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HC 935
Published on 4 April 2018
by authority of the House of Commons
Exiting the European Union Committee
The Exiting the European Union Committee is appointed by the House of
Commons to examine the expenditure, administration, and policy of the
Department for Exiting the European Union and related matters falling within the
responsibilities of associated public bodies.
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The future UK-EU relationship 1
Contents
Conclusions2
1 Introduction 10
The UK as a Member State 12
Formal minutes 61
Witnesses67
Conclusions
The EU’s existing relationships with third countries
1. The Comprehensive Economic and Trade Agreement (CETA) between the EU and
Canada is an arrangement designed to meet the trading objectives of both Canada
and the EU. It does not eliminate all tariffs and provides for market access some way
short of Single Market participation. The trading relationship between the UK and
the EU is very different and so a “CETA-style” agreement with the UK would need
to reflect markets that are already very much more integrated. A cut and paste of
CETA would not be a good deal for the UK or the EU. (Paragraph 36)
2. A more ambitious trade deal for the UK with the EU would need to accommodate
anticipated regulatory divergence, from an identical starting point, rather than
convergence. The Secretary of State for Exiting the EU said that the UK would
start with Canada, and then “add to that the bits missing which is the services”.
The ability to elevate CETA into CETA plus plus plus so that it made up for any
loss in services trade consequent on leaving the Single Market would require an
unprecedented development of mutual recognition agreements far more ambitious
than any previously agreed by the EU with a third country. There is no precedent for
any EU Member State leaving the EU or the type of new deep and special partnership
that the UK is seeking. (Paragraph 37)
3. Most Favoured Nation provisions in CETA (and in other EU Free Trade Agreements)
provide that, if the EU offers the UK greater benefit in cross border provision of
services and financial services, then it must offer the same benefit to Canada. This
would be a consideration affecting the EU’s willingness to provide the UK with
generous market access in services as part of such a deal. There are exceptions that
enable greater market access without triggering the MFN clause, for example mutual
recognition. The Government would need to consider how it could use the available
exceptions to improve on cross border services provided in CETA. MFN provisions
are likely to be particularly sensitive in respect of broadcasting. (Paragraph 38)
5. The EU’s Association Agreements with Ukraine, Georgia and Moldova cover most
of the Internal Market. They also provide for selective participation in many of the
agencies and programmes of the EU. Furthermore, free movement of persons is
not included and the financial obligations on these countries are minimal. Binding
arbitration is provided for dispute resolution and referrals to the Court of Justice of
the EU are limited to interpretations of EU law. (Paragraph 54)
The future UK-EU relationship 3
6. We also note that the European Parliament supports the option of an Association
Agreement. Although these Association Agreements have been reached with
countries converging rather than diverging, these agreements do illustrate the EU’s
ability to think creatively and apply bespoke arrangements to form a deep and
comprehensive relationship with politically important neighbours. (Paragraph 55)
7. However, the mix of rights and obligations that the EU will look to offer in an
Association Agreement will depend on its assessment of its long-term strategic
objectives and the priorities of the Member States. If the UK is to look to negotiate
such an agreement, it needs to set out a clear vision of its future strategic relationship
with the EU, and the Committee notes that such a vision has yet to be fully
articulated. (Paragraph 56)
9. Trade between the two covers some areas of the Internal Market and includes some
mutual recognition, albeit of an asymmetrical nature. Switzerland accepts the
free movement of persons and is part of Schengen. The management of borders
is not intrusive, but there is physical infrastructure at the border and checks and
controls are applied there. Switzerland does set a precedent for a country enjoying
selective participation as a third-country in the EU’s Internal Market, agencies and
programmes. (Paragraph 75)
10. However, the Swiss arrangement has evolved out of a process through which
Switzerland had seemed to be moving towards EU accession, rather than being seen
by the EU as a desirable end-state in itself. (Paragraph 76)
12. The EFTA Court is not the CJEU. The opinions of the EFTA Court are not binding
and it allows scope for national courts to question its interpretation of law as it relates
to the EEA Agreement. Docking with the EFTA Court would provide the UK with
a ready “off-the-shelf” arbitration mechanism for the ongoing UK-EU relationship.
Docking was originally a solution proposed for Switzerland and the EU, so should
garner support from the EU. (Paragraph 108)
13. Being a party to the EEA Agreement and not the Customs Union (nor the Common
Fisheries Policy) means countries such as Norway operate an independent trade
policy. It is noteworthy that Norway and the EFTA countries have chosen to
negotiate free trade agreements with third countries that pre-empt or follow the
free trade agreements negotiated by the EU. (Paragraph 109)
14. Norway has recognised there is a trade-off between being outside the EU Common
Fisheries Policy and the Customs Union, but inside the Single Market. Norway
has control over its own fishing waters, the ownership of its own fleet and retains
flexibility to negotiate its trade in fish. However, this is balanced against tariffs on its
exports of fish into the EU and Norway choosing to align its veterinary checks with
EU rules to reduce the need for compliance checks at the EU border. (Paragraph 110)
15. The Norway-Sweden border has been held up as an example of a possible model
for the Northern Ireland-Ireland border. Norway is in the Single Market but not
the Customs Union. Sweden is in the Single Market and the Customs Union. Both
countries are in Schengen. The two countries have been co-operating on how to
manage the border for several years, but there are still checks and there is physical
infrastructure. (Paragraph 111)
16. Article 112 and Article 113 of the EEA Agreement provides a safeguard measure that
could be used to address “serious economic, societal or environmental difficulties
of a sectorial or regional nature” if they arise. This could provide a route for the UK
to operate a temporary emergency brake on free movement, and a more permanent
way of dealing with freedom of movement issues through Article 28. The EEA
Agreement also provides a mechanism through the EEA Joint Committee to
discuss how to resolve the matter rather than immediately seek a judicial outcome.
