Chapter 5: A UK-EU free trade agreement
117.Instead of remaining in the EEA or the EU’s customs union, the Government could seek to negotiate a free trade agreement (FTA) with the EU. This would give it preferential terms of trade relative to those agreed at the WTO (the subject of the next chapter). Separately, the UK could also negotiate FTAs with key third country trading partners after Brexit. The implications of this approach are the subject of this chapter. More information about FTAs can be found in Box 5.
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A FTA is an agreement between two or more countries that aims to liberalise the trade of goods and/or services. Rather than providing completely free trade, FTAs provide preferential market access relative to a situation in which no such agreement exists. The main benefit of FTAs is lower tariffs than those prescribed by the WTO: FTAs reduce or eliminate tariffs and remove quotas on imported and exported goods. FTAs can also include provisions on investment. As tariffs have gradually fallen, and services have become increasingly central to the global economy, non-tariff barriers have become increasingly important. FTAs are therefore increasingly focused on these measures. The EU’s process of negotiating FTAsArticle 218 TFEU sets out the procedure for conducting international agreements on behalf of the EU. First, the Commission makes recommendations to begin trade negotiations, with a view to obtaining a mandate from the Council. When adopted, this mandate contains the ‘negotiating directives’, which guide the Commission’s engagement with the relevant negotiating partners. If this mandate includes areas of Member State competence, which means that the final agreement will be a ‘mixed agreement’, negotiations by the Commission on behalf of the Member States must be separately authorised by the Member States. The mandate also specifies who will be conducting the negotiations—typically the Commission. A committee of the Council, normally the Trade Policy Committee, must be consulted during negotiations. A similar committee in the European Parliament must also be consulted. At the end of negotiations the Council must adopt a Decision to sign and conclude the agreement. The Decision has to be agreed by consensus if it is a mixed agreement. The consent of the European Parliament is required before the Council can adopt a decision concluding or ratifying any FTA. When both the Council and the European Parliament have given their consent to the final FTA, if the FTA is a mixed agreement, it must also be ratified by all Member States. |
Source: HM Government, Review of the Balance of Competences between the United Kingdom and the European Union: Trade and Investment (February 2014), pp 29-31
Negotiating a FTA between the UK and the EU
118.Mr Luis González García, Associate Member, Matrix Chambers, explained that before seeking to open formal negotiations on a FTA, the Government would have to undertake a “planning phase”, consulting with the public and private sectors in order to understand their various interests. This was “hard work” and a “tremendous and complex exercise … As a trade negotiator, the first thing you need to do is to absorb information—statistics, information about supply chains”. The Government would also have to take on board the views of “industry, listening to consumers associations, importers and exporters, farmers associations, industries, universities and science”. It was also important that the Government engaged with Parliament, in the interests of transparency.163
119.Mr González García said that once the Government had completed its engagement with stakeholders, it would need to “define [its] negotiating objectives”, and then analyse the “economic, legal and political implications of the trade model they want to propose to the other side”. Only once this was complete would the Government “be in a position to decide when to trigger Article 50”, thereby beginning formal negotiations to leave the EU and to agree a framework for the future trade relationship between the two sides.164 These comments beg a number of questions over the scope of possible negotiations under Article 50, and the sequencing of the negotiations with the EU on the terms of exit and on future trade. These are discussed in the next section.
120.On the EU side, Mr González García said that once the Council had established a timeline for negotiations and working groups, it could begin to negotiate with the UK over the ‘mandate’—in effect, “what should be included in the free trade agreement”.165
121.Mr González García believed that this FTA was “very likely to be a mixed agreement”, and that the UK would have to negotiate with the Commission’s legal services about which aspects of the agreement were mixed. This he described as “a long process” and “not easy”. The draft FTA would also need the consent of the European Parliament, which could mean the UK would have to re-enter “a political negotiation”, and “revisit some issues that had been agreed from the technical side”.166 It would also need to be agreed by the Member States, according to their domestic constitutional arrangements.167
122.Mr González García also noted that “the UK’s WTO status would form part of the guidelines” for negotiating a FTA, thus underlining again the importance of sequencing.168
123.More broadly, Mr González García argued that negotiations on a UK-EU FTA would be “unprecedented”, because “the whole idea of a free trade agreement negotiation is to start from the status quo and then go forward for integration.” This would be a negotiation where the “position of the UK in many aspects is to maintain the status quo and in other aspects to go backwards.” However, he did concede that this might bring one advantage—it would remove the “the most complex issue of the negotiation”, namely deciding which regulations to adopt. In this instance, the UK had already adopted the relevant regulations as part of EU law.169
Order of negotiations
124. Mr González García’s description of the process of FTA negotiations relies on the assumption that the UK and the EU would be able to combine withdrawal negotiations under Article 50 with negotiations on the future framework for trade under a comprehensive FTA.
