123.In our December 2018 Report, we said that the Political Declaration was neither detailed nor substantive and that it allowed for a “spectrum” of outcomes for the future UK-EU relationship. We concluded that the document failed to provide certainty on the UK’s objectives for the upcoming negotiations on the future UK-EU relationship:
… the Political Declaration expresses a high level of ambition about the nature and scope of the future relationship, but ambition is no guarantee of success, nor is it clear how it would deliver at least the same outcomes as we have under our current relationship with the EU. People, businesses and institutions will therefore continue to face significant uncertainty about the future terms of EU-UK trade, which will affect future investment in the UK economy.
124.It is clear from the vote on 15 January 2019 that there is no majority in the House for the Government’s deal, including the Political Declaration. On 13 December 2018, however, the EU27 issued a conclusion on the deal which said, “The Union stands by this agreement and intends to proceed with its ratification. It is not open for renegotiation.” Nevertheless, on 19 December 2018, witnesses told us that while the Withdrawal Agreement is not open for renegotiation, it is likely that the Political Declaration can be amended. Sam Lowe told us that there “is probably scope to tweak the Political Declaration, if it was deemed to help the Prime Minister to do so, because it does not bind either side.” Similarly, Dr Kirsty Hughes, Director of the Scottish Centre of European Relations, told us that the Political Declaration could be changed “quite substantively.”
125.It remains unclear whether there is a majority in the House for any of the possible end state options that could form the basis of the Political Declaration, or even if a change to the controversial backstop provisions in the Withdrawal Agreement would be sufficient to ensure that the deal is approved. The Government has sought to find a way to identify which changes might gain the support of the House. We have set out further analysis of what we identified as the three main renegotiation possibilities:
a)Seeking changes to the text in the Withdrawal Agreement on the backstop arrangements;
b)Seeking a Canada-style deal;
c)Seeking to join the EEA through the EFTA pillar and remaining in a customs union with the EU or a variation on this.
If the House indicates a preference, and subsequent negotiations with the EU take place, the deal could be amended to resemble the option favoured by the House.
126.The EU has said unequivocally that the backstop, as set out in the Withdrawal Agreement, is not open to further negotiation. On 16 January 2019, Michel Barnier was reported to have said, “The withdrawal agreement—and, I repeat, the withdrawal agreement—… is not open for renegotiation.” He has also said previously that “To be clear: without a backstop, there can be no Withdrawal Agreement.” Witnesses told us that other options were available that could provide reassurance to the UK, although the primacy of the legal text of the Withdrawal Agreement would remain as it is. While the House could instruct the Government to seek substantive changes to the backstop, the Prime Minister has sought amendments and clarifications already, both during the Article 50 negotiations and after the finalisation of the Withdrawal Agreement, albeit before the House voted down the Agreement on 15 January 2019.
127.On 19 December 2018, Henry Newman told us that one option the Government could undertake would be to create “a role for the Stormont institutions.” He said that this could be done through the UK-EU Joint Committee and it would “give reassurance that the commitments made in December  by both sides in the Joint Report were being met.” On 9 January 2019, the Government published a series of commitments in relation to Northern Ireland and the backstop. This included a commitment to provide a role for the Northern Ireland Executive through the UK’s presence in the governance arrangements that will be established by the Withdrawal Agreement, namely the Joint Committee, Specialised Committee on the Northern Ireland Protocol and the Joint Consultative Working Group. This role would be based on a memorandum of understanding with the Northern Ireland Executive setting out processes for ensuring that “the Northern Ireland voice was represented and heard at each level of the institutional structures that would give effect to the Protocol.”
128.Witnesses also suggested that the Government could seek greater clarity on the operation of the exit mechanisms for the backstop that are contained in the Withdrawal Agreement. On 14 January 2019, in response to a letter from the Prime Minister, Donald Tusk, President of the European Council, and Jean-Claude Juncker, President of the European Commission, set out clarifications on the backstop. However, their letter offered no significantly revised interpretation of the backstop and stated, “we are not in a position to agree to anything that changes or is inconsistent with the Withdrawal Agreement …”. We were told that changes, subject to deliberations in the European Council, could, in theory, be achieved through a form of ‘interpretive declaration’. Professor Catherine Barnard said that such a declaration would most likely take the form of a ‘decision of Heads of State or Government’, i.e. an intergovernmental agreement, which would stand separate and independent from the Withdrawal Agreement. She said that this approach was used for clarifications when Denmark voted against the Maastricht treaty, when Ireland voted against the Lisbon treaty, and for the 2016 Cameron renegotiations.
