The future UK-EU relationship Contents

Conclusions

The EU’s existing relationships with third countries

1. The Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada is an arrangement designed to meet the trading objectives of both Canada and the EU. It does not eliminate all tariffs and provides for market access some way short of Single Market participation. The trading relationship between the UK and the EU is very different and so a “CETA-style” agreement with the UK would need to reflect markets that are already very much more integrated. A cut and paste of CETA would not be a good deal for the UK or the EU. (Paragraph 36)

2. A more ambitious trade deal for the UK with the EU would need to accommodate anticipated regulatory divergence, from an identical starting point, rather than convergence. The Secretary of State for Exiting the EU said that the UK would start with Canada, and then “add to that the bits missing which is the services”. The ability to elevate CETA into CETA plus plus plus so that it made up for any loss in services trade consequent on leaving the Single Market would require an unprecedented development of mutual recognition agreements far more ambitious than any previously agreed by the EU with a third country. There is no precedent for any EU Member State leaving the EU or the type of new deep and special partnership that the UK is seeking. (Paragraph 37)

3. Most Favoured Nation provisions in CETA (and in other EU Free Trade Agreements) provide that, if the EU offers the UK greater benefit in cross border provision of services and financial services, then it must offer the same benefit to Canada. This would be a consideration affecting the EU’s willingness to provide the UK with generous market access in services as part of such a deal. There are exceptions that enable greater market access without triggering the MFN clause, for example mutual recognition. The Government would need to consider how it could use the available exceptions to improve on cross border services provided in CETA. MFN provisions are likely to be particularly sensitive in respect of broadcasting. (Paragraph 38)

4. Alongside CETA, the EU and Canada negotiated a Strategic Partnership Agreement. This falls a long way short of the level of co-operation that the UK would wish to maintain. However, whilst there will be linkages between the two (for example in respect of data protection provisions underpinning both security co-operation and trade), there is no reason why a more limited trade deal could not sit alongside a very close strategic partnership. (Paragraph 39)

5. The EU’s Association Agreements with Ukraine, Georgia and Moldova cover most of the Internal Market. They also provide for selective participation in many of the agencies and programmes of the EU. Furthermore, free movement of persons is not included and the financial obligations on these countries are minimal. Binding arbitration is provided for dispute resolution and referrals to the Court of Justice of the EU are limited to interpretations of EU law. (Paragraph 54)

6. We also note that the European Parliament supports the option of an Association Agreement. Although these Association Agreements have been reached with countries converging rather than diverging, these agreements do illustrate the EU’s ability to think creatively and apply bespoke arrangements to form a deep and comprehensive relationship with politically important neighbours. (Paragraph 55)

7. However, the mix of rights and obligations that the EU will look to offer in an Association Agreement will depend on its assessment of its long-term strategic objectives and the priorities of the Member States. If the UK is to look to negotiate such an agreement, it needs to set out a clear vision of its future strategic relationship with the EU, and the Committee notes that such a vision has yet to be fully articulated. (Paragraph 56)

8. Relations between Switzerland and the EU are governed by a series of bilateral agreements and negotiations towards an institutional framework have been ongoing for a number of years. While we were told that the EU would not be willing to replicate such an arrangement for the UK, it is clear that Switzerland has been able to establish its own unique arrangement with the EU. (Paragraph 74)

9. Trade between the two covers some areas of the Internal Market and includes some mutual recognition, albeit of an asymmetrical nature. Switzerland accepts the free movement of persons and is part of Schengen. The management of borders is not intrusive, but there is physical infrastructure at the border and checks and controls are applied there. Switzerland does set a precedent for a country enjoying selective participation as a third-country in the EU’s Internal Market, agencies and programmes. (Paragraph 75)

10. However, the Swiss arrangement has evolved out of a process through which Switzerland had seemed to be moving towards EU accession, rather than being seen by the EU as a desirable end-state in itself. (Paragraph 76)