125.Mr González García argued that the reference in Article 50 to the “future framework” for a relationship between the Member State and the EU could encompass “the negotiation of a comprehensive free trade agreement.” He continued: “It makes sense in its logic that the negotiators of Article 50, if they wanted just to narrow the scope of what can be negotiated under Article 50, could have set guidelines or principles, but the framework is broad enough to include the future trade rules.” This would “give stability and certainty to the businesses, investors and consumers of Europe”, by providing “clear, permanent and predictable rules for the future relationship between the two sides.”170
126.Dr Markus Gehring, Lecturer, Faculty of Law, University of Cambridge, disagreed. While it might be possible to “establish a programme of negotiation and the broad outline of what a free trade agreement with the then former member state looks like”, he did not think it was “very realistic … to use Article 50 as a legal basis for such an agreement”. He continued: “The Commission is firmly of the view that first you leave and then you negotiate the future relationship. It would be very difficult for the UK to convince the Commission otherwise.”171
127.Mr Ruparel reasoned that while “the Commission has its view … Member States have a slightly different view”. Ultimately, he argued, “the mandate will be tasked by the Member States, and if they set a wide and broad mandate the Commission will have to fulfil it.” He also noted that there was “a clear advantage for the UK in trying to keep the withdrawal agreement and the trade agreement as linked as possible”, since the “types of areas where the UK has significant leverage”, such as foreign policy and security were likely to be “be grouped in the withdrawal agreement”.172
128.Lord Bridges also wanted to ensure that negotiations on the withdrawal treaty and the new relationship were “conducted together.” He believed that the drafting of Article 50 supported this approach, but said the Government “would wish to clarify that”.173
Transitional arrangement
129.Even if a FTA could be negotiated alongside a withdrawal agreement under Article 50, Dr Gehring, Mr Ruparel and Mr González García agreed that it would not be possible to conclude that FTA within two years.174 Mr Ruparel said timing was “the biggest technical risk” to the prospect of successful negotiations. He recommended that the Government seek to gauge “the willingness either to extend the Article 50 period or to consider some kind of transitional period after those two years”.175
130.Mr González García agreed, noting that “the two-year timeframe is not very realistic … I think it is highly unlikely that in two years you can negotiate [a FTA]”. He therefore recommended that the Government and the EU “agree on an extension to the two-year deadline.”176 This is consistent with evidence given to the EU Select Committee by Lord Kerr of Kinlochard GCMG, who told us that a future trade agreement “certainly cannot” be agreed in two years.177 We discuss further the broader issue of, and need for, a transitional trading relationship between the UK and the EU (after the UK’s withdrawal from the EU and before concluding a new agreement) in Chapter 8.
Trade with the Single Market
What could a UK-EU FTA contain?
131.There is no uniformity among FTAs. As Mr González García remarked: “There is a lot of creativity in the negotiation of an FTA.” The content, he said, depended on “the objectives of the negotiation”. On balance the EU negotiated four types of FTAs: those with political, developmental, economic or security dimensions. FTAs could also be combined with other wider agreements such as a “political co-operation agreement”, and separate bilateral arrangements could be used to foster co-operation on other issues, such as scientific research. EU FTAs tended to include provisions on competition law and intellectual property rights, as well as “sustainable development, human rights, environmental protection and labour rights, because that is EU trade practice.” They could also cover public procurement.178
132.Dr Gehring identified three constraints on the scope of an EU FTA: first, the jurisprudence of the CJEU; second, “the political will of the Member States”; and third, the “legal limits” set out in the EU Treaties. Items would be excluded from a FTA if they would require treaty change:
“That is an entirely different kettle of fish. Renegotiating the foundational treaties of the EU is no small feat; some commentators have said it is virtually impossible.”179
133.As a trade negotiator, Mr González García recommended taking a “look at what you have negotiated in other agreements and take the bits that would accommodate your interests and the interests of the other side.”180
134.Box 6 outlines the areas included in the EU’s Comprehensive Free Trade Agreement with Canada (CETA) and its FTA and flanking bilateral agreements with Switzerland. Dispute resolution under FTAs is described in Box 7, later in this chapter.
