Brexit: the options for trade Contents

Chapter 3: Membership of the European Economic Area

54.The UK could in principle join the European Free Trade Area (EFTA) and become a signatory to the EEA Agreement, becoming a non-EU EEA member.62 It would then join the current non-EU members of the EEA, Norway, Liechtenstein and Iceland. An overview of the EFTA and the EEA is given in Box 1.

Box 1: The European Free Trade Area (EFTA) and the European Economic Area (EEA)

The European Free Trade Area (EFTA) is an intergovernmental organisation that promotes free trade and economic integration to the benefit of its four members: Norway, Iceland, Liechtenstein and Switzerland. The EFTA Convention regulates the free trade relations between its four members. Although EFTA has the right to conclude FTAs with third countries, members are also allowed to negotiate their own trade deals.

The EEA brings together all the EU Member States and three of the EFTA states (Norway, Iceland and Liechtenstein). It was established by the EEA Agreement, which entered into force in 1994, and which enables these three EFTA states to participate almost completely in the Single Market. The Agreement covers the Four Freedoms: the free movement of goods, capital, services and people. It guarantees the same rights and obligations of the Single Market for citizens and economic operators in the EEA as for those in the EU Member States.

Although the three non-EU EEA countries are a part of the Single Market in services, including financial services, they are not part of the EU’s customs union. Non-EU EEA countries have the autonomy to negotiate Free Trade Agreements with third countries, either independently or through EFTA.

Non-EU EEA countries are required to implement into national law all EU Single Market legislation, which includes legislation on consumer protection, company law, environmental protection and social policy. The EEA Agreement does not include: the common agriculture and fisheries policies; the Common Foreign and Security Policy; Justice and Home Affairs; or the Economic and Monetary Union.

The principles of direct effect and primacy63 are not part of EEA law, and the EFTA Court refused to include them in the EEA legal order. However, the non-EU EEA states undertake to introduce, if necessary, a statutory provision to the effect that EEA rules prevail in cases of conflict with other statutory provisions and a non-EU EEA state has to provide compensation for loss to individuals where EEA law is breached.64

The Agreement is constantly updated with the introduction of new EU legislation.65 Since 1994, more than 5,000 new legal acts have been incorporated into the Agreement either as Annexes or Protocols. Substantive decisions on the Agreement and its operation are made by the EEA Joint Committee, consisting of representatives from both the EU (represented by the European External Action Service) and the ambassadors of the non-EU EEA countries.

Non-EU EEA countries have no formal powers over decision making in any of the EU’s institutions.

Non-EU EEA countries contribute towards EU programmes (such as Horizon 2020), and make payments towards the social and economic development of EU Member States, including Bulgaria, Hungary, Latvia, Poland and Portugal. These contributions are negotiated through the EU Multiannual Financial Framework. For 2014–20, their collective contribution will be approximately €3.22 billion.66

Source: HM Government, Alternatives to membership: possible models for the United Kingdom outside the European Union (March 2016), pp 12-21: [accessed 28 November 2016]

The process for joining the EEA

55.Dr Sverdrup argued that even though the UK was already a member of the EEA through its membership of the EU, in order to join the EEA as a non-EU country it would have to join EFTA. Article 126 of the EEA Agreement states that the Agreement only applies to EFTA or EU Member States and it is therefore impossible to be a party to the EEA Agreement without being a member of the EU or EFTA.67 Dr Sverdrup explained this is because the EEA Agreement was “constructed as a two pillar system”, which “means that members of the EEA are supposed to be either members of the EU or members of EFTA.”68 The UK could do this by entering into three different Treaties and agreements: the EFTA Treaty (which has all four EFTA states as contracting parties); the “agreement on the surveillance mechanism in the EEA”; and the agreement on the EFTA Court (which has the three non-EU EEA states as contracting parties).69 The process of entering these various agreements would “not take too long”, and ratification of the various Treaties and agreements by the partner countries “could be done in a year or so.”70 If the UK joined EFTA, it is unclear whether it could remain party to the EEA Agreement if its withdrawal from the EU coincided with its joining of EFTA, or if the UK would have to re-join the EEA Agreement after joining EFTA.

