A study was produced in March this year by the EU Directorate General for External Policies (HERE). Written by a lawyer at the Policy Department for External Relations it's called: Future trade relations between the EU and the UK: options after Brexit. It would perhaps have been useful to send it through to DEXEU or The Cabinet Office early on. It could have saved an awful lot of wasted time since it carefully explains what our options are in reality. And they aren't good.
The abstract sets the scene:
"It examines the various models against the canvas of two distinct paradigms: market integration and trade liberalization. It finds that an intermediate model, which would allow for continued convergence and mutual recognition in some sectors/freedoms, but not others, is unavailable and cannot easily be constructed for legal, institutional, and political reasons. The stark choice is between a customs union/free trade agreement, or continued internal market membership through the EEA or an equivalent agreement".
The paper isn't about trade, it's about the legal structures that underpin two trade models that third countries enjoy with the EU: market integration or trade liberalisation. And it makes clear that the bespoke Chequers option halfway between the two is "unavailable".
The differences are explained like this:
The differences are explained like this:
".....what is often missing from the debate is a deeper understanding of the basic distinction between what this study will term the market integration and trade liberalization paradigms. That distinction divides the different models, with Norway, Switzerland and Ukraine broadly on the market integration side, and Turkey, Canada and the WTO on the trade liberalization side. This is a divide which, if not unbridgeable, is deeper than is often assumed. The reasons and causes are of an economic, political, and particularly also of a legal and institutional nature (lawyers would in fact say “constitutional”).
The paper tries to explain that trade agreements are actually about much more than just trade. It's about the world-wide harmonisation of things like intellectual property rights, product regulation, competition policy, anti-dumping measures and so on. It adds:
"Many of the FTAs which the EU concludes go beyond this, not just in terms of more intensive regulation, but also as regards subject-matter, in the sense of including for example environmental protection and social policies. And the agreements associating third countries to the EU internal market are wider still, and provide for a substantially deeper level of economic integration, which encompasses free movement of persons (immigration). “Trade” is a poor denominator for the aims and contents of these various types of agreements. They are agreements aiming to come to terms with the effects of divergent economic and market regulation, along jurisdictional lines, on all kinds of economic transactions in an ever more globalized world economy. They constitute, in a nutshell, international economic law – a much more representative term than trade.
It explains the difference between the two modesl - market integration or trade liberalisation:
The EU’s internal market represents the market integration paradigm. The Norway/Switzerland/Ukraine models are all characterized by a high degree of participation in the EU’s internal market, but with certain limitations compared to full membership. There are very few examples of the market integration paradigm in other parts of the world, at least if one focuses on international agreements. There is in fact a much closer affinity between the EU’s internal market and market integration in countries with a federal-type constitution.
The EU’s market integration model has a number of essential features. They are not contingent and disposable, but are rather the product of many decades of reflection, negotiation, and institution-building, aimed at deeper economic integration in an age of fast developing globalization.
First, it is clear that this system requires more than mere convergence in economic regulations. Such convergence is a necessary, but not a sufficient condition for achieving market integration.
It then lists and explains five more features that the EU's market requires to work effectively:
- Participation in the legal system
- Free movement of people
- Flanking policies on environmental and social issues
- Regulatory Agencies to monitor and enforce market rules
- Safeguarding the EU's law making autonomy
- Participation in the legal system
- Free movement of people
- Flanking policies on environmental and social issues
- Regulatory Agencies to monitor and enforce market rules
- Safeguarding the EU's law making autonomy
It makes the point that the only way to safeguard the present high levels of trade is to maintain close alignment, regardless of which model is used:
"The upshot for the future EU-UK trade relationship is that the EU is aware that the UK will need to maintain high levels of regulatory convergence if it does not want to undermine the current high volumes of trade with the EU. That will be the case, even in the absence of any agreement, leading to trade being conducted under WTO terms. The second dimension is relevant, particularly to trade and economic relations between the North and South in Ireland. The history of the EU's construction of the internal market shows that the removal of border controls is hard work, and requires a wide-ranging effort to tackle a broad range of domestic policies and regulatory or fiscal systems that operate at borders".
This is what the likes of Hannan, Rees-Mogg, Lilley, Redwood and company don't understand because they've never actually done it.
