3“Deal”—a UK Free Trade Agreement with the EU
Concluding a trade agreement by 2019
Introduction
37.In this chapter we consider the advantages and disadvantages of the Government’s preferred option for the UK-EU trade relationship after Brexit, namely a bilateral FTA which meets the Government’s “red lines” (i.e. non-negotiable preconditions for an agreement).
38.We begin by considering whether it is legally possible and practically feasible that such an agreement can actually be achieved, as the Government maintains it can, within the framework of the two-year Article 50 negotiation process. This is particularly important given that the Government has effectively put all its eggs in this particular basket by insisting that “no deal for the UK is better than a bad deal for the UK”.47
Legal possibility
39.In October 2016 the Secretary of State for Exiting the EU, Rt Hon David Davis MP, was challenged in the House regarding the fact that the other members of the EU (the EU27) had “so far refused to say that they will enter trade talks alongside our article 50 negotiations”. He replied that the EU27:
are now starting to read what article 50 actually says. Article 50 implies that there will be parallel negotiations. That is what we will have because […] we need to conclude them within two years to avoid any cliff edge.48
40.Evidence we received from the Law Society of England and Wales explained that there are broadly three areas which are likely to be covered in the Article 50 negotiations: arrangements for the UK to withdraw from the EU; arrangements to implement the new UK relationship to the EU; and the terms of that new relationship itself (including trade arrangements). Article 50, though, the Society further explained, requires the EU to negotiate only on the first of these, concerning “the logistics of withdrawal”—whilst merely “taking into account the framework for the future relationship between the EU and the withdrawing state”.49 On this interpretation, there is no legal requirement for the Article 50 negotiations to cover the UK’s post-Brexit trade relationship with the EU. An even stronger interpretation of Article 50 on this point was given at a press conference in December 2016 by Michel Barnier, the EU Commission’s Chief Negotiator with the UK on Article 50: “Legally these things can’t be done together at same time”.50
41.Sir Andrew Cahn told us that he thought the Government had given up negotiating leverage on this point. He thought the Government should have told the EU:
“We will invoke Article 50 when you have agreed a negotiating process”, in particular saying very clearly that we would be able to negotiate trade agreements simultaneously with the exit arrangements. Whereas at the moment the EU side have simply said, “No, we will not. You sign your exit bill first, and then we will talk about trade”.51
42.Dr Fox acknowledged that “the legality of where we find ourselves” was an issue, but he did not appear to think it was an insurmountable obstacle.52
Practical feasibility
Time constraints
43.Even if it is legally possible to settle the UK’s trading relationship with the EU during the Article 50 negotiations, there is still uncertainty as to the feasibility of doing so. The UKTPO told us:
It is important to recognise that while the Article 50 negotiation is effectively time-limited and approved in the EU27 by qualified majority vote, a trade agreement is not so constrained and requires unanimity among EU Member States. On the precedent of CETA [the EU-Canada Comprehensive Economic and Trade Agreement] for so-called “mixed agreements” which are necessary when the subject matter concerns member states’ competencies, the latter could entail approval by up to 38 different European [national and sub-national] parliaments. Thus it seems almost inevitable that a deep trade negotiation will take longer than two years; based on the EU’s prior experience of negotiating free trade agreements, it is more likely to take between five and ten years.53
44.Furthermore, at Mr Barnier’s press conference in December he said:
It is clear that the period for actual negotiations will be shorter than two years. At the beginning, the two years include the time to the European Council to set guidelines, and for the Council to authorise negotiations, based on a recommendation of the Commission. And at the end, the agreement must, of course, be approved by the Council and the European Parliament. Finally, the UK will have to approve the agreement. All within the two year period. All in all, there will be less than 18 months to negotiate […] Should the UK notify the Council by the end of March 2017 […] it is safe to say that negotiations could start a few weeks later, and an Article 50 agreement be reached by October 2018.54
“Red lines, “cake and eat it”, “cherry picking” and “wriggle room”
45.The UKTPO told us that a particular stumbling block was likely to be the EU27’s stipulation that the UK cannot receive all the benefits of EU or Single Market membership whilst “cherry picking” which of the concomitant obligations it will take on.55
46.The UK Government indicated following the referendum that it regarded the outcome as a mandate for certain “red lines” in negotiating Brexit—although no definitive, codified set of such principles was given.56 The Prime Minister told the Conservative Party conference in October 2016: “Our laws will be made not in Brussels but in Westminster. The judges interpreting those laws will sit not in Luxembourg but in courts in this country. The authority of EU law in Britain will end.” While she wanted “free trade, in goods and services” between the UK and the EU and to give “British companies the maximum freedom to trade with and operate in the Single Market—and let European businesses do the same here”, she was not prepared to barter with British sovereignty. She said: “We are not leaving the European Union only to give up control of immigration again. And we are not leaving only to return to the jurisdiction of the European Court of Justice [ECJ].”57
47.At the same time, there were signs that the Government believed it possible for the UK to obtain all the benefits of Single Market membership while adhering to its “red lines”. The phrase “have cake and eat it” occurred more than once.58
48.In his December 2016 press conference, Mr 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.59
49.In the Prime Minister’s Lancaster House speech on 17 January 2017 and the Brexit White Paper, published on 2 February 2017, the Government set out 12 “objectives” for the Brexit negotiations. Among these were: “Taking control of our own laws” (which would entail “an end to the jurisdiction of the Court of Justice of the European Union in the UK”); “Controlling immigration”; and “Ensuring free trade with European markets”.60 The Prime Minister stated that what the Government was proposing in respect of the last of these “cannot mean membership of the Single Market”, given that “European leaders have said many times that membership means accepting the ‘four freedoms’ of goods, capital, services and people”.61 Instead, the Government was aiming for “the greatest possible access to [the Single Market] through a new, comprehensive, bold and ambitious Free Trade Agreement” with the EU.62 Still there were signs that the Government had a “have cake and eat it” strategy. The Secretary of State for Exiting the EU told the House a week after the Prime Minister’s speech that the arrangements the Government had in mind “will deliver the exact same benefits as we have” presently as an EU member.63
50.The UKTPO indicated in evidence to us that it might be possible to achieve a UK-EU FTA akin to those that the EU already has with third countries (which grant access to the Single Market that is limited and on less favourable terms than those enjoyed by members):
the EU has already granted non-member states some aspects of Single Market freedoms […] Other than as a punishment strategy, it is hard to see why the EU would want to completely reject such options for the UK. Whilst WTO rules constrain the sort of preferential agreements that can be made, it should be quite possible, albeit complicated and time-consuming, to design an agreement that admits enough liberalisation relative to EU WTO schedules to satisfy WTO requirements while still excluding enough to meet a “no cherry picking” position.