(Paragraph 112)
17. Norway’s EEA membership gives it the economic benefits of being a member of
the Single Market but at the cost of having limited and informal participation in
decision-making on the rules of the Single Market. It has chosen to accept the
principle of freedom of movement, one of the UK Government’s red lines. There is
a trade-off to this. EEA States, such as Norway, have to accept all EEA relevant EU
legislation, which is estimated to account for up to 30% of all EU legislation that
currently applies to the UK as an EU Member, while being informally invited to
provide expert advice at an early stage of the Commission drawing up legislation.
They do not have a vote. The Norwegian Parliament has a role in debating EU related
legislation and voting on the financial contribution to the EU. Norway has found a
balance in its relations with the EU that meets its needs. (Paragraph 113)
The future UK-EU relationship 5
18. The Government has rejected applying for EEA Membership because its view is
that this entails accepting both free movement and EU law. Should the negotiations
on a deep and special partnership not prove successful, EFTA/EEA membership
remains an alternative and would have the advantage of continuity of access for UK
services. The EEA option is available off-the-shelf and could be negotiated relatively
quickly. (Paragraph 114)
19. Turkey has a customs union arrangement with the EU covering industrial goods,
but not agriculture (except for processed agricultural products), services or public
procurement. It is bound by the EU’s Common External Tariff, but it is not involved
in setting the direction of the Common Commercial Policy. Nor is it able to
automatically secure market access via the EU’s FTAs, whereas those third countries
have automatic access to Turkey’s market. (Paragraph 129)
20. The incomplete nature of its customs union arrangement means checks still take
place at the Turkey-EU border and there can be long delays. The examples of Jersey,
Guernsey and the Isle of Man show an invisible border can be maintained through
participation in a full customs union and adherence to the rules of the Single
Market in respect of trade in goods. Such an arrangement could make it easier for
the UK to roll-over the EU’s existing FTAs. The UK would also need to negotiate
a consultative role in the EU’s future FTAs, as well as a legal mechanism in future
FTAs which prevented them from entering into force unless the third-country in
question extended market access to the UK. (Paragraph 130)
21. If the UK exited the EU without an agreement on its future trading relationship, it
could do so on WTO terms. Eleven of the twelve studies in the Government’s EU
Exit Analysis show that trading on WTO terms would be particularly damaging to
the UK economy, compared to other scenarios modelled. The UK could still look to
negotiate a series of bilateral arrangements with the EU. These might include terms
of co-operation with the EU in areas such as customs or aviation. It would remain
to be seen how quickly they could be negotiated, or how deep and comprehensive
they would be compared to the current Single Market relationship. (Paragraph 143)
22. The UK could choose to offer zero tariffs on goods between the EU and the UK,
outside of a trade deal and would be able to use a ten-year exemption before offering
the same tariff rates to other nations if the UK were negotiating a trade deal with the
EU at that time. After this period, if the UK did so, it would have to offer the same
zero tariff to all its trading partners. This would leave domestic producers exposed
and remove significant negotiating leverage for the UK in respect of future trade
deals. (Paragraph 144)
23. The UK and the EU have both said that they do not want to reintroduce a hard
border between Ireland and Northern Ireland. If the UK wanted to trade with the
EU on WTO terms, then it could choose to reduce all its tariffs to zero, or it could
choose not to collect duties at the border. However, there would still be the need to
check some goods crossing the border for reasons such as the safety of goods, or
health of agricultural products, or for rules of origin. There are currently checks to
prevent excise fraud or illegal imports of arms and drugs. (Paragraph 145)
6 The future UK-EU relationship
24. The Government has modelled the impact on UK GDP of the three potential
scenarios for future UK-EU trade that we have examined in the course of our work.