Box 6: The EU’s FTAs with Canada and Switzerland
The Comprehensive Economic Trade Agreement (CETA) between Canada and the EUNegotiations between the Commission and Canada started in 2007, and the Council agreed to the signing and provisional application of CETA in October 2016. The European Parliament must also approve CETA, after which it will enter into force provisionally.181 CETA will eliminate tariffs on all industrial products, over two-thirds of tariffs on fishing and over 90% of tariffs on agricultural goods. For these goods and other sensitive agricultural products, the agreement includes increased tariff rate quotas (TRQs).182 All goods traded between Canada and the EU will have to comply with rules of origin, which are used to determine the country of origin of these goods in order to judge whether they will be subject to preferential tariff rates under the agreement, and the relevant EU or Canadian regulations and standards. In relation to services, the agreement requires both the EU and Canada to list discriminatory measures and quantitative restrictions across all sectors. It includes provisions to grant the EU greater access to Canada’s postal, telecommunications and maritime transport services markets. It has also given the EU greater access to Canada’s public procurement market. The agreement enables staff transferred inside their company to be accompanied by their spouses and families if working in the other territory, and extends the period for transfers of contractual service providers and independent professionals from six to 12 months. The agreement also establishes a framework for the mutual recognition of some professional qualifications. CETA does not, however, contain provisions on audio-visual media or aviation services. CETA does not require Canada to make a financial contribution to the EU budget. Switzerland’s trade agreements with the EUSwitzerland is a member of the European Free Trade Area (EFTA), but unlike the three other members of EFTA (Norway, Liechtenstein and Iceland) it is not a member of the European Economic Area (EEA). Over the last two decades, Switzerland and the EU have negotiated a bespoke bilateral arrangement which encompasses over 100 individual agreements covering diverse issues. Among the most significant of these agreements is the 1972 Free Trade Agreement, which laid the groundwork for trade relations. It also provided the foundation for seven sectoral agreements (known as ‘Bilateral Agreements I’) signed in 1999 covering the free movement of persons, technical barriers to trade, public procurement markets, agriculture, research, civil aviation, and overland transport, and nine further agreements (known as ‘Bilateral Agreements II’), which cover topics beyond trade matters, signed in 2004. The ‘Bilateral Agreements I’ are linked through a ‘guillotine-clause’: if one agreement is terminated, all seven lose effect. This means that in return for preferential market access for air transport, carriage of goods by rail and road, trade in agricultural products, mutual recognition, government procurement and scientific co-operation, Switzerland is also required to accept the principle of freedom of movement.183 The Bilateral Agreements II are not linked through a guillotine clause. Since 2014, Switzerland has sought to introduce restrictions on free movement, in response to which the EU has imposed restrictions on Switzerland’s access to Erasmus and Horizon 2020 programme funding.184 While Switzerland has relatively comprehensive preferential access to the Single Market in goods, some agricultural products face tariffs, and Switzerland has to follow rules of origin. Switzerland has less comprehensive preferential access to the Single Market in services—with limited market access for professional business services, and a 90-day limit on Swiss nationals providing services in the EU. Switzerland has no general access to the EU’s market in financial services—and does not have a ‘passport’—meaning that Swiss banks are required to set up subsidiaries in an EU or non EU-EEA states. Attempts to include services in Switzerland’s deals with the EU have failed.185 Switzerland makes financial contributions to the EU through grants to Member States that have joined the EU since 2004 and via contributions to various programmes funded by the EU budget including research, education and satellite navigation. Switzerland’s contribution to the EU budget in recent years has been around £420 million per annum, or £53 per head, compared to current UK net budget contributions of £128 per head.186 In 2010, the Council of the EU described the model of EU-Swiss relations as “complex”, “unwieldy to manage”, and as having “clearly reached its limits”. In particular the institutional component of the Agreements is weak and generally does not provide for a court system. The Council has stated repeatedly that any further improvement of market access would require efficient mechanisms for adopting secondary law, a court system and surveillance of implementation. |
