The future UK-EU relationship Contents

2The EU’s existing relationships with third countries

Deep and Comprehensive Free Trade Agreement - Canada

12.The Secretary of State for Exiting the European Union has said that the Government is looking for a bespoke deal, that would probably start with Canada, with the best bits of the Japan and South Korea deals, and then “add to that the bits missing which is the services.”11 The EU negotiator, Michel Barnier, has said that, based on the UK Government’s own red lines, the UK-EU relationship is likely to be close to the agreement signed with Canada.12 Professor Richard Whitman, Head of School, Professor Politics and International Relations, University of Kent, told us that Mr Barnier’s logic should not be taken as definitive.13

13.The Comprehensive Economic and Trade Agreement, commonly known as CETA, is a trade deal between the EU and Canada. It has been described by the EU Commission as “the most ambitious trade agreement that the EU has ever concluded” and “a milestone in European trade policy”.14 Christophe Bondy, former senior council to Canada on the CETA negotiations, said that the negotiations began with both sides carrying out a joint scoping exercise, which started in 2008.15 Negotiations were completed in August 2014 and the Agreement was signed on 30 October 2016. The internal discussion between the national government and the provinces and territories in Canada added to the time taken.16 Its signature was delayed further at the end by objections from the Walloon Parliament, and the agreement finally came into force, provisionally, in September 2017.17 When asked if he thought the EU-UK negotiations would be shorter than the CETA negotiations, because the UK and EU are starting from a point of harmonisation, Mr Bondy said:

I think it is a completely distinct situation. The main issue is that you are asking of the EU something that it has never given […] It is difficult to compare, because you are not asking for the same thing from the start.18

14.Pascal Lamy, former Director General of the World Trade Organisation, said Brexit was “like removing an egg from an omelette” and that the negotiations will take a long time:

because, simply, it is very complex. It took many, many years for the EU to move from a common market to a Single Market. […] This process of convergence and integration, mostly through regulatory convergence, has been going on for many, many years. Moving back from that will be complex and, in my view, for what it is worth, costly. If there were many benefits in moving to a common market and then from the common market to the Single Market, there will be costs in moving back.19

15.A Free Trade Agreement along the lines of CETA would not compromise the UK Government’s red lines: it would not involve payments to the EU, it would not involve obligations along the lines of the four freedoms associated with the Single Market, it would not constrain trade policy much or involve the CJEU. While the CETA negotiations did consider the temporary entry of workers and enabling visa free access for all EU Member States to Canada, CETA does not provide for free movement.20

16.Comparing the CETA agreement to current arrangements as a Member State, Mr Bondy said that CETA was “a very high standard of free trade agreement […] an excellent free trade agreement” but it would not achieve the regulatory participation and harmonisation of being in the EU for 45 years.21 He said that “With a free trade agreement, you have regulatory autonomy and you have borders.”22

Goods

17.CETA removes all tariffs on industrial products traded between the EU and Canada. There is liberalisation of trade in some agricultural products, but not all, such as poultry and eggs,23 and audiovisual services are also excluded. Fredrik Erixon, Director of the European Centre for International Political Economy, said it might be that the UK-EU FTA could provide zero-tariffs on all goods, but that the important issues would then be “all the practical administrative issues of trade” such as processes for authorising traders to trade without inspection checks and managing rules of origin.24

18.Dr Lorand Bartels, University of Cambridge and Senior Counsel, Linklaters, said that leaving the Single Market to trade on a CETA style basis would provide an opportunity for “an independent trade policy and an independent regulatory policy.” This may entail divergence from the EU, and so could impact on UK-EU trade, but there would be benefits in allowing the UK to reduce tariffs on some foods lower than the EU tariffs, such as citrus fruits, to provide cheaper food for consumers.25 The EU does offer duty-free and quota-free imports from least developed countries through its Everything but Arms initiative.26 Dr Bartels also said that a CETA-type deal would not be compatible with an open border between Northern Ireland and the Republic of Ireland with no checks and no infrastructure.27 When this was put to David Davis he said that it would depend what was added to the CETA-type deal by way of pluses.28

Services

19.CETA does include some provision for trade in services, including access to the Canadian markets in telecoms, energy and maritime transport sectors, and enables EU companies to bid for public procurement contracts in Canada.29 At the same time, the EU entered a large number of reservations on Canadian access to EU financial markets.30 Whereas Canadian services’ exports might be dependent on tourism and transportation, 80% of the UK economy comprises services and the UK places a higher priority on accessing markets where it can sell its services.31 While Mr Bondy said he thought CETA represented a “step forward in terms of services”, it did not allow a service provider to enter “a different economic space and carry on business without complying with the local laws or without having to show compliance with local laws and regulations”.32 David Henig, UK Trade Policy Specialist, said he would expect the EU to make an offer of its standard schedules on services to the UK, and these are “pretty similar for all trading partners in free trade agreements.”33

20.Asked why there might be barriers to a FTA including services with the EU, Mr Erixon told us that there was a tendency across the world, not just in the EU, for regulation in areas such as financial services, telecommunications services and digital services, to operate in a way that made it more difficult to trade with third parties outside of that territory.34 This was a key difference to the Single Market.35 Pascal Lamy, former Chief of Staff to Jacques Delors, acknowledged that the Single Market is still imperfect in services.36 Jessica Gladstone, Clifford Chance, said:

If you do not get a broad, sweeping commitment for services in the round, there is a challenge. If you start breaking it down and you start getting restrictions added and the commitments being less wide-ranging, you have the challenge of trying to identify which non-tariff barriers will in practice hinder the delivery of those services. You have to identify what licences will not be issued or will be difficult to be awarded. You have to identify what regulations it will be more difficult or more costly to comply with from outside than it is when they are the only set of regulations you have to comply with. When you compound it together, that is the challenge of it. You need to break it down to make sure you know what those obstacles are, you know how to write those into the legal text, and you know how in practice that is going to work for the businesses who export their services.37

21.Mr Erixon expected that there would be an agreement on financial services, because it was in the interests of both the UK and the EU to maintain the supply of capital and financial services across Europe, not least because of UK financial services content in industrial exports from countries such as Germany.38 However, while financial services might be part of the UK-EU deal, he anticipated a “material difference between being in the Single Market and having an FTA in terms of what type of access you will have.”39

Mutual recognition agreements

22.CETA includes a Protocol on the mutual acceptance of conformity assessment for products such as electrical equipment, toys, some machinery and hot water boilers.40 It allows for Canada’s assessment bodies to certify that goods made in Canada meet European standards, and vice versa—not the mutual recognition of the actual standards. In some areas Canada has agreed to follow EU rules without reciprocation, and with no influence in how the EU sets those rules.41 In her Mansion House speech, the Prime Minister called for a “comprehensive system of mutual recognition” to “ensure that, as now, products only need to undergo one series of approvals, in one country, to show that they meet the required regulatory standards.”42 In addition to the Protocol on the mutual acceptance of the results of conformity assessment, CETA includes a framework for mutual recognition of testing, providing a structure for individual agreements to be reached for individual products depending on the specific regulations for the particular product. David Henig said:

It is very difficult to get an overall framework that says, “Where the EU requires testing, it is all allowed to be carried out within the UK”. The EU has not done that for any other country, so we would have to go through a process of doing this EU regulation by EU regulation. As you can appreciate, there are an awful lot of those EU regulations.43

Not every product needs to be tested within the EU according to EU standards. David Henig said complex products, e.g. chemicals, are tested, while in some areas, such as telecommunications, the standards are international.44 And for a large number of less complicated products, it may be sufficient for the supplier to declare that the product meets all known regulations and standards.45 He said it would be for the UK “to go through every product, and to go through all the regulations relating to that product, to establish the way that the UK products might be affected by these regulations.”46

23.CETA does include a Framework for Mutual Recognition on professional qualifications, where:

Each Party shall encourage its relevant authorities or professional bodies, as appropriate, to develop and provide to the Joint Committee on Mutual Recognition of Professional Qualifications […] joint recommendations on proposed MRAs [Mutual Recognition Agreements].47

The framework does not provide for each party to recognise automatically the qualifications of individuals from the other, but for the relevant bodies, such as professional bodies in each country, to talk to each other about how to recognise each other’s qualifications.48 The European Council Article 50 draft negotiating guidelines, published on 7 March 2018, includes reference to “a framework for the recognition of professional qualifications.”49

24.Dr Bartels told us that where the EU has agreed an MRA, it has been on an unequal basis.50 Mr Bondy made a similar point with reference to the EU-Ukraine relationship:

If you are participating as, say, the Ukraine in certain aspects, it is because you are fully compliant with the EU-determined rules, not jointly determined but EU-determined.51

He added that there was a clear difference between being in the Single Market and a relationship based on a FTA:

The difference between a trade agreement and a Single Market is that, in a Single Market, there are rules that are deeply harmonised that are jointly developed for all member states. […] With a free trade agreement, you have regulatory autonomy and you have borders.52

25.Dr Bartels noted that the UK-EU negotiations will replace “complete convergence because of the Single Market” to either “harmonised legislation or mutual recognition”. He argued that:

So long as those legal regimes continue, I cannot see any reason why the EU should not be obliged to continue this type of recognition. This is something that the EU negotiators do not accept, but it follows from WTO law, with one exception to do with financial services.53

Mr Lamy’s view as to whether the EU would have to continue to recognise UK standards:

No. The EU will keep, as the UK will, its total sovereignty in deciding on specifications for goods or domestic regulation for services, which is the equivalent for services.54

26.Dr Bartels also said that:

The only other trade agreement that I have encountered that has anything resembling the EU’s mutual recognition and to some extent harmonisation model is the agreement between Australia and New Zealand. Even that agreement has many more carve-outs than what one sees in the EU. […] Regulatory co-operation does not really exist.55

27.Explaining the barriers to the EU-UK relationship ‘cloning’ the mutual recognition practices for services from the Single Market, Mr Erixon said there will be differences, depending on the service, and whether it is a sector with a substantial body of EU regulation or where a licence approval is necessary. He said:

We should bear in mind that the EU does not like mutual recognition agreements outside the Single Market. It has not done many of them.56

This would not, however, necessarily preclude one being done for the UK-EU Agreement, and it would be in both our interests to pursue this.

