number of consequences including the imposition of tariffs (of up to 30–40 per cent on some agricultural products) and customs checks (including between Northern Ireland and the Republic of Ireland), an end to UK participation in the US–EU Open Skies Agreement, “probably” an end to participation in the EHIC health treatment card scheme, an end to passporting rights for the UK financial services sector and uncertainty around data transfer rights for the the digital sector. He also confirmed that there had been no assessment of the implications of ‘no deal’ since before the referendum.
206.While confident that it is unlikely the UK will leave the EU without a deal, the Government has said that it is right that it should prepare for every eventuality. The Secretary of State told us that every department of state was looking at how to mitigate the effects of leaving the EU without a deal. As the White Paper states:
In any eventuality we will ensure that our economic and other functions can continue, including by passing legislation as necessary to mitigate the effects of failing to reach a deal.
207.We heard from the Secretary of State that any economic assessment of ‘no deal’ would depend on the mitigation undertaken and that “until we have worked out all the mitigation procedures, we could not quantify the outcome.” He reassured us that he would be able to quantify it in detail in about a year’s time.
208.The Government has conducted impact assessments into ongoing trade deals previously, for example into the Transatlantic Trade and Investment Partnership between the EU and the US, while the EU also undertook analysis of the Comprehensive Economic Partnership agreement with Canada.
209.In its report on the implications of ‘no deal’, the Foreign Affairs Committee concluded that the Government was not giving that scenario the consideration it deserved, finding no evidence of any serious contingency planning for ‘no deal’. The Committee contended that this would constitute a “serious dereliction of duty” on the part of the Government.
210.Notwithstanding the Government’s ambition to secure a UK–EU FTA, there is a risk that the UK might reach the end of the Article 50 process without a deal and have to fall back on trading under WTO rules. It is imperative that the Government undertake an economic assessment of the scenario whereby the UK leaves the EU without a deal. The Government must also set out what contingency planning is taking place across Whitehall and the mitigation being considered for a ‘no deal’ outcome.
211.In the machinery of Government changes which took place following the EU referendum, the Prime Minister established the Department for International Trade (DIT) with overall responsibility for promoting UK trade across the world, and developing, coordinating and delivering a new trade policy for the UK. The International Trade Committee scrutinises the work of DIT and published its first report on UK trade options beyond 2019 on 7 March 2017. The Government has identified the ability to secure new trade agreements with non-EU countries as a key opportunity arising from the UK leaving the EU. While the Government’s work in negotiating trade relationships with the rest of the world falls within the remit of DIT and the International Trade Committee, that work will be dependent on the nature of the UK’s exit from the EU and the future UK–EU relationship on which we heard evidence. There was agreement amongst witnesses to our inquiry that the UK had to prioritise negotiations on a FTA with the EU before it begins negotiations with other countries. Roderick Abbott told us that there will be countries who will not want to decide what their trading relationship with the UK will be until they know how the UK will be trading with the EU:
It is the idea of a close association with the single market that we started with. That could be a factor that holds other countries back until they know whether the UK will continue to be a place you can go through with your global value chain, or your investment into the EU. That is the key point.
212.Sir Ivan Rogers suggested that, outside the EU, the UK may have the advantage of being “easier to deal with” and more “nimble and agile” than the larger EU market, while also noting that its smaller market could affect its attractiveness. However, the UK’s strength in negotiating FTAs would not be clear until we begin those negotiations:
You can argue that, as part of a composite and as part of the EU28 we have more weight in opening up markets where there has been deliberate protectionism against our products. Or you can argue that as the UK only, we will invest more effort and a higher quantum, a higher proportion of our effort, in doing stuff for Scotch whisky exports than the EU28, where by definition it is one of multiple different negotiation objectives for different countries. What I am saying is the proof of the pudding will be the eating. In some areas we will do better from being the UK alone and saying, “We can now focus on the few things that really matter to us in that market”. You can argue it either way.
213.As the UK embarks on negotiating its own preferential trade agreements, witnesses were clear that the Government would need to build up significant resources, particularly in terms of trade negotiators and experience. Professor Jim Rollo told us that trade negotiating was a craft which had to be learned. He suggested that the UK should begin negotiations with New Zealand and Australia as useful partners to learn from.
214.The UK is a party to over 50 Free Trade Agreements through the EU. Ensuring the UK can continue to trade through those agreements, known as ‘grandfathering’, is another priority for the UK’s future trading relationships. The White Paper states that:
We are also seeking to achieve continuity in our trade and investment relationships with third countries, including those covered by existing EU free trade agreements or EU preferential arrangements. We are exploring with our trading partners ways to achieve this.
215.Roderick Abbott told us that he did not think it would be possible to transition seamlessly to trade deals with current EU partners:
The dynamics of trade between the UK and a partner are not the same as they were between the EU and their partner. It is not seamless in that sense. There is a question or an approach that says, “Why do we not cut and paste from an EU agreement with, let us say, Mexico, which already exists?” You cut and paste; you simply put in all the same clauses. Maybe you change some things, but you basically have the same agreement, and you go to Mexico and say, “How about this?” The question is what answer you are going to get, because this is where dynamics enter into it.