Source: European Commission, ‘CETA: Summary of the final negotiating results’ (February 2016): http://trade.ec.europa.eu/doclib/docs/2014/december/tradoc_152982.pdf [accessed 29 November 2016]; Council of the European Union, Council conclusions on EU relations with EFTA countries (14 December 2010): http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/foraff/118458.pdf [accessed 8 November 2016]; HM Government, ‘Alternatives to membership: possible models for the United Kingdom outside of the European Union’ (March 2016), pp 26-29; Cottier et al., The EEA and the EFTA Court, Decentred Integration (London: Hart Publishing, 2014), p 576
Goods
135.Witnesses agreed that tariff-free access for goods to the EU’s market could be included in a FTA. Mr González García said agreeing tariffs on industrial goods would be straightforward (“I do not see why there should be barriers or obstacles in the automotive industry”), though agreement on tariffs for agriculture and market access for fishing would be more of a “challenge.”187 He added it would be “very easy” to agree on “rules of origin, customs procedures, customs facilitation and co-operation”.188
136.Mr Ruparel said that regardless of what might be included in a FTA, complying with rules of origin and incurring tariffs on goods with parts produced outside of the UK would be an “additional administrative burden for businesses and goods exporters.”189
Services
137.Witnesses also recognised that a FTA provided the possibility of some liberal terms for trade in services with the Single Market, though Mr González García suggested that some services might be easier to include than others, such as telecommunications and e-commerce.190
138.Mr Ruparel went further, saying that services “will clearly be the most difficult sector, particularly financial services, as there is no precedent for third-country access to the Single Market in financial services and other services.”191 Both Dr Gehring and Mr Ruparel said that previous FTAs signed by the EU which included services were some distance short of the access the UK currently enjoys as an EU Member State. Dr Gehring said: “Let us be honest: the current acquis of EU rules is normally much broader [than a FTA].” While the CETA agreement included “some mild form of mutual recognition of qualifications”, there were “quite a few areas of the existing EU acquis that I have not seen in any FTA in a bilateral relationship”.192 Mr Ruparel noted that while CETA provided “some rights of establishment, and the ability to set up subsidiaries and entities in the EU”, it was “far short … of providing a passport and being able to provide a service from your home base in the UK”. There were also “hundreds of pages of restrictions”, and so he concluded that a similar agreement between the UK and the EU “would be a big change for the UK, particularly on the services side”.193
Complying with EU law
139.Mr González García, Dr Gehring and Mr Ruparel agreed that if the UK wanted comprehensive market access under a FTA with the EU, it would have to accept EU regulations and standards. Mr González García said that in negotiations, “the EU is going to ask, ‘You want access to financial services. Which of my directives are you going to implement and replicate in your law?’” He suggested that “the easiest thing would be for the UK to adopt the EU law”, to ensure that “level of access to EU services would be greater”. On the other hand, he cautioned that “the more you want to be in the Single Market, the more locked into EU law you would be”, and that this would result in “less flexibility in negotiation with third countries” on future FTAs.194 Dr Gehring agreed, noting also that this might be “politically … very difficult, because sometimes you do not have political input into how the standards are made.”195
140.In some cases, though, meeting EU standards and regulations would not necessarily require the UK to adopt EU law, if it could demonstrate that its domestic law had an equivalent effect. Dr Gehring referred to the example of the Emissions Trading System, where the UK “would rather have a carbon tax, but the overall price of carbon between the two systems was similar, [so] there could be an equivalence negotiation”.196 Mr Ruparel cautioned, though, that whether “you meet the equivalence standards … is a political not a technical decision”.197
Dispute resolution
141.Dispute resolution under FTAs is described in Box 7.