28.Mr Barnier said on 20 November 2017 that “a legal consequence of Brexit is that UK financial service providers lose their EU passport” and that the EU “will have the possibility to judge some UK rules as equivalent”.57 Equivalence is a lesser form of mutual recognition, where there is recognition that the standards of another are the same, but that recognition can be unilaterally withdrawn at any time.58 The Prime Minister, in her Mansion House speech on March 2018, and the Chancellor in his speech at HSBC on 7 March 2018, have made the case for more comprehensive mutual recognition for financial services.59

29.Ms Gladstone said that the drawback with equivalence was that outside the EU, the UK would no longer have influence in writing the rules, and would be a rule taker on financial services.60 She explained Clifford Chance had developed a model for mutual recognition “at the regulatory level” with the aim of enabling financial services to continue to operate “in a way they have been used to”. Ms Gladstone said the Clifford Chance model would be different to passporting as “Everything is different from passporting. It is definitely a step away from that”.61 Dr Stephen Woolcock, Associate Professor in International Relations, London School of Economics, told us that overcoming the barriers to mutual recognition would be an important test of whether the “plus plus plus” could be added to a Canada style agreement. Most FTAs looked to manage convergence, whereas the UK was trying to negotiate “having some kind of regulatory divergence”.62 If it wanted an agreement involving regulatory divergence it would need to negotiate a solution for arbitration.63

Transatlantic Trade and Investment Partnership (TTIP)

30.The US and the EU agreed to seek a trade agreement to encourage trade across the Atlantic. The first negotiating round was July 2013, initially frozen in January 2014 following disagreement on the investment section, and then for the US election in 2016. While the TTIP negotiations did not reach agreement, we looked at the lessons that came out of the process and how it compared to CETA.

31.Mr Lamy said that the TTIP negotiation was “precisely about regulatory convergence”64 and Mr Bondy told us that “With TTIP they went a step further with attempts at regulatory co-ordination”.65 In a speech on TTIP in 2013, Karel de Gucht, then European Trade Commissioner, said the EU’s proposals for the regulatory chapter of TTIP included the creation of a Regulatory Co-operation Council, which would bring together the important EU and US regulatory agencies, to consider new priorities for regulatory co-operation and ways to avoid future regulations that might create unnecessary trade barriers. He said, “Neither side will be successful if it seeks to impose its system on the other.”66 Sam Lowe, Centre for European Reform, told us that TTIP did not go further than the CETA deal in its approach to services.67 On what TTIP offered on financial services, he said:

Essentially, the proposal is that it would co-ordinate in regard to ongoing international discussions on financial regulation that is coming up, and also to its own—other things that individual parties have coming up, in order to avoid unnecessary barriers emerging—and then have a systemic discussion around areas where equivalence rulings could be appropriate.68

David Henig said the regulatory convergence aspect of TTIP:

[…] was intended to be ground-breaking for the EU and the US. There was going to be a huge degree of dialogue, of potentially moving towards shared regulatory solutions, with two regulatory superpowers coming together to discuss this. […] that dialogue was never completed.69

Furthermore, he said that progress made on TTIP had been because the UK was pushing inside the EU for it to happen, but this would no longer be the case.70

CETA and the Most Favoured Nation Clause

32.The Most Favoured Nation (MFN) clause in the CETA ensures that, if the EU offers a more generous deal to another party in a bilateral trade negotiation, then that benefit must be extended automatically to Canada. Similar clauses are included in the South Korea and Singapore agreements. Dr Woolcock described this as “a bit of a constraint in terms of what the EU is likely to agree to on financial services.”71 MFN provisions do not cover the entire agreement but do apply in respect of investment, cross-border provision of services and financial services.72 In addition, there are three situations where the clause is not caught: endeavouring to create an internal market (e.g. Norway), the second is for an accession country, and third where there is sufficient regulatory approximation.73 Ms Gladstone suggested it might be possible for the EU and the UK to have a mutual recognition agreement on financial services with an underlying requirement that the UK and EU regulators would perform in a particular way. Another nation wishing to take advantage of the MFN clause would need to conform also to the mutual recognition requirements. In this way, it would open up a renegotiation for the EU but it would not be an automatic opening up of the same benefit.74

33.Broadcasting is generally not covered in EU FTAs, a point acknowledged in the Prime Minister’s Mansion House speech,75 and CETA is no exception. Canada has a long tradition of supporting a national broadcaster and national television programmes.76 In the EU, culture is also sensitive for many countries which wish to protect their own national broadcasting. Mr Bondy explained in respect of CETA:

There was a reservation taken in the services and investment area: “The EU reserves the right to adopt and maintain any measure with regard to broadcasting transmission services”.77

He also pointed out that the MFN clause in the CETA agreement would capture audio transmission, so any benefit offered in future to the UK would also have to be offered to Canada:

When the EU is articulating its lists of reservations, there were many things that were never in its contemplation that it would give to anyone but a member of the club. If the UK comes in now saying, “Actually, we want that benefit. We want to be able to fly from point to point in different parts of the EU. We want audio transmission services access”, or what-have-you, the MFN element of the investment and services chapter in CETA will kick in and you have to give in to Canada.78

CETA and the Strategic Partnership Agreement

34.Alongside CETA, the EU and Canada agreed a Strategic Partnership Agreement (SPA). Professor Whitman told us that the SPA included areas where both parties sought political co-operation, such as in security and foreign policy, but also broader sectoral co-operation such as sustainable development and investment. We were told that the SPA is aspirational, whereas the UK agreement would have to be “nuts-and-boltsy”, looking at where the UK and EU already collaborate and working out how to maintain as much of that collaboration as possible.79

35.Professor Whitman told us that the UK and the EU should have much more ambition than the Canadian SPA, so it would be “something like an SPA-plus-plus-plus-plus-plus”.80 He characterised the objective as to achieve “something where the UK is as embedded as possible but also recognised as being a non-member state.”81 He perceived a lack of thought going on in other Member State capitals as to what this future relationship might look like, and how the complexities of the “institutional plug-in and the legal issues” for involving a non-member state outside the jurisdiction of the CJEU in this way might be resolved.82

36.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.

37.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.

38.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.

39.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.

Association Agreement - Ukraine

Association Agreements under Article 217 TFEU

40.An association agreement is a treaty between the European Union and a non-EU country that creates a framework for co-operation between them. Its legal basis is defined in Article 217 of the Treaty on the Functioning of the EU which provides for “an association involving reciprocal rights and obligations, common action and special procedures”. The EU uses an association agreement to create “privileged links” with a non-member country. These privileged links can involve setting up a free trade area between them, or creating broader economic and political co-operation in areas of mutual interest–for example, on defence and security, migration, environmental protection and energy, science, and education. As they can cover areas beyond trade, they can be more extensive than free trade agreements.

41.The EU’s association agreements include Stabilisation and Association Agreements with Western Balkan countries and those that include a Deep and Comprehensive Free Trade Area (DCFTA), namely those with Ukraine, Georgia and Moldova. The DCFTAs in the three agreements with Ukraine, Moldova and Georgia are new to EU association agreements. They cover: market access for goods; trade remedies; technical barriers to trade, standardisation, metrology, accreditation and conformity assessment; sanitary and phytosanitary measures; customs and trade facilitation; establishment, trade in services and e-commerce; current payments and movement of capital; public procurement; intellectual property; competition; trade-related energy; transparency; trade and sustainable development; dispute settlement; mediation mechanism; approximation; rules of origin; mutual administrative assistance in customs matters; and participation in EU programmes.

42.The agreements also include selective participation in EU agencies, as Michael Emerson, Senior Research Fellow at the Centre for European Policy Studies, explained to us:

There is a list of about 30 EU agencies that are officially open to neighbouring non-member states that wish to associate with the policy in question. One could expect the British Government, sooner rather than later, to comb through this list and say what they like … There are loads of things in there that are open. This is linked to the DCFTA question: which of the chapters of EU legislation does the UK wish to continue to relate to? If we want to carry on with that, we can take the agency with it.83

43.Access to the EU’s Internal Market in the agreements is staggered over a number of years, as Dr Tamara Kovziridze, the Georgian former Chief Negotiator of EU-Georgia Association Agreement, explained to us:

One of the key elements of this agreement is conditionality and the legal approximation process. The very logic is that the three countries are supposed to bring their legislation and implementation practice close to the European Union, and this will take about 10 years. The maximum approximation period that is possible is 10 years, whereas it varies between two, three and five, depending on the directive and regulation, on the area and on the topic.84

44.Contrary to EU assertions that the four freedoms of the Internal Market are indivisible, free movement of persons is not included in these agreements, as the Institute for Government has pointed out:

Despite its unprecedented access to the Single Market, Ukraine is not required to accept freedom of movement, or to make any financial contribution. But given that their GDP per capita is well below the EU average and the EU has strategic political interests in Ukraine, the EU was not interested in seeking either freedom of movement or a financial contribution from Ukraine.85

45.However, in its Report on the options for trade after exit, the House of Lords cautioned that:

there are questions around the extent to which the EU Ukraine Agreement would be available to the UK. In particular, the exemption from the principle of free movement contained in the Ukraine agreement reflects the EU’s reluctance to extend full free movement rights further. This is very different from the UK’s position.86

46.Each of these agreements differ in content, as Dr Kovziridze told us, “What we have in place, in reality, are three association agreements that are very similar in structure and slightly different in obligations.”87 and therefore show that the EU is able to adopt a creative approach to tailoring its agreements, given political will. Dr Kovziridze added that:

It is a matter of political priority to decide specifically what type of agreement it will be and when to enter into it. The dynamics and the timeline are often defined by political factors.88

47.Dmytro Tupchiienko, a Ukrainian lawyer at EY, told us that:

the only thing which could be taken off the experience of the Ukrainian association agreement for the UK would be that a bespoke future agreement between the UK and the EU is possible. That is the only answer that could be drawn now.89

48.Andrew Duff, a former MEP, has noted that, from the EU’s perspective, these agreements were aimed at third-countries converging, rather than diverging with the EU:

While the Ukraine association agreement is an interesting precedent–we know how to do it–the analogy with Britain should not be pressed too far. The aim of the Ukrainian deal is to encourage convergence on the EU acquis and to enhance political co-operation. The purpose of a British deal will be to manage divergence from the acquis and to downgrade political co-operation.90

49.This was echoed by Dr Kovziridze who told us that:

These countries are still distant from the EU in terms of their level of regulatory approximation, so how the legislative framework as well as its implementation works is still different. The whole objective of those agreements is to bring those two regulatory frameworks closer. More specifically in this case, it means that it has to become similar to the European Union in the case of Ukraine, Georgia and Moldova.91

50.A study by Guillaume Van der Loo noted the broader political context to these agreements, as all three countries were part of the EU’s Eastern Partnership (EaP) policy:

When the EaP was launched in 2009, one of the key objectives of the EU was to conclude a new generation of association agreements with the partner countries establishing an ambitious form of political association and economic integration. The latter objective was to be realised by the conclusion of “Deep and Comprehensive” Free Trade Areas (DCFTAs).92

51.Mr Emerson highlighted the geostrategic significance of the EU-Ukraine Association Agreement. He told us that the political circumstances reflected “profound underlying tensions between Russia and Ukraine, which were brought to the surface by this clear act of pro-European, pro-western orientation.”93

European Parliament Resolution

52.On 14 March 2018, the European Parliament adopted a Resolution on the framework of the future EU-UK relationship. The Resolution sets out an Association Agreement between the UK and the EU as the European Parliament’s preferred option. The Resolution stated that the European Parliament would only endorse a framework for the future EU-UK relationship if it maintained:

protection of the integrity and correct functioning of the internal market, the customs union and the four freedoms, without allowing for a sector-by-sector approach […]

that Internal Market participation requires full adherence to the four freedoms and incorporation of corresponding EU rules, a level playing field, including through a competition and state aid regime, binding CJEU jurisprudence and contributions to the EU budget. […]

safeguarding of the EU legal order and the role of the Court of Justice of the European Union (CJEU) in this respect.94

53.The Association Agreement with Ukraine sets out the procedures for dispute resolution. Mr Tupchiienko explained that WTO arbitration was the model primarily used and the CJEU is “mentioned only in terms of it being beneficial to use the precedents as guidance in spirit and in fact, but not an obligatory issue”.95 Mr Emerson added that:

The main game is arbitration: one appointed by each side and one third party; binding arbitration. The European Court of Justice comes in if there is a controversy over interpreting European Union law, in which case it is invited to deliberate on the subject.96

54.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.

55.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.

56.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.

Switzerland

57.Relations between Switzerland and the EU are governed by over 120 bilateral agreements, stretching back over many decades. The most significant cover free trade in industrial products; insurance (excluding life insurances); customs facilitation and security; free movement of persons; technical obstacles to trade; public procurement market; agriculture; research; civil aviation; overland transport; Schengen/Dublin; taxation of savings; fight against fraud; processed agricultural products; MEDIA (Creative Europe); Environment; Statistics; pensions; education, vocational training, youth; Europol; Eurojust; co-operation with the European Defence Agency; Co-operation of competition authorities; Satellite navigation (Galileo, EGNOS); European Asylum Support Office; and company taxation.97

58.Switzerland’s bilateral agreements selectively apply parts of the EU’s acquis as it existed at the time, as Professor Clive Church, Emeritus Professor of European Studies at the University of Kent, drew to our attention:

[…] it is static. To a large extent, the agreements reflect the EU acquis as it was back in 1999. They have not been adjusted.98

59.According to a paper by Christa Tobler, since the most recent round of bilateral agreements, the EU has insisted on a renewed institutional framework for relations with Switzerland. It has demanded an institutional overhaul along the lines of the institutional framework of EEA law, failing which it declared it was not prepared to conclude any new market access agreements with Switzerland. Negotiations on the ‘institutional matters’, as they are commonly referred to in Switzerland, began in spring 2014 and are ongoing.99

60.At a Swiss-EU meeting in November 2017, it was reported that there was no progress on negotiations for a Swiss-EU framework agreement, although European Commission President Jean-Claude Juncker reportedly said that things were moving in the right direction and an agreement could be on the table by next spring if the last stretch of negotiations was tackled with the necessary flexibility.100

61.The selective, static, application of the EU’s acquis is a significant reason why the EU has officially expressed its dissatisfaction with the relationship between Switzerland and the EU, as John Springford, Deputy Director of the Centre for European Reform, told us:

the EU is not particularly happy with the institutional arrangements, which are essentially a set of bilateral committees between the EU and Switzerland, which aim to ensure that there is regulatory alignment in those sectors of the economy where there has been an agreement. Brussels is not particularly happy with this arrangement because it does not require the automatic download of EU law in the same way that we see in the European Economic Area and of course for EU members.101

62.This was reiterated by Professor René Schwok, Associate Professor at the University of Geneva. He told us that “the EU does not want this experience, model or regime any more. It wants something more difficult for Switzerland in terms of sovereignty”.102 However, he questioned whether this official position was reflected at the highest levels of the EU. He told us that he had conducted research into the EU’s attitudes towards the relationship and found that:

High-level servants and legal experts within the Commission are frustrated with these agreements, because there is no institutional dimension to them. […] But higher people in the Commission […] including Michel Barnier—were not aware of this issue. They said, “We do not care. What are you talking about? I did not know.” […] [Barroso] told me, “We never mentioned this in the Commission at the highest level. It was of no interest.” I talked to several politicians: Ministers in France and Italy. They told us, “We do not care so much about it.”103

The role of the CJEU

63.The majority of the bilateral agreements provide for a Joint Committee to oversee the functioning of the agreement in question. The Joint Committees serve as a platform for the exchange of information, for advice and for consultation. They also play a key role should differences of opinion arise. Decisions are made unanimously within the scope of the powers afforded by the respective agreement.

64.The Court of Justice of the EU does not therefore play a direct role in the relationship, as Professor Schwok told us:

First of all, nowadays in current Switzerland-EU agreements there is no mention of the ECJ. […] Secondly, practically, Swiss tribunals apply ECJ jurisprudence if necessary.104

65.He added that the EU has been pushing for a formal role for the CJEU:

[…] in the current negotiations about the new institutional framework, the EU clearly wants the Swiss to recognise the jurisprudence of the ECJ, because until today it is practically recognised, but not officially recognised. […] there is [also] the issue of what happens in disputes between Switzerland and the EU on, for instance, the application by Switzerland of the evolution of the EU legislation. […] The Swiss refuse this. They say, “These are foreign judges, and William Tell created Switzerland against foreign judges, so we do not want foreign judges.”105

Trade between Switzerland and the EU

66.Trade between Switzerland and the EU is facilitated to an extent by some mutual recognition, but this is primarily a one-way process, as Professor Schwok explained to us:

there have been some mutual recognition agreements, for example on making sure that standards testing bodies in Switzerland are able to say whether something meets EU standards, and then that good can just be shipped across the border. […] This is largely a process whereby the EU standards and rules in goods have been adopted by Switzerland and then they can be sold in the EU.106

67.The EU’s Internal Market is governed by the Cassis de Dijon principle, from the European Court of Justice case of the same name. This applies to all rules in the EU/EEA which have not been harmonised—that is, replaced with supranational EU rules common to all member states. It means that any product lawfully sold in one country can automatically be sold in another even if the product does not fully comply with the technical rules of the other.107

68.Professor Schwok explained to us that, from the Swiss perspective, the mutual recognition in the Swiss-EU agreements was akin to that provided under CETA, and therefore inferior to the Cassis de Dijon principle. Furthermore, mutual recognition is applied asymmetrically in the agreements:

The Swiss accept products from the EU on the Cassis de Dijon principle mechanism, but the EU does not recognise the Cassis de Dijon towards Swiss products.108

Relationship with Free movement and Schengen

69.Switzerland has a bilateral agreement with the EU on the free movement of persons. It is also part of Schengen, which adds a further dimension to its border management, as Professor Schwok explained:

If you are a member of Schengen, you have removed physical barriers on movement of goods and persons. This of course makes it easier not to have controls on the border.109

Border co-operation with EU Member State neighbours

70.Switzerland engages in a substantial form of border co-operation with its EU neighbours. Mr Springford described it as an “extremely sophisticated customs operation”:

The way that it works is similar to the technological solution that the Government put forward in their options paper for customs. There are cameras on pretty much every road crossing into Switzerland, where they take number plates and match those number plates to any car or lorry that has been flagged as a potential risk for smuggling or any kind of illegal activity. If that car or lorry goes over the Swiss border, it is checked.110

71.He explained that it involves a lot of “other risk-based work”:

They sometimes do what they call a “customs blitz” where for two or three hours they will stop all lorries that are going across a particular crossing. They cannot do it for any longer than that because word gets around the lorry drivers and they will avoid the crossing. […] There is also quite strong collaboration between Swiss customs officials and German, French and Italian customs officials, to the extent that they do joint operations, go in each other’s helicopters and that kind of thing, to try to track down smugglers.111

72.Mr Springford also drew our attention to evidence given to the Northern Ireland Affairs Committee by a senior Swiss customs official indicating they stop around 2% of lorries that are crossing the border.112 There are different aspects to Switzerland’s border management, as Professor Schwok explained:

For me, there are four types of barriers, frontiers or hurdles. One is the so-called customs. Those customs frontiers were removed in 1972 on industrial products, but not on agricultural products. The second type of customs is about non-tariff, technical barriers. They have been removed mostly through bilateral agreements, but not on the Cassis de Dijon. […] The third type of frontier or barrier is the so-called indirect fiscality: VAT, excise duties, et cetera. There is no agreement between Switzerland and the EU on removing fiscal barriers … The fourth one is so-called physical barriers: Schengen. You do not have to check people entering into Switzerland.113

73.Overall, although not obtrusive in general, the border between Switzerland and its EU neighbours does require checks to be undertaken and some physical infrastructure, as Mr Springford explained to us:

On infrastructure, there are border cameras. One of the issues with the UK’s current strategy of leaving the customs union is that, yes, we can minimise the amount of border infrastructure that there is, but any kind of customs border requires some kind of border. It requires some checks to stop smuggling. It means that you have to have some checks to ensure that, say, animal standards are kept to. There are some Single Market-type checks that have to be kept up.114

[…] We can talk about the amount of friction, but it is clearly not zero. If you want to export a good across from Switzerland to the EU, you have to fill in quite a lot of paperwork. You have to pay tariffs if that good has significant content that has been imported to Switzerland from outside the EU. There are spot checks on lorries. There are other customs issues, like VAT. The Swiss are not part of the EU’s VAT regime, which means there are spot checks to ensure that VAT has been paid. It is not a very friction-full border. It is one of the lighter-touch borders, but you cannot say it is frictionless.115

74.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.