56.Importantly, Dr Sverdrup told us that the EEA Agreement worked on the basis of unanimity and that all the non-EU EEA states “speak with one voice”. This had important implications, because it meant that “in reality the Prince of Liechtenstein has a veto power over Norway, and vice versa”.71 Joining the EFTA treaties and agreements would require unanimity of the other parties.72

57.Dr Sverdrup did not think the current non-EU EEA countries would be “eager to go out and try to recruit the UK”, for a number of reasons. First, expansion of the EFTA side of the EEA “has never been done before”. Before the EU’s enlargement, when some Central and Eastern European countries asked “if they could join the EEA first … the EFTA countries were reluctant to let them do that”. Second, while the UK and the EFTA countries “share a lot of cultural sentiments and orientations”, there were some very significant differences “in size, geography [and] history”. Third, and more importantly, there were “differences of interests” and “political orientation” in important policy areas such as agriculture. Finally, there would be some reservations about the “functioning of the EEA institutions” if the UK were to join.73 We note in particular that expanding a bloc of five million people to include an additional 65 million people would considerably alter the balance of the non-EU EEA bloc.74

58.On balance, however, Dr Sverdrup suggested that it might be possible for the UK to join the EEA: “at the end of the day if the EU and the UK think that this a nice and attractive political solution, I do not think they will object to it.” The “big question” therefore was the EU-27’s view, as the UK joining the EEA would require their consent.75 Although this was “uncertain territory”, Dr Sverdrup was “pretty sure the EU would be quite happy with that”.76 Various studies had shown that from the EU’s perspective, “the EEA is the most preferred model” of association for third countries.77

59.Dr Sverdrup was also asked whether the UK could seek membership of the EEA as a transitional measure, between withdrawal and agreement of a comprehensive FTA. He had sympathy with the need for a transitional arrangement, which he said was a “good strategy”, but he underlined that both parties would need to be clear about when the transition would come to an end: “You should keep in mind that the EEA was at first signed as a temporary agreement. When you say ‘temporary’, do you mean 25 years or two years?”78 This was borne out by Dr Peter Holmes, Lecturer in Economics, University of Sussex, who cautioned that “Negotiating into the EEA and then out again sounds very complicated.”79

EEA membership and free movement of people

60.Non-EU EEA states comply with the principle of free movement in broadly the same way as EU Member States. Although the EEA Agreement differs from EU law both in terms of the rights of free movement for third country or non-EU citizens and in not providing for ‘Union citizenship’, Dr Sverdrup said the EFTA Court had sought to overcome this gap by making similar rulings to the CJEU. As a result, “they are interpreted similarly”, and the judgments of the EFTA Court “parallel the developments in the EU”.80

61.Dr Sverdrup also noted that the EEA Agreement included a “standard safety clause”, Article 112, which enabled a state in certain circumstances to “move back from some of its obligations” on free movement of persons. Such an ‘emergency brake’ “should be temporary and proportionate”. Bearing these factors in mind, he concluded: “I do not think the Article 112 strategy is designed for countries that want to be left out of the free movement of persons.”81

Complying with EU law

62.Although certain policy areas are excluded from the EEA agreement, Dr Sverdrup told us that in practice Norway and other EEA states were “subject to around three-quarters of all EU legislation”. In those areas, he added that Norway had to have the same rules in place as an EU Member State.82 Thus in reference to the operation of state aid rules, he said: “The rules are not more lax in Norway than in the EU. They are exactly the same.”83

63.Despite being subject to three-quarters of EU legislation, non-EU EEA states have little or no influence over the preparation and adoption of EU law. More information is given in Box 2.

Box 2: Non-EU EEA states’ influence over EU legislation

Officials from the non-EU EEA countries can participate in expert groups and committees of the European Commission, and may submit comments on forthcoming legislation. Norwegian officials participate in just over 200 Committees in the European Commission.

Non-EU EEA states can ask to amend EU legislation, but only in circumstances where this is required for the law to make sense in domestic legislation. Any amendment has to secure the agreement of the Commission. Non-EU EEA countries can refuse to implement or veto EU legislation, but this veto would suspend the application of the whole affected part or annex to the EEA Agreement for the country exercising the veto. Norway has never exercised its veto right.