It then sets out what trade liberalisation means:
"The trade liberalization paradigm stands in stark contrast to the market integration paradigm. As the name suggests, its focus is trade, and it is through the trade perspective that it aims to facilitate economic exchange. Its aim is not one of integration of markets; but rather of the liberalization of trade between distinct markets. The liberalization of trade in goods generally distinguishes tariffs from non-tariff barriers (NTBs). On the tariff side there are some basic, straightforward distinctions. First, trade may take place on a most-favoured-nation (MFN) basis, in which case tariffs cannot be higher than those committed to in the relevant WTO schedule. Nor can distinctions be made between different countries of origin, as this would violate MFN. Second, trade may be governed by a preferential trade agreement (PTA) which creates either a free-trade area (FTA) or a customs union (CU). The difference between an FTA and a CU is that, in the former, the parties each maintain independent trade policies with the rest of the world, but not in the latter, where the parties agree to adopt a common external tariff and trade policy. FTAs therefore require rules of origin, which determine the conditions under which goods are considered to be produced in one of the parties to the FTA, and are thus able to benefit from tariff-free trade. A customs union avoids rules of origin, and therefore allows all goods to be "in free circulation" between the parties to the customs union - whether those goods were produced in one of those parties, or were imported from a third country. A further, very important point is that both FTAs and CUs must cover "substantially all the trade" between the parties".
It also talks about the problems of trade in services which is always more difficult:
"In the sphere of trade in services the trade liberalization paradigm offers even less than for trade in goods. International trade in services is a phenomenon which is a lot more difficult to capture and define than trade in goods. There are no tariffs, only NTBs. Liberalizing trade in services therefore requires a response to divergent product and service market regulations. National regulatory systems in the sphere of services are predominantly sectoral, reflecting the different policy concerns associated with the various sectors. The regulation of health, education, transport, financial, and telecommunications services (to name some) is inherently very different in terms of policy goals and regulatory institutions and instruments".
"25 years after the creation of the GATS framework, which is used also in FTAs, it is not clear whether the unified trade liberalization paradigm is working in terms of actual liberalization, or greater convergence of product and market regulations. The original commitments entered into by WTO members were largely of a stand-still nature, and they have, with some exceptions, not been updated due to the WTO’s failure to conclude the Doha Round".
"In terms of flanking policies, the trade liberalization paradigm is also very different, and more limited than the market integration paradigm. The WTO does not operate a world-wide competition policy. What it does is to tackle certain subsidies (in particular export subsidies), by enabling members to challenge those subsidies in the WTO, or to apply countervailing import duties. The behaviour of private undertakings is not regulated as such, but WTO members are able to adopt protective measures, particularly anti-dumping duties, in the face of certain types of price-oriented market distortions. The WTO also does not impose particular environmental or social policies".
It looks at the EEA option and notes that several countries that started in the EEA are now in the EU - we would be the first and only country to go the other way!
"It is further worth noting that the EEA originally covered a wider group of EFTA countries, but has shrunk as a result of the expansion of the EU to include Austria, Sweden and Finland. What would need to be done, legally, for the UK to benefit from the EEA as a non-EU contracting party?
"The UK would need to join EFTA, if anything because the EFTA Court and EFTA Surveillance Authority are critical EEA institutions. Arrangements would need to be made for the UK to contribute to the work of the EFTA Court and Surveillance Authority. The EEA Agreement would need to be amended, although, conceivably, a Protocol may be sufficient to make the UK switch sides – from the EU to the non-EU side of the EEA. All of this is achievable in legal terms, but requires the consent of all EFTA/EEA and all EU Member States, plus the EU, because the EEA is a mixed agreement.
"There are however a number of obvious political difficulties with the EEA option. First, the UK’s participation in the EEA, on the EFTA side, would create even greater imbalance between the participants. The size of the UK economy and population is many times the size of the combined economies and populations of the three other members. The UK would risk dominating EFTA and the EEA in ways which the other EFTA states may not prefer."
It also looks at the possibility of negotiating a customs agreement but notes that this alone would mean the benefits of the single market would be lost and therefore the Irish border problem (or problems at Dover and other ports) would not be resolved:
"In legal terms, a customs union agreement could, if it was confined to customs and tariff arrangements, be negotiated and concluded by the EU acting alone, without the Member States. That would facilitate decision-making (Council QMV), and avoid the long road of ratification at a domestic level in the Member States. However, such an agreement would also sit firmly within the trade liberalization paradigm. In other words, all the benefits of the current market integration paradigm would be lost, unless the customs union was complemented with a form of extension of the EU internal market.