The Observatory suggested that “the UK government could agree to budgetary subscriptions, e.g. to [research and development] or regional funds, as a quid pro quo for certain restrictions on free movement.” It might further be possible to “finesse” the issue of immigration by means of a quota system for unskilled labour from the EU. And ECJ oversight might be replaced with a new mechanism acceptable to both sides (this is discussed further below).64 The Observatory’s Professor Alan Winters suggested that the UK might propose that “for a small reduction in mobility, maybe we can negotiate a small reduction in single market rights”.65
51.The Government has given a few signs which have been interpreted as meaning there might be “wriggle room” of this kind regarding its “red lines”. On 1 December 2016, the Secretary of State for Exiting the EU, Rt Hon David Davis MP, responded as follows to a question on the floor of the House regarding whether the Government would “consider making any contribution in any shape or form for access to the single market”:
The major criterion here is that we get the best possible access for goods and services to the European market and if that is included in what he’s talking about then of course we would consider it.66
This statement was subsequently reported to have been endorsed by the Chancellor. Also on 1 December, Mr Davis reportedly said: “We won’t [end free movement] in a way that it is contrary to the national and economic interest. Britain must win the global battle for talent. No one wants to see labour shortages in key sectors”.67
52.It may be possible to read into the wording of the Prime Minister’s Lancaster House speech and the White Paper an element of provision for “wriggle room”. Both refer to the possibility of continuing British financial contributions in respect of certain “European programmes”. The White Paper talks in cautious terms about the need to consider the impact of changes in immigration policy on different sectors of the economy and the labour market; and both it and the Prime Minister’s speech talk of the possible need for phased implementation of changes in this regard.68
Strength of the UK’s negotiating position
53.Another view put to us was that, notwithstanding talk of “no cherry picking”, sheer commercial self-interest will ultimately oblige the EU27 to agree to an FTA that meets all of the UK’s “red lines” in time for Brexit in 2019. We heard from the former Trade Minister Digby, Lord Jones of Birmingham Kb, the view that the short time-limit on trade negotiations during the Article 50 process would be to the UK’s advantage, as it would concentrate minds and ensure an agreement was reached:
One of the best things for getting a deal done is Monsieur Barnier will know that, at midnight on a certain date, if he does not have a deal done, it is off to the WTO. It will not be in the remaining EU’s interests for that to happen.69
Lord Jones thought that:
One of the great imperatives down at the wire in 2019 will be that there will be various vested interests in Europe […] saying, “Please do not mess us about. Do not let our exports into Britain suffer a 10%, 15%, 20% or 130% tariff.” […] Automotive is a good example. Audi, Volkswagen, Mercedes and BMW are not going to want their products in Britain, up against [Jaguar Land Rover], to be 15% more expensive that day.70
54.We heard a similar view from Allister Heath, of the Daily Telegraph, with regard to trade in financial services. He told us that the “cliff-edge scenario” of the sudden removal at the point of Brexit of “passporting” rights for UK companies (which we discuss further below) would be “very, very damaging for both sides”. For that reason, he doubted that the EU27 would trigger “some sort of trade war or a complete breakdown in relations”, as it “would be a disaster for the EU just as much as it would be a disaster for the UK”.71 Similarly, we heard from other witnesses that the EU27 would have no interest in disrupting those UK-provided financial services (not least euro-denominated clearing) from which the EU27 derive considerable benefit.72
55.However, Professor Winters of the UKTPO took a different view regarding the strength of the UK’s negotiating position:
It is not that the EU is going to fall over and say, “Anything you want is fine with us because we are desperate for your market”. It is going to be more likely the other way around.73
He argued that the UK’s negotiating position was weak, since the average UK exporter sent 45% of its exports to the EU, while the average EU exporter sent some 7% of its exports to the UK.74 Professor Winters thought that the political pressure on the UK Government to accede to EU27 terms in order to avoid EU tariffs on UK goods would be greater than the equivalent pressure on the EU27 governments.75 Regarding the interests of the German car industry, he thought the German Chancellor would listen to the industry “but it absolutely will not be the only thing she listens to”.76 Even where economic self-interest might seem to dictate that a particular country should look favourably on the UK’s negotiating terms, wider concerns about the future of the EU may well also be in play. Sean McGuire, the Director of CBI Brussels, emphasised that EU27 governments:
have two challenges: getting a good deal for Brexit that helps their companies and their economies, but also trying to push forward in an EU of 27 that does not totally unravel and does not lead to even further market segmentation.77
56.Mike Hawes, Chief Executive of the Society of Motor Manufacturers and Traders (SMMT), told us he thought that, self-interest notwithstanding, German car manufacturers “will align with what is best for Germany” regarding the terms of a trade agreement with the UK.78 In this connection recent comments by Matthias Wissmann, the head of the German car manufacturers’ association, are noteworthy. In October 2016, he said that: “The UK is an important market for us but the EU market is much more important […] If the EU were to fall apart, that would be a lot worse for our industry”. Germany’s priority, he added, must be “to keep the EU 27 together”.79
57.Another issue here will be the relative price elasticity of demand for the goods that are traded between the UK and the EU27 countries. It is questionable whether UK tariffs are likely to have much effect on the demand for premium products such as German cars and French wine.
58.Several statistics about UK trade with the EU27 are noteworthy in this connection:80
- In 2015 some 44% of UK exports went to EU27 countries. In 2014 8% or 17% of EU27 exports (depending on how the figure is calculated)81 came to the UK.
- UK exports to EU27 countries are worth about 13% of the UK economy, while EU27 exports to the UK are worth around 3% to 4% of those countries’ economies (taken as an aggregated whole).
- The UK has a deficit on trade in goods with the EU27 (£89 billion in 2015) but a surplus on trade in services (£28 billion in 2015).
- The UK’s trade deficit in goods with the EU27 is very unevenly distributed among EU27 countries and is largely accounted for by just two countries (Germany and the Netherlands).
59.As we have noted, a UK-EU FTA requires (de facto) unanimity among the EU27 nations, and these are likely to perceive their interests differently regarding the terms of such an agreement.
60.The Secretary of State insisted to us that self-interest on the part of the EU27 meant that they would want to negotiate future trade arrangements during the Article 50 process. He did, though, acknowledge that there were countervailing political pressures, relating to: the propensity to see the EU project in political and even emotional terms, rather than purely economic ones; and the possible effects of the elections due this year in the Netherlands, France and Germany.82
Availability of negotiators
61.A further question regarding the feasibility of arriving at a UK-EU FTA by 2019 is the extent to which the UK will have available sufficient numbers of expert staff to undertake negotiations. It seems as yet unclear how exactly DExEU will relate to DIT (which is being built up as the locus of trade-policy expertise in the civil service) in the conduct of the trade element of the Article 50 negotiations. However that relationship is handled, the limited pool of trained staff is likely to be under significant pressure during the two years of negotiating prior to Brexit. As we have noted, by 2019 the UK will also need to have established the terms of its separate WTO membership in a potentially complex and lengthy negotiating process. And, as we discuss in Chapter 5, the UK will probably also be involved in some form of trade talks (if not actual negotiations) with various countries in the run-up to Brexit, including those with which we already trade under EU FTAs and those with which we might be seeking a wholly new FTA.