( … ) From a Mexican point of view, they may have been willing to do something for the EU that they are not willing to do just for the UK, because it is a much smaller market. The key here is that the UK on its own, outside the EU, is a much smaller market, in terms of population and consumers, and therefore in a mercantile trade sense it is less interesting.
216.Professor Jim Rollo explained that the UK was circa 15 per cent of the EU28 market. Trade partners may not be willing to offer the same terms to the UK as they did for the EU. He added that it is not in the UK’s gift to run these agreements through.
217. The option of ‘grandfathering’ existing FTAs is therefore far from guaranteed. The House of Lords’ EU Committee concluded in its report on trade in goods that maintaining access to the EU’s trade agreements was “unlikely”, but recommended that the Government focus its efforts on agreements with those countries as “the cessation of these preferential trade conditions is likely to result in significant tariff costs after Brexit, until such a time as the UK is able to conclude new FTAs.”
218.Similar to negotiating a UK–EU FTA, embarking on negotiations for FTAs with non-EU countries is entering into the unknown. It is unclear whether the UK’s smaller and more focussed market will be an advantage or a disadvantage in trading negotiations. What is clear, however, is that the UK needs to urgently develop resources and expertise for trade negotiations. The Government should identify resourcing needs and prioritise countries which provide opportunities for developing expertise in trade negotiating. The Government should also prioritise those countries with which the EU has preferential trade agreements and seek early clarity on whether the UK can ‘grandfather’ those FTAs after Brexit.
219.The Government’s priorities for the negotiations include trying to maintain the UK’s position as a leader in science and a leading participant in Europe-wide measures in research and innovation. The White Paper states:
From space exploration to clean energy, from medical technologies to agri-tech, the UK will remain at the forefront of collective endeavours to better understand, and make better, the world in which we live. We will seek agreement to continue to collaborate with our European partners on major science, research, and technology initiatives.
It also notes the strength of the UK university base, with the UK having three of the world’s top ten—and twelve of the top 100—universities, and the Government’s investment in research and innovation—£2 billion announced in the Autumn Statement and through the Government’s Industrial Strategy to help turn research into commercial products. These factors, the UK’s track record in collaboration, and its involvement in EU space programmes and research into nuclear fusion make the UK an attractive place to carry out research and innovation.
220.The Government has responded to concerns from the higher education sector by saying it will underwrite research funding through Horizon 2020 while the UK is still a Member State, even if the project continues after the date the UK leaves the EU. It is not clear if the funding guarantee is new money or the EU’s legal commitments. The Government has said that existing EU students, and those starting courses up to 2017–18, “will continue to be eligible for student loans and home fee status for the duration of their courses”, with similar support for postgraduate students. There are over 125,000 EU students at UK universities and 16 per cent of academic staff at UK universities are from EU countries.
221.The success of the UK university sector is in part due to its ability to attract international talent and produce world class research. Professor Davies, Professor of Law and Senior Pro-Vice-Chancellor, of Swansea University told us:
A key point, of course, relates to the skills of the EU staff in question. For us, the importance of ensuring access to those skills, and the reputation of higher education and universities in Wales from the research outputs that come through collaboration, are mission-critical to the way in which science operates. It operates in a borderless world. For us, part of that process would be not simply ensuring continuing recognition of the ability of EU staff to remain, but being open to the world for the best, highly skilled international researchers and staff. [ … ] Part of our process would be to ensure that we could create a vision for Wales that is one where we are open to international staff and student collaboration. Without that, the essential USP of universities as global industries fails.
This applies also to the student base. Erasmus, Europe’s programme to facilitate educational exchange, enables students to undertake part of their studies abroad. Research has shown that Erasmus increases participants’ employability through soft skills and the ability to speak foreign languages.
222.The Secretary of State acknowledged that part of the success of UK science was due to the collaborative nature of research in the UK. He told us that he had devoted a lot of energy to meeting people from the higher education sector, and sciencedriven companies like GSK, to send out a consistent message that Brexit “is not a doorslamming exercise on immigration”. When asked whether a future immigration system would be flexible enough to include scientists and researchers who may not meet the criteria if their role was subject to an income threshold, the Secretary of State told us that good work permit systems had some sort of mechanism to “recognise another measure of value” and that he would be making “quite serious representations” when we get closer to the Immigration Bill so that “We have to have a technical skills requirement.”
223.The value of international collaboration for innovation is not limited to academia. Sadiq Khan told us that fintech had taken off in London because of the proximity of financial services, “tech” expertise and venture capital, and that London would look to maximise the opportunities of leaving the EU by being able to continue to create the environment for talent and innovation in London. The CBI have stressed the need for an “open, flexible, simple immigration system [ … ] particularly for high-skilled immigration that boosts innovation and productivity.”
