Scrutiny of international agreements: treaties considered on 14 May 2019
Chapter 1: Agreement drawn to the special attention of the House
Agreement between the United Kingdom of Great Britain and Northern Ireland, Iceland and the Kingdom of Norway on Trade in Goods (CP 89, 2019)1
1.The Agreement between the United Kingdom of Great Britain and Northern Ireland, Iceland and the Kingdom of Norway on Trade in Goods was laid on 12 April 2019 and the scrutiny period is scheduled to end on 10 June. It was considered by the EU Internal Market Sub-Committee at its meeting on 9 May; additional explanation of aspects of the Agreement was subsequently provided by the Department for International Trade (DIT).
2.Iceland and Norway, along with Liechtenstein and the 28 EU Member States, form part of the European Economic Area (EEA). The EEA’s legal framework is set by the Agreement on the European Economic Area2 (‘the EEA Agreement’), which, among other things, extends the EU’s Single Market and its Four Freedoms to non-EU EEA countries. The EEA Agreement provides for application of EU rules on the Single Market and related policy areas—for example, competition, labour, transport and energy—across the EEA. New or amended EU law is incorporated into the EEA Agreement by decision of the EEA Joint Committee.3 Effective monitoring of the EEA Agreement is guaranteed through a neutral surveillance mechanism (the European Commission for EU states, the EFTA Surveillance Authority for other EEA states) and a court (the Court of Justice of the European Union for EU states, the European Free Trade Association EFTA Court for other EEA states).
3.The high degree of regulatory alignment between EU and other EEA States significantly reduces non-tariff barriers to trade. The EEA Agreement also removes tariffs on the vast majority of industrial goods and establishes tariff preferences for processed agricultural and fish products. In addition, the EU has concluded several bilateral agreements with Iceland or Norway. Most have been superseded by the EEA Agreement, but some still have a bearing on trade.
4.The EEA Agreement does not require membership of the EU Customs Union or the Common Commercial Policy, so does not prevent Iceland or Norway from concluding free trade agreements (FTAs) with third countries, either independently or collectively, with Switzerland and Liechtenstein, as members of the European Free Trade Association.
5.The United Kingdom is currently a party to the EEA Agreement and the EU’s bilateral agreements with Iceland and Norway by virtue of its status as an EU Member State. While there has been some discussion over the UK’s position vis-à-vis the EEA, since the Government did not notify its withdrawal under Article 127 of the EEA Agreement, the “prevailing legal opinion” is that under Article 126(1) of the EEA Agreement the UK will automatically cease to be party to that Agreement at the same moment as it ceases to be an EU Member State, or will at least cease to benefit from it.4
6.It follows therefore that a successor agreement is needed to ensure continuity of UK trade with Norway and Iceland after Brexit.5 If the UK ratifies the Withdrawal Agreement adopted in November 2018, that Agreement will ensure the UK’s continued participation in predecessor EU-Iceland and/or EU-Norway arrangements during the transition period. If, on the other hand, the UK leaves the EU without having ratified the Withdrawal Agreement (a ‘no deal’ Brexit), then the UK’s existing trading arrangements with Norway and Iceland will cease. The Trade Agreement is intended to manage this risk, and will enter into force only in the event of a ‘no deal’ Brexit, or if the UK leaves the EU on terms that do not allow its continued participation in predecessor EU-Iceland and/or EU-Norway arrangements during a transition period. It will not take effect if the Withdrawal Agreement is ratified.
7.An overview of UK-Norway and UK-Iceland trade is provided in Box 1.
