236.All the frameworks discussed in Chapters 3–6 have important advantages in liberalising trade between contracting parties, but all also have significant shortcomings.
237.Becoming a non-EU member of the EEA would, in trade terms, be the least disruptive option—providing full membership of the Single Market in services and partial access to the Single Market in goods. It would also be one of the more straightforward options to negotiate and conclude within the two-year timeframe set by Article 50. The UK would be able independently to negotiate FTAs with third countries, but would be constrained by its membership of the Single Market with regard to non-tariff barriers.
238.On the other hand, membership of the EEA would entail rules of origin for trade, and tariffs on some goods between the UK and the EU. It would not provide the UK with the opportunity to influence future rules regarding the Single Market, reducing national control over regulatory standards, and would mean accepting the principle of free movement of persons. It would mean accepting the jurisdiction of the EFTA Court, and, by extension, that Court’s principle of securing homogeneity with the CJEU wherever possible.
239.A UK customs unions with the EU after Brexit would overcome one of the difficulties with all the other options: the UK would not be required to comply with rules of origin. Thus, to a significant extent, trade in goods would not be disrupted.
240.Pursuing this policy in the long term would, though, require the UK to follow the EU’s external trade policy and tariffs, thereby eliminating the option of having an independent international trade policy. A customs union with the EU would also provide no preferential trade in services with the EU. Nevertheless, extending the UK’s existing status as a member of the customs union beyond the two year Article 50 period could form a valuable element of a transitional arrangement.
241.A FTA with the EU would provide greater flexibility to the UK with regards to the issue of free movement, and the opportunity to increase or diminish the scope of the UK’s future trading relationship with the EU, subject to negotiation with the EU-27.
242.However, there is no precedent for any country negotiating a FTA that provides terms of trade with the EU equivalent to Single Market membership. Services would be particularly challenging to negotiate in a FTA. Furthermore, witnesses were unanimous that it would be impossible to agree a comprehensive FTA within the two-year deadline set by Article 50, not least because it would have to be agreed unanimously by the EU-27.
243.The terms on which Switzerland trades with the Single Market (through its FTA and bilateral agreements) illustrate the limitations of existing free trade agreements. Switzerland’s arrangements provide only limited preferential terms for services, and, as discussed in Chapter 5, the EU has described this arrangement as having “reached its limits”.
244.Our evidence also indicates that the UK would not be able to continue to benefit from the EU’s existing FTAs with third countries after leaving the EU. It would not be able to conclude new FTAs until it had left the EU, although this period could be used to begin discussions on future FTAs.
245.In the absence of EEA membership, membership of the customs union, or a bilateral FTA, the UK’s commitments at the WTO would form the baseline for trade with the EU. Regardless of the deal it reaches with the EU, the UK would in any case have to establish independent schedules at the WTO in order to continue to trade with third countries (including those with which it currently enjoys preferential market access via EU FTAs).These schedules would also be the fall-back option for trade with the EU.
246.Trading with the EU under WTO rules alone would be the most disruptive option, providing no preferential access to the Single Market for either goods or services. This option is therefore unattractive for UK-EU trade in goods and in services.
247.The liberalisation of trade requires states to agree to limit the exercise of their sovereignty, for example by agreeing to harmonise their rules for products, or to remove tariffs. A trade-off between market access and the exercise of sovereignty is required in all frameworks for liberalising trade, and is often most visible in the dispute surveillance and dispute resolution mechanisms established through these arrangements. As an EU Member State, the UK has full membership of the Single Market, but is subject to decisions of the CJEU in enforcing the rules of the Single Market. Joining the EEA as a non-EU member would make the UK subject to the decisions of the EFTA Surveillance Authority and the EFTA Court. Participating in the customs union would require the UK to cede to the EU the right to set tariffs and to determine its trade policy. A FTA with the EU would require the UK to agree to trade terms with the EU that would be binding under international law. Finally, agreeing its schedules of concessions at the WTO would require the UK to make legally-binding commitments to all members of the WTO, most notably on its tariffs, which would be enforceable under international law.
248.We note that there is no precedent for hybrid models combining elements of the existing frameworks outlined above. The Government made it clear that it intended to pursue a bespoke agreement with the EU. We are not clear what the Government means by this term. The evidence we have heard underlines that not all the trade benefits of EU membership can be retained as a non-member. Any future UK-EU relationship will therefore include trade-offs between the closeness of relations with the EU and national sovereignty.
249.If the Government chose to negotiate a bespoke FTA with the EU, and even if it were possible to conduct such negotiations alongside the Article 50 negotiations, our witnesses indicated that it would be likely to take longer than two years. The Government would therefore need to consider a transitional arrangement, to establish a bridge between the UK’s withdrawal and agreement of these preferential trading terms. Lord Bridges said it was of “paramount importance”, and “in our interests and in those of our partners in Europe to have a very smooth and orderly process.” Lord Price concurred: “we want to make sure that we have the best possible transition from where we are today to the new world”. Lord Bridges said that while a number of businesses had “flagged with us the need for transitional arrangements”, he could not specify what form they might take: “there are various meanings of this term”. The Government was “cognisant of the need for us to look at this”.