Potential features of a UK-EU FTA
Trade in goods
Tariff barriers
62.As a member of the EU, the UK is able to carry on trade in goods with the EU on a tariff-free basis. At the very least, a UK-EU FTA would be expected to preserve that arrangement. While this seems likely, it cannot, however, be taken for granted. (We discuss in Chapter 4 issues that would arise if UK exports were to face the EU’s MFN tariffs—a situation that will necessarily arise if no UK-EU FTA is concluded before Brexit.) It is noteworthy that a UK-EU FTA would entail the introduction of trade defence instruments into trade between the UK and the EU27,83 albeit possibly subject to some limitations.84
Non-tariff barriers concerning goods
63.A much more difficult aspect of UK-EU FTA negotiations will be that of non-tariff barriers. In the contemporary context, these are arguably of much greater importance than tariffs. While a tariff affects the price of a product in a particular market, non-tariff barriers determine whether or not the product can be sold at all, or under what conditions, in that market.
The EU Single Market seeks to prevent regulatory systems inhibiting the free movement of goods by: harmonisation (of product rules, voluntary Technical Standards and certain regulatory regimes); and mutual recognition of rules and standards (meaning that goods lawfully manufactured or marketed in one Member State can be lawfully sold in all Member States). Manufactured goods must be marked “CE” (Conformité Européenne) for sale within the Single Market. In respect of most goods imported into the EU, conformity (also known as compliance) is not checked at the border85 but is undertaken at the local level by trading-standards officials.
64.There are understandable concerns about the degree to which there will be continuity between these arrangements and those which will apply under a UK-EU FTA. The SMMT told us in written evidence of their concerns as a body representing a key manufacturing sector:
It is essential that there is certainty and continuity through harmonisation of EU and UK regulations affecting the automotive sector to support both UK manufacturing and the UK vehicle market. Government should establish appropriate, clear and non-burdensome structures that enable application and implementation of crucial EU legislation. Regulatory divergence or uncertainty in the legal framework for the automotive industry would amount to non-tariff trade barriers, increasing costs and reducing the competitiveness of both the manufacturing base and ability to sell vehicles.86
65.We also heard the following from Which?, giving the perspective of consumers:
As members of the EU we have supported a harmonised and better-functioning single market for goods so as to allow improved access for consumers who wish to shop cross-border and encourage the growth of the EU’s digital economy. Consumers have been accustomed to shopping cross border and will likely still wish to do so following the UK’s exit from the EU regardless of whether the UK is a member of the Single Market or not. The negotiations should ensure that cross border trade is not hindered and is accompanied by suitable measures to deliver consistent enforcement, redress and safe products for UK consumers.87
66.Were at-the-border checks to be introduced in order to enforce EU product standards, this would, of course, create trade friction at the border. It could also have political consequences in relation to the land border between Northern Ireland and the Republic of Ireland, which is currently not operated as a “hard” border (with physical barriers and traffic being stopped and checked).88 Evidence given to the Treasury Committee by officials of HM Revenue and Customs (HMRC) indicates that electronic systems could help to limit the scope of trade friction at the border.89 In respect of Ireland, scepticism has been expressed by the House of Lords EU Committee regarding how far such technology could obviate the need for physical checks at the border.90
67.Even where standards barriers persist, conformity (or compliance) assessment barriers can be eased by means of equivalence of assessment (including mutual recognition of assessment91 and “Authorised Economic Operators”).92 It is very common for the EU to have such an agreement, even in the case of countries with which it does not even have an FTA.
68.A particular issue is that of the UK losing access to EU certification agencies, which play an important role in facilitating the Single Market. The ADS Group, a trade organisation for companies in the UK Aerospace, Defence, Security and Space Sectors, told us:
Membership of the European Aviation Safety Agency (EASA) in particular, allows the UK to benefit from regulatory harmonisation, ensuring its products and components are certified and safe for use across Europe. EASA is the EU agency responsible for regulating and overseeing the safe operation of civil aviation across Europe. EASA is a unique agency, with significant influence in technical aviation safety rulemaking in Europe and across the world. Its duties include certifying aviation products for use and overseeing approved organisations. The UK has been an influential member state at EASA over the past 10 years, participating actively in all of the technical working groups and rulemaking committees and helping to continually improve the safety of Aviation safety across Europe. For the Aerospace industry, EASA provides an efficient route to the global market for many UK companies, as agreed bilateral safety agreements ensure European certifications and approvals can be validated in markets such as the US and Canada.93
69.The Brexit White Paper lays particular emphasis on the extent to which voluntary technical standards are increasingly developed globally. These standards are implemented at regional level (in Europe’s case through the European Standards Organisations, which are not EU bodies, although they have special status in the EU) and national level (in the UK’s case through the British Standards Institution).94 It is noteworthy, however, that these voluntary technical standards are only one facet of the harmonisation of product standards within the EU.
70.In giving evidence to us, Dr Fox appeared confident that non-tariff barriers to trade in goods would not be increased in a UK-EU FTA: “We are already at the point of maximal regulatory equivalence. We have complete coincidence in fact of regulator equivalence so we are not trying to achieve something that doesn’t exist at the present time”.95 A critical question, however, is the extent to which this will remain the case in the future, with the likelihood of regulatory divergence over time—which would have implications for the continued acceptance of UK standards as being equivalent to the EU’s.
Trade in services in general
71.The UKTPO told us:
Services are particularly important to the UK. In 2014 services generated 78.3% of UK GDP and UK exports of cross-border services to the world amounted to £220bn (almost 43% of total UK exports of goods and services), of which £81bn went to the EU. Around a quarter of the latter were financial services. Total imports of services were £131bn (24% of total goods and services imports) of which £64bn came from the EU.96
It should be noted that official trade figures do not include sales by affiliates of UK companies that are based in the EU; and nor do they include trading behind the border, even though this can involve the employment of UK citizens abroad and the resulting profits count as UK national income. Consequently, trade in services is even more significant than the narrow cross-border figures suggest.97
72.The services sector is not subject to tariffs. Where barriers to trade in services exist, they are generally due to regulatory differences (concerning market access and minimum standards). At present, UK service-providers benefit from provision in the EU treaties for:
- right of establishment (meaning that individuals or companies from one member state must be legally free to deliver services in another member state either temporarily or permanently, while continuing to be regulated by the authorities of their home country); and
- mutual recognition of professional qualifications (the licensing of professionals by regulatory bodies is subject to the principle of mutual recognition throughout the Single Market).
In addition, the EU has developed sets of regulations for particular service sectors, including telecommunications, aviation, road-transport and media services. The Digital Single Market (covering digital marketing, e-commerce and telecommunications) aims to keep the EU’s regulatory environment abreast of the fast-moving digital economy.