Box 1: UK trade with Norway and Iceland
|
Norway is the UK’s 12th largest trading partner, accounting for 2.2% of UK total trade. UK imports from Norway significantly outweigh exports (£21.1 billion against £6.5 billion in 2017). UK-Norway trade is mostly in goods. Iceland is the UK’s 63rd largest trading partner, representing 0.1% of total UK trade. In 2017, UK exports to Iceland were £0.7 billion, while imports amounted to £1.2 billion. The majority of this trade is in services (£1 billion in 2017). Top goods imported from Norway and Iceland are mineral fuels and oils (accounting for over 80% of UK imports from the two countries), aircraft and fish/crustaceans. Top exports are machinery and mechanical appliances, aircraft and vehicles other than railway or tramway stock. In terms of services, the UK mostly imports business services, travel and transportation from Norway and Iceland, and exports business services, travel and financial services. DIT estimates that between 2014 and 2017 UK businesses won approximately £1.1 billion of Norwegian and Icelandic procurement contracts—contracts for the repair and maintenance of aircraft, railways, roads and marine equipment accounted for over 85% of this value. 93% of the value of UK firms’ contracts in Iceland and Norway was covered by commitments under the Government Procurement Agreement.6 |
Source: Department for International Trade, Continuing the United Kingdom’s trade relationship with Iceland and the Kingdom of Norway, April 2019: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/795335/100419_OFF-SEN_EEA_PR.pdf [accessed 3 May 2019]; DIT unpublished analysis of Tenders Electronic Daily (TED) Database 2014–17.
The Trade Agreement
8.The UK-Iceland-Norway Trade Agreement (‘the Trade Agreement’) is intended to preserve EU-Iceland-Norway tariff arrangements. To this end, the Trade Agreement brings together provisions from:
- The EEA Agreement;7
- Seven bilateral agreements or protocols between the EU and Iceland, relating to agricultural and fish products;
- Fourteen bilateral agreements or protocols between the EU and Norway, regarding agricultural and fish goods.8
9.The Trade Agreement incorporates these provisions mutatis mutandis.9 However, unlike other rolled-over agreements that make use of this approach, the Trade Agreement does not incorporate the main underlying agreement (the EEA Agreement) and then name exceptions. Instead, it incorporates specific provisions of the EEA Agreement (Article 5). Specific modifications are set out in the Annexes to the Agreement. The main text also contains overarching provisions in relation to the Joint Committee, amendments and trade remedies. We discuss significant additions to and modifications of precursor arrangements below.
10.The Trade Agreement differs fundamentally from the EEA Agreement in terms of scope and content, and therefore provides only limited continuity in trade relations with Iceland and Norway. Its sole focus is on the tariff element of trade in goods, while non-tariff barriers and trade in services are not addressed. The monitoring and enforcement structure of the EEA Agreement is not replicated—except for high-level provisions on arbitration between the Parties. Nor are requirements for regulatory alignment with the EU. The Four Freedoms will therefore be discontinued, in line with the Government’s position on the future UK-EU relationship. All of this will profoundly change the UK’s trade relationship with Iceland and Norway.
Cumulation
11.Annex IV sets out comprehensive rules of origin provisions, which are broadly consistent with those contained in other Brexit-related trade agreements.10 In particular, the Annex establishes the conditions for recognising (in technical terms, ‘cumulating’) materials and working or processing from countries that are not Parties to the Trade Agreement. The parliamentary report explains that EU materials and working or processing will continue to be recognised in UK exports to Iceland or Norway, and vice versa. We note that, under Article 3(7)(a) of Annex IV, the UK will need to have arrangements on administrative cooperation in place with the EU for cumulation to apply. DIT officials have previously reassured us that they do not expect difficulties in securing basic cooperation arrangements with the EU in a ‘no deal’ scenario.11
12.Although not covered in the parliamentary report, the Trade Agreement allows for the cumulation of materials from other third countries that have signed the Regional Convention on pan-Euro-Mediterranean preferential rules of origin (PEM Convention), such as Switzerland.12 This, however, is conditional, among other things, upon the UK and Norway or Iceland having concluded FTAs with these other countries.
Agricultural and fish products
13.The Trade Agreement rolls over Protocols 3 and 9 of the EEA Agreement, which establish preferential tariffs for processed agricultural products and fish products respectively. Protocol 9 has been transitioned with some, chiefly technical, modifications. Changes to Protocol 3, which we discuss below, are more substantial.