129.In the Prime Minister’s letter to President Tusk and President Juncker on 14 January 2019, the Prime Minister repeated a proposal to agree a “legal commitment to have our future partnership in place by the end of 2021 at the latest.” Henry Newman suggested that such an approach could, “create a new negotiation cliff edge, which you then rush towards and take actual power away from the UK negotiating team. I do not think they are going to give us that, and it is not a very sensible approach.”
130.The House could seek to amend the Political Declaration so that it set out an end state comparable with the Comprehensive Economic and Trade Agreement (CETA), a free trade deal between the EU and Canada.
131.CETA is one of the most ambitious free trade deals that the EU has concluded to date. A UK-EU relationship on similar terms would be much less close than a Norway/EEA-style arrangement. Under the CETA model, the UK would not be required to make financial contributions to the EU. Moreover, the UK would not have the rights or the obligations that flow from being party to the Single Market’s four freedoms. This would mean, for example, that the UK would not be required to accept the principle of free movement of people, an objective of the UK Government. However, outside the Single Market and its constituent four freedoms, there would be less access to the Single Market and more bureaucracy for UK firms that trade with the EU.
132.The main benefit that the UK would derive from a CETA-style relationship is that it would be able to adapt its trade and regulatory policies to secure better market access in non-EU countries. However, this would inevitably increase barriers to trade with the EU, which is the UK’s nearest and largest market. It is possible that some barriers could be reduced in the future, with additional UK-EU agreements and the use of technology to reduce some friction to trade, but these mitigations would take time to negotiate and to implement.
133.Northern Ireland would have to be outside any CETA-style relationship that the rest of the UK negotiated with the EU, as a relationship on these terms would not entail the level of regulatory alignment between Northern Ireland and Ireland that is necessary to maintain an open border between them. The Government committed to maintain an open border in December 2017. Sam Lowe said, “if you want a Canada-style relationship it can only be for Great Britain, because Northern Ireland will have to have supplementary provisions.” Dr Kirsty Hughes told us, “If you go down the Canada route, you are only going to get joint agreement to go down the Canada route by having a border in the Irish Sea.” The Government has said previously that technology could provide a solution, and it is for this reason that the model has been called ‘Canada Plus’. However, the Government’s technological proposals were rejected by the EU as unworkable.
134.In the absence of a technological solution to maintain an open border, Northern Ireland would have to trade under the backstop provisions set out in the Withdrawal Agreement. The Withdrawal Agreement states that the backstop can be terminated “in whole or in part”, if the two sides deem that the Protocol “in whole or in part” is no longer necessary. This allows for the possibility to leave the backstop provisions that apply to Northern Ireland in place but to remove the backstop provisions that apply to the rest of the UK, so that it can enter into a new trade relationship with the EU, including a CETA-style arrangement. This arrangement would result in a customs border between Northern Ireland and Great Britain, increasing trade friction across the Irish Sea. On 28 February 2018, the Prime Minister said this was an outcome that “no UK Prime Minister could ever agree to”. Furthermore, any free trade agreements concluded between the UK and non-EU countries that cover goods would be unlikely to apply to Northern Ireland.
135.For trade between the EU and the UK, a CETA-style deal would almost certainly entail no duties or tariffs on goods. The Political Declaration already states an ambition to negotiate an economic partnership that will “ensure no tariffs, fees, charges or quantitative restrictions across all sectors”. However, as we noted in our September 2018 Report, a relationship on these terms would not, on its own, ensure the type of friction-free trade with the EU that many UK companies with just-in-time supply chains need, as friction free trade is not possible outside the Single Market and Customs Union. There would be more administrative costs for businesses that trade with the EU, and there would be additional checks and controls at the UK border.