75.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.

76.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.

The EEA Agreement - Norway

77.In force since 1994, the European Economic Area Agreement (EEA) brought together the EU Member States and the three EEA EFTA States in a Single Market. Article 128 of the EEA Agreement states that when a country becomes a member of the EU, it shall also apply to become party to the EEA Agreement. Therefore, parties to the EEA Agreement include Norway, Iceland and Liechtenstein, plus the 28 EU Member States.116

78.The EEA Agreement guarantees equal rights and obligations within the internal market for individuals and economic operators in the EEA. It provides for the inclusion of EU legislation covering the four freedoms—the free movement of goods, services, persons and capital—throughout the 31 EEA States. In addition, the Agreement covers co-operation in areas such as research and development, education, social policy, the environment, consumer protection, tourism and culture, collectively known as “flanking and horizontal” policies. Apart from the main body of the Agreement, there are twenty-two Annexes.117

79.The EEA Agreement does not bind a country to the EU in the following areas: Common Agriculture and Fisheries Policies, Customs Union, Common Trade Policy, Common Foreign and Security Policy, Justice and Home Affairs, or Monetary Union. It does not have a goal of ever closer union.118 In addition to the EEA Agreement, Norway has 80 agreements with the EU,119 and participates in Europol, Eurojust, and Frontex, and is a member of the Schengen Agreement.

80.EEA Members are not in the Customs Union, but participate in the EU Single Market, and so are able to operate a separate trade policy, albeit within constraints. Pascal Lamy told us:

Norway, basically, is in the Single Market de facto, without being in the customs union, because Norway, for its own reasons, wants to keep an autonomous trade policy, although in reality, if you look at the difference between the Norwegian trade regime and the EU trade regime, there are not many differences.120

EEA Members are not directly subject to the jurisdiction of the CJEU and the concept of direct effect does not exist within the EEA. The CJEU and the EFTA Court engage in judicial dialogue and the EFTA Court has established precedents, that the CJEU has later followed. Professor Baudenbacher told us:

The sovereignty issue was dear to the heart, in particular, of the Nordic EEA EFTA states, because they come from a very dualistic tradition when it comes to constitutional law. They wanted to avoid, for instance, the EEA Agreement producing direct effect. In fact, the EFTA Court has given an interpretation to protocol 35 where we said no direct effect and no primacy.121

EEA Members are able, following the precedent enshrined in Protocol 15, unilaterally to apply different controls to the free movement of people, compared to those currently operating in the UK, by applying the Article 112 emergency brake and entering into Article 113 negotiations, to agree a long-term solution. Financial contribution to the EU are linked to the level of EU Single Market access and participation in EU programmes. EEA Members only accept the rules deemed relevant by the EEA Joint Committee and all of these rules must be passed into domestic legislation by contracting parties.

81.Professor Yarrow said that the EEA Agreement is “nobody’s favourite” as a model for the UK, as he thought it did not appeal to either end of the Brexit debate. He told us, in his opinion, that “it is what most people in the country would prefer”.122 Mr Sverdrup said that the EEA Agreement had been good for Norway, “primarily due to the fact that there are no other good alternatives or better alternatives that are politically feasible.”123

82.Norway makes a financial contribution to the EU in various ways:

In total, Norway pays to the EU about £740 million annually, or about £140 per person. The UK pays £14 billion as a full member, or about £220 per person.124

83.In her Lancaster House speech, in January 2017, the Prime Minister said:

And because we will no longer be members of the Single Market, we will not be required to contribute huge sums to the EU budget. There may be some specific European programmes in which we might want to participate. If so, and this will be for us to decide, it is reasonable that we should make an appropriate contribution. But the principle is clear: the days of Britain making vast contributions to the European Union every year will end.125

84.In her Florence speech, in September 2017, the Prime Minister said the UK wanted to continue working together in ways to “promote the long-term economic development” of Europe, continuing to take part in policies and programmes “that promote science, education and culture–and those that promote our mutual security.” She said the UK would “make an ongoing contribution to cover our fair share of the costs involved.”126 In March 2018, in her Mansion House speech, the Prime Minister said the UK Government wanted to remain part of three EU agencies, and that “We would, of course, accept that this would mean abiding by the rules of those agencies and making an appropriate financial contribution.”127 The three agencies she mentioned are the European Medicines Agency, the European Chemicals Agency, and the European Aviation Safety Agency. 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, therefore, the only way in which the UK can be a member of the Medicines Agency from outside the EU is through membership of the EEA.

The CJEU and the EFTA Court

85.The EFTA Court has jurisdiction with regard to EFTA States which are parties to the EEA Agreement.128 The Court is mainly competent to deal with infringement actions brought by the EFTA Surveillance Authority (ESA) against an EFTA State with regard to the implementation, application or interpretation of EEA law rules. The EFTA Court is bound to follow relevant pre-EEA Agreement CJEU case-law. The EFTA Court is furthermore required to pay “due account” to all subsequent relevant CJEU jurisprudence and, in effect, pays equal regard to post 1992 CJEU case-law. Case law on the primacy and direct effect of EU law does not apply.129

86.Professor Alla Pozdnakova, University of Oslo, said there were several differences between the EFTA Court and the CJEU, notably:

Complainants to the EFTA Court from Norway were generally businesses unhappy with how Norway applies its EEA obligations.131

87.She told us that Norwegian courts have started to take their own view about what EEA law is and have said, “We do not really agree with how the EFTA Court understands EEA law.”132 Similarly, Professor Baudenbacher said that both the Supreme Court of Iceland and of Norway have stated that they are “not only entitled but obliged under national law to assess independently whether they will follow” the opinions of the EFTA Court.133 The EFTA Court has also demonstrated it does not always follow the CJEU and that, when the EFTA Court tackles a legal question first, then the CJEU may follow it. This is helped by “very intense judicial dialogue.”134

88.It has been suggested that the UK might “dock” with the EFTA Court, so it could rule on the UK pillar on the interpretation and compliance with the withdrawal agreement. Docking was originally proposed by the EU to Switzerland to try and place the Swiss-EU bilateral treaties under the jurisdiction of the EFTA Court. Professor Baudenbacher, president of the EFTA Court, explained that docking would be a partial participation in the EEA. (It is likely that the UK would need the agreement of the EU and the three EFTA EEA countries.135) It was Professor Baudenbacher’s view that the UK would be welcomed into the EFTA Court, because the Court would become more important, and he believed the EU was considering the EFTA Court as an option for the future UK-EU relationship.136

Norway as a rule taker

89.In her Florence speech in September 2017, the Prime Minister drew attention to the fact that membership of the EEA would mean the UK having to adopt automatically new EU rules which the UK would have little influence over and no vote. She said that such a loss of democratic control could not work for the British people and would risk “a damaging re-opening of the nature of our relationship in the near future”.137

90.Norway has agreed to follow almost the entire Single Market acquis—a body of nearly 900 EU directives and over 3,600 regulations—and relevant CJEU 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 Member State. Nearly two-thirds of that acquis accounts for goods-related regulations, such as technical rules, and food safety and animal health regulations, while only 16% constitute services-related regulations.138 However, the amount of EU law that applies to EEA states appears to vary. The Icelandic government, for example, considers that only 10% of EU legislation applies in Iceland.139

91.Norway is involved at an early stage in scrutiny of legislation through expert committees and through the EEA Joint Committee—which has to adopt all EU legal acts that are EEA relevant.140 The law is adopted into the Norwegian legal order, either by governmental decree or by statute passed by Parliament.141 The Norwegian Parliament had considered using reservation rights in a very small number of instances--18 out of near 6,000–8,000 legal Acts.142 It has used them once, when it rejected the Third Postal Directive and suffered no repercussions. It later accepted the Directive because of a change in government which took a different view to its predecessors.143 Ulf Sverdrup described some of the political aspects of the process:

First, it is very difficult for the Norwegian Parliament to instruct the Norwegian Government on what it should say or how it should vote in Brussels as it has no vote. Secondly, it is also difficult for the Norwegian Parliament to keep the Government accountable on what they really said, because there are no minutes from a lobbying activity. That is one fundamental weakness. When it comes to the legal aspect, the legislator, as you said—Parliament—is involved. When it comes to budgetary affairs, Parliament is involved. It allocates money, for instance, to research spending, satellite co-operation and all kinds of programmes. It approves that every year.144

However George Yarrow, gave a different view:

the incorporation of EU Directives and Regulations into EEA legislation is a decision that falls to the EEA Joint Committee, which can reject or amend proposals, for example because they are not ‘EEA relevant’ or because they require adjustment to reflect the circumstances of the EEA’s non-EU members. The decision process is consensual, implying that each party has a de facto veto in relation to incorporation decisions.145

EFTA has characterised this process as follows:

the EEA Agreement provides for the most participative procedures available to associated countries outside the EU whose simultaneous aim is to safeguard their sovereignty as far as possible, whilst at the same time benefiting from participation in the Internal Market.146

Divergence from the EU regulatory regime

92.If an EEA country wishes to diverge in terms of EU regulatory requirements, then it could be taken to the EFTA Court by the EFTA Surveillance Authority and found to be in breach of the Agreement.147 Ulf Sverdrup explained that the insistence of the EFTA countries on maintaining sovereignty led to the creation of a separate body—the EFTA Surveillance Authority (like a mini EU Commission)—to oversee the agreement.148 He said:

A fundamental factor, which is probably the biggest hurdle for you in your Brexit discussions, is that in managing your relationship with the EU you probably need to establish some kind of trust. Trust is very difficult to establish. The main way of doing that is through the institutions. We need institutions to manage that kind of trust.149

And that, despite the parts of the arrangement that might be unsatisfactory:

Norway did a big study, which ran to 1,000 pages, on the economic, political and social impacts of Norway’s agreements with the EU. […] A short version of the conclusions is that the economic benefits outweigh the costs. [..] It is not only on the economic side but also on the political side.150

Independent trade policy

93.The EFTA EEA countries are not constrained by the EU Customs Union in developing their own independent trade policy. The EFTA countries can negotiate trade agreements individually or as a bloc, although the population of the bloc is only 10million. Iceland has a free trade agreement with China while Norway is still negotiating separately.151 Mr Sverdrup told us that, as the EU started negotiating trade policies with third countries, the EFTA countries started to follow the EU trade agreements and “joined in afterwards to avoid discrepancies”. He said:

During the EU negotiations on the free trade agreement with Mexico, the EFTA countries discovered that they could sign these agreements quicker than the EU, a few months in advance. So they started making them a bit more. For instance, we entered into a free trade agreement with South Korea 18 or 20 months before the EU did. In content and scope, they are not that different from the EU’s agreements.152

However, while EFTA has around 27 free trade agreements:

they have not been successful in negotiating free trade agreements with what we could call the biggest economies in the world. There is no free trade agreement with Japan, Australia and India, although it is trying to negotiate one. There is also no free trade agreement with the US or Brazil. That is probably because the Norwegians do not want to bring agriculture into the discussions, but that is important for the US, Australia, Brazil and so on.153

94.Outside the Customs Union, the EFTA EEA countries can negotiate on tariffs but cannot negotiate on non-tariff barriers in EEA relevant areas of the Single Market.154 Asked if this impacted on the free trade agreements with third countries, Mr Sverdrup said:

The Norwegian Government have very different interests from the British, for instance, on free trade on agriculture. We do not want free trade on agricultural products, for instance, but we want massive free trade on fish. These regulations on agricultural products, technical standards and veterinary standards are not that harmful.155

95.Being outside the Common Fisheries Policy allows Norway to control access to its waters for fishing and to control ownership of the Norwegian fishing fleet. This control is balanced against obstacles to trade in fish with the EU. There is a differential in EU tariffs between frozen fish and processed fish, which results in 10,000–12,000 people employed in Poland processing Norwegian fish. Furthermore, delays arising from EU inspections of Norwegian fish entering the EU, led to Norway joining the EU regulation on veterinary standards to avoid the need for compliance checks at the border.156

Border management

96.Professor Michael Dougan, Professor of European Law at the University of Liverpool, told us that the Norway-Sweden border is about as closely integrated a border as you can get outside the Customs Union and “pretty much full regulatory alignment” and co-operation, but that there are still “checks, formalities, physical infrastructure and so on.”157 Alla Pozdnakova said the biggest impact on border management in terms of people was not when Sweden joined the EU, but when Sweden joined the Schengen area. This led to Norway and Finland joining the Schengen Agreement.158 Ulf Sverdrup said:

If you go to the border now, you see that the trucks are stopped. They are in a long line to declare their papers, but most trucks can pass through rather rapidly because they have done some kind of electronic declaration up front. That requires a pretty advanced electronic system, combined with a good, trust-based system, with a lot of information about the economic operators. Then, of course, you have these risked-based random checks.159

97.Dr Lars Karlsson, author of Smart Border 2.0, a report he produced for the AFCO Committee in the European Parliament, gave evidence to this Committee on 20 March. He outlined three aspects to consider when designing a border: the laws, conventions, rules and regulations governing trade; the trade policies of the countries either side of the border, and issues around security and safety. He said: “The level you will see at the border depends on the level the two partners would like to have in each of these three dimensions.”160 He acknowledged that his report was commissioned and published before the Joint Report was agreed in December, and it was not the only report presented to the European Parliament.161 His report was written to consider the future UK-EU border in a general sense, for example at Eurotunnel, and not only to meet the aim of avoiding physical infrastructure, checks and controls at the Northern Ireland border.162 He had not been approached subsequently by the UK Government for advice in designing a border which would comply with the terms of the December 2017 agreement.

98.Dr Karlsson said the technology and processes existed that could make a frictionless border without any physical infrastructure on the border itself. The Norway-Sweden border, often held up as near as possible to a smart border, was only 60–75% smart—there is physical infrastructure and checks at the border.163 He said it could be 100% smart but a decision was taken to avoid the additional investment necessary because the border functioned satisfactorily as it was. When asked about what could be in place by the end of transition in December 2020, he said this would depend on what the partners could agree in respect of the development of a trusted trader scheme, the infrastructure for checks (at some point away from the border) and the extent to which the private sector could be engaged and involved.164 He acknowledged that the system would have to be designed to allow for the traders who wished to trade across the border without trusted trader status, to make sure the system captured those who wilfully or accidentally avoided compliance.165 There are already low levels of physical checks for non-EU trade entering the Republic of Ireland. David Campbell Bannerman MEP pointed out that, according to the WTO, Ireland only carried out physical checks on 1% of non-EU trade and there is no reason why this low level of physical checks should be higher for trade from the UK after we leave the EU.166

99.On 5 March 2018, the Prime Minister said she was aware of the Smart Border 2.0 report and that she had asked officials to look at it very carefully.167 At Departmental questions on 15 March, Suella Fernandes, the Parliamentary Under Secretary of State for Exiting the EU, was asked about the Smart Border 2.0 report produced by Dr Karlsson for the European Parliament.168 She replied:

The report to which he refers is an interesting document, but it does not go as far as the commitment made by the United Kingdom. Our unwavering commitment is to not introduce any physical infrastructure at the border. We have explicitly ruled that out. The report is interesting, but it does not go all the way.169

On 21 March, at Northern Ireland Office questions, Karen Bradley, the Secretary of State for Northern Ireland, said she was not familiar with Dr Karlsson’s report.170

Free movement and the EEA Agreement

100.Norway accepts the EU’s principle of freedom of movement: its citizens are entitled to be treated in the same way as EU nationals, which includes the right to live, work and access public services and benefits. Article 112 of the EEA Agreement allows for a EEA EFTA country to trigger a safeguard measure unilaterally if “serious economic, societal or environmental difficulties of a sectorial or regional nature” arise and are deemed liable to persist. The safeguard measures “shall be restricted with regard to their scope and duration to what is strictly necessary in order to remedy the situation” and relate to the procedures laid down in Article 113, which set out a process for consultations in the EEA Joint Committee with a view to resolving the dispute.171 The Joint Committee also monitors any such safeguard measures with a view to their abolition or limitation in scope. Professor Yarrow has said that the EEA Joint Committee has recognised explicitly that free movement of persons is to be interpreted differently in EU contexts than in the EEA Agreement context.172 In the EEA, the four freedoms serve the Article 1 purpose of promoting “a continuous and balanced strengthening of trade and economic relations” between EEA members,173 whereas for the EU the four freedoms serve the fundamental political purpose of “ever closer union”.

101.Norway has never used the safeguard measures. Iceland used the safeguard measure to control movement of capital after the financial crisis in 2008.174 In 1998, the EEA joint committee agreed that Liechtenstein should be allowed to issue residence permits to Norwegian, Icelandic and EU nationals owing to its “specific geographical situation”. Liechtenstein is the only EEA member currently allowed to impose such restrictions on free movement. The Liechtenstein variant of the emergency brake applies only to physical residence and not to work—it limits residence permits—moreover, its small size and specific geographic location within Europe—with high levels of cross-border commuting—make it difficult to compare to the UK. Liechtenstein has a population of around 37,000 and a land area near 160 km2. It is substantially smaller than the Isle of Wight in population (138,000) and land area (258 km2). Nevertheless, the precedent of Liechtenstein shows some flexibility in the requirements of EEA membership in respect of free movement. Landlocked Liechtenstein has an unusually high proportion of its workforce commuting daily across its border, but this is not the case in the UK where a limit on residence permits would be difficult to distinguish from a limit on work.

102.The precedent of Liechtenstein however shows some flexibility in the requirements of EEA membership in respect of free movement. The Protocol adjusting the EEA Agreement to enable this to happen was signed in 1993 to reflect the changes made following Switzerland’s decision not to ratify the Agreement. The Adjusting Protocol deleted Switzerland from the Agreement, including from Protocol 15 on transitional periods on the free movement of persons. As Protocol 15 was originally drafted to enable Switzerland and Liechtenstein to introduce similar but not identical temporary measures to restrict free movement, it would suggest the Protocol was not drawn up solely for the specific circumstances of a microstate.