73.According to the UKTPO:
The EU Single Market for services is still incomplete but it greatly facilitates the exchange of services amongst members, so Brexit will almost surely be associated with a deterioration in market access conditions for UK providers.98
This echoes the Government’s view that “The Single Market for services is not complete”.99 The Law Society similarly told us: “It is commonly accepted that the EU single market in services is a work in progress. However in legal services a single market is already a reality.”100
74.Some, however, take a stronger view on the extent to which the single market in services is underdeveloped. Economists for Brexit said:
It is essential to understand that only a start has been made in regulating trade in services within the EU—known somewhat misleadingly as the “Single Market in Services”. In reality, there essentially is no single market in services to leave.101
And Lord Jones told us:
One of the great lies is that there is a single market in services in Europe. There isn’t. There might be a document that says there is but it is not the same. There is a fabulous single market for manufactured goods. It does not mirror through into services.102
75.Without the drive of the UK with its services-based economy, it seems there could be a risk that the EU’s progress towards a single market in services could be slowed.
76.Regarding the extent to which the UK should seek to harmonise regulation of services with the EU as part of an FTA, we received mixed evidence. Mickael Laurans of the Law Society told us that:
a key ask for my organisation was the continuation of the participation of the UK legal services sector in the two EU lawyers directives and the mutual recognition of qualifications directive. If you leave the Single Market, you have to look at 27 different national regimes of regulation, each having different restrictions in terms of market access and national treatment. There would be member states in which you cannot fly in/fly out. In others you cannot establish or in others you cannot partner with local lawyers.103
77.Some saw a move to UK-based regulation as an opportunity. Gerard Grech, Chief Executive of TechCityUK, told us that, because the UK was a leader in the digital sector:
A key focus for Government is to continue to make sure that they are creating the right policy and regulatory conditions for the digital tech sector to thrive, which I think a lot of European countries will look to.104
78.A further issue is the way in which UK businesses will be able to provide services after Brexit (which we consider further below in the specific context of financial services). Dr Federico Ortino, of King’s College London, told us that:
you could have the most liberal service industry—unregulated, efficient, whatever you want—but if the receiving states say, “No, you can’t enter”, there is nothing you can do. What you need to be able to export your services is that the host state opens up to your services. At the moment in the single market, it is not an absolute single market but it is as good as it gets. If you step away from that, even the most advanced FTA with Korea or with Canada just gives you a little bit more than what the WTO provides.105
79.It is notable that general trade in services receives scant attention in the Brexit White Paper. Regarding the Government’s aspirations for the shape of future UK-EU trade in services other than financial services, it says only: “In our new strategic partnership we will be aiming for the freest possible trade in services between the UK and EU Member States.”106
Trade in financial services
80.Financial services are a particularly important industry for the UK. Mr Heath of the Daily Telegraph argued that the stakes around the trade negotiations for financial services were significantly higher than in other sectors:
[W]hen it comes to financial services, the EU, if it wants to be protectionist, can impose, effectively, infinite tariffs. It can simply ban activity from taking place, trading from happening, from the UK to the EU. That does not happen in other areas, for example in automotive or manufacturing, or so on.107
81.At present, financial service firms based in the UK can rely on “passporting” to do business in the rest of the European Union. The Bank of England provides the following explanation of passporting:
Subject to its fulfilment of conditions under the relevant single market directive, a firm authorised in a European Economic Area (EEA) state is entitled to carry on permitted activities in any other EEA state by either exercising the right of establishment (of a branch and/or agents) or providing cross-border services. This is referred to in Financial Services and Markets Act 2000 (as amended) (FSMA) as an EEA right and the exercise of this right is known as “passporting”.108
82.Niamh Moloney, Professor of Financial Markets Law at the London School of Economics (LSE), told us that it would be “very, very difficult” for the EU to allow the UK passporting rights indefinitely after Brexit.109 She argued that this was for two reasons:
The first thing is that passporting is an access mechanism, but the reason why it is possible, the reason we have this at all, is that we have what is called the Single Rulebook in the EU. This is this enormously densely harmonised set of standards that go from high-level principles right down into the administrative wheels, in terms of how financial actors operate. Sitting beside that, if you like, there are legally binding pan-European supervisory co-ordination arrangements: exchange of information, financial stability arrangements, data exchange. Because these two are in place, this is what allows—economically and politically, as it were—member states to accept financial actors from other jurisdictions. It is the pay-off, if you like. It is the price of access.110
83.Should passporting for UK firms into the remaining EU countries not be the negotiated outcome, then firms could seek other ways of doing business with the remaining members of the EU. As the Bank of England notes above, passporting allows a firm to set up a branch (as opposed to a subsidiary) in another EEA country. Having to set up subsidiaries instead, as a result of the removal of passporting, would not be without cost. The General Council of the Bar of England and Wales noted that: “The passport is undeniably beneficial: it avoids the costs and requirements of setting up a subsidiary authorised and regulated in each Member State into which it is desired to do business”.111
84.One suggestion to minimise the costs for UK firms on withdrawal from the Single Market would be to rely on “equivalence”. The EU Commission states that “In certain cases the EU may recognise that the regulatory or supervisory regime of a non-EU country is equivalent to the corresponding EU regime”. The Commission states that such equivalence brings the following benefits to both parties:
- it allows authorities in the EU to rely on supervised entities’ compliance with equivalent rules in a non-EU country
- it reduces or even eliminates overlaps in compliance requirements for both EU and foreign market players
- it makes certain services, products or activities of non-EU companies acceptable for regulatory purposes in the EU
- it allows less burdensome prudential regime to apply to EU banks and other financial institutions with exposures in equivalent non-EU countries.112
85.Several witnesses noted, though, that there might be drawbacks to relying on equivalence. Anthony Browne, CEO of the British Bankers’ Association, characterised equivalence as “very one-sided” and a “gift given by the Commission”.113 He argued that:
If you are basing your operations and making multi-billion pound investment decisions, you need to know that the tap cannot suddenly be turned off by politicians in another country. You need a stable legal framework underpinning your operations and your trade.114
86.Hugh Savill, Director of Regulation at the Association of British Insurers (ABI), noted that “If we have to fall back on equivalence, that is really not so good in the insurance sector. It is a very restricted set of permissions by comparison with passporting.”115 He also noted that “There are many things that are wrong with equivalence. One of them is that the Commission decides it and the Commission can rescind it with a month’s notice.”116
87.If passporting is unavailable, and if equivalence were deemed too restrictive and potentially short-term, then some type of alternative agreement might be reached. Mr Savill argued that:
As the Prime Minister has now decided that we are not to be members of the Single Market, we are hoping that the Prime Minister strikes an ambitious deal that replicates in some way the kind of passporting arrangements we have now.117
88.Mr Browne provided us with more detail as to what such an agreement (something “in between” passporting and equivalence) should look like:
What we want is mutual market access and passporting rights. Passporting as currently defined only exists within the single market. We are leaving the single market. What we mean by “passporting rights” is the ability to sell directly to customers across border in another country and to set up branches in those countries without burdensome regulatory approvals. That matters more in some sectors than others. It matters more in wholesale banking than retail. There is not much possible in retail banking. We would like to retain those rights in some form.118
Mr Heath noted that “On the other hand, there is a distinction to be made between equivalence of outcomes and equivalence of process”.119 Gary Campkin, of TheCityUK, argued that:
The bespoke deal needs to allow current arrangements to continue to the extent possible. We would argue that the bespoke deal also offers an opportunity to take things even further. The bottom line of the point is to look at what happens here in London and the UK as the world’s leading financial centre and as Europe’s financial centre. Part and parcel of that is not just straight [financial services], it is also legal, accountancy and business advisory.120
89.There would, however, be potential costs to such an arrangement. Professor Moloney of the LSE also told us that as she had looked:
at systems of passporting and how these sorts of arrangements work internationally, and you do indeed get access, you do get subsidiaries and branches and so on, but there is no example of complete unfettered access to a visiting system without concessions to that regulatory system.121
90.Whatever form of agreement is struck, there are bound to be forces on both sides tending towards regulatory divergence after Brexit. Mr Savill of the ABI told us that such divergence is “inevitable”. He argued that the UK version of Solvency II (the EU directive which allows for passporting in the insurance industry):
is going to focus on what is good for the UK. Meanwhile, on the European side there are lots of bits of Solvency II that were put in there for the British market. When they review that, they will think, ‘Why on earth is that there?’122
From a position outside the EU, the UK will, of course, have limited influence over evolving EU standards and, consequently, little leverage to ensure the continuation of equivalence (or whatever other arrangement has been arrived at).