11. Norway makes a financial contribution to the EU in areas such as European cohesion funds, a number of EU programmes relating to science, education and culture, such as Horizon 2020, and JHA matters which promote mutual security. The Prime Minister has said that the UK would like to continue to work with the EU in ways that promote the long-term economic development of Europe; in policies and programmes in science, education and culture; in areas of mutual security; and also remain party to three EU agencies, European Medicines Agency, the European Chemicals Agency, and the European Aviation Safety Agency. The UK Government has also acknowledged that this will involve a continuing role for the CJEU in the UK. While the European Chemicals and Aviation Safety Agencies include provisions for third country membership, the Medicines Agency does not. Membership of the Medicines Agency is only open to EU and EEA States. Under current rules, the UK would only be a member of the Medicines Agency from outside the EU through membership of the EEA. Whether or not participation could be secured through a future partnership arrangement has yet to be determined. In her Mansion House speech the Prime Minister said “if we agree that the UK should continue to participate in an EU agency the UK would have to respect the remit of the ECJ in that regard.” (Paragraph 107)

12. The EFTA Court is not the CJEU. The opinions of the EFTA Court are not binding and it allows scope for national courts to question its interpretation of law as it relates to the EEA Agreement. Docking with the EFTA Court would provide the UK with a ready “off-the-shelf” arbitration mechanism for the ongoing UK-EU relationship. Docking was originally a solution proposed for Switzerland and the EU, so should garner support from the EU. (Paragraph 108)

13. Being a party to the EEA Agreement and not the Customs Union (nor the Common Fisheries Policy) means countries such as Norway operate an independent trade policy. It is noteworthy that Norway and the EFTA countries have chosen to negotiate free trade agreements with third countries that pre-empt or follow the free trade agreements negotiated by the EU. (Paragraph 109)

14. Norway has recognised there is a trade-off between being outside the EU Common Fisheries Policy and the Customs Union, but inside the Single Market. Norway has control over its own fishing waters, the ownership of its own fleet and retains flexibility to negotiate its trade in fish. However, this is balanced against tariffs on its exports of fish into the EU and Norway choosing to align its veterinary checks with EU rules to reduce the need for compliance checks at the EU border. (Paragraph 110)

15. The Norway-Sweden border has been held up as an example of a possible model for the Northern Ireland-Ireland border. Norway is in the Single Market but not the Customs Union. Sweden is in the Single Market and the Customs Union. Both countries are in Schengen. The two countries have been co-operating on how to manage the border for several years, but there are still checks and there is physical infrastructure. (Paragraph 111)

16. Article 112 and Article 113 of the EEA Agreement provides a safeguard measure that could be used to address “serious economic, societal or environmental difficulties of a sectorial or regional nature” if they arise. This could provide a route for the UK to operate a temporary emergency brake on free movement, and a more permanent way of dealing with freedom of movement issues through Article 28. The EEA Agreement also provides a mechanism through the EEA Joint Committee to discuss how to resolve the matter rather than immediately seek a judicial outcome. (Paragraph 112)

17. Norway’s EEA membership gives it the economic benefits of being a member of the Single Market but at the cost of having limited and informal participation in decision-making on the rules of the Single Market. It has chosen to accept the principle of freedom of movement, one of the UK Government’s red lines. There is a trade-off to this. EEA States, such as Norway, have to accept all EEA relevant EU legislation, which is estimated to account for up to 30% of all EU legislation that currently applies to the UK as an EU Member, while being informally invited to provide expert advice at an early stage of the Commission drawing up legislation. They do not have a vote. The Norwegian Parliament has a role in debating EU related legislation and voting on the financial contribution to the EU. Norway has found a balance in its relations with the EU that meets its needs. (Paragraph 113)

18. The Government has rejected applying for EEA Membership because its view is that this entails accepting both free movement and EU law. Should the negotiations on a deep and special partnership not prove successful, EFTA/EEA membership remains an alternative and would have the advantage of continuity of access for UK services. The EEA option is available off-the-shelf and could be negotiated relatively quickly. (Paragraph 114)

19. Turkey has a customs union arrangement with the EU covering industrial goods, but not agriculture (except for processed agricultural products), services or public procurement. It is bound by the EU’s Common External Tariff, but it is not involved in setting the direction of the Common Commercial Policy. Nor is it able to automatically secure market access via the EU’s FTAs, whereas those third countries have automatic access to Turkey’s market. (Paragraph 129)