224.The success of the Higher Education sector in the UK owes much to its ability to attract international skills and talent. The UK Government must design a future immigration system that does not make it difficult for such talent, both students and staff, to come to the UK. It must also send a strong and consistent message that the UK is a welcoming place for people to come and study. The Government should make clear that it wishes to continue to take part in the Erasmus+ student exchange programme.
225.Horizon 2020 is an EU scheme to leverage research, development and innovation funding, to help meet research and development targets, including the target of 3 per cent of GDP for research and development across the EU by 2020. The UK has a strong track record in securing funds from Horizon 2020 and its predecessors. Around 15 per cent of funds allocated from Horizon 2020 have come to the UK, with UK universities in the top four higher education recipients to date (Cambridge, UCL, Imperial College London and Oxford). As of 23 February 2016, these four universities alone had been assigned over £363 million in Horizon 2020 funding. There have been a total of 3,937 participations in the programme from UK organisations, including 1,052 private, for-profit entities, 341 research organisations, 150 public bodies, 2,253 higher or secondary education places, and 141 others. Horizon 2020 also links education institutes with the private sector, and supports the broader UK’s science and research base, from food and drink to life sciences to the creative industries.
226.When asked about the Government’s commitment to Horizon 2020, the Secretary of State said the Treasury had moved very quickly to underwrite research funding so universities felt confident to continue making research applications, and to offer guarantees for EU students here. He said:
I am not kidding; to get the Treasury to move in two weeks in August is a measure of quite how seriously the issue is taken. [ … ]
I do not know what ongoing relationship we may have with projects or operations like Horizon 2020, like Erasmus and like all the various elements. I will say to you what I have said to every university and every research operation that I have talked to, which is this: we are a science superpower.
227.The UK has benefitted from being part of Horizon 2020. The Government has made a clear commitment to underwrite research funding commitments while the UK is a Member State, even if the project continues after the UK leaves the EU. However, the Secretary of State has told us that he does not know what ongoing relationship the UK will have with Horizon 2020. The Government needs to make an explicit commitment that it wishes to continue joint research with the EU27 on the basis of the Horizon 2020 framework, and its successor.
228.Euratom provides a legal framework for civil nuclear power generation and radioactive waste management across Europe, including arrangements for nuclear safeguards, the movement and trade of nuclear materials between Euratom members, and also between Euratom Members and third countries such as the US. Euratom covers the management of nuclear material at various sites in the UK, including Sellafield in Cumbria—the UK stores stocks of plutonium belonging to other Euratom members at Sellafield. Hinkley Point C was approved under regulation under the Euratom Treaty. Euratom is responsible for the nuclear aspects of Horizon 2020 research funding. In addition to being a source of funding, it provides access to programmes linked with other research centres. Nuclear fusion research at Culham gains £48 million a year from the Euratom research fund.
229.Switzerland has an associate status with Euratom which enables it to access nuclear research through Horizon 2020. The Swiss example may not necessarily replicate all that the UK wants from nuclear cooperation. A recent report on Brexit from the Tweede Kamer, one of the Chambers of the Dutch Parliament, noted the risk that, whatever the outcome, arrangements for cooperation in this crucial area might not be in place on the day the UK left the EU. The report recommended keeping the Euratom process separate from the Article 50 process so that “the negotiations on this can be conducted with care, rather than under time pressure.”
230.The UK Government has said that future cooperation on nuclear energy matters will be a matter for the negotiations, and that:
it is an important priority for us–the nuclear industry remains of key strategic importance to the UK and leaving Euratom does not affect our clear aim of seeking to maintain close and effective arrangements for civil nuclear cooperation, safeguards, safety and trade with Europe and our international partners.
231.The UK needs to be clear what kind of relationship it wishes to pursue with Euratom. It is important that whatever the relationship is, it does not reduce the ability of the UK to pursue international cooperation in the civil nuclear industry and collaborative research in the future, including Horizon 2020 and its successor.
232.The Secretary of State has told the House that the Government aims to “keep our justice and security arrangements at least as strong as they are” and wants “as far as possible, to replicate what we already have”. The White Paper notes that the UK has been “at the forefront” of developing tools for cooperation with the EU in combating crime and terrorism and:
As we exit, we will therefore look to negotiate the best deal we can with the EU to cooperate in the fight against crime and terrorism. We will seek a strong and close future relationship with the EU, with a focus on operational and practical cross-border cooperation.
233.The Secretary of State believes that the UK will negotiate from a position of strength:
Britain is the intelligence superpower in Europe; we are critical to the defence of Europe from terrorist threat, and we are critical to the military support of Europe and to dealing with migration, with our Navy at work. Those things will continue.