There is near consensus that moving from trading with the EU as a Member State
to trading with the EU on WTO terms would have a significant negative impact
on the UK economy. According to most analyses, this negative impact would be
mitigated in part by agreeing a “Canada-style” FTA, and further reduced by trading
within the Single Market (but outside the Customs Union) as an EEA State. Each of
the three scenarios modelled in the Government’s EU Exit analysis factored in the
transitional adoption of all existing EU FTAs, and includes the effects of a bilateral
UK-US trade deal, which is estimated to bring a benefit of 0.1–0.3% of GDP over
the long term, but excludes any other potential FTAs, which the Analysis estimates
could add a further 0.1–0.4% of GDP. (Paragraph 153)
25. The EU’s different forms of relations with third countries have been driven by a range
of particular circumstances and strategic interests. While there are a number of “off-
the-shelf” models, the details of each vary widely. There is no precedent for Brexit
and any deal reached between the UK and the EU on the UK’s future relationship
will, by its nature, be bespoke. A “CETA-style” trade agreement between the UK and
the EU would reflect very different trading priorities to the Canada deal and could be
part of a very much deeper relationship with the EU in terms of security, academic
and many other areas of co-operation than that enjoyed by Canada, however the
lack of access for services in such a FTA would pose serious challenges for the UK.
Even trading on WTO terms after agreeing exit terms under Article 50 would not
rule out continuing close co-operation in areas of mutual benefit. (Paragraph 174)
26. Continuing security co-operation is a priority for both sides. Our predecessor
Committee welcomed the Government’s commitment to continuing co-operation
with the EU27 on foreign policy and defence matters. That Committee called on
the Government in March 2017 to set out some detail about how such co-operation
could be made to work in practice, including the institutional and decision-making
frameworks that would underpin it. It is regrettable that no response has yet been
provided to that report and no detail has been set out. Our predecessor Committee
also welcomed the Secretary of State’s statement that the Government wants “as
far as is possible to replicate what we already have” in respect of Justice and Home
Affairs Co-operation and concluded that the UK’s relationship with the EU when
outside should be one of partnership on the basis of shared values and co-operation.
Maintaining this level of co-operation will require overcoming a number of
technical challenges in respect of agreeing data protection, judicial oversight and
governance provisions. The Prime Minister’s Munich speech acknowledges that the
Government will be looking to find positive solutions to address these challenges
(Paragraph 175)
27. Ensuring the continued free flow of data between the UK and the EU, once the UK
has left will be one of the most important cross-cutting issues to be resolved in the
negotiations on the future relationship. Data flows are vital for ensuring frictionless
trade between the UK and the EU and they underpin co-operation in combating
terrorism and organised crime. This is just one area of cross-over that illustrates the
The future UK-EU relationship 7
relationship between both trade and non-trade elements of the future relationship.
Our scrutiny of other third country relations with the EU indicates that imaginative
solutions are possible but will require agreement over regulatory frameworks,
governance and oversight arrangements. Indeed, we welcome the greater emphasis
on alignment, rather than divergence, in the Prime Minister’s Mansion House
speech. (Paragraph 176)
28. Our study of the existing relationships between the EU and third countries shows
that there are trade-offs between the rights and obligations that comprise those
relationships. Michel Barnier’s “staircase” diagram takes as a starting point that
the UK Government’s existing red lines suggest a “Canada style” trade deal. The
Government is seeking a much wider CETA plus plus plus agreement. While
imaginative solutions are possible in other areas of co-operation, these red lines
will also affect other aspects of the relationship. Ending free movement will affect
the extent of involvement in programmes of academic co-operation granted to the
UK. Ending the jurisdiction of the Court of Justice of the EU and any regulatory
divergence in data protection will place constraints on a range of programmes for
justice and home affairs co-operation, although in her Munich speech about security
and policing co-operation, the Prime Minister indicated the UK’s willingness to
accept the remit of the CJEU in these areas, respecting the sovereignty of both the
UK and the EU’s legal orders. This is a very positive approach which we encourage
the Government to apply in other areas. (Paragraph 177)
29. In respect of both trade and non-trade agreements, other countries will take a close
interest in the mix of rights and obligations that constitute any future relationship
with the UK and may see any special deals for the UK as a precedent. Countries
such as Switzerland and Norway will examine closely any agreement between the
UK and the EU to see if it contains better terms than their current arrangements.
