The UK government is defining its objectives for the UK’s future relationship with the EU. Businesses have a crucial role to play in influencing its thinking. This engagement cannot be left to trade associations alone - individual companies need to set out clear, well-argued priorities to promote and to defend their specific interests. The government has indicated that it will not adopt an ‘off the shelf’ model but will seek a ‘unique’ deal for the UK. As the government works to clarify what it wants to achieve and what is likely to be achievable in such a deal, Dechert looks at what lessons can be drawn from existing models.
The other 27 EU Member States have asserted that: “Any agreement which will be concluded with the UK as a third country will have to be based on a balance of rights and obligations. Access to the Single Market requires acceptance of all four freedoms [the movement of goods, capital, services and people]”. Subject to how far they may be prepared to compromise on these principles in the negotiations, the UK faces making tough choices on trade-offs between, on the one hand, its level of access to the Single Market and, on the other, its objectives including reducing EU regulation, particularly to reduce EU immigration, regulation and budget contributions.
In recent briefs, we have looked at navigating the maze of risks and opportunities created by Brexit and who will be the key movers and shakers in the UK-EU negotiations. Here, we examine the five main models of the EU’s current relationships with other countries for potential lessons on its future relationship with the UK.
1) European Economic Area (EEA – e.g. Norway)
The EEA comprises all EU Member States plus Norway, Iceland and Liechtenstein. Trade between these countries and the EU is free from tariffs in most sectors except agriculture and fisheries, although it is subject to customs procedures and companies must be able to prove the origin of the components in their products (‘Rules of Origin’ requirements). Non-EU EEA states have the same level of access to the Single Market for their service providers as EU Member States, covering sectors such as air travel, retail, tourism, construction, business services and financial services (the ‘passport’ for financial services means that banking, insurance, investment, asset management and payment services firms authorised in one EEA country can provide their services across the EEA without further authorisation).
Although not mandatory, the non-EU EEA members adopt most EU rules to ensure that their domestic law complies with EU requirements. Norway has incorporated approximately three-quarters of EU laws into its domestic legislation, not only sector-specific rules, but also in areas such as competition, state aid, social policy and consumer protection.
The non-EU EEA members are obliged to accept the free movement of people from both EU and other EEA countries and to contribute to the EU budget. Norway has a higher proportion of EU migrants than the UK and contributes some 90% per capita of what the UK contributes.
2) European Free Trade Association (EFTA) plus Bilateral Agreements (e.g. Switzerland)
EFTA comprises Iceland, Liechtenstein, Norway and Switzerland. Trade between these countries and the EU is free from tariffs in most sectors except agriculture and fisheries, but it is subject to full customs procedures. Switzerland has negotiated over 100 bilateral agreements with the EU giving it further non-discriminatory access in a range of sectors including services such as some types of insurance and public procurement. But Switzerland has only limited market access for professional services including accountancy, auditing and legal services, and no passporting rights for financial services.
EFTA members are not obliged to incorporate EU regulations into domestic law, but exporters to the EU must comply with EU rules, such as on the environment and safety, and any divergence risks acting as a barrier to trade. As a result, Switzerland chooses in most cases to align its domestic laws with new EU laws as they are adopted, including on competition, state aid and environmental standards. Nonetheless, the EU does not recognize most Swiss assessments of the compliance of its products with EU standards, making them dependent on separate approval by EU authorities before they can be sold in the EU.
Although in principle EFTA countries are not required to accept free movement of people from the EU nor to contribute to the EU budget, under its bilateral agreements Switzerland has undertaken to do both (it has a higher proportion of EU immigrants than the UK). In 2014, the Swiss voted to introduce quotas for immigration but consequently the EU has reduced Swiss access to some EU programmes and suspended negotiations on further access to the EU market.
3) EU Customs Union (e.g. Turkey)
Turkey has an Association Agreement with the EU and participates in the EU Customs Union. Turkish industrial and processed (but not raw) agricultural goods can enter the Single Market free of tariffs and quotas. But trade in services is not covered in the Agreement.
Where Turkey has access to the EU market, it is required to enforce rules that are equivalent to the those in the EU including in areas such as competition, product, state aid and environmental standards. Turkey is in principle, free to negotiate trade agreements with countries outside the EU. But its external tariffs must remain aligned with those of the EU. Thus, when the EU signs a trade agreement with a third country, Turkey must give that country access to its market on the same terms. But this obligation is not reciprocal: the third country is not required to open its market on the same terms to Turkish exports.
Turkey has no obligation to accept the free movement of people nor to contribute to the EU budget.
4) Free Trade Agreement (e.g. Canada)
Free Trade Agreements may address whatever issues the parties to them agree. However Canada’s bilateral free trade agreement with the EU is of particular interest in that, when it enters into force, it will go further than any previous EU trade deal. The deal will lift tariffs on all industrial and most agricultural goods, and address a number of other discriminatory measures such as quotas and subsidies for industrial goods. But certain sensitive areas will remain protected (e.g. export quotas on fish, beef and pork will remain) and all trade will remain subject to full customs procedures. In services, the EU will open its market significantly for Canadian firms but a number of key sectors are not included, including audio-visual and the majority of air transport, and there will be no passporting of financial services.
Canada will be under no obligation to apply Single Market regulations nor to ensure that its domestic law complies with EU legislation. But its exporters to the EU will still have to comply with EU rules, such as on the environment and safety, and any divergence will risk acting as a barrier to trade. As in the case of Switzerland, many Canadian products will remain dependent on approval by EU authorities before they can be sold in the Single Market.
Canada will have no obligation to accept the free movement of people from the EU (although the agreement does involve a requirement to accept arrangements for the temporary movement of professionals working in service sectors) nor to contribute to the EU budget.
5) World Trade Organisation (WTO)
In the absence of an agreement between the UK and the EU before the expiration of the two-year time limit under Article 50, the UK’s existing WTO membership would provide the basis of the trading relationships (although its exit from the EU may give rise to uncertainty regarding the UK’s future status in the WTO). UK exports to the EU would become subject to the EU’s common external tariff and to full customs procedures. The EU would only be obliged to give access to UK service providers in line with WTO rules, giving less access than the other models described above.
The UK would need to decide on a single set of tariffs to apply to its trade with all WTO members including the EU. Imposing tariffs would increase the cost of imported goods, but lowering the tariffs would not necessarily be reciprocated and would weaken the UK’s position in negotiating future trade agreements.
The UK would be under no obligation to apply EU regulations nor to ensure domestic law complies with EU legislation but, as in the other models, exporters would still have to comply with EU rules in order to trade with the single market and any divergence would risk acting as a barrier to trade. There would be no obligation to accept the free movement of people from the EU nor to contribute to the EU budget.
What does this mean for businesses?
Establishing an ad hoc framework of relations with the European Union will be complex and lengthy. However, as the Government starts shaping the outline of such a model to be proposed to the EU, they will be taking preliminary decisions on trade-offs and areas where they will be seeking lower market access in exchange for concessions on migration and other issues. Those businesses who are able to articulate their needs and red lines early on in this process will have an advantage over others.
Thus, businesses should be not only planning for how they will best weather the current uncertainty and adjust to the post-Brexit environment, but also preparing their contribution to shape the forthcoming negotiations through engagement with the UK government, with other Member States or with the EU institutions. Businesses who are ready early with a clear, specific, well-argued set of priorities will be best placed to influence the government’s thinking and to defend their interests when the inevitable trade-offs are decided.