Box 7: Dispute resolution in FTAs
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Any FTA would require the establishment of some form of mechanism to resolve disputes. Countries can also use the WTO dispute settlement which allows for an appeal of the decision and for compensation if the case is won. When set up within the framework of a FTA, the most common procedure for resolving trade disputes is state-to-state dispute settlement. In this case, a state complains about violations of the agreement by the other state to a joint panel. However, dispute settlement clauses in FTAs are as diverse as the FTAs themselves. In FTAs containing an investment chapter, it is also possible to include a dispute settlement mechanism between investors and states (investor-state dispute settlement—ISDS). This grants an investor the right to resort to international arbitration against a country’s government where the host state violates the rights granted to an investor under public international law.198 In the case of the proposed Transatlantic Trade and Investment Partnership (TTIP) and under CETA, this has proved extremely controversial. The provisional application of CETA agreed in October 2016 does not include these investor-state dispute resolution provisions. If there is a dispute about trade relations between the Switzerland and the EU, the CJEU will initially publish its decision, and this decision will then go to a joint committee of Swiss and EU officials, which decides on how this issue should be viewed in the context of their bilateral relationship. |
Source: European Commission, ‘CETA: EU and Canada agree on new approach on investment in trade agreement’ (29 February 2016): http://europa.eu/rapid/press-release_IP-16-399_en.htm [accessed 29 November 2016] and Q 12 (Dr Markus Gehring)
142.According to Mr González García, the advantage of including dispute settlement clauses within FTAs was that they provided an extra (if indirect) benefit to business and investors by offering “an additional forum where the state will call the other state to say that they have an issue”.199 FTAs provided complainants with the ability to “challenge and appeal the decision by an impartial, neutral administrative tribunal, in quasijudicial or judicial proceedings”.200
143.On the other hand, Dr Gehring argued that states seem to “prefer the WTO process”.201 That process can result in the complainant being allowed to impose countermeasures—such as breaking its own WTO obligations towards the member that lost in WTO dispute settlement (for example by imposing tariffs beyond the bound tariff rate)—which may convince the trading partner to bring its actions into line with WTO practice.202 Dr Gehring emphasised that FTA dispute resolution clauses worked on a state-to-state level and so did not provide businesses with the opportunity to challenge the actions of their trading partners unless they had “access to the Government” and could “easily sway the entire United Kingdom to take on, say, the United States”.203
144.Several witnesses urged the Government to consider developing more robust dispute settlement arrangements to police a future FTA between the UK and the EU. Referring to the EFTA Court, Dr Gehring said: “A joint court between EU judges and UK judges to administer the new comprehensive relationship could be possible”.204 Mr Ruparel agreed.205 We note that such a proposal is unlikely to pass legal scrutiny by the CJEU. In 1991, it ruled against a proposal to establish an EEA court composed of eight judges—including five from the CJEU—on the basis that such a system was incompatible with Community law. As a consequence, the EFTA Court was set up pursuant to a different model.206 Dr Gehring too warned that such “creativity may run into slight difficulties”.207 He referred to the Swiss model of dispute resolution (which does not have a court): “The practice over the last 10 years has shown that … it is basically impossible for the Swiss side to get any change negotiated in the joint committee, because the Commission officials feel legally bound by the definitive judgment of the Court of Justice.”208
Association Agreements
145.Another possibility would be for the UK to agree a FTA with the EU in the context of a wider Association Agreement. Association Agreements provide a framework for co-operation between the EU and a third country, including provisions on trade, but also cover many wider issues.
146.Mr Michael Emerson, in a paper published in October 2016, cited the 2016 Association Agreements between the EU and Ukraine and Georgia as recent examples. He argued that these provided a high degree of access to the Single Market for three of the four freedoms (goods, services, capital, but not the free movement of persons). He also suggested that such agreements provided for the first time a “departure from the doctrine that all four freedoms always come together in an indivisible package”.209 Mr Andrew Duff, Research Fellow, European Policy Centre (EPC), confirmed in written evidence that movement of labour under Association Agreements was subject “to work permits against the backdrop of visa liberalisation”.210
147.At the heart of the EU Ukraine Association Agreement is a FTA, referred to as a Deep and Comprehensive Free Trade Area (DCFTA).211 Mr Duff told us that this granted Ukraine “tariff free access for goods, co-operation on VAT and customs procedures (including the complex rules of origin)”. Regarding services, he said that Ukraine could elect to deepen its trade relationship in key service sectors such as finance (including passporting), transport and energy.212
148.In order to gain this market access Ukraine is obliged to achieve conformity with the relevant EU sectoral regulation. This includes provisions on trade remedies, mutual recognition of equivalent technical standards and joint observance of EU policies on public procurement, competition, state aid and intellectual property. A mediation and trade dispute settlement machinery has also been established which involves a tribunal of three judges. Mr Duff stressed that the UK could potentially secure continued market access for certain sectors of the economy insofar as it also maintained “current standards of technical and regulatory equivalence with the acquis”.213