This, in itself, may limit the EU’s room for manoeuvre in terms of what it is prepared
to offer the UK. (Paragraph 178)
30. The UK has an enormous amount to offer the EU as a third country. A deep
partnership will ensure that the UK’s defence, intelligence and security capabilities
continue to add to the EU’s resources (and vice versa), that the international financial
centre for our continent stays in Europe; and that our co-operation continues across
a wide number of important sectors. However, Ministers need to set out what they
want to achieve overall, in much more detail, in terms of the future relationship. The
absence of such detail could allow the terms of the future negotiation to be set by the
EU with the “offer” to the UK determined by the EU’s analysis of the implications of
the UK’s red lines, rather than by a proper consideration by the EU of the strategic
value of a continuing close relationship with the UK. We encourage the Government
to take a more proactive approach to the linkages between different areas of the
future relationship, given that they will be negotiated to different timescales, so that
the UK does not find that options are inadvertently closed off. (Paragraph 179)
relationship. In our last report, we questioned whether the transition period would
be sufficient to agree the future relationship. The more bespoke and ambitious the
relationship, the harder this will be to achieve in the time available. (Paragraph 180)
32. Whilst the UK will not be looking to replicate the relationships of other countries
with the EU, our analysis has indicated that there are a number of key tests by which
any deal agreed by October can be judged. The Prime Minister has set out her red
lines for the negotiations. However, the success of the future relationship will be
judged on the ground by the members of the public, businesses and agencies that
travel to and from, trade with and will continue to work closely with the EU and EU
Member States. The criteria by which they and we will judge the political declaration
that we expect to be reached by October will be the following:
• The border between the Republic of Ireland and Northern Ireland must remain
open, with no physical infrastructure or any related checks and controls, as
agreed in the Phase 1 Withdrawal Agreement;
• In the fight against crime and terrorism, arrangements must replicate what
currently exists in operational and practical cross-border co-operation. In
particular, the UK must retain involvement with Europol and the European
Arrest Warrant and continue to participate in the EU’s information-sharing
systems including SIS II;
• There must be no impediments to the free flow of data between the UK and
the EU;
• Any new immigration arrangements set up between the UK and the EU must
not act as an impediment to the movement of workers providing services
across borders or to the recognition of their qualifications and their right to
practise;
The future UK-EU relationship 9
1 Introduction
1. We noted in our report on The progress of the UK’s negotiations on EU withdrawal:
December 2017 to March 2018 that we have been undertaking scrutiny of the different
types of trade and partnership agreements into which the EU had entered with third
countries.
2. On 19 March 2018, the Draft Agreement on the withdrawal of the UK from the
EU was published.1 The EU and the UK will now move onto detailed scoping of future
relations with a view to reaching agreement on a political declaration on the framework
for this future relationship in October 2018. This will be agreed alongside the Article 50
withdrawal agreement and the agreement on the transition period. The European Council
agreed its guidelines for the forthcoming negotiations at its March meeting.2
3. The Committee has held several evidence sessions to examine a number of different
EU-third country relationships, including those with Canada (the Comprehensive
Economic and Trade Agreement), the Association Agreements with Ukraine and Georgia,
the series of bilateral agreements with Switzerland, the participation of Norway in the
European Economic Area (EEA) and the European Free Trade Area (EFTA), and the
partial customs union with Turkey. We outline each of these in this report.
4. The public debate has largely focussed on the trading and economic relationship
between the UK and the EU, but the future relationship will also involve much broader
matters. Michel Barnier, the EU Commission chief negotiator, explained to us that he
envisaged a future relationship based on four pillars—trade, areas of “thematic co-
operation” such as aviation and research, justice and home affairs, and security and
defence policy.
5. In her speech to the Conservative Party Conference in October 2016, the Prime
Minister set out a number of “red lines” for the Government’s approach to the negotiations.
These represented commitments to:
• end the freedom of movement for EU citizens into the UK;
• end the jurisdiction of the Court of Justice of the EU (CJEU);
• end “vast contributions” to the EU budget.
She acknowledged that these red lines would mean the UK leaving the Single Market and
the Customs Union. In her Lancaster House speech in January 2017, the Prime Minister
said that “full Customs Union membership” prevents the UK from negotiating its own
comprehensive trade deals, whereas she wanted Britain to be able to negotiate its own
trade agreements.3
6. Mr Barnier has interpreted the UK’s red lines on trade as dictating a Canada-style
Free Trade Agreement (FTA). In September 2017, he said that the UK’s future relationship
with the EU will not “combine the benefits of the Norway model with the weak constraints
of the Canada model.”4 He has produced the following slide that demonstrates the current
models of EU-third country trading relationships, and how each one matches the UK
Government’s red lines.
1 Draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the
European Union and the European Atomic Energy Community
2 European Council (Art. 50) - 23 March 2018 - Guidelines
3 Lancaster House speech 17 January 2017
4 Statement by Michel Barnier on the publication of the Guiding Principles for the Dialogue on Ireland and
Northern Ireland, 7 September 2017
Future economic relationship
UK leaves
No deal
the EU
UK red lines:
- No ECJ jurisdiction
- No free
movement
UK red lines:
- No substantial
financial - No free
contribution movement
- Regulatory - No substantial UK red lines:
autonomy financial - No ECJ
contribution jurisdiction
- Regulatory UK red lines:
- Regulatory
autonomy autonomy - Independent
trade policy
The future UK-EU relationship
11
12 The future UK-EU relationship
7. The Prime Minister made clear in her Lancaster House speech that she would “not
seek to adopt a model already enjoyed by other countries”.5 The White Paper on the
United Kingdom’s exit from, and new partnership with, the EU, published in February
2017, noted that the UK would seek “a new strategic partnership with the EU, including an
ambitious and comprehensive Free Trade Agreement and a new customs agreement”.6 In
her Florence speech, she rejected what she termed as a “stark and unimaginative choice”
between the EEA model and a Canada-style relationship.7 It was suggested to us in Brussels
that the future relationship would be a unique arrangement.
9. Motor vehicles and parts is the largest product group by value of exports: the UK
exported £18 billion of motor vehicles and trailers to the EU in 2016. The next largest
product group exported to the EU is chemicals and chemical products, £15 billion in 2016.