234.In considering the model for future UK–EU interaction in security, criminal justice and law enforcement, Brandon Lewis MP, Minister of State for Policing and the Fire Service, Home Office, said:
We are looking at existing arrangements for third country cooperation with the EU, which can inform discussions, but it is important to be clear that we are not looking to replicate any other nation’s model.
235.The Government’s objectives must be reconciled with the Government’s broader goals for the exit negotiations—set out in the Prime Minister’s Lancaster House speech—including “taking back control of our laws and bringing an end to the jurisdiction of the European Court of Justice”. Cooperation on criminal justice is one of the areas in which the Prime Minister envisages that “a phased process of implementation” may be needed.
236.Europol is at the forefront of the EU’s response to international crime. Founded as an intergovernmental organisation in 1995 and operational since 1999, Europol became an EU Agency in 2010. It provides analytical and operational support to national law enforcement authorities in all 28 EU Member States, enhancing their capacity to tackle security threats which have a cross-border dimension. Since 2009 Europol has been led by Rob Wainwright, the former head of the international division of the UK’s Serious and Organised Crime Agency (now the National Crime Agency). David Armond, the Deputy Director General at the National Crime Agency, told us that “In terms of the access we have obtained through Europol and the influence we exert through having a British director, who has implemented since 2008 a whole load of what are really British intelligence management systems, we would have a quite steep hill to climb if we were to lose access to all of them.”
237.Europol’s staff work alongside liaison officers seconded to its headquarters in The Hague by EU Member States and other partner countries or organisations in order to facilitate the rapid exchange of criminal intelligence, strategic and operational information. David Armond told us that it was “eminently possible” for the UK to have a liaison bureau but added that the size of the UK team might have to be “culled” because of available office space and that “we would have to make all our inquiries through a liaison structure rather than by direct access to the systems”.
238.The UK participates fully in Europol. The Government has opted into a new Regulation updating Europol’s governance structure, objectives and tasks which will take effect on 1 May 2017. According to Brandon Lewis MP, Minister for Policing and the Fire Service:
Opting in will maintain operational continuity for UK law enforcement ahead of the EU exiting the EU, ensuring our Liaison Bureau at Europol is maintained, and that law enforcement agencies can continue to access Europol systems and intelligence. This decision is without prejudice to discussions on the UK’s future relationship with Europol when outside the EU.
239.Denmark currently participates fully in Europol but has an opt out of all post-Lisbon EU justice and home affairs measures, meaning that it is unable to participate in the new Europol Regulation. An agreement has been reached to designate Denmark as a third country with respect to Europol, thereby making it possible for Europol and Denmark to conclude a cooperation agreement. A Joint Declaration issued in December by the Presidents of the European Council (Donald Tusk) and the European Commission (Jean-Claude Junker) and the Danish Prime Minister (Lars Lokke Rasmussen) states:
Such arrangements must be Denmark-specific, and not in any way equal full membership of Europol, i.e. provide access to Europol’s data repositories, or for full participation in Europol’s operational work and database, or give decision-making rights in the governing bodies of Europol. However, it should ensure a sufficient level of operational cooperation including exchange of relevant data, subject to adequate safeguards.
This arrangement would be conditioned on Denmark’s continued membership of the European Union and of the Schengen area, on Denmark’s obligation to fully implement in Danish law Directive (EU) 2016/680/EU on data protection in police matters by 1 May 2017 and on Denmark’s agreement to the application of the jurisdiction of the Court of Justice of the EU and the competence of the European Data Protection Supervisor.
240.Commenting on these arrangements, David Anderson QC said:
One could say that is cutting off the nose to spite the face. One could say we are probably a much bigger contributor to Europol than Denmark is. Nonetheless, it is an indicator of how some people at least within the institutions think about these matters, and the distinction that they draw between being a Member State or, at the very least, being a member of the Schengen arrangements and being a third country, even one which in the past has fully participated.
241.The cooperation agreement with Denmark would be based on the existing rules governing Europol’s relations with third countries. These envisage two types of third country agreements:
242.David Anderson QC told us that some operational agreements had taken between five to twelve years to negotiate. The dispute settlement provisions vary. Most envisage “consultations and negotiations” between the parties or an arbitration panel if the parties are unable to reach an amicable settlement. The agreements with Canada and the US envisage a process of mutual consultation.
243.No third country agreements with Europol allow direct access to Europol’s databases or its secure messaging system (SIENA). Nor do they allow any role in Europol’s governance structures which influence Europol’s strategic direction. Third countries with operational agreements are able to post liaison officers to Europol’s HQ in The Hague. Any new relationship with Europol once the UK leaves the EU will be governed by the new Europol Regulation. The Regulation authorises the transfer of personal data to third countries in the following circumstances:
The White Paper notes the UK’s important contribution to Europol:
244.The Government intends to seek a “unique and bespoke” relationship with Europol:
There are associate members of Europol that are not members of the EU, such as the United States. I also point out that Europol existed as a non-EU institution before the EU was involved with it. Therefore, it is important to recognise that we will look to develop a unique and bespoke position for the country.