91.On the future framework for UK-EU trade in financial services, the Brexit White Paper says only: “In our new strategic partnership agreement we will be aiming for the freest possible trade in financial services between the UK and EU Member States.”123 It adds that:
As the UK leaves the EU, we will seek to establish strong cooperative oversight arrangements with the EU and will continue to support and implement international standards to continue to safely serve the UK, European and global economy.124
92.It would further need to be resolved how the current role of the ECJ would be performed in a future agreement on financial services. Professor Moloney told us that the ECJ currently had a significant role, both in cross-border resolution of financial institutions when they fail and in dispute resolution more generally. She said that “the Court of Justice has been critical. We will need to ensure in the negotiations that this gets mapped to a certain extent, not so much on the detailed rules, technicalities and passporting but on the big principle of non-discrimination”.125 She further said that the EU’s rules for third countries:
do not specifically arrange for dispute resolution and what would happen if the European structures refused to comply with a resolution decision made in the UK that required action to be taken in the EU. It is at that level of granularity that the free trade agreement will be very, very important. There will be means of dealing with this, whether it is a tribunal or other. It will not be the Court of Justice because I do not think that sort of single market location of the Court of Justice will translate to a free trade agreement. However, that is exactly the level of granularity that will have to be addressed.126
Inward investment
93.Regarding inward investment into the UK economy, the Brexit White Paper states:
The UK is an attractive destination for inward investment. After the US and China (including Hong Kong), the UK ranks third globally for the amount of inward Foreign Direct Investment stock, having passed the £1 trillion level in 2014. Investors remain confident in the UK and according to major independent reports, the UK is the number one destination for Foreign Direct Investment in Europe.127
94.It is important to note that the UK benefits from inward investment by third-country businesses which use this country as a “bridgehead” into the Single Market. In addition, half of direct investment in the UK actually comes from EU nations and such investment will be substantially predicated on the UK’s current status as a member of the Single Market.128 The UKTPO noted in evidence to us that:
For business services in particular, EU membership also has an indirect effect [on investment] by foreign firms seeking to serve UK manufacturing activity, which itself benefits from the Single Market. Thus Brexit could alter the rationale for at least some of the investment that has previously flowed into UK services sectors.129
Dispute resolution
95.A key consideration regarding the terms of a UK-EU FTA is the form of dispute-resolution procedure that will apply. In respect of financial services, Mr Browne told us:
It is completely normal in trade agreements to have dispute resolution mechanisms […] [Y]ou can start off with the current regime, but in order to be dynamic and future-proofed against changes on either side you need some sort of dispute resolution mechanism that both sides accept.130
96.The UKTPO told us in written evidence that:
an EU-UK agreement might have its own dispute settlement or mutual recognition body that eased the continuation of existing standard setting procedures for food and other products.131
97.As we have noted, a key “red line” of the Government in negotiating Brexit is for the UK no longer to be within the jurisdiction of the ECJ. The Prime Minister’s Lancaster House speech clearly ruled out the form of dispute resolution that applies to non-EU EEA members (involving another supranational court which has a collateral relationship with the ECJ).132 This, she said: “would mean accepting a role for the European Court of Justice that would see it still having direct legal authority in our country”.133
98.As we have also noted, the Prime Minister said in her Conservative Party conference speech that Brexit will mean Britain no longer has laws made in Brussels and interpreted by judges in Luxembourg.134 However, as we heard in evidence, entering into any form of international dispute-resolution mechanism inevitably entails relinquishing an element of sovereignty. Dr Ortino of King’s College London told us “in theory, there is no difference” between the ECJ and any other dispute-resolution body: “Whether it is a panel decision or an appellate body decision or any other decision of an international tribunal, it may have the effect of telling a country that that certain behaviour is not complying with a specific international obligation”.135
99.The Brexit White Paper states that:
The UK already has a number of dispute resolution mechanisms in its international arrangements. The same is true for the EU. Unlike decisions made by the [ECJ], dispute resolution in these agreements does not have direct effect in UK law.
As with any wide-ranging agreement between states, the UK will seek to agree a new approach to interpretation and dispute resolution with the EU.
[…]
The actual form of dispute resolution in a future relationship with the EU will be a matter for negotiations between the UK and the EU, and we should not be constrained by precedent. Different dispute resolution mechanisms could apply to different agreements, depending on how the new relationship with the EU is structured.136
100.Dr Fox told us in evidence that:
All the EU FTAs have dispute resolution mechanisms that lie outside the ECJ. All the current EU FTAs tend to have bespoke agreements, depending on the agreement they […] and I think that that would be a good model going forward for a potential EU FTA […]137
101.This leaves open a wide range of possibilities. Notably, it remains unclear whether any possible dispute-resolution mechanism could involve provision for foreign investment protection, such that companies could sue states in an international tribunal for alleged discriminatory practices. As we heard in evidence, the inclusion of such investment protection arrangements (in the form of the Investor-State Dispute Settlement system and the Investment Court System) in FTAs has proved highly controversial.138
“Customs arrangements”
Purpose of rules of origin
102.An FTA requires certain safeguards to be in place to prevent third countries using it to circumvent higher tariffs in one FTA party by routing goods through another FTA party with a lower tariff (effectively using the second FTA party as a “back door” into the first—known as “trade deflection”).139 These safeguards take the form of: customs checks at borders to determine whether duty is payable on a product by virtue of its having originated outside the area of the FTA; and rules of origin, i.e. criteria to determine the source of a product on which such customs checks are based.