Meanwhile, 37% of UK service exports went to the EU in 2016, down from 40% in 2015.
Financial services contributed more than a quarter of the UK’s services exports to the EU
(£27 billion out of £90 billion).9 In 2016, 54% of all UK’s imports were from the EU.10
10. The UK’s economy is integrated into the Single Market which allows products and
services from one EU Member State to be sold in another without the need for additional
checks. The Single Market aims to make trade easier between Member States, through
the free movement of goods, people, services and capital, and through the introduction
of rules that remove barriers to trade, and harmonise national rules at EU level. The EU
Customs Union is an agreement among EU Member States under which each country
has agreed to be bound by the same common external tariffs on imports from third
countries, and to remove tariffs from trade in goods between countries within the Union.
The common external tariff is part of the EU’s Common Commercial Policy.
11. There are other legal requirements on Member States governing their ability to trade
within the EU, such as rules on data protection and common product, environmental
and labour standards. There are also broader programmes of economic importance that
flank the trade relationship, such as co-operation on research and innovation, and rules
on competition and state aid. Outside the Single Market, the UK and the EU will have to
agree the level of interaction that the UK has with these institutions and structures.
5 The government’s negotiating objectives for exiting the EU, Lancaster House, 17 January 2017
6 The United Kingdom’s exit from and new partnership with the European Union White Paper, CM 9417
7 Florence speech: a new era of co-operation and partnership between the UK and the EU, 22 Sept 2017
8 House of Commons Library, Statistics on UK-EU trade, 19 December 2017
9 ONS, Who does the UK trade with? 2018
10 House of Commons Library, Statistics on UK-EU trade, 19 December 2017
The future UK-EU relationship 13
13. The Comprehensive Economic and Trade Agreement, commonly known as CETA,
is a trade deal between the EU and Canada. It has been described by the EU Commission
as “the most ambitious trade agreement that the EU has ever concluded” and “a milestone
in European trade policy”.14 Christophe Bondy, former senior council to Canada on the
CETA negotiations, said that the negotiations began with both sides carrying out a joint
scoping exercise, which started in 2008.15 Negotiations were completed in August 2014
and the Agreement was signed on 30 October 2016. The internal discussion between the
national government and the provinces and territories in Canada added to the time taken.16
Its signature was delayed further at the end by objections from the Walloon Parliament,
and the agreement finally came into force, provisionally, in September 2017.17 When asked
if he thought the EU-UK negotiations would be shorter than the CETA negotiations,
because the UK and EU are starting from a point of harmonisation, Mr Bondy said:
I think it is a completely distinct situation. The main issue is that you are
asking of the EU something that it has never given […] It is difficult to
compare, because you are not asking for the same thing from the start.18
14. Pascal Lamy, former Director General of the World Trade Organisation, said Brexit
was “like removing an egg from an omelette” and that the negotiations will take a long
time:
because, simply, it is very complex. It took many, many years for the EU
to move from a common market to a Single Market. […] This process of
convergence and integration, mostly through regulatory convergence, has
been going on for many, many years. Moving back from that will be complex
11 Andrew Marr Show [BBC]: Interview with the Rt Hon. David Davis MP [Transcript], 10 December 2017
12 Michel Barnier warns UK: You’ll get Canada-style trade deal with EU, 24 October 2017
13 Q483
14 European Commission proposes signature and conclusion of EU-Canada trade deal, 5 July 2016
15 Canada-European Union Joint Report: Towards a Comprehensive Economic Agreement. In October 2008,
the EU and Canada released a joint study “Assessing the Costs and Benefits of a Closer EU-Canada Economic
Partnership”.
16 Q493
17 Q546
18 Q593
14 The future UK-EU relationship
and, in my view, for what it is worth, costly. If there were many benefits in
moving to a common market and then from the common market to the
Single Market, there will be costs in moving back.19
15. A Free Trade Agreement along the lines of CETA would not compromise the UK
Government’s red lines: it would not involve payments to the EU, it would not involve
obligations along the lines of the four freedoms associated with the Single Market, it would
not constrain trade policy much or involve the CJEU. While the CETA negotiations did
consider the temporary entry of workers and enabling visa free access for all EU Member