250.Asked about the impact of uncertainty upon businesses, Lord Bridges agreed “101% that there is this concern in a number of sectors”, and accepted that “we need to try to get that clarity and certainty”. Lord Price noted that uncertainty affected not just UK businesses but “all of Europe”. But Lord Bridges felt that the desire for certainty had to be balanced against the “national interests in our negotiating position”. The Government’s announcement of a ‘Great Repeal Bill’ demonstrated “our intent on certainty”. But he reiterated that “I am not going to start speculating on what may or may not happen”.
251.We heard about the different forms such a transitional arrangement might take. Dr Holmes recommended temporary membership of the EU’s customs union to enable goods exporters and importers to avoid tariffs and rules of origin. While temporary membership of the EEA as a transitional arrangement between leaving the EU and firming up new trade terms was deemed unfeasible, Dr Sverdrup suggested that the UK needed to consider “second-best solutions” before a final deal was struck. The technicalities of a transitional arrangement—how long it would last, how quickly it could be agreed to—are all important considerations for the Government.
252.It will be essential for the Government to determine, as a priority, whether and to what extent, legally and politically, negotiations on a new trade relationship could be conducted under the terms of Article 50, as constituting part of the “framework” for the future relationship between the EU and the withdrawing state. This will have an impact on both sequencing and the timeline of negotiations.
253.The sequencing of negotiations on the UK’s future trading relationship with the EU, the UK’s schedules at the WTO and negotiations with third countries will also be critical. We were pleased that Lord Price recognised the importance of concluding the UK’s participation in the WTO as soon as possible, and recognised that it must configure its new terms of trade with the EU before concluding FTAs with third countries.
254.Lord Price reasoned that because “we are tied with the EU”, after certifying the UK’s schedules at the WTO (which would rely in part on negotiations with the EU), the next step would be:
“to come to an agreement with the EU on our trading relationship with the EU. Once those two things are shaped, we can of course begin negotiations with third parties, cognitive of the tariff or the non-tariff barriers, or the other regulations we have put in place. That would be the sequence.”
255.Lord Price continued:
“One of the requirements to sign an FTA is that we have clarity on what our own tariffs and [non-tariff barriers] are going to be, so crystallising our agreements with the WTO and understanding better our agreement with the EU will lead us to be able to do those FTAs. One can imagine a scenario where those things become clearer over a number of years, and as they become clearer our discussions can clearly strengthen.”
256.Lord Price also noted that “we cannot sign and ratify [FTAs with third countries] until after we have left, but we can have discussions ahead of that”. He said that working groups had already been formed with a number of countries to consider the possibility of new FTAs.
257.What was missing from the Government’s approach was an assessment of the consequences of leaving the EU’s customs union, and therefore a developed position on continued participation, including as part of a transitional arrangement, in advance of triggering Article 50. This decision will have to be taken in parallel with determining the UK’s schedules at the WTO (which would, in a customs union, need to be the same as the EU’s) and its future relationship with the EU.
259.Many elements of the different frameworks for future trade between the UK and the EU and between the UK and third countries are interwoven. Nonetheless, it is clear to us that the current priorities are the UK’s relationship with the EU and its schedules at the WTO. The UK’s future trading relationship with third countries will be vital in the longer term, but will inevitably be contingent on what is negotiated with the EU and at the WTO. Negotiations need to be sequenced accordingly.
260.The notion that a country can have complete regulatory sovereignty while engaging in comprehensive free trade with partners is based on a misunderstanding of the nature of free trade. Modern FTAs involve extensive regulatory harmonisation in order to eliminate non-tariff barriers, and surveillance and dispute resolution arrangements to monitor and enforce implementation. The liberalisation of trade thus requires states to agree to limit the exercise of their sovereignty. The four frameworks considered in this report all require different trade-offs between market access and the exercise of sovereignty. As a general rule, the deeper the trade relationship, the greater the loss of sovereignty.
261.Businesses are operating in conditions of considerable uncertainty. Uncertainty undermines investor confidence, and is thus in itself a significant threat to the UK economy. An important step in reducing this uncertainty would be to confirm the Government’s plans.
262.Brexit will dramatically alter the UK’s trading relationship with its biggest trading partner, the EU. The evidence we have heard underlines the importance of establishing transitional or interim arrangements to mitigate the shock that would follow were the UK to leave the EU under the terms of Article 50 without securing agreement on future trading relations with the EU.
263.A transitional agreement will therefore almost certainly be necessary. We see little evidence that agreeing a transitional arrangement would put the UK’s wider interests at risk. Quite the opposite: a transitional arrangement would allow negotiations to be conducted in a less pressured environment, benefiting all concerned. We urge the Government to establish at the outset of negotiations a clear ‘game plan’ for a future transitional agreement, with specific proposals as to what form it should take.
328 (Raoul Ruparel) and (Luis González García and Dr Markus Gehring)
329 Council of the European Union, Council conclusions on EU relations with EFTA countries (14 December 2010): [accessed 8 November 2016]
330 (Lord Price)
332 (Raoul Ruparel) and (Luis González García and Dr Markus Gehring)
341 (Dr Peter Holmes and Dr Ulf Sverdrup)