I understand that the EU Treaties do not allow for non-EU members to join Europol as full members, but, as indicated already, we are seeking bespoke arrangements with the EU in this regard, and certainly we would wish to pursue access to Europol on as enhanced a basis as possible.
245.The Government will be looking to conclude a bespoke arrangement for continuing involvement with Europol. The UK has been a leading force in Europol’s development. If negotiations progress in a spirit of goodwill towards agreement, there should be scope for an imaginative solution to enable the UK to continue some level of involvement with Europol for the benefit of all European citizens. However, the technical obstacles that will need to be overcome for this to happen will be significant and it is unlikely that the UK will be able to retain the leading role that it currently enjoys.
246.The White Paper highlights the law enforcement benefits of the Schengen Information System—the latest version is abbreviated as SIS II—as well as the EU Passenger Name Records (PNR) Directive and the European Criminal Records Information System (ECRIS). The UK participates in all of these measures and last year opted back into the so-called Prüm measures on cross-border law enforcement cooperation.
247.There is limited third country participation in EU law enforcement information sharing systems: the four Schengen associate countries (Iceland, Norway, Switzerland and Liechtenstein) participate in SIS II. The EU has negotiated three international agreements on the sharing of PNR data with Australia and the US (both in force since 2012) and with Canada (not in force, awaiting a ruling from the CJEU). No third country participates in ECRIS. The EU has concluded an agreement with Iceland and Norway on participation in Prüm which is not yet in force, and has a mandate to open negotiations with Switzerland and Liechtenstein.
248.The Government has not set out its position on future UK participation in EU information sharing systems but has made clear that “the question of how the UK shares data with the EU from the point of exit will be an issue for discussion during the negotiations”.
249.The Home Secretary told the House in December:
I am having extensive discussions with European counterparts and with European bodies that help to keep us safe, so that when we do leave the European Union, we will, as far as possible, be able to have access to that information. When people voted to leave the European Union, they did not vote to be less safe.
250.Closing gaps in existing EU information sharing systems is a priority for the Commission, following a spate of terrorist attacks across Europe. It has established a High Level Expert Group to explore the interoperability of EU border management and security information systems which will produce a final report in April 2017. It is considering various work stands to enhance the interconnectivity of the databases including single search interfaces.
251.It is unclear whether this work will make it easier or harder for the UK to negotiate some form of access to EU information sharing systems post-Brexit. The European Parliament’s Committee on Civil Liberties, Justice and Home Affairs (LIBE) has suggested that technical arrangements would need to be put in place to ensure that the UK only has access to the information systems on which an agreement on participation/access has been reached, not to other inter-linked systems.
252.As the UK does not participate in the Schengen free movement area and is not bound by EU rules on external border controls, it is not entitled to access alerts concerning third country (non-EEA) nationals who are to be refused entry or stay in the Schengen area. The UK does participate in those elements of the Schengen rule book that deal with broader law enforcement issues and can access all other alerts held in SIS II, covering matters such as the arrest of individuals wanted for extradition. SIS II became operational in April 2013; the UK connected to it in April 2015.
253.Four non-EU countries associated with Schengen (Iceland, Norway, Switzerland and Liechtenstein) apply the full Schengen rule book and participate in all aspects of SIS II covering both border control and law enforcement. Apart from these countries, there is currently no provision for wider third country access to SIS II data.
254.The UK has consistently pressed for the introduction of an EU-wide framework for the collection, processing and use of Passenger Name Record (PNR) data—the term used to describe information held in air carriers’ reservation and departure control systems which provides a record of each passenger’s flight details and itinerary. An increasing number of countries view PNR data as an important means of combating serious crime and terrorism and require air carriers operating flights to, from or across their territory to provide their law enforcement authorities with electronic access to the passenger data they collect. These data can be used to help identify passengers who may present a security risk or are wanted for a criminal or terrorist offence.
255.The EU has concluded PNR agreements with Australia, Canada and the United States to regulate the transmission and use of PNR data. The UK participates in all three agreements. The Government believes that such agreements are necessary to remove legal uncertainty for air carriers flying to these countries and to ensure adequate data protection safeguards. The European Parliament has asked the Court of Justice to consider whether the agreement is compatible with the data protection provisions in the EU Treaties and the EU Charter of Fundamental Rights.
256.Last September, the Court’s Advocate General issued a preliminary opinion (which is likely to be persuasive, but is not binding on the Court) stating that some provisions of the agreement are incompatible with the EU Charter. For example, the agreement would allow the processing of sensitive data (information revealing racial or ethnic origin, political opinions, religious or philosophical beliefs, trade-union membership, or information about a person’s health or sex life) under certain conditions. The agreement would also allow PNR data to be processed for purposes which the Advocate General does not consider are strictly necessary to prevent and detect terrorist offences and other serious transnational crimes. The Court is expected to issue its opinion in the early part of 2017.