Source: Open Europe, What if … ? The Consequences, challenges and opportunities facing Britain outside of the EU (March 2015), p 52: [accessed 28 November 2016]

64.In 2012 the Norwegian Government published a report evaluating its relationship with the EU through the EEA Agreement. This report found that:

“The most problematic aspect of Norway’s form of association with the EU is the fact that Norway is in practice bound to adopt EU policies and rules on a broad range of issues without being a member and without voting rights … This raises democratic problems.”84

Reform of the EEA Agreement

65.Dr Sverdrup was asked about the likelihood of the UK being able to negotiate changes to the EEA agreement, so that non-EU countries could have voting rights over EU legislation. Dr Sverdrup explained that while existing non-EU EEA countries might find this appealing, the “main framework of the EEA Agreement has never been renegotiated” in the “past 25 years”.85

66.This was due to a number of factors. First, non-EU EEA countries “basically think that they cannot get a better deal”. When the EEA agreement was signed in 1992, EFTA had seven countries while the EU had twelve. Now, however, the “EU consists of 500 million people and the EEA is only five million”. A second reason was that “sentiments in the EU” would not favour such an approach. It was “not very likely” that an “EU member country [would] accept being outvoted by a non-member.” Finally, any change to the Agreement would have to be ratified by all the signatories, which was “not very easy”. Bearing all these factors in mind, Dr Sverdrup concluded that Norway had accepted that “we have what we have, and it is very difficult to negotiate it ‘up’ or ‘down’.” 86

67.As an alternative to renegotiation, Dr Sverdrup thought it might be possible for the UK and other non-EU EEA countries to negotiate representation at Council meetings, albeit without voting rights. This was the mechanism used under the Schengen Agreement, and it gave states “a right to share their views, listen in and talk”.87

68.Dr Sverdrup noted that EEA membership as a basis for trade had not worked for everyone: “Austria, Finland and Sweden left because they felt it was not attractive.”88 But for Norway it was a “part of a domestic compromise”: the day after a referendum in November 1994, where the population rejected membership of the EU, “the political leadership moved to, ‘Let’s maintain the EEA and promote integration through that path’”.89 Since that time, “one reason why the EEA has been fairly successful is because there have been few attempts to play against the rules”. 90

69.In summary, Dr Sverdrup concluded that a key lesson Norway had learned from EEA membership was:

“there is no free lunch. You cannot have it all. You have to decide what you would like to have and play hard to try to get that, but at the same time you have to accept that others have legitimate interests as well”.91

Trade with the Single Market

70.In its report, The EU Single Market: The Value of Membership versus Access to the UK, the IFS argued that “EEA would mean stronger economic performance than an FTA scenario”, worth potentially 4% of GDP relative to trading with the EU under WTO rules.92 Mr Michael Emerson, Associate Research Fellow, Centre for European Policy Studies (CEPS), agreed that the advantage of the EEA option was that:

“It is a system that exists, offers legal clarity and actually works. It is closest among other options to sticking to the status quo in economic terms and it would avoid uncertainty and thereby minimise damage to the UK as a destination for foreign investment aimed at the EU market.”93


71.Dr Holmes told us that the EEA agreement only provided “incomplete access” to the Single Market in goods, because non-EU states were outside the EU’s customs union.94 Instead the EEA Agreement includes a provision that waives the Common External Tariff on goods (except certain agricultural and fish products) exported from non-EU EEA states into the EU, as long as the majority of their parts are produced in the EEA (‘rules of origin’).95 The Government’s paper, Alternatives to membership: possible models for the United Kingdom outside the European Union, said that while this arrangement worked well for countries like Norway, three-fifths of whose exports are raw materials (gas and oil), it would be more problematic for the UK—where on average 23% of the value of the UK’s goods exports is derived from foreign components.96

72.Dr Sverdrup told us that complying with rules of origin had introduced “a bit of bureaucracy or paper-shuffling”, and so increased “the transaction costs for business”. He noted that as “economies become more integrated”, with supply chains crossing national boundaries, it was “more challenging to determine where things are produced”.97

73.Dr Holmes also told us that while “the EEA gives free circulation to all goods put on the market in the EEA … to put them on the market in the EEA you have to comply with EU standards”.98 This means that while goods are checked at the EU’s borders for compliance with rules of origin, they are not checked for compliance with EU technical rules, “because membership of the EEA implies full legal compliance with all EU rules”.99 Goods intended for domestic consumption also have to comply with EU rules.

74.For those sectors outside the EEA Agreement, such as agriculture and fisheries, EU and non-EU EEA states trade on the basis of bilateral treaties. Where bilateral treaties do not exist, the EU imposes tariffs on goods imported from non-EU EEA countries, and the EU can apply safeguard measures, such as antidumping policies, as it has done in the past on fish products, for example.100 This could potentially pose difficulties for the UK, as 64% of the UK’s fish and 73% of vegetable exports go to the EU.101 This has implications for the UK’s border with the Republic of Ireland—the subject of our report on the implications of Brexit for UK-Irish relations.102


75.Dr Sverdrup told us that the EEA Agreement provided “not only full access to, but membership of the internal market” in services.103 More broadly, while free movement of services within the Single Market is still developing, the EU has increasingly focused on reducing non-tariff barriers over the last two decades.104 Dr Holmes described the EEA as a “regulatory union” which, in parallel to the EU, has aimed to remove and eliminate non-tariff barriers to trade. He contrasted this with other trade relationships, such as a customs union, which focus on removing tariffs on goods.105 Under EEA membership, all service providers have to comply with the relevant EU law even if they do not trade with the EU.