States to Canada, CETA does not provide for free movement.20
Goods
17. CETA removes all tariffs on industrial products traded between the EU and Canada.
There is liberalisation of trade in some agricultural products, but not all, such as poultry
and eggs,23 and audiovisual services are also excluded. Fredrik Erixon, Director of the
European Centre for International Political Economy, said it might be that the UK-EU
FTA could provide zero-tariffs on all goods, but that the important issues would then be
“all the practical administrative issues of trade” such as processes for authorising traders
to trade without inspection checks and managing rules of origin.24
18. Dr Lorand Bartels, University of Cambridge and Senior Counsel, Linklaters, said that
leaving the Single Market to trade on a CETA style basis would provide an opportunity
for “an independent trade policy and an independent regulatory policy.” This may entail
divergence from the EU, and so could impact on UK-EU trade, but there would be benefits
in allowing the UK to reduce tariffs on some foods lower than the EU tariffs, such as
citrus fruits, to provide cheaper food for consumers.25 The EU does offer duty-free and
quota-free imports from least developed countries through its Everything but Arms
initiative.26 Dr Bartels also said that a CETA-type deal would not be compatible with an
open border between Northern Ireland and the Republic of Ireland with no checks and
no infrastructure.27 When this was put to David Davis he said that it would depend what
was added to the CETA-type deal by way of pluses.28
19 Q1101
20 Q520, Q579
21 Q551
22 Q559
23 Statement by President Donald Tusk on the draft guidelines on the framework for the future relationship with
the UK, 7 March 2018
24 Q459
25 Q574
26 Q1123, Everything But Arms (EBA) – Who benefits?
27 Q620
28 Q735
The future UK-EU relationship 15
Services
19. CETA does include some provision for trade in services, including access to the
Canadian markets in telecoms, energy and maritime transport sectors, and enables EU
companies to bid for public procurement contracts in Canada.29 At the same time, the
EU entered a large number of reservations on Canadian access to EU financial markets.30
Whereas Canadian services’ exports might be dependent on tourism and transportation,
80% of the UK economy comprises services and the UK places a higher priority on
accessing markets where it can sell its services.31 While Mr Bondy said he thought CETA
represented a “step forward in terms of services”, it did not allow a service provider to enter
“a different economic space and carry on business without complying with the local laws
or without having to show compliance with local laws and regulations”.32 David Henig,
UK Trade Policy Specialist, said he would expect the EU to make an offer of its standard
schedules on services to the UK, and these are “pretty similar for all trading partners in
free trade agreements.”33
20. Asked why there might be barriers to a FTA including services with the EU, Mr
Erixon told us that there was a tendency across the world, not just in the EU, for regulation
in areas such as financial services, telecommunications services and digital services, to
operate in a way that made it more difficult to trade with third parties outside of that
territory.34 This was a key difference to the Single Market.35 Pascal Lamy, former Chief of
Staff to Jacques Delors, acknowledged that the Single Market is still imperfect in services.36
Jessica Gladstone, Clifford Chance, said:
If you do not get a broad, sweeping commitment for services in the round,
there is a challenge. If you start breaking it down and you start getting
restrictions added and the commitments being less wide-ranging, you have
the challenge of trying to identify which non-tariff barriers will in practice
hinder the delivery of those services. You have to identify what licences
will not be issued or will be difficult to be awarded. You have to identify
what regulations it will be more difficult or more costly to comply with
from outside than it is when they are the only set of regulations you have
to comply with. When you compound it together, that is the challenge of
it. You need to break it down to make sure you know what those obstacles
are, you know how to write those into the legal text, and you know how in
practice that is going to work for the businesses who export their services.37
29 Qq567–568
30 Q499
31 Qq475–476. Fredrik Erixon, The Canada-EU trade deal is no model for Brexit, 26 March 2016
32 Q549
33 Q1248
34 Q479
35 Qq488–489
36 Q1124
37 Q1249
16 The future UK-EU relationship
21. Mr Erixon expected that there would be an agreement on financial services, because
it was in the interests of both the UK and the EU to maintain the supply of capital and
financial services across Europe, not least because of UK financial services content in
industrial exports from countries such as Germany.38 However, while financial services
might be part of the UK-EU deal, he anticipated a “material difference between being in
the Single Market and having an FTA in terms of what type of access you will have.”39
22. CETA includes a Protocol on the mutual acceptance of conformity assessment for
products such as electrical equipment, toys, some machinery and hot water boilers.40 It
allows for Canada’s assessment bodies to certify that goods made in Canada meet European
standards, and vice versa—not the mutual recognition of the actual standards. In some
areas Canada has agreed to follow EU rules without reciprocation, and with no influence
in how the EU sets those rules.41 In her Mansion House speech, the Prime Minister called
for a “comprehensive system of mutual recognition” to “ensure that, as now, products
only need to undergo one series of approvals, in one country, to show that they meet the
required regulatory standards.”42 In addition to the Protocol on the mutual acceptance of
the results of conformity assessment, CETA includes a framework for mutual recognition
of testing, providing a structure for individual agreements to be reached for individual
products depending on the specific regulations for the particular product. David Henig
said:
Not every product needs to be tested within the EU according to EU standards. David
Henig said complex products, e.g. chemicals, are tested, while in some areas, such as
telecommunications, the standards are international.44 And for a large number of less
complicated products, it may be sufficient for the supplier to declare that the product meets
all known regulations and standards.45 He said it would be for the UK “to go through
every product, and to go through all the regulations relating to that product, to establish
the way that the UK products might be affected by these regulations.”46
38 Q515
39 Q516
40 Protocol on the mutual acceptance of the results of conformity assessment, Annex 1
41 Beth Oppenheim and Charles Grant, UK + EU = Canada+? 1 December 2017
42 Mansion House speech, 2 March 2018
43 Q1243
44 Qq1270–1271
45 Qq1268–1271
46 Q1273
The future UK-EU relationship 17
The framework does not provide for each party to recognise automatically the qualifications
of individuals from the other, but for the relevant bodies, such as professional bodies in
each country, to talk to each other about how to recognise each other’s qualifications.48
The European Council Article 50 draft negotiating guidelines, published on 7 March 2018,
includes reference to “a framework for the recognition of professional qualifications.”49
24. Dr Bartels told us that where the EU has agreed an MRA, it has been on an unequal
basis.50 Mr Bondy made a similar point with reference to the EU-Ukraine relationship:
He added that there was a clear difference between being in the Single Market and a
relationship based on a FTA:
25. Dr Bartels noted that the UK-EU negotiations will replace “complete convergence
because of the Single Market” to either “harmonised legislation or mutual recognition”.