136.CETA includes some provision for trade in services, including access to the Canadian market in telecoms, energy and maritime sectors. It also enables EU companies to bid for public procurement contracts in Canada. There are also some limited provisions for financial services, although these falls far short of Single Market passporting rights and rely on the EU’s equivalence framework. The UK-EU financial services relationship would also probably be based on the EU’s equivalence regime, as already set out in the Political Declaration. This does not cover all financial services and access can be withdrawn with as little as 30 days’ notice. Nevertheless, the Political Declaration already includes a commitment to keep UK and EU equivalency frameworks under review, and to be transparent and consult on decisions to adopt, suspend or withdraw equivalency decisions.
137.Under a CETA-style arrangement, the UK would not be under the jurisdiction of the CJEU. However, enforcement mechanisms contained in free trade agreements can be highly controversial, as was the case with the investment protection and dispute settlement provisions in CETA. Critics said that these provisions would allow foreign companies to sue governments in special tribunals outside domestic legal systems, if they had been affected adversely by changes in policy. This famously led to a delay in ratifying CETA when the Belgium region of Wallonia threatened to veto the agreement.
138.The European Economic Area (EEA) Agreement brings together the 28 EU Member States and three of the four EFTA States—Norway, Iceland and Liechtenstein (‘the EEA EFTA states’). The Agreement provides the EEA EFTA states with effective membership of the Single Market by requiring them to accept the legal rights and obligations that flow from the four freedoms (goods, services, capital and people), and EU level playing field rules. The EEA EFTA states have made a firm choice to align their trade and regulatory policies with the EU, to secure deeper access to the Single Market with less bureaucracy. Compared with EU membership, EEA EFTA states are not in the room when decisions about EU law are taken and they do not have the ability to put regulatory standards, covered by the EEA Agreement, on the table during trade negotiations with non-EU/EEA countries, which could otherwise provide EEA EFTA states with more access to those markets. However, while they do not have a vote through the formal processes in the EU institutions, they do have a right under the Treaties to be consulted about draft EU legislation.
139.There are significant differences between being a third country that is party to the EEA Agreement and being a full EU Member State. EEA EFTA states do not participate in the Common Agricultural Policy, the Common Fisheries Policy, the Customs Union, the Common Commercial Policy, the Common Foreign and Security Policy, justice and home affairs rules, or the Euro. The EEA EFTA states are also not under the direct jurisdiction of the CJEU but accept the jurisdiction of the EFTA Court instead. There is no concept of ‘direct effect’ under the EEA Agreement and therefore the EFTA Court is a separate and independent court covering a separate and independent jurisdiction. Currently, each EFTA state has one judge on the EFTA Court. The EFTA Court gives ‘advisory opinions’ on the interpretation of the EEA Agreement, when requested by national courts of the three EFTA EEA states. These are not binding on the national courts unlike the rulings of the CJEU which are binding on EU Member States. Nevertheless, the EFTA Court is ultimately bound to follow the relevant rulings of the CJEU closely, although it has also established its own precedents in case law. If an EEA EFTA state is not satisfied with a proposed Single Market law they can contest the relevance of new EEA law to the functioning of the Single Market and seek to secure changes, adaptations or derogations. This occurs through the EEA Joint Committee where representatives from the EU and EEA3 meet to ‘decide’ on whether to ratify the proposed new EEA law. New EEA law is only incorporated into the EEA Agreement with the unanimous agreement of the EU and the EEA EFTA states (unlike in the EU Council where voting is on the basis of a qualified majority).
140.The EEA Agreement provides considerable tariff-free access to the Single Market in industrial goods, although there are some restrictions on agricultural and fish products. Furthermore, outside the Customs Union, Norwegian businesses are subject to Rules of Origin requirements. Therefore, trade that crosses the Norway-Sweden border, for example, is not frictionless despite these two countries being closely integrated, with one state in the EEA and the other in the EU. Service providers from EEA EFTA states have similar levels of access to the Single Market as businesses from EU Member States, including the right of establishment. Financial services firms based in EEA EFTA states also have the right to provide services using the Single Market passport.