14.The Parties have agreed not to replicate an annual review mechanism of customs duties, which is used in the EEA context to compensate for changes in the prices of raw materials. Instead, a new Article 2 in Protocol 3 provides that tariffs levied by Norway or Iceland on UK processed agricultural products should not exceed those applied to EU products. DIT officials told us that any adjustments agreed between the EU and Norway or Iceland would be applied automatically to the UK. The parliamentary report notes that this arrangement will prevent the UK from having to engage in “resource intensive” annual negotiation. It further clarifies that the UK would be able to request consultation, should its market conditions differ significantly from those in the EU.
15.The Trade Agreement also transitions tariff rate quotas (TRQs) maintained between the EU and Norway or Iceland for agricultural and fish products. The transitioned TRQs have been resized to reflect the fact that the UK is a smaller market than the EU. The parliamentary report explains that the resizing was based on three-year historical customs usage data or, in their absence, trade flow data. DIT officials told us that “it was deemed appropriate” to not replicate TRQs where usage has been zero. We note that this approach is a departure from other Brexit-related trade agreements, where unused TRQs have been re-established in order to allow future market access opportunities.13 We call on the Government to provide a fuller explanation for this discrepancy.
16.An EU-Iceland Agreement on the protection of agri-food geographical indications (GIs) has been rolled over to ensure the continued recognition of these UK GIs in Iceland.14 The parliamentary report specifies that there is no equivalent agreement between the EU and Norway. Protections of wine and spirits GIs have not been re-established, as they are predicated on alignment with EU rules. The Government intends to replicate the effects of existing protections through a separate GI Agreement. Officials explained that, even in the absence of a specific GI Agreement, Iceland and Norway will be required by the EEA Agreement to continue recognising existing UK spirits GIs; there is however no equivalent obligation in respect of UK wines.
Governance arrangements and entry into force
17.As noted above, the Trade Agreement will only enter into force in the event of a ‘no deal’ Brexit, or if the UK leaves the EU on terms that do not allow its continued participation in predecessor EU-Iceland and/or EU-Norway arrangements during a transition period. DIT officials explained that it is also intended to be temporary in nature. Its preamble makes clear that, should the Trade Agreement take effect, new negotiations on the UK-Iceland-Norway trading relationship would have to begin “as soon as possible”. To cover any gap between exit and completion of domestic ratification procedures, the Parties have agreed that the Trade Agreement may be applied provisionally.
18.Article 14 of the Trade Agreement enables the Parties to make amendments in writing. The parliamentary report notes that such amendments would only enter into force once the necessary “internal procedures” have been completed. DIT officials explained that these procedures would entail parliamentary scrutiny under the terms of the Constitutional Reform and Governance Act 2010 (CRAG).
19.Article 14 also empowers the Joint Committee responsible for administering the Trade Agreement to amend Annex I (‘Modifications to the EEA Agreement’) and Annex IV (‘Protocol on rules of origin’). DIT officials told us that these amendments would not engage the CRAG process. The provisions incorporated from the EEA Agreement are identified in the main text of the Trade Agreement; it will therefore not be within the Joint Committee’s purview to add or remove them. Nonetheless, the Joint Committee would be able to change the way these provisions, and rules of origin provisions, are implemented.
Trade remedies
20.The Trade Agreement rolls over the EEA Agreement’s provisions on safeguards.15 In addition, it makes provision for:
- Subsidies and countervailing measures—provided the Parties first seek a “mutually acceptable solution” within the Joint Committee;
- Anti-dumping measures—although the Parties have undertaken to endeavour to refrain from taking such measures.
21.The parliamentary report explains that, while these additional trade remedies are not required within a homogeneous and dynamic EEA-EU relationship, they become appropriate in the context of post-Brexit UK-Iceland-Norway relations.
Consultation
22.The Explanatory Memorandum (EM) makes reference to the Government’s engagement with private sector stakeholders. DIT officials added that no “formal feedback” was received. In the EM, the Government also notes its ongoing engagement with the devolved administrations. DIT officials told us that the text of the Trade Agreement was shared with the devolved administrations, the Crown Dependencies and Gibraltar on 18 March. No “formal response” was provided.