"The first political difficulty with an EU-UK customs union is therefore that, in essence the UK would need to continue to implement the EU’s external trade policy. In terms of trade agreements between the EU and third countries, this would mean that the UK would either need to be a contracting party to those agreements, or would need to conclude its own agreements which would need to mimic, in substance, the EU’s agreements (the Turkey model)
"In terms of economic effects, it must first of all be noted that the principle of free circulation, in a customs union, does not of necessity extend to regulatory issues and controls. An EU-UK customs union would not do away with the need to manage future regulatory divergence. A customs union achieves free circulation in customs terms – no tariffs are applied to any of the goods crossing the respective borders, and therefore no customs controls are required. But the EU would need to apply the full range of its laws and regulations governing imports and exports which are not of a customs nature"
"As regards flanking policies, a customs union would require an effective and well-functioning competition policy (including state aids) for the EU to be guaranteed that barriers to trade are not re-introduced by private undertakings abusing a dominant position and participating in a cartel, and that a level playing field is maintained in terms of state aids and public procurement. These flanking policies would seem to constitute an indispensable protection against the risks created by regulatory divergence.
"A customs union cannot operate trade protection instruments (anti-dumping and anti-subsidy) at the border, and the EU will want to be reassured that it is not locked into a customs union with a major economy which could use its regulatory sovereignty to compete through deregulation (“Singapore on the Thames”).
And on the multiplicity of the existing FTAs that the EU has negotiated over 40 years. There are two types which will complicate matters:
"The UK is currently bound by the provisions of any and all trade agreements concluded by the EU, with third countries. Such agreements may have been concluded by the EU, acting alone. These agreements are binding on the Member States by virtue of Art 216(2) TFEU. However, the majority of trade agreements are concluded as mixed agreements. Such agreements are binding on the Member States, not only by virtue of Art 216(2), but also on the basis of each State’s signature and ratification. The justification for mixed agreements is that it is accepted that they may contain provisions which are not within EU competence, and which could therefore not be concluded by the EU acting alone. It is therefore useful, in what follows, to distinguish first between what we will call pure EU agreements, and mixed agreements. It may be added that this is a complex area of law, and that this study does not purport to address all the different types of agreements and their permutations, or all of the legal questions to which they give rise.
"Pure EU agreements will cease to bind the UK at the point in time Brexit takes place (scheduled to be 29 March 2019 – though that date may still change). This is on the understanding that Art 216(2) TFEU will no longer apply to the UK. The transition period, currently under negotiation, may provide otherwise, and that eventuality is considered below. If Art 216(2) no longer applies to the UK, there is no further legal basis for a pure EU agreement to bind the UK, pursuant to EU law; and as the UK never concluded those agreements itself, there is no basis under international law either. That position is reflected by the terms of these agreements, which as a rule provide that they apply in the territories of the Member States of the EU. Once the UK is no longer a Member State, by definition the agreement no longer applies, and the third-country contracting party will have no further obligations with respect to trade with the UK".
For mixed agreements the position is more complex, as there are various types of mixed agreements.
"First, there is a difference between mixed agreements which give some indication of the division of competences between the EU and the Member States, for example through a “declaration of competences”, 52 and mixed agreements which do not do so. The latter approach is the one adopted most frequently, particularly in the trade and economic field. There is academic debate about the relevance of this distinction, but in international legal practice there is in any event a generally accepted understanding that mixed agreements are binding, in their entirety, on the EU and each of the Member States.
"Second, some mixed agreements, particularly of the multilateral kind, contain a so-called disconnection clause. The effect of such a clause is that the commitments entered into by the parties, which on the EU side include each Member State, do not apply in intra-EU relations. Where such a clause is not included, a mixed agreement normally does create such intra-EU commitments. A good example is the Energy Charter Treaty (ECT), which includes investor protection provisions which are currently being litigated in several cases involving an investor from one EU Member State challenging conduct by another Member State.
"However, and third, many mixed agreements, particularly in the trade field, do not need a disconnection clause, because they are drafted in a bilateral way, with the EU and its Member States defined as in essence hi one party, and the third country or countries concerned as the other party. The usual formulation for this is to define the EU and its Member States as parties, “on the one hand”, and the other contracting parties “on the other hand”. Furthermore, the EU’s trade agreements define the territories to which they apply in an analogous way, speaking “on the one hand”, of “the territories in which the TEU and the TFEU are applied”, and “on the other hand” of “the territory of” the non-EU contracting party or parties.
"Furthermore, it is clear from the very terms of these agreements that, in matters of trade, they are bilateral in the sense of covering imports into and exports from the EU’s unified customs territory. These agreements clearly do not purport to create obligations between the EU’s own Member States: those trade relations are governed by EU internal market law.
"What is the legal fate of these mixed agreements post Brexit? With that we mean the legal position, of the parties concerned, in the absence of any negotiations between them, or any amendments or protocols. Here it is indispensable to make a distinction between mixed agreements – including nearly all trade agreements – which are essentially bilateral in nature, and those which are not.