141.As well as covering many of the EU’s rules for goods and services, the EEA Agreement covers cooperation in research and development, education, social policy, environmental protection, consumer protection, tourism and culture. The Government has already indicated a willingness to continue to cooperate with the EU in many of these areas, as set out in the Political Declaration. EEA EFTA states make financial contributions to the EU to participate in its agencies and programmes, and to Europe-wide cohesion efforts. For example, Norway makes a net contribution of approximately £536 million (€597 million) a year to the EU. The UK makes a net contribution of £8.9 billion a year to be a full member.
142.EEA EFTA states are not represented in the EU’s institutions, but they have some limited rights to consultation on policy at an early stage of development. Nevertheless, Dr Kirsty Hughes told us that Norway’s Europe policy suffered from a democratic deficit and that the country’s influence on EU rules was limited:
I worked in the Commission for two years. How countries influence laws and outcomes that are in their interest depends on being at the table. From my two years at the Commission, I cannot remember hearing Norway’s views being brought up by somebody in any meeting that I was at.
We note that the UK joining the EEA would be likely to make the EFTA pillar of the EEA more influential. An EEA EFTA state can ultimately reject a change to EU law if it is prepared to see its market access suspended in relevant areas. Estimates vary on how much of the EU’s acquis has been adopted by Norway. According to the Institute for Government:
Norway, like other EEA countries, has agreed to follow almost the entire Single Market acquis—a body of nearly 900 EU directives and over 3,600 regulations—and relevant ECJ case law. This acquis includes about 45% of all EU directives, which amounts to about 30% of all EU legislation that the UK currently adopts as an EU country member.
Norway obtained derogations from 55 legal acts and Iceland from 349 acts up until June 2011. The amount of EU law that applies to EEA states appears to vary. For example, the Icelandic Government considers that only 10% of EU legislation applies in Iceland.
143.There are provisions in the Agreement to allow EEA EFTA states to trigger safeguard measures—an ‘emergency brake’—to suspend aspects of the Agreement if “serious economic, societal or environmental difficulties of a sectorial or regional nature” arise and are deemed liable to persist. This can include suspending aspects of the Agreement that relate to the free movement of people. The Agreement states that safeguard measures “shall be restricted with regard to their scope and duration to what is strictly necessary in order to remedy the situation” and it sets out a process for consultations in the EEA Joint Committee for resolving the issues and identifying long-term solutions. Only Liechtenstein has triggered these provisions to control migration, and this was on account of its unique circumstances but they were also offered to Switzerland had the country voted to join the EEA in their 1993 referendum. Sam Lowe told us that the EU is likely to have significant concerns over the possibility of the UK exercising the emergency brake provisions, if the UK decides to seek a Norway-style relationship with the EU. He said, “There is also talk that we could trigger article 112 and do something on freedom of movement. We cannot pretend the EU has not noticed this and would not put in something in a bespoke arrangement to prevent that from happening.” However, this would be a matter for negotiation.
144.EEA EFTA states have trade policies that are more independent than those of EU Member States, as EEA EFTA states are not members of the Customs Union, nor are they party to the Common Commercial Policy. EEA EFTA states do not benefit from the EU’s trade deals with third countries, but they can negotiate their own trade deals as a block or individually. The EEA Agreement inevitably places constraints on these negotiations. While EFTA EEA states can negotiate tariffs and quotas, they cannot alter the standards and regulations which are required for them to be part of the Single Market, under the EEA Agreement.
145.The UK’s commitment to maintain an open border on the island of Ireland would constrain the UK’s trade independence further. Sam Lowe told us that a UK-EU relationship on the same terms as Norway would not maintain an open border. The Government would also need to negotiate a series of additional agreements on top of the EEA Agreement, including a UK-EU customs union. He said:
it would have to not only cover fish and agriculture, but you would probably need to be in a customs union. Even deeper than a customs union, you would probably need to be within the Union Customs Code, as Northern Ireland is under the backstop, and you would also need provisions on VAT and excise.