103.In the case of a customs union (such as the EU Single Market), the need for rules of origin and associated customs checks is obviated by means of a common external tariff (CET). By this means, the principle of “free circulation” of imported goods can be allowed, such that imports are treated as though originating within the customs union. The existence of a CET means that the members of a customs union pursue a common trade policy and conclude FTAs with third countries as a bloc rather than individually.
Impact of rules of origin on UK-EU trade
104.Were the UK to conclude an FTA with the EU but without a complementary customs union, rules of origin would apply and a customs border would consequently exist between the UK and the EU. This would again raise the issues of trade friction and a “hard border” between Northern Ireland and the Republic of Ireland.140 As we have already discussed, there would apparently be some scope for electronic systems to ease any trade friction caused by at-the-border customs controls. Also, the Secretary of State for Exiting the EU has suggested that a potential model for the future UK-EU border might be that between Sweden (an EU member) and Norway. The latter state, as a non-EU member of the European Economic Area (EEA), trades on a tariff-free basis with the EU but is outside the EU customs union.141 However, evidence taken on this subject by the House of Lords EU Committee142 and the Northern Ireland Affairs Committee143 casts some doubt on the applicability of this model to the Irish land border.
105.Even with minimal trade-friction at the border, though, there would still be significant compliance costs associated with rules of origin for some industries with a complex supply chain. The SMMT told us that “Irrespective of how generous the tariff set under the terms of such a trade agreement, the necessary introduction of rules of origin will result in new administrative costs”.144 Where a sector already has a high level of traceability built into its supply chains (for instance, aerospace), compliance with rules of origin will not impose significant additional costs. However, in other sectors (such as the automotive industry), the additional costs may be such that it could actually prove cheaper just to export subject to the tariff.145
106.A more serious problem still would be that some products which are made in the UK and currently traded freely across the EU might not actually meet the criteria for sale in the EU under rules of origin. Mr Hawes of the SMMT told us:
generally rules of origin require around 50%, 55% local content. Currently in the UK the average car has about 41% local content. Being part of the customs union, basically European content counts, so that is not an issue. If you then have a free trade agreement, and again you can look at the EU and South Korea as an example here, they require 55% local content. As a consequence, potentially a lot of the vehicles made in the UK may not qualify, depending on the nature of that agreement, because we would not reach the threshold for rules of origin.
107.Although the local content of UK-produced cars had increased, Mr Hawes warned that increasing to 55% “cannot happen overnight”: “The danger is that UK-built cars may not qualify under most normal free trade agreements”.146
108.In written evidence, the SMMT argued for the application of the “diagonal accumulation of origin principle”.147 This would involve the EU and the UK accepting (for the purposes of rules of origin) products manufactured in each other’s territory which contain a high proportion of components originating outside the UK-EU free trade area. The basis for doing so would be that the components concerned originated in third countries with which both the UK and EU had FTAs that were aligned in terms of tariffs and rules of origin.148
Government policy
109.Towards the end of 2016, several Government pronouncements were made which left it unclear whether or not it was intended to try and remain in a customs union with the EU. On 16 November, the Prime Minister told the House that “the customs union is not just a binary decision”.149 This was subsequently reiterated to Members by the Secretary of State for Exiting the EU.150 On 1 December, an interview with Greg Hands MP, a Minister of State at DIT, was published in which he explained the Prime Minister’s remark as follows:
You can choose which markets, which products the customs unions affect and which they don’t—so there isn’t a binary thing of being inside the customs union or outside of the customs union […] The history of international trade has got all kinds of examples of customs unions.
The Minister cited the Zollverein, formed by a group of German states in the 1830s, as an example of how “These things can be multifaceted and dynamic”.151 In an interview on 18 December, Dr Fox responded as follows when asked about customs union membership:
It’s not binary, I hear people talking about “hard” Brexit and “soft” Brexit as though it’s a boiled egg we’re talking about. It’s a little more complex. So Turkey, for example, is in part of the customs union but not other parts.152
Since then, the Government has stated that one of its key Brexit “negotiating objectives” is for the UK to be able to operate its own independent trade policy, unhindered by the EU’s Common Commercial Policy and CET.153 Consequently, a customs union with the EU (as exists in the case of a small number of countries—see Annex 2) is also categorically ruled out.
110.In her Lancaster House speech, the Prime Minister said that she wanted cross-border trade with the EU to be “as frictionless as possible”. Consequently, while she did not want the UK to be in a customs union with the EU:
I do want us to have 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.154
111.When the Secretary of State appeared before us on 1 February, we asked him to clarify for us what exactly the Prime Minister had meant by a “customs agreement”, but he was apparently unable to do so.155 He did appear to rule out the sort of customs union that Turkey has with the EU. And he told us:
What we will look like in terms of our customs arrangements is yet to be discussed fully and determined because of the complication that the UK has with the Irish border. We will want to ensure that there is no return to a hard border in Ireland.156
112.Also on 1 February, Lord Price, a Minister of State at DIT, was reported in the German press as giving the following answer to a question regarding the Prime Minister’s reference to a “customs agreement”:
During the last weeks, I have met with many of my EU counterparts […] Most of them were very clear. There will be no cherry-picking. We have understood this message […] The aim must be now to agree on all questions through a free trade agreement with the EU 27. We hope to find a solution on that within the next two years.157
113.However, in the Brexit White Paper, which was published on the following day, the Government stated:
the UK will seek a new customs arrangement with the EU, which enables us to make the most of the opportunities from trade with others and for trade between the UK and the EU to continue to be as frictionless as possible. There are a number of options for any new customs arrangement, including a completely new agreement, or for the UK to remain a signatory to some of the elements of the existing arrangements. The precise form of this new agreement will be the subject of negotiation.
[…]
Whatever form that customs arrangement takes, and whatever the mechanism to deliver it, we will seek to maintain many of the facilitations that businesses currently enjoy, whilst aiming that, if there are requirements for customs procedures, these are as frictionless as possible.158
Sectoral customs union
114.In October 2016, the car manufacturer Nissan UK indicated its intention to continue manufacturing cars in the UK after Brexit;159 and subsequently announced that it would be building two new models at its Sunderland plant, following “support and assurances” from the Government about mitigating the consequences of Brexit.160 The Secretary of State for Business, Energy and Industrial Strategy, Rt Hon Greg Clark MP, denied that any financial inducements had been given to the company.161 However, the Government has thus far not made public the letter that Mr Clark sent to the company detailing the Government’s assurances. It was speculated that what the Government actually gave Nissan was an assurance that the UK would be in a customs union with the EU after Brexit (which we now know will not be the case)—or that there would be some sort of sectoral arrangement specifically for the automotive industry.