20. The incomplete nature of its customs union arrangement means checks still take place at the Turkey-EU border and there can be long delays. The examples of Jersey, Guernsey and the Isle of Man show an invisible border can be maintained through participation in a full customs union and adherence to the rules of the Single Market in respect of trade in goods. Such an arrangement could make it easier for the UK to roll-over the EU’s existing FTAs. The UK would also need to negotiate a consultative role in the EU’s future FTAs, as well as a legal mechanism in future FTAs which prevented them from entering into force unless the third-country in question extended market access to the UK. (Paragraph 130)

21. If the UK exited the EU without an agreement on its future trading relationship, it could do so on WTO terms. Eleven of the twelve studies in the Government’s EU Exit Analysis show that trading on WTO terms would be particularly damaging to the UK economy, compared to other scenarios modelled. The UK could still look to negotiate a series of bilateral arrangements with the EU. These might include terms of co-operation with the EU in areas such as customs or aviation. It would remain to be seen how quickly they could be negotiated, or how deep and comprehensive they would be compared to the current Single Market relationship. (Paragraph 143)

22. The UK could choose to offer zero tariffs on goods between the EU and the UK, outside of a trade deal and would be able to use a ten-year exemption before offering the same tariff rates to other nations if the UK were negotiating a trade deal with the EU at that time. After this period, if the UK did so, it would have to offer the same zero tariff to all its trading partners. This would leave domestic producers exposed and remove significant negotiating leverage for the UK in respect of future trade deals. (Paragraph 144)

23. The UK and the EU have both said that they do not want to reintroduce a hard border between Ireland and Northern Ireland. If the UK wanted to trade with the EU on WTO terms, then it could choose to reduce all its tariffs to zero, or it could choose not to collect duties at the border. However, there would still be the need to check some goods crossing the border for reasons such as the safety of goods, or health of agricultural products, or for rules of origin. There are currently checks to prevent excise fraud or illegal imports of arms and drugs. (Paragraph 145)

24. The Government has modelled the impact on UK GDP of the three potential scenarios for future UK-EU trade that we have examined in the course of our work. There is near consensus that moving from trading with the EU as a Member State to trading with the EU on WTO terms would have a significant negative impact on the UK economy. According to most analyses, this negative impact would be mitigated in part by agreeing a “Canada-style” FTA, and further reduced by trading within the Single Market (but outside the Customs Union) as an EEA State. Each of the three scenarios modelled in the Government’s EU Exit analysis factored in the transitional adoption of all existing EU FTAs, and includes the effects of a bilateral UK-US trade deal, which is estimated to bring a benefit of 0.1–0.3% of GDP over the long term, but excludes any other potential FTAs, which the Analysis estimates could add a further 0.1–0.4% of GDP. (Paragraph 153)

The UK’s future relationship with the EU

25. The EU’s different forms of relations with third countries have been driven by a range of particular circumstances and strategic interests. While there are a number of “off-the-shelf” models, the details of each vary widely. There is no precedent for Brexit and any deal reached between the UK and the EU on the UK’s future relationship will, by its nature, be bespoke. A “CETA-style” trade agreement between the UK and the EU would reflect very different trading priorities to the Canada deal and could be part of a very much deeper relationship with the EU in terms of security, academic and many other areas of co-operation than that enjoyed by Canada, however the lack of access for services in such a FTA would pose serious challenges for the UK. Even trading on WTO terms after agreeing exit terms under Article 50 would not rule out continuing close co-operation in areas of mutual benefit. (Paragraph 174)

26. Continuing security co-operation is a priority for both sides. Our predecessor Committee welcomed the Government’s commitment to continuing co-operation with the EU27 on foreign policy and defence matters. That Committee called on the Government in March 2017 to set out some detail about how such co-operation could be made to work in practice, including the institutional and decision-making frameworks that would underpin it. It is regrettable that no response has yet been provided to that report and no detail has been set out. Our predecessor Committee also welcomed the Secretary of State’s statement that the Government wants “as far as is possible to replicate what we already have” in respect of Justice and Home Affairs Co-operation and concluded that the UK’s relationship with the EU when outside should be one of partnership on the basis of shared values and co-operation. Maintaining this level of co-operation will require overcoming a number of technical challenges in respect of agreeing data protection, judicial oversight and governance provisions. The Prime Minister’s Munich speech acknowledges that the Government will be looking to find positive solutions to address these challenges (Paragraph 175)