Dr Kirsty Hughes told us that joining a customs union would also require the UK to seek a derogation from the EFTA Convention, to exempt the UK from the bloc’s free trade agreements. The necessity of these additional agreements, particularly the need for a UK-EU customs union, have led to the model being known as ‘Norway Plus’. Within a customs union, the Government could not negotiate wide ranging trade deals with non-EU countries which included goods, but it could still conclude more limited agreements in other areas, such as on measures to facilitate trade in services.
146.Witnesses were clear that ‘Norway Plus’ is not an ‘off-the-shelf’ option that could be negotiated rapidly. The additional agreements that the UK requires will result in longer and more complicated negotiations. Dr Kirsty Hughes said, “It would take time to negotiate. Issues like fisheries and the level playing field conditions would come back up, but you could get there.” Henry Newman, described a negotiation on Norway Plus as “very messy”, with the UK holding little leverage. He said that during the transition/implementation period, the Government would “come up against all kinds of negotiating cliff edges, where the price is going to be, fish, level playing field, Gibraltar, tighter regulations on our services and divergence.”
147.We also heard that the EEA Agreement is not designed for countries with economies the size of the UK’s, and that the EU would almost certainly require stronger commitments from the UK than it does for a state the size of Norway, for example on level playing field provisions or on the parts of the EEA agreement that allow for the option to delay or reject the implementation of EU rules. Sam Lowe said that a Norway-style future UK-EU relationship would more likely be a separate, bespoke agreement, rather than a straightforward adoption of the exiting EEA Agreement with additions and derogations. He said, “Actually, what the EU and EEA countries would prefer, and it is probably more in the UK’s interests to take this route, is a bespoke arrangement that is built on similar terms to the EEA agreement.”
148.One option for a separate, “bespoke agreement” could include a UK-EU customs union, combined with continued alignment with certain EU rules on goods to maintain frictionless trade at the border. Turkey has a partial customs union with the EU, which covers industrial goods but not agriculture. Turkey is expected to align with EU rules, particularly industrial standards, but not for rules on services and is outside the EU’s free movement of people rules.
149.Unlike Turkey, the UK would require a full customs union that covered goods and agriculture, including alignment with relevant EU rules, to maintain an open border on the island of Ireland, and between Northern Ireland and Great Britain. The backstop Protocol in the Withdrawal Agreement sets out what a ‘bare bones’ customs union between the EU and the UK might look like, although this contains deeper Single Market obligations for Northern Ireland, when compared to the rest of the UK. To make a UK-EU customs union sustainable in the long-term, both sides would need to negotiate additional agreements, including on trade in fish and access to waters, and an agreement to eliminate sanitary and phytosanitary checks between the two sides. The EU would also, almost certainly, insist on the UK signing up to further level playing field rules, as it would wish to avoid the risk of the UK undercutting it on social, tax and environmental standards, while having privileged access to the Single Market in goods.
150.A UK-EU customs union would constrain the UK’s ability to negotiate trade deals with non-EU countries that covered goods. However, the UK would be freer to strike trade deals with non-EU countries in services than it would be as a party to the EEA Agreement. Nevertheless, outside the Single Market, the UK’s services sector would face increased barriers to trade with the EU, without additional agreements on data, labour mobility, the mutual recognition of professional qualifications or equivalency agreements for financial services. New barriers to trade would affect both the EU and the UK. Under the EU-Turkey customs union, the Turkish government is not consulted before the EU negotiates new free trade agreements, and Turkey is required to open its market to the EU’s FTA partners without it necessarily having reciprocal agreements in place. It is possible that the UK could negotiate better terms than Turkey, for example through agreeing a mechanism under which the EU could consult with the UK before or during trade negotiations with third countries, in the similar way that Norway is able to be consulted on the development of certain EU rules, albeit without a vote.
151.The House could decide that the Political Declaration, which offers no certainty on the UK’s end state relationship with the EU, should be amended to provide clarity on a shared understanding between the UK and the EU about a mutually agreeable end state. This would require re-negotiation which would, most likely, require a limited extension of the Article 50 process. We would expect that, within reason, the EU would accede to any such limited request, although such a decision does require the unanimity of the 27. The pronouncements of the EU indicate that any request to re-open negotiations on the legally binding Withdrawal Agreement would not receive a positive response.