103.Ulf Sverdrup told the House of Lords EU Committee that Liechtenstein was allowed a special exemption on the free movement of persons when it entered the EEA Agreement, on the basis of its size and the high proportion of non-Liechtenstein nationals working there. The exemption from the free movement of persons was initially temporary. Mr Sverdrup explained the background to the exemption and questioned its potential applicability to the UK:

This [exemption] expired in 1998 and the EU would not extend it further. Then Liechtenstein used Article 112 to say that they needed a limitation on free movement of persons. But when the EU was enlarged in 2004, the parties made some sort of adjustment as an annex to the EEA agreement […] basically accepting that this exception is going to be integrated permanently into the agreement. In general, I do not think the Article 112 strategy is designed for countries that want to be left out of the free movement of persons.175

He told us:

The United Kingdom is a great country with a great history. Liechtenstein is also an interesting country but a small principality. It is not comparable.176

104.Ulf Sverdrup said that, if the UK joined the EEA, it would then have to be committed to take on the obligation of free movement of persons as in the agreement, and then trigger article 112 as some kind of a security measure.177 He said:

You are then back to the situation that Cameron negotiated before you had your referendum. What kind of special situation is it now where you can have some negotiations? Are there some special circumstances related to the UK labour market that enable some kind of legitimate claim to pull this security clause? […] That being said, we have to remember that article 112 is a security clause for some kind of exceptional situation. It is not supposed to last as some kind of permanent thing, so you have to find some kind of transition arrangement and find a solution to that problem. It would be in breach of the spirit of the agreement.178

105.Others have written on the outcome of the UK’s renegotiation of its relationship with the EU—the attempt by David Cameron to secure an emergency brake on migration. Professor Barnard, University of Cambridge, has pointed out that the Conclusions of the European Council from February 2016 used the language of the free movement of workers,179 and that while free movement of workers is an integral part of the internal market, both differing levels of pay and the diversity of social security systems across Europe may incentivise workers to move. The Conclusions said that:

It is legitimate to take this situation into account and to provide, both at Union and at national level, and without creating unjustified direct or indirect discrimination, for measures limiting flows of workers of such a scale that they have negative effects both for the Member States of origin and for the Member States of destination.180

And that,

if overriding reasons of public interest make it necessary, free movement of workers may be restricted by measures proportionate to the legitimate aim pursued. Encouraging recruitment, reducing unemployment, protecting vulnerable workers and averting the risk of seriously undermining the sustainability of social security systems are reasons of public interest recognised in the jurisprudence of the Court of Justice of the European Union for this purpose, based on a case by case analysis.181

Mr Yarrow said Article 112 and 113 altered the balance to the UK in terms of control:

All these things reduce to questions of power. The EEA would give the UK, in the EFTA pillar, the unilateral right to trigger the safeguard measures, and it would also give it the unilateral right to use what I think is the more important freedom of movement provision, which is the first line of article 28(3). That is a more permanent way of dealing with freedom of movement issues.182

He said that if the UK was in the EFTA pillar then “the control and sovereignty is with the UK”.183 Article 28 of the EEA Agreement allows for freedom of workers to accept offers of work actually made, to move freely for that purpose, and to stay in another territory for the purpose of work. This right is “subject to limitations justified on grounds of public policy, public security or public health”.184

106.Professor Pozdnakova pointed out that the EEA Agreement does not include provisions on EU citizenship in the EU, and that the gap between EU law and the EEA in this area, while reducing, is still developing.185 She pointed out that Norway, and the EFTA EEA states, have implemented the EU Citizens’ Rights Directive even though there is an absence of provisions on EU citizenship in the EEA Agreement.186 Professor Yarrow also commented on the difference between the EU and the EEA position on citizenship:

There is a difference of interpretation in the two [the EU and EEA]. There has to be, because the EEA does not cover citizenship. So, anything that involves a free movement issue where citizenship rights play any role, which, of course, the European Court of Justice does, is out of bounds for the EFTA Court. The courts are creatures of their own treaties, and the treaties are different. I go back to a point earlier that was made. It is not just that the EEA is a sub-component of the European treaty; it also has some differences, and where the differences occur they are profound.187

When asked what Norway might think of the UK joining EFTA EEA, Ulf Sverdrup said:

Two things make Norwegians concerned about bringing the UK in on the EFTA side. The first is that, in EFTA, decisions on adding new legal Acts are done through unanimity. So, if the UK is brought in, it might change the dynamics slightly within EFTA. The second slight concern is that, if the UK uses the EEA as a platform for disintegrating from the EU, that is slightly different from the spirit of the EFTA countries who are using this platform as a form of continuing integration. Those are the two main concerns.188

107.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.”

108.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.

109.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.

110.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.

111.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.

112.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.

113.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.

114.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.

The Customs Union - Turkey

What is a customs union?

115.The EU’s Customs Union is made up of EU Member States, and includes the Isle of Man and the Channel Islands. Under Articles 28, 30, 34, 35 and 36 of the Treaty on the Functioning of the EU, individual Member States are not permitted to introduce charges that have an effect equivalent to that of customs duties on goods; nor are they permitted to impose quantitative restrictions or quotas. This means Member States are obliged to allow goods that are legally produced and marketed in other Member States to be circulated and placed on their domestic markets.

116.The EU’s Customs Union has a Common External Tariff, which is imposed on all goods imported from third countries. Uniform implementation of the Common External Tariff by customs authorities across the EU’s external borders is ensured through the Union Customs Code. Almost 80% of the revenue generated by tariffs go directly to the EU’s budget (in 2015, this made up 13.6% of the EU’s total budget).

117.Goods imported into the EU need to comply with Internal Market legislation. In support of this, the EU has legislated to harmonise regulations (such as product standards and safety requirements) and to enforce the principle of mutual recognition (which requires Member States to accept each other’s certification and conformity practices).

118.Goods imported into the EU need to follow rules of origin, which determine where a product and its components were produced in order to ensure that the correct customs duty is levied. If goods consist of materials from more than one country, special rules apply to determine which country will be judged to be the country of origin. These are based on the origins of the materials, the value added in the process, and where the final substantial production phase took place. Such formalities are not necessary for goods manufactured inside the Customs Union.189

Partial customs union

119.Following its Association Agreement with the EU (the Ankara Agreement, signed in 1963), and the opening of accession negotiations, Turkey signed a Customs Union Agreement with the EU in 1995. This states that:

From the date of entry into force of this Decision, Turkey shall, in relation to countries which are not members of the Community, apply provisions and implementing measures which are substantially similar to those of the Community’s commercial policy.190

120.Turkey’s customs union with the EU covers all industrial goods, but not agriculture (except processed agricultural products), services or public procurement. It also excludes the free movement of labour. Although Turkey and the EU have negotiated to extend and deepen their Customs Union Agreement to include services and public procurement, these negotiations were suspended in 2002. The EU foresees that Turkey will align its national legislation with a number of essential Internal Market rules, notably on industrial standards.191 Trade arrangements for coal and steel products result from an Agreement in 1996 between Turkey and the then European Coal and Steel Community. Those products remain outside of the scope of the Customs Union Agreement.

Asymmetric relationship

121.Turkey imposes the EU’s Common External Tariff on all goods imported from non-EU countries that are covered by the Customs Union Agreement. Turkey has no involvement in decisions about the Common External Tariff or setting the direction of the Common Commercial Policy. It is also not able automatically to secure additional market access via EU FTAs with third countries, but these third countries have access to Turkey’s market. Turkey is expected to align itself to EU preferential tariffs by negotiating FTAs with countries the EU has concluded FTAs with, in order to gain access to their market. Turkey has signed FTAs with EFTA, a number of Eastern European and Middle Eastern countries and South Korea.192

122.The Customs Union Agreement with Turkey reduces the need for checks, for instance on rules of origin, but does not remove them entirely. This is because although industrial goods may be exempt, checks may still take place to ensure compliance with the rules of the Internal Market, for example on phytosanitary products, as Dr Pinar Artiran, Assistant Professor and WTO Chair Holder at Bilgi University, explained to us:

Depending on the nature of the product, especially if it is a product that is related to the sanitary and phytosanitary standards, it might be checked.193

A partial Customs Union

123.The Institute of Directors has called for the UK to negotiate a partial customs union with the EU based on the Turkish experience.194 In practice, a partial customs union arrangement also necessitates checks for other reasons, as Dr Peter Holmes, Reader in Economics at the University of Sussex, set out to us:

[…] an incomplete customs union is a quantum leap away from a complete one. […] the EU-Turkey border is not an open border. The stories are up to 30 hours’ delay. The moment that anything is excluded—in this case, agriculture is excluded—you have to have a provision for stopping every truck just in case. Normally, they will be waved through, but unless your agreement is complete, it does not deliver you the frictionless border that you might hope for.195

124.He also told us that Turkey has the obligation under parts of the Customs Union Agreement to operate regulatory alignment, but that itself did not guarantee mutual recognition of the testing and certification in Turkey:

You still have to have goods stopped at the border, even if there are no tariffs, if there is any possibility that they may not satisfy [sanitary and phytosanitary measures] or conceivably some sort of non-food-safety standards.196

125.Dr Holmes gave us an example of when the EU put anti-dumping duties on televisions from Turkey, also requiring border checks:

Turkish manufacturers were then selling them across the border to Georgia. They got Georgian certificates of origin, and then they were trundled back across Turkey into the EU, and there was a big dispute about whether they were really Turkish. All these things have to be checked. If it is complete customs union, you do not need to have any checks. As long as there is anything that you need to stop things for, you have a potential problem.197

126.By dealing with rules of origin, a customs union arrangement like Turkey’s can still be beneficial, as Sam Lowe, Research Fellow at the Centre for European Reform, pointed out to us:

There are studies that show that, if [Turkey] exited the customs union, but liberalised everywhere else and went into a deep and comprehensive free trade agreement, reducing non-tariff barriers, it still would not make up for the cost of having to deal with rules of origin after leaving. Estimates of the cost of rules of origin vary. It is usually put between 2% and 6% of the value of the product, but the real cost is that companies just find it too complicated, and do not use a free trade agreement.198

Jersey example

127.Mr Lowe suggested that a customs union arrangement based on Jersey, Guernsey or the Isle of Man could provide a solution to avoid a hard border between the UK and Ireland/EU. Mr Lowe set out such a complete customs union arrangement:

There can be no exclusions, because […] once there is an exclusion, you essentially need to have checks to differentiate between that which is excluded and that which is not. You would need a Single Market for goods […] We would also have to stay part of the European VAT area, because otherwise VAT becomes a border tax once we have left. […] There would still be invisible barriers, because there would still be barriers to services. We would have […] given ourselves the freedom to negotiate on services and the like globally. Invisible borders do not lead to trucks backing up on them.199

128.Mr Lowe noted several advantages to such an arrangement:

The starting basis was how you fix the Irish border issue, for one. We think it does that. Secondly, would the European Union go for it? We are not sure. We think maybe, and the reason for that is because it is a comprehensive customs union. A customs union is an already-defined relationship that the EU has, in part, with another country, in Turkey, and it is also defined within the WTO GATT agreement. […] The UK gets the ability to regulate its own economy in the area of services […] It would also have the ability to negotiate agreements on services, investment, and data with other countries around the world.200

129.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.

130.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.