149.The EU Ukraine Agreement also provides for increased co-operation in the fields of foreign and security policy, migration, asylum and border management, and combating international organised crime.214 Mr González García noted that Ukraine’s Association Agreement allowed it to contribute to the EU budget in instances where it was “interested in European funds and in European programmes”.215
150.We note 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.216 We also note that as with the FTAs discussed above, a mixed agreement FTA within an Association Agreement would likewise be subject to Member State ratification. The political and co-operation provisions of the EU Ukraine Association Agreement have been provisionally applied since November 2014, and the DCFTA has been provisionally applied since January 2016.217 In a referendum in April 2016 the Netherlands voted against the approval of the EU Ukraine Association Agreement, and the Dutch Government is currently seeking an opt-out from a number of aspects of the agreement.218
151.In conclusion, while Mr Duff acknowledged that a UK EU Association Agreement would not be a matter of ‘cut and paste’ from the EU Ukraine Agreement, he suggested that, for the EU 27, “the Ukrainian deal provides a precedent which it would be difficult to deny its former Member State.”219
152.The Committee asked the two Ministers whether they had met representatives from Ukraine to discuss their Association Agreement with the EU. Lord Price replied: “No, I have not met with the Ukraine yet.”220
Trade with third countries
153.We also considered whether the UK could enjoy continued access to FTAs agreed by the EU with third countries after Brexit, without which the UK would have to revert to WTO terms for trade (as discussed in Chapter 6).221 Illustrating this issue, Mr Richard Eglin, Senior Trade Advisor, White and Case LLP, noted that without the EU FTA with Caribbean countries, the UK would no longer be able to import sugar duty free, unless it replaced the EU agreements with a scheme allowing least developed countries (LDCs) tariff-free access to the UK market, or if it granted duty free access to all members of the WTO on a MFN basis.222
154.Dr Gehring suggested that it would not be possible for the UK to continue to enjoy the benefits of such FTAs. Some were “just concluded by the EU, so there would be no access to the UK”, while even mixed agreements (where the UK has signed and ratified them in addition to the EU) tended to “specify that the application of the agreement is really restricted to EU Member States”.223 Mr González García agreed, noting that the “language of the FTAs does not leave room to differentiate which commitments belong to the EU and which ones [are] for individual Member States”. It followed that: “If a country ceased to be part of the Union the FTA is no longer applicable.”224
155.Dr Gehring recognised that the forthcoming negotiations might provide an opportunity for the UK to become an individual signatory to such FTAs, but said that if this did happen, “either the EU or the third country partner would probably have a right to request some form of renegotiation.” The likelihood of this depended on the shape of the UK’s future relationship with the EU: “if the UK can no longer participate in the EU internal market, in my view it can no longer fulfil a good chunk of those free trade obligations, and that triggers the renegotiation.” Dr Gehring noted that even if a third-country partner agreed to the UK being a signatory to a FTA on the same terms as it had when it was a member of the EU, the “EU could take the very drastic step of either withdrawing or terminating those kinds of agreements”. 225
156.Mr González García therefore concluded that it was more likely that the UK would have to negotiate a separate FTA with a third country, which “might not look like the original FTA”.226 Mr Ruparel went further, suggesting that it “might be simpler for the UK to seek to sign new bilateral agreements with these states which mirror the current agreements”.227
157.The Government acknowledged that the UK’s ongoing access to EU FTAs was unlikely. In an appendix to a letter to Lord Boswell, Chairman of the EU Select Committee, on CETA, received on 3 October 2016, Lord Price wrote that the Government’s assessment was that:
“On leaving the EU, the UK will no longer retain access to the trade preferences contained within CETA unless arrangements to do so are put in place as part of our negotiations with the EU. This outcome will not be impacted by whether or not the existing trade deal was signed as a mixed agreement.”228
158.Lord Price told us that around 11% of UK export trade relied on the EU’s FTAs with third countries, and that “another 25%” would be added when FTAs with Canada, the US and Japan were concluded. Lord Price said that, in line with the Prime Minister’s ambition to ensure “the best possible transition from where we are today to the new world”, the DIT was looking “at what we might do with those countries that currently have an FTA with the EU, to see how we might have some kind of transition to make operations smooth for business.” He and the Secretary of State’s were making “trips around the world”, to find out “how we might mitigate the impact of that going forward.”229 We note that while the CCP prohibits the UK from negotiating bilateral trade agreements, it does not prevent the Government from engaging in discussions with third countries to prepare the ground for future FTAs. Lord Price confirmed this: “The formal position is that we cannot sign and ratify until after we have left, but we can have discussions ahead of that.”230
Conclusions and recommendations
159.The Government has made clear its desire to open negotiations on the future trading relationship between the UK and the EU as part of the withdrawal negotiations under Article 50. This desire will only be fulfilled if both sides agree. Before triggering Article 50, the Government must, as a priority, seek confirmation from all parties that the framework for a future trading relationship will be included within the Article 50 negotiations.