Dispute resolution

76.Dr Sverdrup described the EFTA Court and Surveillance Authority as “unique elements” of the EEA Agreement. They worked as “micro-version” of the European Commission and the CJEU.106 They are described in Box 3.

Box 3: The EFTA Court and Surveillance Authority

The EFTA Court, based in Luxembourg, deals with infringement actions brought by the EFTA Surveillance Authority (ESA) against non-EU EEA states with regard to the implementation, application or interpretation of EEA law, with appeals concerning decisions taken by the EFTA Surveillance Authority, with actions for failure to act, and with actions for damages. It also gives advisory opinions to courts in the non-EU EEA states on interpretations of EEA rules, and is competent for settling disputes between two or more non-EU EEA states. The Court has three judges (one from each non-EU EEA state).

The ESA investigates compliance and implementation of the EEA Agreement and law including restrictions on state aid and rules relating to competition. The ESA’s powers in this regard correspond to those of the European Commission, with which it co-operates closely. Located in Brussels, the ESA is led by a College of three members, each appointed for four years by the three participating non-EU EEA states.

Source: Q 27 (Dr Ulf Sverdrup); Carl Baudenbacher, ‘The EFTA Court: Structure and Tasks’, in The Handbook of EEA Law, p 139; European Free Trade Area, ‘The EFTA Surveillance Authority at a Glance’: [accessed 29 November]; EFTA Court, ‘Introduction to the EFTA Court’: [accessed 29 November]

77.Although the EFTA Court was considered to be “autonomous and independent”, Dr Sverdrup argued that it had been “trying rather forcefully to put forward this idea that the main principle is to secure homogeneity” between its own rulings and those of the CJEU.107 The Court’s reasoning was typically “what would the European Court of Justice have ruled in a case such as this if it were presented with one?”108 This approach meant that even if there was a gap between the EEA agreement and EU law, the policy of the EFTA Court was “to make rulings in the direction of homogeneity”.109

78.Dr Sverdrup also noted that “for reasons of formal sovereignty”, the powers of the EFTA Court did “not extend quite as far as for the [CJEU]”. Although the Court could make “binding judgements on infringement proceedings against the member states”, it could not “impose a financial penalty”.110

Trade with third countries

79.Non-EU EEA countries have to be members of EFTA, but can independently agree FTAs with third countries. Dr Sverdrup said that FTAs were often negotiated by EFTA, rather than by individual states, because it was easier to enter negotiations “if you have a slightly bigger market”.111 On the other hand, members could pursue independent and separate negotiations, and Dr Sverdrup told us that both Iceland and Switzerland had bilateral FTAs with China.112 According to the IFS, EFTA has 28 trade deals with 38 different countries (excluding the EU), accounting for 13.1% of global GDP and 11.8% of the global population, as well as 10% of UK exports. EFTA’s trade deals include Hong Kong, Canada, Saudi Arabia, Singapore and South Korea.113 In some cases agreements have been reached in advance of the EU—Dr Sverdrup noted that the EFTA agreement with South Korea was signed “a year or a year and a half prior to the EU’s”.114

80.At the same time, there are restrictions on the autonomy of non-EU EEA states, and Dr Holmes noted that they “would not be free to sign a free trade agreement with regard to non-tariff components”. For instance, a non-EU EEA state “could reduce all its tariffs on Chinese products to zero”, but it “would not be able to relax the conditions under which Chinese goods, or anyone else’s goods, could be imported”.115 The IFS found that “few of the [EFTA] trade deals significantly enable trade in services”, and that many “do not appear to go far beyond incorporating the General Agreement on Trade in Services (GATS) rules established by the World Trade Organisation (WTO) in 1995”.116

81.Dr Sverdrup did not think it would be possible for the UK to become party to EFTA’s existing FTAs, because “third countries would probably like to look into it and see whether they would like to renegotiate those agreements”.117

Conclusions and recommendations

82.EEA membership would be the least disruptive option for UK-EU trade, not least because it would maintain membership of the Single Market for services. It would also provide partial membership of the Single Market for goods, though businesses would have to comply with rules of origin.