He argued that:
So long as those legal regimes continue, I cannot see any reason why the EU
should not be obliged to continue this type of recognition. This is something
that the EU negotiators do not accept, but it follows from WTO law, with
one exception to do with financial services.53
No. The EU will keep, as the UK will, its total sovereignty in deciding on
specifications for goods or domestic regulation for services, which is the
equivalent for services.54
The only other trade agreement that I have encountered that has anything
resembling the EU’s mutual recognition and to some extent harmonisation
model is the agreement between Australia and New Zealand. Even that
agreement has many more carve-outs than what one sees in the EU. […]
Regulatory co-operation does not really exist.55
27. Explaining the barriers to the EU-UK relationship ‘cloning’ the mutual recognition
practices for services from the Single Market, Mr Erixon said there will be differences,
depending on the service, and whether it is a sector with a substantial body of EU
regulation or where a licence approval is necessary. He said:
We should bear in mind that the EU does not like mutual recognition
agreements outside the Single Market. It has not done many of them.56
This would not, however, necessarily preclude one being done for the UK-EU Agreement,
and it would be in both our interests to pursue this.
28. Mr Barnier said on 20 November 2017 that “a legal consequence of Brexit is that
UK financial service providers lose their EU passport” and that the EU “will have the
possibility to judge some UK rules as equivalent”.57 Equivalence is a lesser form of mutual
recognition, where there is recognition that the standards of another are the same, but
that recognition can be unilaterally withdrawn at any time.58 The Prime Minister, in her
Mansion House speech on March 2018, and the Chancellor in his speech at HSBC on 7
March 2018, have made the case for more comprehensive mutual recognition for financial
services.59
29. Ms Gladstone said that the drawback with equivalence was that outside the EU, the UK
would no longer have influence in writing the rules, and would be a rule taker on financial
services.60 She explained Clifford Chance had developed a model for mutual recognition
“at the regulatory level” with the aim of enabling financial services to continue to operate
“in a way they have been used to”. Ms Gladstone said the Clifford Chance model would be
different to passporting as “Everything is different from passporting. It is definitely a step
away from that”.61 Dr Stephen Woolcock, Associate Professor in International Relations,
London School of Economics, told us that overcoming the barriers to mutual recognition
would be an important test of whether the “plus plus plus” could be added to a Canada
style agreement. Most FTAs looked to manage convergence, whereas the UK was trying
to negotiate “having some kind of regulatory divergence”.62 If it wanted an agreement
involving regulatory divergence it would need to negotiate a solution for arbitration.63
55 Q561
56 Q490
57 Michel Barnier speech at ‘The future of the EU’ Conference, 20 November 2017
58 The IFG Quick guide to the language of trade: mutual recognition
59 Mansion House speech, 2 March 2018 and Chancellor speech on financial services, 7 March 2018
60 Q1254
61 Q1255. See also Q1276 and UK Finance, Supporting Europe’s Economies and Citizens, September 2017
62 Q503
63 Q540
The future UK-EU relationship 19
30. The US and the EU agreed to seek a trade agreement to encourage trade across
the Atlantic. The first negotiating round was July 2013, initially frozen in January 2014
following disagreement on the investment section, and then for the US election in 2016.
While the TTIP negotiations did not reach agreement, we looked at the lessons that came
out of the process and how it compared to CETA.