WTO terms

131.The UK has said it wishes to seek a negotiated outcome. At the same time, the Government maintains the position that the option of no deal is part of its negotiation strategy. In the Lancaster House speech, in January 2017, the Prime Minister said that “while I am sure a positive agreement can be reached–I am equally clear that no deal for Britain is better than a bad deal for Britain.”201 In her Mansion House speech, the Prime Minister did not use the words “no deal” but said that “given the uncertainty inherent in this negotiation, [the Government was] preparing for every scenario.”202

132.On Michel Barnier’s slide, trading on World Trade Organisation (WTO) terms is classified as the default in the event of exiting the EU with no agreed future trading relationship. This would satisfy some of the stated UK red lines—no free movement, no payments to the EU if the UK does not want to be involved with any aspect of the EU, such as research or EU agencies. There would be no obligation to follow the rulings of the CJEU and the UK would be free to follow an independent trade policy. However, it would fail, according to the Government’s own analysis, on the Mansion House speech test that Brexit must ‘protect people’s jobs and security’. Pascal Lamy, former Director-General of the WTO, told us he thought there would be no difficulty in the UK becoming an independent member of the WTO outside of the EU. There may be technical negotiations, around tariff rate quotas and governance, but Mr Lamy saw no legal impediment.203 The UK would rely upon its commitments regarding tariffs on goods and the commitments made on services in the General Agreement on Trade in Services (GATS).

133.However, Pascal Lamy described the WTO regime as league three in world trade, inferior to bilateral trade agreements and the internal market. Explaining what this meant in practice, Mr Lamy said that for goods, there would be an average tariff of 4% to 5%, with 10% in the automotive sector, around 7% for footwear and textiles, and higher levels in agriculture. He said the level of openness is “very, very low” under WTO terms compared to the internal market of the EU. The consequence of trading under the WTO regime, which is much less open than the bilateral agreement, would result in costs and controls.204

Failure to reach an agreement and the impact of trading on WTO terms

134.Some of the evidence we have heard echoes the view that trading with the EU on WTO terms would have a negative effect on trade. Dr Andy Williams, AstraZeneca, told us in Cambridge:

I think if we were to just leave now or whenever it is, in March next year, we would go back to WTO rules, which would obviously affect trade. We have estimated that would cost AstraZeneca around $30 million a year in additional trade costs. Our bigger concern to some extent is the bureaucracy associated with that, which we would be able to handle, but smaller companies may not be able to.205

135.Evidence from the automotive sector to the Business, Energy and Industrial Strategy Committee said trading on WTO terms, and the application of current WTO tariffs on the automotive sector (10% on cars, 4.5% for components) was described by the Society of Motor Manufacturers & Traders as an “incredible challenge” as it could make UK manufactured vehicles “uncompetitive”. The BEIS Committee concluded that “For the automotive sector, no deal would undoubtedly be hugely damaging. The Government should not seriously contemplate this outcome.”206

136.The British Retail Consortium (BRC) said that leaving the EU without a deal would mean tariffs on food products imported from the EU could be in the order of 22%. The BRC said that 79% of food imported by their members into the UK comes from the EU-27, and that:

Higher tariffs would impact on the price of imported goods, and diminish living standards for consumers. Our research points to potential rises in the price of cheese in the order of 6–32%, on tomatoes of 9–18%, and on beef of 5–29%. We also note other similar studies which show a similar picture, and that consumers would suffer the highest detriment.207

However, the BRC also said that “non-tariff barriers would be the most burdensome” and that this would have an effect “in relation to customs, and for meat and plant-derived products, from health or veterinary checks stemming from sanitary and phytosanitary requirements.”208

137.A joint statement between the UK Chemical Industries Association and the European Chemical Industry Council, representing chemical and pharmaceutical companies—which add £14.4 billion of value to the UK economy every year from total annual turnover of over £40 billion, said that “Brexit without a new trade agreement between the UK and the European Union would be the worst possible outcome”.209

Trading solely on WTO terms

138.Very few countries trade solely on WTO terms. All large trading countries are party to other bilateral agreements facilitating relations between two countries / parties, such as customs co-operation and managing data flows. These still require negotiation and agreement. Only seven countries trade with the EU on WTO terms alone,210 and research by the Institute for Government found that:

In 2016, of the top 10 trading partners with the EU by total trade, the US, China, Russia, Japan and India have a substantial number of bilateral agreements that go well beyond the terms of WTO trade. Of the top 20, there are no countries that trade on WTO rules alone with no bilateral agreements and no free trade deals.211

139.On the other hand, it is not necessary to have a specific Free Trade Agreement to enable trade. Lamy pointed out that:

The reason why we do not have a free trade agreement with the US is because we are both the most open large economies. With that we can trade relatively easily, but not as much as we theoretically could, which is why the TTIP negotiation was launched some years ago.212

Border management

140.Pascal Lamy said that once the UK was no longer a Member State, and whether it had a bilateral agreement or traded on WTO terms, then this “will necessitate a border.” There need to be checks on both goods and people. If there were duties then duties would need to be paid. He said that if the UK chose to operate a unilateral zero tariff, there would still be checks, as a precaution, on the safety of products such as children’s toys or cars, and checks on food products for disease or residues.213

141.One of the WTO’s principles of trade is the Most Favoured Nation rule, whereby a preferential treatment for one trading partner has to be offered to others, unless it is as part of a free trade deal. This would, in theory, require the UK to operate the same regime at all its borders as it did at the Northern Ireland-Ireland border.214 If the UK-EU negotiations end in a no deal, and the UK wanted to offer zero tariffs unilaterally to the EU, it would have to offer zero tariff to all its trading partners.215

142.Mr Lamy said that UK customs may want to check to make sure all the products crossing the border from Ireland are of EU origin. This may depend on the tariff regime operated by the UK, and whether the UK was concerned about allowing Chinese goods into the UK market via the Irish land border. Mr Lamy agreed that the WTO rules would not stop the UK unilaterally deciding to not have checks, “but that will not mean that there is no border.”216 The UK could not determine what the EU did on the other side of the border, and to what extent the EU wanted to carry out precautionary checks on products for safety reasons.217 He referred to the Norway-Sweden border as the example of where it was most likely for there to be a ‘virtual border’ but “It is nothing like that.” The Sweden Norway border has “a border post and you have border control.”218 When asked if there was any country in the world that has an open door to all trade with anybody, Mr Lamy said:

No, I do not think so, because the country doing this would have no leverage to gain market access in third markets, which of course is your negotiating currency. If you have totally open trade, why should others give you access to their market? They have duty-free, quota-free access to your market.219

143.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.

144.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.

145.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.

EU Exit Analysis: Cross-Whitehall Briefing

146.The Government has conducted an analysis of the economic impact of exiting the EU under a number of specified scenarios. Following the agreement of a Humble Address in the House of Commons on 31 January, this document was provided to us; we decided to publish it, although with one Annex removed on the grounds that the Department had indicated that its content was of sensitivity to the negotiations.220 The Government’s EU Exit Analysis: Cross-Whitehall Briefing states that:

We need to base our exit negotiations and preparations on the best possible evidence and analysis. Analysing the potential impact of different exit scenarios is an unprecedented challenge.

The analysis sets out the factors creating uncertainty and warns that it does not seek to provide a definitive single point estimate:

There is no single model or analysis which can provide a definitive assessment of all possible outcomes, but economic analysis nevertheless provides us with the best available evidence base on which to draw a “broad” directional picture (and illustrate the importance of key uncertainties).

147.The scenarios modelled by the analysis are an EEA-type scenario (equivalent to Norway’s relationship with the EU); and FTA-type scenario (analogous to the CETA deal) and trading on WTO terms. Notably, the analysis does not seek to model the impact of moving to the relationship that the Government is looking to achieve, the model set out by the Prime Minister’s speeches in Florence and Mansion House. The analysis uses a range of methodologies to inform a computable general equilibrium model (CGE). DEXEU describes it as a “state of the art structural model”, and emphasises that this is not the same model used before the referendum which was based on gravity modelling. The CGE model is informed by gravity modelling but also draws on other techniques. It is claimed that this analysis is much more sophisticated and also factors in the benefits of new trade deals and any gains from de-regulation. The analysis states that “non tariff barriers are the most important driver of trade impacts”.221

148.The analysis indicated that, compared to indicative GDP growth, and spread over 15 years, the EEA-type scenario would result in -1.6% less growth, the FTA-type scenario would result in -4.8% less growth, and the WTO scenario would result in -7.7% less growth.222 The analysis states that:

External estimates vary, reflecting uncertainties around exit. Emerging HMG estimates of the illustrative “existing” trade models sit broadly in the middle of this range, and are in line with the consensus of the relative costs incurred between the different scenarios.223

149.On 15 January the Scottish Government presented the latest analysis of the implications for Scotland’s economy.224 This is the only other Government analysis to be published in the UK. It concluded that Brexit will significantly weaken the Scottish economy and result in lower economic growth and lower incomes in Scotland. The same three off-the-shelf options were modelled. The results showed the following negative impacts on headline macroeconomic indicators, relative to a baseline of full EU membership, to 2030:

150.Economists for Free Trade, a group of economists including Professor Patrick Minford, Dr Gerard Lyons, Julian Jessop and Roger Bootle has published its own “Alternative Exit Analysis” report which concluded:

Based on the track record of Whitehall and associated institutions, it must be questioned if the conclusions of this secret report can be trusted […] If the Government’s policy--as declared at Lancaster House - is fed into the new Whitehall model, it produces positive outcomes for Brexit that are essentially the same as those of the models of other independent economists.

151.This Alternative Brexit Economic Analysis has, in turn, been criticised for its assumptions, such as the UK having no tariffs or non-tariff barriers with any country, and that border costs with the EU will be zero. This does not represent current Government policy.225

152.The Government’s estimates are comparable to those of the National Institute of Economic and Social Research (NIESR), the OECD and the World Bank. Several analysts - Oxford Economics, PWC/CBI, IEA and Open Europe - offer a relatively more optimistic analysis, in particular for the scenario of trading under WTO rules, but each forecast a negative impact on UK GDP arising from trade on this basis (with only the IEA and Open Europe suggesting a small positive impact from trading on an EEA basis or on the basis of an FTA). Economists for Free Trade have produced the only analysis suggesting a positive impact on GDP of moving to WTO terms.226

153.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.