Excluded trade-related provisions
23.The parliamentary report outlines key trade facilitations that would fall away under the Trade Agreement. The reason for their exclusion is, essentially, the Government’s desire not to commit to regulatory alignment with the EU in the event of a ‘no deal’ Brexit.
24.First, procurement provisions under the EEA Agreement have not been transitioned. This means that UK businesses would no longer be able to bid for contracts in Norway and Iceland above and beyond the commitments of these countries under the Government Procurement Agreement. The parliamentary report indicates that UK businesses win around £14 million worth of these contracts per year. DIT officials told us that they do not expect any implications to arise for existing contracts awarded to UK businesses in Norway or Iceland.
25.Second, the Trade Agreement will not address technical barriers to trade. A key implication of this is that product certifications issued by UK conformity assessment bodies (CABs) will no longer be recognised in Norway and Iceland. This means that UK exporters will need to obtain these attestations from EU- or EEA-based CABs. A specific mutual recognition agreement with Norway or Iceland is not possible at this stage, as the EEA Agreement prevents them from negotiating such an arrangement independently of the EU.
26.Third, the Trade Agreement does not cover sanitary and phytosanitary rules, which relate to food safety and animal and plant health. The parliamentary report states that Norway and Iceland have undertaken, in a non-binding exchange of letters with the UK Government, to treat UK imports in the same way as the EU does in the event of ‘no deal’. DIT officials explained that, for example, UK exporters of animal products will become subject to third country requirements, such as producing additional documentation or transiting goods through a border inspection post.
27.We also note that, in a ‘no deal’ scenario, Norway and Iceland will only be able to accept imports of animals and animal products from the UK once the UK is ‘listed’ by the European Commission as a third country for animal health purposes. The UK has committed to treat Norwegian and Icelandic imports no less favourably than EU ones and not to require additional checks on food products from these countries for a time-limited period.
28.Fourth, preferential access to Norway’s and Iceland’s services markets is not maintained. The parliamentary report notes that the impact on UK services trade with Norway and Iceland will depend, among other things, on bilateral arrangements put in place to support trade in services with these countries. The EM observes that the Trade Agreement is part of “a wider suite” of arrangements being finalised with Iceland and Norway, including on citizens’ rights.16
Conclusions
29.Amendments made by the Joint Committee could have a significant bearing on the way provisions incorporated from the EEA Agreement and rules of origin provisions operate—without this being subject to parliamentary scrutiny under the Constitutional Reform and Governance Act 2010. We call on the Government to ensure that any significant changes to this and other agreements will be subject to appropriate scrutiny by Parliament, including when such changes are made by a Joint Committee.
30.While preserving tariff preferences, the Trade Agreement will significantly change the nature of the UK’s trade relationship with Iceland and Norway. It will not address non-tariff barriers to trade in goods, and trade in services is excluded entirely. Moreover, institutional arrangements and the enforcement mechanisms involved differ substantially. We recognise that the specific features of the EEA Agreement, designed to achieve economic integration through regulatory alignment, have severely limited the Government’s ability to transition existing arrangements with Norway and Iceland in the event of a ‘no deal’ Brexit. We therefore welcome the Parties’ intention to re-open negotiations on their trade relationship as soon as possible, should the Trade Agreement take effect, with a view to replacing it.
31.We draw special attention to the Agreement between the United Kingdom of Great Britain and Northern Ireland, Iceland and the Kingdom of Norway on Trade in Goods, on the grounds that:
- It is politically important, and gives rise to issues of public policy that the House may wish to debate prior to ratification; and
- it differs significantly from the precursor agreements to which the UK is party as an EU member state.
1 Agreement between the United Kingdom of Great Britain and Northern Ireland, Iceland and the Kingdom of Norway on Trade in Goods, CP 89, 2019: https://www.gov.uk/government/publications/ms-no172019-agreement-between-the-united-kingdom-of-great-britain-and-northern-ireland-iceland-and-the-kingdom-of-norway-on-trade-in-goods [accessed 9 May 2019]
2 Agreement on the European Economic Area (1993, updated 2016) https://www.efta.int/sites/default/files/documents/legal-texts/eea/the-eea-agreement/Main%20Text%20of%20the%20Agreement/EEAagreement.pdf [accessed 10 May 2019]
3 European Parliament, The European Economic Area (EEA), Switzerland and the North (October 2018): https://www.europarl.europa.eu/ftu/pdf/en/FTU_5.5.3.pdf [accessed 13 May 2019]
4 See House of Commons Library Briefing Paper, The European Economic Area CBP-8129, December 2018, summary. See also section 9.2.