115.The idea of a sectoral customs for the automotive industry (along with a sectoral mutual recognition agreement for conformity assessment) was floated in November 2016 in a paper published by the UKTPO.162 The Observatory’s Professor Winters explained to us how it might work:
Maybe you would just follow the EU, but you would confirm that you would have the same tariff on motor vehicles themselves, on all the various component parts or significant component parts and therefore that there was no worry, no concern about trade deflection. Therefore, even if you had a rule of origin written down, you would not seek to enforce it in a very bureaucratic way because the problem it was designed to solve would not arise. It is a very pragmatic sort of thing. It is not a separate trade agreement.163
Regarding the objection that it would be difficult to distinguish between components for use in an industry within a sectoral customs union and identical components for use in other industries, Professor Winters thought it would be “absolutely silly” to attempt to do so: “You would have to have the same tariff on the intermediate goods for all their uses.”164
116.He told us that a sectoral customs union would not be in violation of the WTO’s MFN principle, since it would be a form of preferential trade agreement (as allowed under GATT Article XXIV).165 There remains, however, the question of whether a sectoral customs union would be in violation of GATT Article XXIV:8, which states that preferential trade agreements must cover “substantially all the trade” in goods. This would seem, by its very nature, to rule out sectoral arrangements.
117.The UKTPO paper suggests that “an FTA with the EU, but with a specific deal for cars which maintains existing access to the EU market” (with a CET on cars and their components) would not be WTO incompatible.166 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, 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.
118.We also heard that there would be business and trade-union objections to any approach that privileged certain sectors of the economy at the expense of others.167
Transitional arrangements
119.The Government expects to be able to achieve agreement on a “phased process of implementation” from the point of Brexit in 2019, so that there is no “cliff-edge for business” or “threat to stability”. The Prime Minister has emphasised that this will not be “some form of unlimited transitional status, in which we find ourselves stuck forever in some kind of permanent political purgatory”, but a bridge to a definitively agreed new relationship between the UK and the EU.168
This position clearly rules out the possibility of merely extending the status quo from 2019 and then, over a protracted period, negotiating an FTA on that basis.
120.The Government envisages that the transition process:
might be about our immigration controls, customs systems or the way in which we cooperate on criminal and civil justice matters. Or it might be about the future legal and regulatory framework for business. For each issue, the time we need to phase in the new arrangements may differ; some might be introduced very quickly, some might take longer.169
121.We heard that there are particularly important transition issues around financial services. Professor Moloney of the LSE told us that:
The transitional arrangement is absolutely critical. The cliff-edge effects are bad for everybody. There is absolutely no doubt about that. There is an interdependency there. It is how long it goes on for and what the conditions of the transitional arrangements are. A critical one will be, if you transition and we keep passporting for two, three years, how do we mediate disputes at that stage? Do we have the [European] Court of Justice? One can see that would become a tricky issue. Yes, it is in everybody’s interests to avoid the cliff-edge effect, but there will come a point where passporting will lift and it will be replaced by something else.170
Conclusions and recommendations
122.The government must initiate negotiations for an EU-UK FTA, including customs arrangements and a phased process of implementation, in parallel to the Article 50 negotiations. The Government should identify and address the legal implications of doing so and should make clear how it will address the resourcing implications of doing so.
123.The Government must seek a reciprocal tariff-free basis for trade with the EU after Brexit. In addition, a UK-EU FTA should seek to retain the mutual recognition of rules and standards, and conformity assessment, that the UK currently has as an EU member—bearing in mind the potential need to align rules and standards with those of other trading partners. Even if this is not possible, a UK-EU FTA should allow for equivalence of assessment (including mutual recognition of assessment), in order to minimise as far as possible the friction to trade caused by any regulatory barriers to trade in goods.
124.In respect of trade in services in general, 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. Regarding trade in financial services, the Government should seek the nearest achievable approximation to the EU system of “passporting”. This is a matter to which the Committee will return, including the examination of regulatory change.
125.It would be helpful if the Government could be clearer about the design principles for the dispute-resolution mechanism it will seek as part of a UK-EU FTA. In particular, it should say whether it envisages the possibility of such a mechanism involving provision for foreign investment protection along the lines of the Investor-State Dispute Settlement system. Clarity on how complex disputes in the financial services sector will be resolved without the involvement of the European Court of Justice (ECJ) would also be welcome.
126.A UK-EU FTA should also take full account of the importance of inward investment for the UK economy, and the importance of UK outward investment into the remaining 27 member states.
127.The Government says that it does not wish the UK to continue in a customs union with the EU and that it aspires instead to some form of post-Brexit “customs arrangement”—but the latter has thus far been described only in very vague terms. The current uncertainty is delaying investment decisions, particularly in the manufacturing sector. The Government must be much clearer about the defining characteristics of the proposed “customs arrangement” and explain how it would differ from a customs union. The Government should clarify if there will be a significant sectoral aspect to the arrangement they are seeking and whether that would impact on future international trade policy.
128.Regarding the “phased process of implementation” which the Government envisages, it must take particular account of the need to avoid the sudden ending of passporting in financial services. Any such transitional arrangements will need to include fully worked-out arrangements for dispute resolution.
129.As a general principle, we strongly urge that, in the interests of allowing businesses to adapt and plan for new trading arrangements with the EU, the Government provide as much certainty as possible, as early as negotiations allow.
130.Whatever option applies, the Government must clarify arrangements for customs and border operations, and specify the expected number and intensity of customs checks. Planning for this is a matter of urgency now.
47 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, para 12.3
48 HC Deb, 20 October 2016, cols 937–938
50 “Brexit deal could be reached by October 2018, says lead EU negotiator Michel Barnier”, Telegraph website, 6 December 2016. Mr Barnier also stated that the Article 50 agreement was required to “take into account” the future relationship between the UK and the EU—“Introductory comments by Michel Barnier”, European Commission website, 6 December 2016.
54 “Introductory comments by Michel Barnier”, European Commission website, 6 December 2016
55 UK Trade Policy Observatory (UKT0019). The UKTPO cites the following: “Angela Merkel: no special favours for UK over single market”, Guardian, 28 June 2016; “Speech by President Donald Tusk at the European Policy Centre conference”, 13 October 2016.
56 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, UK-EU Trade Relations Post Brexit: Too Many Red Lines? (UKTPO Briefing Paper 5, November 2016), p 2.
57 “Prime Minister: Britain after Brexit: A Vision of a Global Britain”, Conservative Party website, 2 October 2016
58 “’We’ll have our cake and eat it’: Boris Johnson joins forces with Liam Fox and declares support for ‘hard’ Brexit which will ‘liberate’ Britain to champion free trade”, Sun website, 30 September 2016; “’Have cake and eat it’—aide reveals Brexit tactic”, The Times website, 29 November 2016
59 “Introductory comments by Michel Barnier”, European Commission website, 6 December 2016
60 “The government’s negotiating objectives for exiting the EU: PM speech”, Prime Minister’s Office, 17 January 2017; HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017
61 This effectively rules out membership of the European Economic Area and a Swiss-style bilateral relationship to the EU (on these two options, see Annex 2).
