With the result of tomorrow’s EU Referendum still in the balance, we have recently looked at the legal process that would govern a Brexit and the effect a Brexit would have on UK and Scots law and regulation.
But what will the UK’s alternatives to EU membership be in the event of a Brexit?
A variety of different models have been proposed for use in the event of a “’Leave”’ vote, based on the relationships that various countries around Europe have with the EU (for a useful graphic illustration of that, see here). In its paper on alternatives to EU membership the UK Government assessed several different models that would offer different balances in terms of advantages, obligations and influence.
The Government has (perhaps unsurprisingly) said it would seek to negotiate the best possible balance of advantages in the event of a Brexit, though its paper looked specifically at three alternative models for a future UK/EU relationship: (1) the Norway model; (2) a negotiated bilateral agreement; and (3) World Trade Organization (WTO) membership only.
Norway, like Iceland and Lichtenstein, is in the European Economic Area (EEA) but not in the EU. Following that approach would mean that the UK would leave the EU but join the EEA as a non-EU member state. The Norway model is as close to being an EU Member State as a country can be without actually being in the EU, and thus would likely involve the least amount of change (and therefore risk) compared to the status quo. EEA membership would mean the UK continuing to have access to the Single Market.
However, EEA membership would require the UK to make important concessions. EEA countries are still required to make contributions to the EU budget. They are also generally obliged to abide by the EU’s Single Market rules, as well as certain other aspects of EU law, but without any formal vote or say on how those rules are made. In particular, EEA countries have to accept the EU’s free movement principles, including the free movement of workers
Because EEA countries are outside the EU customs union they do not benefit from EU trade deals with other non-EU countries, though the corollary is that they are free to enter into their own trading arrangements. EEA countries are also not covered by the EU’s Common Agricultural and Fisheries Policies.
Although the UK is already an individual signatory to the EEA Agreement, there seems to be a consensus that the UK would not automatically have EEA status. All EEA members would therefore have to agree to the UK joining the EEA.
Given that much of the pro-Brexit argument has focused on the UK’s contributions to the EU budget; the regulatory requirement of complying with the Single Market rules; and (perhaps above all) the impact of the free movement of persons on immigration, it may be politically difficult for the UK Government to agree to an alternative relationship that would require accepting many of the same conditions.
Negotiated bilateral agreement
The UK might also look to enter into bilateral trade agreements that would allow access to the single market on a negotiated basis. There are many different ways this could be done, and any agreement between the UK and the EU would presumably be unique. However, the examples of Switzerland, Turkey and Canada present useful examples of what the relationship might look like.
The Swiss model
Although Switzerland is a member of the European Free Trade Association (EFTA), it is not a member of the EEA. Its bilateral agreements with the EU nevertheless come close to replicating EU / EEA membership. It has access to the single market in some areas but not in others, including being excluded from the financial services ‘passporting’ rules. Like the EEA countries, however, Switzerland has had to accept certain trade-offs in return for market access, including applying the free movement of persons, making some contribution to the EU budget (though a lower one than the EEA countries) and having to comply with the majority of the Single Market rules. Whether we would have to accept similar trade-offs would depend on the relative strength of the UK’s negotiating position. Again like the EEA countries, Switzerland is not covered by the EU’s free trade agreements but instead is free to make its own arrangements with third countries.
The Turkish model
An alternative to a Swiss style bilateral agreement would be to negotiate access to the EU customs union, along similar lines to Turkey. This would keep internal tariffs from being applied to UK-EU trade in goods, and unlike the Norwegian and Swiss models would not be dependent on the UK having to make a financial contribution to the EU. While the UK would not be bound by the majority of EU law under this model, we may still have to apply the same controls on imports that apply to goods entering the Single Market, with a very limited ability to influence the formation of those rules.
The customs union only covers goods rather than services, and the nature of the arrangement means Turkey is obliged to apply EU tariffs to trade with third countries. Given the importance of services to the UK economy, and the prominence those favouring a ‘Leave’ vote have given to the prospect of individual trade agreements with non-EU countries, it seems unlikely that this model would be particularly attractive to the UK.
The Canadian model
The UK could seek a comprehensive economic trade agreement like that recently negotiated between the EU and Canada. That agreement will allow tariff-free trade in certain manufactured goods, and provide for the removal of some non-tariff barriers for goods and services, including financial services. Canada of course remains free to enter into separate trade agreements with other non-EU countries, and will not have to make any contributions to the EU budget.
The challenge with any bilateral model is that agreements can take years to negotiate (the EU-Canada agreement took seven years to finalise). The length of the negotiations, not to mention their success or failure, would therefore largely depend on the willingness of the remaining EU Member States to reach a deal with the UK. A key factor may be whether the agreement would require unanimity or only a qualified majority under Article 50 TEU, and whether the negotiation timetable could be extended beyond the 2-year default period (for more on those issues see here). There may be a significant incentive on both the UK and the other Member States to reach a deal that could apply immediately post-Brexit, to mitigate the trade disruption that would otherwise be felt by both sides. However, and as one would expect, the more favourable the terms the UK was seeking, the more difficult and time-consuming the negotiations may be.
The UK is a member of the WTO, as is the EU. If no specific agreement could be reached with the EU, whether on one of the above models or something sui generis, the trade relationship would revert to using the WTO rules as the basis for trade – just like other WTO members do in their trade with the EU. Those rules do not prevent tariffs but do impose caps on the level at which they can be set. The UK would therefore face caps on tariffs to goods exported to the EU, and would no longer have access to the single market. The UK would have a discretion over whether to impose retaliatory tariffs on imports from the EU, and would be able to enter into separate trade agreements with non-EU countries (with the UK no longer being bound to / having the benefit of the EU’s 53 existing free trade agreements).
Whatever alternative relationship a post-Brexit UK might ultimately have with the EU, a ‘Leave’ vote would be followed by a complex and lengthy process of negotiation and discussion. That would not only concern the timing and nature of our exit from the EU, but also the consequences for the UK’s future international relationships.
Charles Livingstone is a Partner, and Niall McLean an Associate, in the public law & regulatory team at Brodies LLP. For more information, please contact them at firstname.lastname@example.org or email@example.com.