27. Ensuring the continued free flow of data between the UK and the EU, once the UK has left will be one of the most important cross-cutting issues to be resolved in the negotiations on the future relationship. Data flows are vital for ensuring frictionless trade between the UK and the EU and they underpin co-operation in combating terrorism and organised crime. This is just one area of cross-over that illustrates the relationship between both trade and non-trade elements of the future relationship. Our scrutiny of other third country relations with the EU indicates that imaginative solutions are possible but will require agreement over regulatory frameworks, governance and oversight arrangements. Indeed, we welcome the greater emphasis on alignment, rather than divergence, in the Prime Minister’s Mansion House speech. (Paragraph 176)

28. Our study of the existing relationships between the EU and third countries shows that there are trade-offs between the rights and obligations that comprise those relationships. Michel Barnier’s “staircase” diagram takes as a starting point that the UK Government’s existing red lines suggest a “Canada style” trade deal. The Government is seeking a much wider CETA plus plus plus agreement. While imaginative solutions are possible in other areas of co-operation, these red lines will also affect other aspects of the relationship. Ending free movement will affect the extent of involvement in programmes of academic co-operation granted to the UK. Ending the jurisdiction of the Court of Justice of the EU and any regulatory divergence in data protection will place constraints on a range of programmes for justice and home affairs co-operation, although in her Munich speech about security and policing co-operation, the Prime Minister indicated the UK’s willingness to accept the remit of the CJEU in these areas, respecting the sovereignty of both the UK and the EU’s legal orders. This is a very positive approach which we encourage the Government to apply in other areas. (Paragraph 177)

29. In respect of both trade and non-trade agreements, other countries will take a close interest in the mix of rights and obligations that constitute any future relationship with the UK and may see any special deals for the UK as a precedent. Countries such as Switzerland and Norway will examine closely any agreement between the UK and the EU to see if it contains better terms than their current arrangements. This, in itself, may limit the EU’s room for manoeuvre in terms of what it is prepared to offer the UK. (Paragraph 178)

30. The UK has an enormous amount to offer the EU as a third country. A deep partnership will ensure that the UK’s defence, intelligence and security capabilities continue to add to the EU’s resources (and vice versa), that the international financial centre for our continent stays in Europe; and that our co-operation continues across a wide number of important sectors. However, Ministers need to set out what they want to achieve overall, in much more detail, in terms of the future relationship. The absence of such detail could allow the terms of the future negotiation to be set by the EU with the “offer” to the UK determined by the EU’s analysis of the implications of the UK’s red lines, rather than by a proper consideration by the EU of the strategic value of a continuing close relationship with the UK. We encourage the Government to take a more proactive approach to the linkages between different areas of the future relationship, given that they will be negotiated to different timescales, so that the UK does not find that options are inadvertently closed off. (Paragraph 179)

31. A political declaration on the future partnership is expected to be agreed alongside the withdrawal agreement around October this year. The Secretary of State is confident that final agreement on the future relationship can be reached very shortly after the UK leaves the EU in March 2019, providing for most of the transition period (currently anticipated to last 21 months) to be spent “implementing” the future relationship. In our last report, we questioned whether the transition period would be sufficient to agree the future relationship. The more bespoke and ambitious the relationship, the harder this will be to achieve in the time available. (Paragraph 180)

32. Whilst the UK will not be looking to replicate the relationships of other countries with the EU, our analysis has indicated that there are a number of key tests by which any deal agreed by October can be judged. The Prime Minister has set out her red lines for the negotiations. However, the success of the future relationship will be judged on the ground by the members of the public, businesses and agencies that travel to and from, trade with and will continue to work closely with the EU and EU Member States. The criteria by which they and we will judge the political declaration that we expect to be reached by October will be the following:



Published: 4 April 2018