160.Negotiation of a Free Trade Agreement between the UK and the EU would be unprecedented. While FTA negotiations usually aim to increase market integration between two sides, the UK would start from a position of full integration, and would presumably seek to maintain many aspects of the status quo while reducing integration in some areas.
161.As, for the time being, the UK is compliant with EU law (and the announcement of the Great Repeal Bill by the Government suggests that in general much of EU law will be maintained in national law, at least in the period immediately following Brexit), the complex issue of harmonising rules and regulations between two sides can be deferred in the short term.
162.Nonetheless, experience demonstrates that FTA negotiations with the EU are complex and slow moving. We conclude that, even if it were possible to negotiate a FTA within the terms of Article 50, it would be impossible to agree it within two years. It follows that if the Government is minded to seek a FTA as the long-term basis for future UK-EU trade, it should clarify whether it is also considering a transitional trading arrangement.
163.Even the most advanced FTAs do not provide the level of market access for goods that the UK currently enjoys by virtue of membership of the Single Market. We also note that providing equivalent liberal market access for services in a FTA with the EU would be unprecedented.
164.The level of market access the UK is able to negotiate with the EU would depend in part on the extent to which it was willing to accept and adopt EU law or demonstrate equivalence with EU rules. In the medium to long-term the UK may have to continue to update its domestic law to be consistent with EU law.
165.The UK and the EU may require stronger institutions than are normally included in FTAs to police their trading relationship. While a UK-EU court could help to achieve this, we note any such arrangement could be subject the decisions of the Court of Justice of the European Union.
166.These constraints on a UK-EU FTA notwithstanding, its key benefit would be flexibility. It would not require the UK to accept the principle of the free movement of persons; it would give the UK autonomy over its laws and trade policy with third countries; and it could be supported by separate agreements regarding other areas of interest to the UK if desired. A FTA could also avoid the imposition of tariffs on goods traded between the UK and the EU, although rules of origin would apply.
167.We invite the Government to confirm whether it is giving consideration to an Association Agreement, incorporating a FTA, such as that agreed with Ukraine, as the basis for a future political and trade relationship with the EU.
168.On the balance of evidence, we conclude that the UK is unlikely to be able to retain access to the EU’s FTAs with third countries following Brexit, whether they are mixed agreements or not. We urge the Government to confirm that this is the case.
169.We doubt that the UK would be able to conclude new agreements to replace EU FTAs with third countries within the two-year timeframe for withdrawal negotiations prescribed by Article 50. Nor, while the UK remains an EU Member State, is it able formally to conclude such negotiations, although we note that substantive preliminary discussions are already being conducted to prepare the ground for future FTAs.
170.It follows that the Government must develop a contingency arrangement to secure continuation of the level of market access currently enjoyed by the UK to third countries under EU FTAs, following the completion of withdrawal under Article 50.
167 Q 11. We note that agreement to a FTA by Member States may require the agreement of regional parliaments, as was demonstrated in October 2016 by the parliament of Walloon in the ratification of the comprehensive FTA between Canada and the EU. ‘EU presses Walloons over key Canada trade deal Ceta’, BBC News (24 October 2016): http://www.bbc.co.uk/news/world-europe-37749609 [accessed 21 October 2016]
181 As a mixed agreement, CETA will also be subject to ratification by national parliaments. Only the sections that fall under EU exclusive or shared competence will be subject to provisional application. Letter from Lord Price CVO to Lord Boswell of Aynho (29 September 2016)