83.The process of joining the EEA as a non-EU Member State appears to be technically possible. It is unclear, however, whether other non-EU EEA countries would be amenable to the UK’s entry.

84.We urge the Government to offer clarity on the legal question of whether the UK would have to leave the EEA Agreement altogether before joining as a non-EU country (under EFTA).

85.Becoming a non-EU EEA member would significantly restrict the UK’s ability to limit the free movement of persons. It would also require the UK to adopt existing and future EU laws relevant to the EEA Agreement in the same way as an EU Member State, without having any voting rights.

86.We see little prospect that the EEA Agreement will be reformed to give the non-EU EEA states voting rights on new EU laws. Thus if it became a non-EU EEA member, the UK would be unable to exercise control over the pace of integration with the EU’s laws and practices. As a non-EU EEA state, the UK would be able to negotiate FTAs with third countries, but would be constrained by its obligations to comply with EU law in areas covered by the EEA Agreement. It is unlikely that EFTA’s existing FTAs with third countries would be open, or attractive, to the UK.

62 The EEA comprises the 28 EU Member States, and the three members of EFTA which have signed the EEA Agreement, namely Iceland, Lichtenstein and Norway. We refer to the three countries as ‘non-EU EEA states’ and ‘non-EU EEA members’ in this report. Switzerland is a member of EFTA but not a signatory to the EEA Agreement.

63 In contrast, in the EU, the principle of direct effect enables individuals to invoke a European provision before a national or European court, and the principle of primacy means that EU law should prevail if it conflicts with national law.

64 Páll Hreinsson, ‘General Principles’, in The Handbook of EEA Law ed. by Carl Baudenbacher (Berlin: Springer International Publishing, 2016), pp 349-353

65 European Free Trade Association, A short introduction to 50 years of EFTA (April 2010), p 2: [accessed 23 November 2016]

66 European Free Trade Association, ‘EU Programmes with EEA EFTA Participation’: [accessed 23 November 2016]

67 European Free Trade Association, ‘Frequently asked questions on EFTA and the EEA’: [accessed 23 November 2016]

68 Written evidence from Dr Ulf Sverdrup (ETG0010)

69 Q 23 (Dr Ulf Sverdrup)

70 Q 24 (Dr Ulf Sverdrup)

74 Q 28 (Dr Ulf Sverdrup); Office for National Statistics, ‘Population estimates’:
[accessed 28 November 2016]

76 Q 23 and 24

84 Norwegian Government EEA Review Committee, Outside and Inside: Norway’s agreements with the European Union quoted in HM Government, Alternatives to membership: possible models for the United Kingdom outside the European Union (March 2016), p 20

86 Q 28 (Dr Ulf Sverdrup)

92 Institute for Fiscal Studies, The EU Single Market: The Value of Membership Versus Access for the UK (August 2016), p 33

93 Michael Emerson, Centre for European Policy Studies, Which model for Brexit? (14 October 2016): [accessed 28 November 2016]

95 European Free Trade Association, Free Movement of Goods (August 2014), p 7: [accessed 28 November 2016]

96 HM Government, Alternatives to membership: possible models for the United Kingdom outside of the European Union (March 2016), p 20

99 Written evidence from Dr Peter Holmes (ETG0011)

100 European Free Trade Association, ‘Free Movement of Goods–Factsheet’ (August 2014): [accessed 28 November 2016]

101 HM Government, Alternatives to membership: possible models for the United Kingdom outside the European Union (March 2016), pp 17-18

102 European Union Committee, Brexit: UK-Irish relations (6th Report, Session 2016–17, HL Paper 76)

104 HM Government, Alternatives to membership: possible models for the United Kingdom outside the European Union (March 2016), pp 10-11

107 Q 27; This idea of homogeneity finds its source in the language of the relevant treaties themselves, including Article 1(1) and Article 6 of the EEA Agreement, Recital 15 of the preamble to the EEA Agreement and Article 3(2) of the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice. Carl Baudenbacher, ‘The Relationship Between the EFTA Court and the Court of Justice of the European Union’, in The Handbook of EEA Law, p 179

108 Q 27 (Dr Ulf Sverdrup)

109 Q 27 (Dr Ulf Sverdrup)

110 Written evidence from Dr Ulf Sverdrup (ETG0010)

113 Institute for Fiscal Studies, The EU Single Market: The Value of Membership versus Access to the UK (August 2016), p 23

116 Institute for Fiscal Studies, The EU Single Market: the Value of Membership versus Access to the UK (August 2016), pp 23-24

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