"Let us start with an example of the latter. UNCLOS [UN Convention on the Law of the Sea] is a mixed agreement which clearly contains provisions which are within EU competence, and provisions which are within Member State competence (for example on territorial waters and exclusive economic zones). The UK is at present bound by UNCLOS, both by virtue of Art 216(2) TFEU and by virtue of its own signature and ratification. Once it has left the EU, the latter legal basis for continuing to apply UNCLOS continues to exist. The other contracting parties to UNCLOS have not made the UK’s party status conditional on its EU membership. Going forward, instead of there being a division of competences between the EU and the UK in the matters included in UNCLOS, the UK will need to assume the full extent of its UNCLOS obligations.
"However, the same conclusion cannot be reached for the large majority of the EU’s trade agreements, precisely because of their essentially bilateral nature, and the way in which they lay down their territorial field of application. If one takes for example the EU-Korea FTA, even though the UK has signed and ratified that trade agreement, its very terms suggest that it does not continue to apply post Brexit: the UK is then no longer a territory in which the TEU and the TFEU apply. The position would therefore seem to be that, although the UK is a signatory to the agreement, none of its provisions will continue to apply to Korea-UK trade. In practical terms, this means that Korea could deny exports from the UK the benefits of tariff-free access to Korean territory. Whether, in the real world, Korea or any other third country, party to a trade agreement with the EU, will modify its trade regime for imports from the UK is difficult to predict. But if they do, they would have strong legal arguments to defend their position. There is, furthermore, a potential legal issue for those third countries which, without any further legal steps being taken with the UK (and possibly the EU), do continue to give preferences to imports from the UK: other WTO members could claim that there is no functioning FTA any longer, and that therefore those preferences fall foul of Art XXIV GATT.
"A further complexity is that a transition phase, in the context of the Art 50 withdrawal agreement between the EU and the UK, may extend to the continued application of Art 216(2) TFEU. The effect of that would be that, under EU law and the withdrawal agreement, the UK would have to continue to apply the relevant trade agreements, even if the third countries concerned argue that they are no longer bound. This is clearly a state of affairs which ought to be avoided.
"It is clear that the UK government’s position is that it wishes to continue to apply, and benefit from the FTAs concluded by the EU. However, post transition it will be difficult to maintain the position that, effectively, nothing has changed. The legal position will clearly be different, as the UK will no longer be an EU Member State, and will not be able to claim that EU law continues to apply in its territory. And, depending on the terms of trade agreed between the EU and the UK in the agreement on the future trade relationship, the UK will be more or less dissociated from the EU internal market. If there is no customs union, exports to the UK will not gain free circulation throughout the EU. Exports of intermediate goods, to be incorporated in final products, may suffer from the fact that those final products may not benefit from access to the EU internal market (depending on the relevant rules of origin, in case of an FTA).
"As can be seen, the effect on exports, to the UK, from third countries which benefit from a free trade agreement with the EU will depend enormously on the future terms of EU-UK trade. Third countries fully realize this, and it has been widely reported that many of them will first want to see what those terms will look like, before engaging in actual negotiations with the UK. One can assume that this applies just as much to the third countries benefiting from existing EU FTAs, as to “new” trading partners which the UK has in its sights".
I think it's quite obvious that renegotiating these mixed agreements is not going to be the doddle that Liam Fox thought it was and a long and difficult road lies ahead.
In conclusion the report says:
"It is clearly also in the EU’s interest to promote and negotiate a deep and comprehensive trade and economic relationship with the exiting UK. There are however legal and institutional restraints which cannot be overcome without upsetting the EU’s very successful current construction of an integrated market. Associated to those constraints, there are clear political imperatives, which are well known, in terms of not allowing an exiting Member State to cherry-pick and gain advantages not available to non-exiting Member States.
"This study has also attempted to analyse the fate of existing trade agreements, concluded by the EU. There is a level of complexity here to which there are no easy answers.
"Beyond these general conclusions, the choices are largely political. However, from the perspective of the author of this study – a legal academic – it is particularly deplorable that the Brexit phenomenon is characterized by such a strong rejection of the role of “common” law in matters of trade and economic cooperation and integration in Europe. The UK rejection of the role of the ECJ, and the desire to take back control, mean a return to intergovernmentalism and a model of international relations characterized by power politics rather than democratic deliberation resulting in shared law".
This reference to a return to "power politics" is more or less a description of what the Brexiteers want. They still see Britain as a great world power able to force other countries into bending the knee and conceding things in trade agreements to us that wouldn't be available to other "lesser" countries. It's the British exceptionalism raising it's head again isn't it. But time and the world have moved on. We are not the power we were and this is about to be discovered.