182 TRQs provide lower duties on limited quantities of goods imported into a country.
183 Schweizerische Eidgenossenschaft, ‘Bilateral Agreements I’ (23 September 2016): https://www.eda.admin.ch/dea/en/home/europapolitik/ueberblick/bilaterale-1.html [accessed 22 November 2016]
184 Jon Henley, ‘Whatever you do, don’t become Switzerland, Swiss academics tell UK’, The Guardian (11 November 2015): https://www.theguardian.com/politics/2015/nov/11/whatever-you-do-dont-become-switzerland-swiss-academics-tell-uk [accessed 18 November 2016]
185 This is in part because in return for trade liberalisation in services, Switzerland would be expected to increase its integration with the EU (as is seen in the case of non-EU EEA states) and to accept the free movement of workers. Pawel Swidlicki, ‘Swiss told to vote again on free movement–except this time the stakes are higher’, Open Europe (10 April 2015): http://openeurope.org.uk/today/blog/swiss-told-to-vote-again-on-free-movement-except-this-time-the-stakes-are-higher/ [accessed 17 November 2016]
186 House of Commons Library, ‘The economic impact of EU membership on the UK’, Standard Note, SN/EP/6730, 17 September 2013, p 25; ‘Reality check: How much does the EU Budget cost the UK?’, BBC (April 2016): http://www.bbc.co.uk/news/uk-politics-eu-referendum-35943216 [accessed 4 November 2016]. The Swiss government has noted that this is not a one-way transfer: “funds also flow back into Switzerland”. It cited the example of the sixth research framework programmes of the EU, under which more than 100% of its contribution flowed back into Switzerland as EU subsidies. Swiss Confederation, Bilateral agreements—Switzerland–EU (August 2009), p 18 and p 43: http://www.europarl.europa.eu/meetdocs/2009_2014/documents/deea/dv/2203_07/2203_07en.pdf [accessed 17 November 2016]
187 Q 12; The Committee is conducting a separate inquiry into the impact of Brexit on the UK’s fisheries policies.
198 Similar rights are granted in many Bilateral Investment Treaties (BITs). The UK is currently party to almost 100 BITs. Dolzer and Schreuer, Principles of International Investment Law, 2nd edition (Oxford: Oxford University Press, 2012)
199 Q 17; We note that in the case of FTAs with ISDS clauses (such as CETA), these can also be used for investment-related disputes.
202 WTO, ‘Legal texts: the WTO agreements’: https://www.wto.org/english/docs_e/legal_e/ursum_e.htm#Understanding [accessed 9 November 2016]
206 The CJEU found that such a new court system posed a threat to the autonomy of the Community legal order. It concluded that this threat was not reduced by the fact that CJEU judges were to sit on the court: the different goals of the EEA and the European Community would mean that the judges of the CJEU who were also on the EEA Court would have to interpret the same provisions using different approaches, which would make it difficult for them to keep an open mind in the CJEU if they already tackled similar issues in the EEA Court. CJEU, Opinion 1/91, ECLI: EU: C: 1991:490
209 Centre for European Policy Studies, Which model for Brexit? (14 October 2016), p 6: https://www.ceps.eu/system/files/SR147%20ME%20Which%20model%20for%20Brexit.pdf [accessed 1 November 2016]
211 EU External Action Service, EU-Ukraine Association Agreement—Quick Guide to the Association Agreement: http://eeas.europa.eu/archives/docs/ukraine/pdf/071215_eu-ukraine_association_agreement.
pdf [accessed 21 November 2016]
214 The EU Ukraine Association Agreement also establishes an annual summit meeting, a ministerial council, technical committees and a joint parliamentary body. Written evidence from Andrew Duff (ETG0014)
216 Michael Emerson, Centre for European Policy Studies, Which model for Brexit? (14 October 2016), p 6: https://www.ceps.eu/system/files/SR147%20ME%20Which%20model%20for%20Brexit.pdf [accessed 1 November 2016]
217 European Commission: ‘Countries and regions—Ukraine’ http://ec.europa.eu/trade/policy/countries-and-regions/countries/ukraine/index_en.htm [accessed 22 November 2016]
218 Arthur Beesley, ‘Dutch objections threaten to scupper Ukraine treaty’, The Financial Times
(28 October 2016): https://www.ft.com/content/36b560c2-9d20-11e6-8324-be63473ce146 [accessed 21 November 2016]
221 The European Commission lists 50 trade agreements. European Commission Memo, The EU’s bilateral trade and investment agreements–where are we? (3 December 2013): http://trade.ec.europa.eu/doclib/docs/2012/november/tradoc_150129.pdf [accessed 1 November 2016]; Full Fact notes that not all of these are FTAs, as the list includes the customs union with Turkey and the non-EU EEA countries. Full Fact, ‘How many free trade deals has the EU done?’: https://fullfact.org/europe/how-many-free-trade-deals-has-eu-done/ [accessed 17 October 2016]