11 Andrew Marr Show [BBC]: Interview with the Rt Hon. David Davis MP [Transcript], 10 December 2017

12 Michel Barnier warns UK: You’ll get Canada-style trade deal with EU, 24 October 2017

13 Q483

14 European Commission proposes signature and conclusion of EU-Canada trade deal, 5 July 2016

15 Canada-European Union Joint Report: Towards a Comprehensive Economic Agreement. In October 2008, the EU and Canada released a joint study “Assessing the Costs and Benefits of a Closer EU-Canada Economic Partnership”.

16 Q493

17 Q546

18 Q593

19 Q1101

20 Q520, Q579

21 Q551

22 Q559

23 Statement by President Donald Tusk on the draft guidelines on the framework for the future relationship with the UK, 7 March 2018

24 Q459

25 Q574

26 Q1123, Everything But Arms (EBA) – Who benefits?

27 Q620

28 Q735

29 Qq567–568

30 Q499

31 Qq475–476. Fredrik Erixon, The Canada-EU trade deal is no model for Brexit, 26 March 2016

32 Q549

33 Q1248

34 Q479

35 Qq488–489

36 Q1124

37 Q1249

38 Q515

39 Q516

40 Protocol on the mutual acceptance of the results of conformity assessment, Annex 1

41 Beth Oppenheim and Charles Grant, UK + EU = Canada+? 1 December 2017

42 Mansion House speech, 2 March 2018

43 Q1243

44 Qq1270–1271

45 Qq1268–1271

46 Q1273

47 CETA Article 11.3 Negotiation of an MRA

48 See Q468-Q473 for discussion on how MFN clause applies in general (WTO) and specifically (in a FTA), and how they relate to services and investment

49 European Council (Art. 50) (23 March 2018) - Draft Guidelines, 7 March 2018

50 Q561

51 Q559

52 Q559

53 Q561

54 Q1159

55 Q561

56 Q490

57 Michel Barnier speech at ‘The future of the EU’ Conference, 20 November 2017

58 The IFG Quick guide to the language of trade: mutual recognition

59 Mansion House speech, 2 March 2018 and Chancellor speech on financial services, 7 March 2018

60 Q1254

61 Q1255. See also Q1276 and UK Finance, Supporting Europe’s Economies and Citizens, September 2017

62 Q503

63 Q540

64 Q1108

65 Q560

66 Karel De Gucht, Transatlantic Trade and Investment Partnership (TTIP) – Solving the Regulatory Puzzle, 10 October 2013

67 Q1064

68 Q1079

69 Q1277

70 Q1277

71 Q461

72 Q463

73 Q1075. The witness suggested there were two aspects to understanding what sufficient regulatory approximation could mean. 1) whatever the EU says it means, and 2) the views of the third countries that have this clause, and the lawyers of businesses based in those countries.

74 Qq1256–1257

75 Mansion House speech, 2 March 2018

76 Q582

77 Q554

78 Q554

79 Q530. See also Qq1201–1202

80 Q527

81 Q543

82 Q545

83 Q861

84 Q851

85 Institute for Government, Trade after Brexit, Options for the UK’s relationship with the EU, December 2017

86 House of Lords, Brexit: the options for trade, HL 62, 16 December 2016

87 Q887

88 Q887

89 Q836

90 Andrew Duff, Brexit: Terra Nova to explore together, 7 November 2017

91 Q836

92 Guillaume Van der Loo, A Comparative study of the Association Agreements and DCFTAs concluded with Ukraine, Moldova and Georgia, 26 June 2017

93 Q844

94 European Parliament Resolution of 14 March 2018 on the framework of the future EU-UK relationship

95 Q850

96 Q852. Article 322 of the Ukraine Association Agreement covers dispute settlement relating to regulatory approximation, and Art.322(2) includes “The ruling of the Court of Justice of the European Union shall be binding on the arbitration panel.”.

97 Swiss Federal Department of Foreign Affairs, Switzerland and the European Union

98 Q915

99 Tobler, One of many challenges after ‘Brexit’: The Institutional Framework of an Alternative Agreement – Lessons from Switzerland and Elsewhere? 2016

100 Swissinfo, EU-Swiss ties: Happy with progress but obstacles remain, 23 November 2017

101 Q906

102 Q906

103 Q906

104 Q928

105 Q929. See Swiss soften line on foreign judges in bid to bolster EU ties, FT, 5 March 2018

106 Q923

107 Institute for Government, Mutual recognition: can the UK have its Brexit cake and eat it?, 1 September 2017

108 Q921

109 Q938

110 Q908

111 Q908

112 Q38

113 Q909

114 Q938

115 Q949

116 We use EFTA EEA states to describe Norway, Iceland and Liechtenstein. (Switzerland is a member of EFTA but not party to the EEA Agreement.)

117 For example, Annex I is on Veterinary and phytosanitary matters, Annex XI is on Electronic communication, Audio-visual Services, and Information Society (and includes the AVMS Directive) Annex XV is on State Aid

118 Q1037

119 Oral evidence to the House of Lords, 15 September 2016, Q25 [Sverdrup]

120 Q1125

121 Q1028

122 Q966

123 Q1000

124 FullFact, Norway’s EU payments, August 2016 and Norway and the EU: Financial contributions

125 Lancaster House speech 17 January 2017

126 Florence speech 22 September 2017

127 Lancaster House speech 17 January 2017 and Mansion House speech, 2 March 2018

128 At present Iceland, Liechtenstein and Norway

129 Michael-James Clifton, EEA: Another Side to Europe, 17 October 2016

130 Q989. See also Q1028 [Baudenbacher]

131 Q998

132 Q990

133 Q1028

134 Q1029

135 Q1031

136 Qq1026–1027

137 Florence speech 22 September 2017

138 Institute for Government, Trade after Brexit Options for the UK’s relationship with the EU, Dece 2017

139 Iceland has adopted 10% of EU laws, Iceland Monitor, 21 October 2015

140 Q975

141 Q978

142 Q978

143 EU facts behind the claims: Norway. 25 April 2016; Norges hovedinnlegg på EØS-rådsmøte, Brussel, 19 November 2013

144 Q979

145 George Yarrow, Brexit and the Single Market Revisited, December 2017

146 EFTA Bulletin of July 2015

147 Q993

148 Q996

149 Q997

150 Q1000

151 Q981

152 Q980

153 Q980

154 Qq971–972

155 Q973

156 Qq1003–1005

157 Q393

158 Q984

159 Q986

160 Q1163

161 Q1170

162 Qq1167-1169

163 Q1172

164 Qq1184-1185

165 Q1183

166 Q1123–1225

167 HC Deb 5 March 2018, col 25 Statement on the UK/EU Future Economic Partnership

168 Smart Border 2.0 Avoiding a hard border on the island of Ireland for Customs control and the free movement of persons, November 2017

169 HC Deb 15 March 2018, col 980

170 HC Deb 21 March 2018, col 263

171 The EEA Joint Committee (EEA JC) is responsible for the management of the EEA Agreement and typically meets six to eight times a year. It is a forum in which views are exchanged and decisions are taken by consensus to incorporate EU legislation into the EEA Agreement. Before the Lisbon Treaty, the EEA JC comprised the ambassadors of the EEA EFTA States and representatives of the European Commission.

172 Catherine Yarrow and George Yarrow, The European Economic Area Agreement: A short introduction, March 2017

173 See Catherine Yarrow and George Yarrow, The European Economic Area Agreement: A short introduction, March 2017

174 Oral evidence to the Lords EU Committee in September 2017, Q29

175 Oral evidence to the Lords EU Committee, 15 September 2016

176 Q977

177 Q1018

178 Q1018

179 Professor Catherine Barnard, Could free movement of persons be confined to free movement of workers in any Brexit deal?

180 SECTION D Social benefits and free movement

181 European Council meeting (18 and 19 February 2016) – Conclusions, 19 February 2017, Interpretation of current EU rules 1.(a)

182 Q1019.

183 Q1019

184 Article 28 of the EEA Agreement

185 Q1016

186 Q1013

187 Q1015

188 Q969

189 House of Lords Report, Brexit: the options for trade: Chapter 4: Membership of the EU’s customs union

190 Decision No 1/95 of the EC-Turkey Association Council of 22 December 1995 on implementing the final phase of the Customs Union

191 European Commission, DG Trade: Turkey

192 European Commission, DG Trade: Turkey

193 Q1052

194 Institute of Directors, Customising Brexit: a hybrid option for a UK-EU trade framework, 15 February 2017

195 Q1065

196 Q1067

197 Q1065

198 Q1065

199 Q1068

200 Q1069

201 Lancaster House speech 17 January 2017

202 Mansion House speech, 2 March 2018

203 Q1138

204 Q1106

205 Q651

206 Business, Energy and Industrial Strategy Committee, Leaving the EU: Implications for the Automotive Industry, HC 379, para 12

207 Written evidence from the BRC, NEG0010

208 Ibid.

209 European chemical industry unites over post-Brexit future for the continent’s manufacturing backbone, 14 November 2017; See also oral evidence on 18 October 2017 Q111 [Steve Elliot]

210 The Economist, Brexiteers claim that trade on WTO terms would be fine. Wrong, 30 November 2017

211 Institute for Government, Bilateral Agreements, June 2017.

212 Q1108

213 Q1121, Q1112

214 Q1126

215 The economist, Brexiteers claim that trade on WTO terms would be fine. Wrong, 30 November 2017

216 Q1118, Q1119, Q1120

217 Q1122

218 Qq1113 and Q1116

219 Q1127

220 EU Exit Analysis Cross Whitehall Briefing, January 2018

221 Ibid. page 9

222 Ibid. page 16

223 Ibid. page 17

224 Scotland’s Place in Europe: People, Jobs and Investment, 15 January 2018

225 The latest pro-Brexit analysis has got its sums badly wrong, Financial Times, 21 February 2018

226 Ibid., page 17



Published: 4 April 2018