5 The Government has concluded a separate Agreement with Liechtenstein, as the latter forms a customs union with Switzerland. For more detail see our report Scrutiny of international agreements: treaties considered on 19 March 2019 (34th Report, Session 2017–19, HL Paper 321)
6 The Government Procurement Agreement is a plurilateral WTO agreement under which the Parties open their public procurement markets to each other. It was laid before Parliament on 18 February 2019. For more information see our report Scrutiny of international agreements: treaties considered on 12 March 2019 (33rd Report, Session 2017–19, HL Paper 315)
7 Decision of the Council and the Commission of 13 December 1993 on the conclusion of the Agreement on the European Economic Area between the European Communities, their Member States and the Republic of Austria, the Republic of Finland, the Republic of Iceland, the Principality of Liechtenstein, the Kingdom of Norway, the Kingdom of Sweden and the Swiss Confederation, OJ L 1/1 (3 January 1994)
8 The full list of EU-Norway and EU-Iceland agreements or protocols that have been rolled over as part of the Trade Agreement is found in the relevant parliamentary report. Department for International Trade, Continuing the United Kingdom’s trade relationship with Iceland and the Kingdom of Norway, April 2019: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/795335/100419_OFF-SEN_EEA_PR.pdf [accessed 2 May 2019]
9 The Latin term mutatis mutandis is used when comparing two or more things to say that, although changes will be necessary in order to take account of different situations, the basic points remain the same. For more detail, see our report Scrutiny of international agreements: treaties considered on 26 February 2019 (31st Report, Session 2017–19, HL Paper 300)
10 For example, the UK-Swiss Trade Agreement. See our report Scrutiny of international agreements: treaties considered on 12 March 2019 (33rd Report, Session 2017–19, HL Paper 315)
11 See our report Scrutiny of international agreements: treaties considered on 12 March 2019 (33rd Report, Session 2017–19, HL Paper 315)
12 The PEM Convention is a multilateral agreement between the EU and members of the pan-Euro-Mediterranean zone, notably: Iceland, Liechtenstein, Norway, Switzerland, Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, the Palestinian Authority, Syria, Tunisia, Turkey, Albania, Bosnia and Herzegovina, the Republic of North Macedonia, Montenegro, Serbia, Kosovo, the Faroe Islands, Moldova, Georgia and Ukraine. See https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ:L:2013:054:TOC [accessed 1 May 2019]
13 For example, in the UK-Swiss Trade Agreement and in the UK-Israel Trade and Partnership Agreement. See our reports Scrutiny of international agreements: treaties considered on 12 March 2019 (33rd Report, Session 2017–19, HL Paper 315) and Scrutiny of international agreements: treaties considered on 19 March 2019 (34th Report, Session 2017–19, HL Paper 321)
14 A GI is a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin.
15 Trade remedies are policy measures used when imports from a trading partner cause material injury to a domestic industry. Safeguards are one such remedy, enabling a country to restrict certain imports. Other trade remedies include: Countervailing duty measures, imposed on imports that benefit from specific public financial contributions in the exporting country; and anti-dumping measures, taken against importers charging lower prices than on their home markets.
16 The Government has concluded, or is in the process of concluding, the following additional agreements with Iceland and Norway: The EEA EFTA Citizens’ Rights Agreement; a Fishing Agreement with Norway; Air Services Agreements with Norway and Iceland; and a Road Transport Agreement with Norway. For more detail see Department for Exiting the European Union, Preparing for EU Exit: Norway, Iceland and Liechtenstein, (29 March 2019): https://www.gov.uk/guidance/preparing-for-eu-exit-norway-iceland-and-liechtenstein [accessed 3 May 2019]