257.The Court’s ruling will potentially have important implications for any future agreement between the EU and the UK to share PNR data once the UK leaves the EU. In proposing a negotiating mandate for an agreement with the UK, the Commission will be bound to ensure that it complies with EU Treaty and EU Charter requirements on data protection, as interpreted by the CJEU. David Anderson QC told us;
Just look at what is happening at the moment with the EU–Canada PNR agreement, which similarly was forged for completely pragmatic reasons, but which appears to be running into quite serious problems in the European Court. Put that together with the Davis–Watson case, which is very hostile to this whole idea of the blanket collection and retention of data, and you find quite a neuralgic issue that could arise between the UK and Europe.
258.Prüm is one of the areas in which the Government is keen to seek a bespoke solution for the UK. In his letter of 22 November 2016 to the Chair of the European Scrutiny Committee, Brandon Lewis MP, the Minister for Policing and Fire Services, made clear that the UK “is in a unique starting position” and in stating that the UK “will not be replicating another nation’s model”, said:
We have a strong history of working closely with Member States as partners and allies on security cooperation. We have significant technical expertise in relation to fingerprints and DNA. Our law enforcement agencies use biometric information more effectively than many others in Europe and maintain a significant database of the fingerprints and DNA of convicted persons.
259.The Secretary of State told the House earlier this month that, although the UK would no longer be part of the Prüm framework when it leaves the EU, “that is not to say that we will not be making new arrangements”:
The Prüm framework covers data exchange, DNA and so on, and it is very clear in our minds that we will be making new arrangements to keep terrorism, crime and so on under control.”
260.There is no provision for third countries to participate in ECRIS, either in the existing instruments governing its use or in the latest changes proposed by the Commission. Brandon Lewis MP, the Minister for Policing and the Fire Service, has confirmed that “the ECRIS legislation does not explicitly provide for the possibility of third country agreements”, adding:
The EU could conclude an agreement with a third country to exchange criminal records. At present, however, there are no countries other than EU Member States participating in ECRIS.
261.He also indicated that the Justice and Home Affairs Council has called for work to “consider solutions (other than the ECRIS system) to allow the proactive sharing of convictions data, in particular relating to terrorism”.
262.The White Paper underlines the utility of ECRIS for law enforcement, noting:
The UK is the fourth largest user of European Criminal Records Information System (ECRIS). In 2015/16 the majority of the over 155,000 requests for overseas criminal convictions information were made to EU countries through ECRIS. EU Member States also benefit from notification messages we provide about their nationals who have been convicted in the UK, with the vast majority of the over 46,000 notifications made through ECRIS.
263.There are alternatives to ECRIS—the 1959 Council of Europe Convention on Mutual Assistance in Criminal Matters or informal Interpol channels—but the Government’s view is that these are “more time consuming, complex and expensive than the ECRIS procedure”.
264.Across the range of Justice and Home Affairs data-sharing instruments, there is a strong operational argument, in the interest of both UK and EU27 law enforcement, for the UK retaining access to data. However, the extent to which this will be possible is likely to be determined by commitments that the UK is able to make in relation to ensuring that its data protection provisions remain aligned with those of the EU, and the governance arrangements that can be agreed around the databases. The access agreed is likely not to be of the same level currently granted.
265.The principle of mutual recognition involves decisions by the judicial authority in one Member State being recognised and given effect by the competent authorities of another with minimum formality and minimum grounds for refusal. The most notable and most controversial mutual recognition instrument is the European Arrest Warrant (EAW). The UK opted back in to this instrument in December 2014.
266.Prior to the EAW, extradition between Member States was underpinned by the 1957 Council of Europe Convention on Extradition, which has been ratified by a wide number of states which are members of the Council of Europe and three which are not (Israel, South Korea and South Africa). Whilst the Convention is still in force it has been superseded by the EAW for extradition between EU Member States. Extradition under the 1957 Council of Europe Convention is less streamlined than the EAW in some notable respects:
267.Some Member States have adjusted their extradition arrangements with other Member States to rely solely on the EAW and would have to legislate to revert to extradition under the 1957 Convention., David Armond told us “In the event that we lose that, which is likely, we would need to go through a process of re-engaging with all the Member States to negotiate treaties on extradition, because many countries have repealed the legislation.”
268.The House of Lords EU Committee summarises evidence from law-enforcement agencies on the EAW in its December 2016 report, Brexit: future UK–EU security and police cooperation:
The Crown Prosecution Service still regarded the EAW as ‘absolutely vital’. The National Crime Agency also listed the EAW among their top three priorities for the forthcoming negotiations on UK withdrawal from the EU. Helen Ball, the Metropolitan Police Service’s Senior National Coordinator for Counter-Terrorism Policing, told us that on a scale of 1 to 10, she would currently rate the EAW ‘about an 8’ in terms of its importance to CT policing: ‘it is an extremely valuable power to have’.