152.If the House decides to accept the Withdrawal Agreement but to amend the Political Declaration in a way that sets out a clear end state for the future UK-EU relationship, there will inevitably be trade-offs between the level of UK regulatory autonomy and the level of market access and opportunities for future EU/UK co-operation in a range of fields.
153.We note that the Government is seeking an economic relationship that would enable frictionless trade to continue. This would not be possible under a CETA-style free trade agreement with the EU. Furthermore, under this arrangement, Northern Ireland would not be included and would trade under different rules from the rest of the UK, as set out in the backstop Protocol, resulting in a trade and regulatory border in the Irish Sea.
154.A Norway Plus relationship between the UK and the EU, or a variation of this option, would enable frictionless trade on the condition that the UK continued to adhere to EU rules. Along with following Single Market rules, the UK would need to be in a UK-EU customs union, which would further constrain its trade policy. The Government has not faced up to these trade-offs.
272 Exiting the European Union Committee, , Tenth Report of Session 2017–19, HC 1778, 9 December 2018, para.
273 The House voted against the Government’s motion to approve the Withdrawal Agreement and Political Declaration by 432 votes to 202. See HC Deb 15 January 2019 Vol. 652, Col.
274 European Council, , 13 December 2018, para. 1
277 Exiting the European Union Committee, , Eleventh Report of Session 2017–19, HC 1902, 16 January 2019, paras. 14–19
278 Reuters, , 16 January 2019
279 European Commission, , 30 April 2018
281 HM Government, , 9 January 2019, paras. 24–27
282 Department for Exiting the European Union, , 14 January 2019
284 Department for Exiting the European Union, , 14 January 2018
286 See, Cecilia Malmström, 9 December 2015 and, European Commission Press Release, , 5 July 2016
287 European Commission & Department for Exiting the European Union, , 8 December 2017, para 49
290 See, Department for Exiting the European Union, 15 August 2017. See also, Department for Exiting the European Union, , 16 August 2017, and, Politico, , 24 April 2018
291 European Commission & Department for Exiting the European Union, , Protocol on Ireland/Northern Ireland, article 20
292 HC Deb 28 February 2018, Vol. 636,
293 [Dr Holger Hestermeyer]
294 European Commission & HM Government, , 22 November 2018, para. 23. Under CETA, 98% of EU goods enter Canada free of tariffs and duties.
295 Exiting the European Union Committee, , Ninth Report of Session 2017–19, HC 1554, 18 September 2018, para 63
296 Institute for Government, , 18 December 2017, page 13
297 European Commission & HM Government, , 22 November 2018, paras. 37–39
298 Switzerland is in EFTA but is not party to the EEA Agreement. Its relationship with the EU and the Single Market is established in a series of bilateral agreements.
300 The EFTA Court is bound to interpret the EEA Agreement in conformity with the relevant rulings of the CJEU that were issued prior to the signing of the EEA agreement in 1992. For rulings issued after that date, the EFTA Court is obligated to pay ‘due account’ to relevant rulings.
301 [Professor Carl Baudenbacher, former Judge of the EFTA Court]
303 European Commission & HM Government, , 22 November 2018
304 House of Commons Library Briefing Paper, , Number 8129, 21 December 2018, page 16
305 House of Commons Library Briefing Paper, , Number CBP 7886, 23 November 2018, page 3. The Government has published a long term economic analysis in which it estimated that, based on Norway’s contribution of 0.15% of GDP, the UK would contribute £6.2 billion to participate in the Single Market through the EEA in 2035/36. See, HM Government, , November 2018, section 8.5
306 EFTA.int, , Part IV, Chapter 2
308 Institute for Government, , 18 December 2017, page 10
309 Iceland Monitor, , 21 October 2015
310 EFTA.int, , updated 1 August 2016, Articles 112–114
311 Liechtenstein subsequently secured an amendment to the EEA Agreement to enable it to continue to apply restrictions to free movement of people provisions. Iceland used the safeguard measure to control movement of capital after the financial crisis in 2008.
315 Centre for European Reform [Sam Lowe], , December 2018
318 [Sam Lowe]
319 [Sam Lowe]
320 Except processed agricultural products.
321 European Commission,
Published: 28 January 2019