62 “The government’s negotiating objectives for exiting the EU: PM speech”, Prime Minister’s Office, 17 January 2017
67 “Top ministers say UK open to paying for EU market access”, Financial Times website, 1 December 2016
68 “The government’s negotiating objectives for exiting the EU: PM speech”, Prime Minister’s Office, 17 January 2017; HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, paras 8.51, 5.9–5.10
79 “Germany warns hard Brexit will damage UK car industry”, Financial Times website, 16 October 2016
80 Statistics on UK-EU trade, Briefing Paper 7851, House of Commons Library, January 2017; “UK Perspectives 2016: Trade with the EU and beyond”, 25 May 2016, ONS Digital, Office for National Statistics; “Everything you might want to know about the UK’s trade with the EU”, Full Fact website, 20 June 2016. Regarding trade in goods, a margin of error must be allowed for in respect of the so-called “Rotterdam effect”, whereby around half of all goods exported to the Netherlands are re-exported to non-EU countries. It is estimated that the Rotterdam effect could account for around four percentage points as regards UK goods exports.
81 About 8% of EU exports to both EU and non-EU countries went to the UK in 2014. If exports from EU countries to the UK are expressed as a proportion of EU exports to non-EU countries plus the UK, this gives a figure of 17%.
85 Where such checks are made at the border, they are carried out by customs officials. It should be noted, though, that checking for compliance with product rules / standards is quite distinct from border checks that are concerned with the payment of duty.
88 A customs border was operated between the UK and Ireland continuously between 1923 and the inception of the Single Market in 1993. During that period, security and immigration arrangements at the Irish border went through various phases of strictness and looseness.
89 Oral evidence taken before the Treasury Committee on 7 February 2017, HC(2016–17)387, Q599. Regarding the Irish border, see also Oral evidence taken before the Northern Ireland Affairs Committee on 1 February 2017, HC(2016–17)700.
90 House of Lords, Report of the Select Committee on the European Union, Session 2016–17, HL Paper 76, paras 102–5
91 Mutual recognition of conformity assessment involves recognition by parties to an agreement that each other’s conformity assessment bodies are capable of carrying out assessment procedures against each other’s product rules.
92 Authorised Economic Operator status is an international quality mark which indicates that a company has a secure role in the international supply chain, with customs controls and procedures that are efficient and comply with recognised standards.
94 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, p 40
97 The WTO counts four modes of services exports in GATS:
• Mode 1: Cross border trade—from the territory of one Member into the territory of any other Member (e.g. call centres)
• Mode 2: Consumption abroad—in the territory of one Member to the service consumer of any other Member (e.g. tourism in the home country)
• Mode 3: Commercial presence—by a service supplier of one Member, through commercial presence, in the territory of any other Member (e.g. a bank setting up a branch overseas)
• Mode 4: Presence of natural persons—by a service supplier of one Member, through the presence of natural persons of a Member in the territory of any other Member (e.g. overseas postings, self-employment).
UK Balance of Payments statistics count only services under Modes 1 and 2.
99 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, para 8.18
101 Economists for Brexit (UKT0024). Economists for Brexit is now known as Economists for Free Trade.
106 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, para 8.21
108 Bank of England Prudential Regulation Authority, “Passporting”
112 European Commission, “Recognition of non-EU financial frameworks (equivalence decisions)”
123 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, para 8.25
124 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, para 8.26
127 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, para 9.4
128 Swati Dhingra, Gianmarco Ottaviano, Thomas Sampson, John Van Reenen, The impact of Brexit on foreign investment in the UK (Centre for Economic Performance, London School of Economics, April 2016)
133 “The government’s negotiating objectives for exiting the EU: PM speech”, Prime Minister’s Office, 17 January 2017
134 “Prime Minister: Britain after Brexit: A Vision of a Global Britain”, Conservative Party website, 2 October 2016
136 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, paras 2.8–2.10
138 Trade Justice Movement (UKT0011); StopTTIP uk (UKT0025); Friends of the Earth (England, Wales and Northern Ireland) (UKT0028); Royal College of Nursing (UKT0038); Cheryl Coyne (UKT0043); Timothy Flitcroft (UKT0044)
141 Oral evidence taken before the Exiting the EU Committee on 14 December 2016, HC(2016–17)815, Qq418, 420. The Sweden–Norway border has a small number of one-stop customs posts on “red lane” routes (for those carrying goods to declare), operated by both countries with streamlined procedures. Most routes across the border are operated as open “green lanes”, monitored by number-plate recognition cameras – “Scandinavia’s borders set an example for Ireland”, The Times website, 27 October 2016,
142 House of Lords, Report of the Select Committee on the European Union, Session 2016–17, HL Paper 76, paras 100–1
143 Oral evidence taken before the Northern Ireland Affairs Committee on 1 February 2017, HC(2016–17)700, Qq392, 403, 409
145 Oral evidence taken before the Treasury Committee on 7 February 2017, HC(2016–17)387, Q618
148 A more developed form of this approach to rules of origin is “full cumulation”, whereby products are accepted by parties to an FTA as originating in the free-trade area despite their constituents having originated outside, on the basis that they have been subject to working or processing within the area.
149 H C Deb, 16 November 2016, col 232 [Commons Chamber]. The Prime Minister was responding to criticism of the Foreign Secretary regarding an interview in which he apparently stated that the UK would “probably have to leave the customs union […] while maintaining free trade [with the EU]”—“Free trade outside the EU customs union”, Full Fact website, 16 November 2016.
150 H C Deb, 7 December 2016, cols 236–7 [Commons Chamber]
151 “U.K. Could Stay in Customs Union After Brexit, Trade Aide Says”, Bloomberg website, 1 December 2016
152 The Andrew Marr Show, BBC One, 18 December 2016. Turkey has a form of customs union with the EU, but it is not part of the EU’s customs union.
153 “The government’s negotiating objectives for exiting the EU: PM speech”, Prime Minister’s Office, 17 January 2017; HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, para 8.43
154 “The government’s negotiating objectives for exiting the EU: PM speech”, Prime Minister’s Office, 17 January 2017
157 “Government accepts UK must leave EU Customs Union”, Die Welt website, 1 February 2017
158 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, paras 8.45 and 8.47
159 “Brexit: Nissan boss meets PM over Sunderland plant fears” BBC News website, 14 October 2016
160 “Nissan and Government deny ‘sweetheart deal’ over UK investment”, Sky News website, 27 October 2016
161 “’No cheque book’ involved in Nissan pledge, says minister”, Guardian website, 28 October 2016
162 Michael Gasiorek, Peter Holmes, Jim Rollo, UK-EUTrade Relations Post Brexit: Too Many Red Lines? (UKTPO Briefing Paper 5, November 2016), p 5
164 Q213. See also Qq282, 284, 338.
166 Michael Gasiorek, Peter Holmes, Jim Rollo, UK-EU Trade Relations Post Brexit: Too Many Red Lines? (UKTPO Briefing Paper 5, November 2016), p 5
168 “The government’s negotiating objectives for exiting the EU: PM speech”, Prime Minister’s Office, 17 January 2017
6 March 2017