269.The Framework Decision establishing the EAW makes no provision for third countries to participate. However, the EU has entered into an EAW style extradition treaty with Norway and Iceland. Barristers Chambers 6KBW College Hill in July 2016 identified a number of factors which might affect the willingness and/or ability of the UK to adopt this course of action but concluded:
an EAW-style agreement remains a significant option. It is important to note that (unlike Norway and Iceland) the UK will be negotiating as a current member of the EAW system whose extradition processes are already in harmony with those of the EU. A potentially important factor may be that the Norway/Iceland agreement does not provide for the CJEU to have jurisdiction over disputes, and instead provides for a harmonisation of approach through the ‘constant review’ of case-law (Article 37 of the Agreement) which may make this a more attractive option for the UK Government.
270.However, David Anderson QC observed that there could be “great resistance to us trying to carve out a special relationship for ourselves” in relation to EAW cooperation citing the examples of Norway and Iceland. However, he added “We can certainly try. We are leaving now so one takes that as the baseline. There is going to be a trade-off between getting an early deal on extradition and getting a bespoke deal on extradition. I would be very surprised if we can manage both”.
271.The value of maintaining participation in the European Arrest Warrant, or at least securing an analogous agreement, has been commended to us. We note that the UK comes from the position of having extradition processes already in line with those in the EU. We also note that there are precedents for agreements with the EU analogous to the European Arrest Warrant that do not involve remaining within the jurisdiction of the CJEU.
272.The Secretary of State has said that the Government wants “as far as is possible to replicate what we already have” in respect of Justice and Home Affairs Cooperation. It is to be hoped that the UK’s relationship with the EU when outside it will be one of partnership on the basis of shared values and cooperation. Continuing deep levels of Justice and Home Affairs cooperation represents a test of whether this will be possible. The technical challenges are significant but, we believe, not insuperable and the prize of continued close cooperation is too valuable to lose. We note that, as the Prime Minister acknowledged, a “phased process of implementation” may be required if agreement is not possible within two years.
273.The UK is a major global actor. It is one of the EU’s two nuclear-armed states with a permanent seat on the United Nations Security Council. It is also a prominent member of NATO, the G7 and G20. In addition to the bilateral agreements it has with certain states—such as the Lancaster House Agreements with France—the UK cooperates with other EU states on foreign and defence policy matters through the intergovernmental Common Foreign and Security Policy (CFSP) and Common Security and Defence Policy (CSDP). This includes participation in both military and civilian CSDP operations overseas, the adoption of common positions on major global issues, and the imposition and maintenance of sanctions against third countries such as Russia.
274.In our previous Report, we said it would be “essential” for the Government to maintain co-operation with the EU27 on defence and foreign policy matters, and that it would be “clearly in the UK’s and EU27’s mutual interests” to ensure that this happens.
275.The White Paper makes clear the Government’s intention to continue this cooperation, although it does not go into detail on how this might be achieved in the light of the UK’s departure from the institutional decision-making structures of CSDP and CFSP. The White Paper says:
We want to use our tools and privileged position in international affairs to continue to work with the EU on foreign policy security and defence. Whether it is implementing sanctions against Russia following its actions in Ukraine, working for peace and stability in the Balkans, or securing Europe’s external border, we will continue to play a leading role alongside EU partners in buttressing and promoting European security and influence around the world. We aim to enhance our strong bilateral relationships with our European partners and beyond, projecting a truly global UK across the world.
On defence matters specifically, the White Paper adds:
We participate in Common Security and Defence Policy (CSDP) missions and operations across the globe. Our objective is to ensure that the EU’s role on defence and security is complementary to, and respects the central role of, NATO. After we leave the EU, we will remain committed to European security and add value to EU foreign and security policy.
276.We welcome the Government’s commitment to continuing co-operation with the EU27 on foreign policy and defence matters. This is an area of considerable mutual interest and must be prioritised during the negotiations. We look forward to the Government setting out in more detail its proposals for how such cooperation can be made to work in practice, including the institutional and decision-making frameworks that would underpin it.
151 para 8.2
152 Oral evidence taken before the International Trade Committee on 17 January 2017, HC (2016–17) 817-iv, [Peter Hardwick]
154 List of EU trade agreements, Briefing Paper , House of Commons Library, 21 November 2016
155 para 8.2
156 , Conservative Party Conference 2016, 2 October 2016
157 In November 2016, a paper published by the UKTPO identified the following “red lines”:
• No free movement of people / labour;
• Independent trade policy;
• No compulsory budgetary contribution;
• Legal oversight by UK courts only and not by the European Court of Justice
—Michael Gasiorek, Peter Holmes, Jim Rollo, (UKTPO Briefing Paper 5, November 2016), p 2
159 HC Deb, 24 January 2017,
161 paras 8.2 and 8.3
163 , European Commission website, 6 December 2016
168 of Session 2016–17, HC 815, para 58
169 of Session 2016–17, HC 1101, para 26
170 For example, CETA negotiating mandate was adopted in 2009 with provisional ratification just beginning, but full implementation could take years due to need for ratification by 28 national and a bunch of regional parliaments. While negotiations with South Korea began in 2007 and agreement was signed 2 ½ years later in 2009. The trade agreement came into provisional application in July 2011 and is not yet fully in force.
171 para 8.2
174 para 8.13
175 For example, see visit notes from Sunderland and Aberdeen at Annex 1 and 2 of of Session 2016–17, HC 815
177 para 8.9
178 UK Trade Policy Observatory () para 1.1
179 para 8.11
180 Q1395 [Rt Hon David Davis MP]
184 House of Lords’ European Union Committee, Eighteenth Report of Session 2016–17, , HL Paper 135, para 35
185 While only the EU can act in areas where it has exclusive competence (for example in setting the Common External Tariff for goods entering the customs union), in areas of shared competence either the EU or Member States can act (although Member States may be prevented from acting where the EU has already done so), giving Member States a certain amount of discretion over the application of services regulations.
186 International Trade Committee, First Report of Session 2016–17, , HC 817, para 72
187 para 8.21
188 Q1077 [Sir Ivan Rogers]
192 International Trade Committee, First Report of Session 2016–17, , HC 817, para 124
193 para 8.23
194 , Evening Standard, 27 June 2016
197 , Financial Times, 12 January 2017
198 Treasury Committee, , 28 October 2017
199 Treasury Committee, , 13 January 2017
202 paras 8.38 and 8.40
203 techUK, “, January 2017, p38
205 para 8.35
206 European Commission,
207 Financial Times, 18 November 2016
208 House of Lords European Union Committee, , HL Paper 135, Paras 173–195, 201–207
209 A draft recast of the AVMSD proposes requiring a “majority” of a broadcaster’s workforce to be based in the EU in order for it to be eligible for a license, as opposed to a “significant part” of it.
210 House of Lords European Union Committee, , HL Paper 135, Paras 178–179 and Box.10, and
214 , para 8.45
220 para 8.44, and Q1400
221 House of Lords’ EU External Affairs and Internal Markets Sub-Committees, , 28 February 2017
224 Oral evidence taken before the International Trade Committee on 28 February 2017, Q631 [Colin Lawther]
225 International Trade Committee, First Report of Session 2016–17, , HC 817, para 117
228 , para 9.16–9.18
229 , para 8.1;
230 , para 12.3
239 Department for Business, Innovation and Skills, , March 2013
240 European Commission, , June 2011
241 Foreign Affairs Committee, Ninth Report of Session 2016–17, , HC 1077, para 60
242 International Trade Committee, First Report of Session 2016–17, , HC 817
248 Q1023 [Prof Rollo]
250 Q1026 [Roderick Abbott]
253 House of Lords European Union Committee, Sixteenth Report of Session 2016–17, , HL Paper 129, p5
255 Science and Technology Committee, Seventh Report of Session 20216_17, , HC 502
256 Business, Energy and Industrial Strategy, , press release, 2 December 2016
257 . There are currently nearly half a million international students at UK universities, with over 125,000 of them from EU countries
258 , 17 January 2017
259 Q1263, Q1265.
270 A 283 million euro operation contract signed between the European Commission and CCFE in July 2014 secures JET operation until 2018.
274 HC Deb, 10 October 2016, and 1 December 2016,
275 HC Deb, 17 January 2017,
276 HC Deb, 18 January 2017,
281 “”, European Commission, 15 December 2016
283 Europol has concluded strategic agreements with Bosnia and Herzegovina, Russia, Turkey and Ukraine. Any disputes as to the interpretation or application of these agreements are to be settled through “consultations and negotiations” between the parties.
284 Europol has concluded operational agreements with Albania, Australia, Canada, Colombia, the former Yugoslav Republic of Macedonia (FYROM), Iceland, Liechtenstein, Moldova, Monaco, Montenegro, Norway, Serbia, Switzerland and the USA.
286 , para 11.2
287 HC Deb, 18 January 2017,
288 HC Deb, 18 January 2017,
290 HC Deb, 5 December 2016,
292 “”, Case Law of the Court of Justice, 8 September 2016
295 HC Deb, 2 February 2017, [Commons Chamber]
297 , para 11.2
298 For example, See , published in May 2016.
299 For example Denmark, (p55 of , the Government’s Impact Assessments for the purpose of the UK opt-out of JHA measures) and Ireland (House of Lords, European Union Committee, Sixth Report of Session 2016–17, HL Paper 76, para 147)
301 House of Lords EU Committee, , HL Paper 77
302 6KBW College Hill
304 Exiting the EU Committee, First Report of Session 2016–17, The process for exiting the European Union and the Government’s negotiating objectives, HC 815, para 99
3 April 2017