31. Mr Lamy said that the TTIP negotiation was “precisely about regulatory convergence”64
and Mr Bondy told us that “With TTIP they went a step further with attempts at regulatory
co-ordination”.65 In a speech on TTIP in 2013, Karel de Gucht, then European Trade
Commissioner, said the EU’s proposals for the regulatory chapter of TTIP included the
creation of a Regulatory Co-operation Council, which would bring together the important
EU and US regulatory agencies, to consider new priorities for regulatory co-operation and
ways to avoid future regulations that might create unnecessary trade barriers. He said,
“Neither side will be successful if it seeks to impose its system on the other.”66 Sam Lowe,
Centre for European Reform, told us that TTIP did not go further than the CETA deal in
its approach to services.67 On what TTIP offered on financial services, he said:
[…] was intended to be ground-breaking for the EU and the US. There was
going to be a huge degree of dialogue, of potentially moving towards shared
regulatory solutions, with two regulatory superpowers coming together to
discuss this. […] that dialogue was never completed.69
Furthermore, he said that progress made on TTIP had been because the UK was pushing
inside the EU for it to happen, but this would no longer be the case.70
32. The Most Favoured Nation (MFN) clause in the CETA ensures that, if the EU offers
a more generous deal to another party in a bilateral trade negotiation, then that benefit
must be extended automatically to Canada. Similar clauses are included in the South
Korea and Singapore agreements. Dr Woolcock described this as “a bit of a constraint in
terms of what the EU is likely to agree to on financial services.”71 MFN provisions do not
cover the entire agreement but do apply in respect of investment, cross-border provision
64 Q1108
65 Q560
66 Karel De Gucht, Transatlantic Trade and Investment Partnership (TTIP) – Solving the Regulatory Puzzle, 10
October 2013
67 Q1064
68 Q1079
69 Q1277
70 Q1277
71 Q461
20 The future UK-EU relationship
of services and financial services.72 In addition, there are three situations where the clause
is not caught: endeavouring to create an internal market (e.g. Norway), the second is
for an accession country, and third where there is sufficient regulatory approximation.73
Ms Gladstone suggested it might be possible for the EU and the UK to have a mutual
recognition agreement on financial services with an underlying requirement that the
UK and EU regulators would perform in a particular way. Another nation wishing to
take advantage of the MFN clause would need to conform also to the mutual recognition
requirements. In this way, it would open up a renegotiation for the EU but it would not be
an automatic opening up of the same benefit.74
There was a reservation taken in the services and investment area: “The
EU reserves the right to adopt and maintain any measure with regard to
broadcasting transmission services”.77
He also pointed out that the MFN clause in the CETA agreement would capture audio
transmission, so any benefit offered in future to the UK would also have to be offered to
Canada:
When the EU is articulating its lists of reservations, there were many things
that were never in its contemplation that it would give to anyone but a
member of the club. If the UK comes in now saying, “Actually, we want that
benefit. We want to be able to fly from point to point in different parts of
the EU. We want audio transmission services access”, or what-have-you, the
MFN element of the investment and services chapter in CETA will kick in
and you have to give in to Canada.78
34. Alongside CETA, the EU and Canada agreed a Strategic Partnership Agreement
(SPA). Professor Whitman told us that the SPA included areas where both parties sought
political co-operation, such as in security and foreign policy, but also broader sectoral co-
operation such as sustainable development and investment. We were told that the SPA is
aspirational, whereas the UK agreement would have to be “nuts-and-boltsy”, looking at
where the UK and EU already collaborate and working out how to maintain as much of
that collaboration as possible.79
72 Q463
73 Q1075. The witness suggested there were two aspects to understanding what sufficient regulatory
approximation could mean. 1) whatever the EU says it means, and 2) the views of the third countries that have
this clause, and the lawyers of businesses based in those countries.
74 Qq1256–1257
75 Mansion House speech, 2 March 2018
76 Q582
77 Q554
78 Q554
79 Q530. See also Qq1201–1202
The future UK-EU relationship 21
35. Professor Whitman told us that the UK and the EU should have much more ambition
than the Canadian SPA, so it would be “something like an SPA-plus-plus-plus-plus-plus”.80
He characterised the objective as to achieve “something where the UK is as embedded
as possible but also recognised as being a non-member state.”81 He perceived a lack of
thought going on in other Member State capitals as to what this future relationship might
look like, and how the complexities of the “institutional plug-in and the legal issues” for
involving a non-member state outside the jurisdiction of the CJEU in this way might be
resolved.82
36. The Comprehensive Economic and Trade Agreement (CETA) between the EU and
Canada is an arrangement designed to meet the trading objectives of both Canada and
the EU. It does not eliminate all tariffs and provides for market access some way short
of Single Market participation. The trading relationship between the UK and the EU
is very different and so a “CETA-style” agreement with the UK would need to reflect
markets that are already very much more integrated. A cut and paste of CETA would
not be a good deal for the UK or the EU.
37. A more ambitious trade deal for the UK with the EU would need to accommodate
anticipated regulatory divergence, from an identical starting point, rather than
convergence. The Secretary of State for Exiting the EU said that the UK would start
with Canada, and then “add to that the bits missing which is the services”. The ability to
elevate CETA into CETA plus plus plus so that it made up for any loss in services trade
consequent on leaving the Single Market would require an unprecedented development
of mutual recognition agreements far more ambitious than any previously agreed by
the EU with a third country. There is no precedent for any EU Member State leaving
the EU or the type of new deep and special partnership that the UK is seeking.
38. Most Favoured Nation provisions in CETA (and in other EU Free Trade Agreements)
provide that, if the EU offers the UK greater benefit in cross border provision of services
and financial services, then it must offer the same benefit to Canada. This would be a
consideration affecting the EU’s willingness to provide the UK with generous market
access in services as part of such a deal. There are exceptions that enable greater
market access without triggering the MFN clause, for example mutual recognition.
The Government would need to consider how it could use the available exceptions to
improve on cross border services provided in CETA. MFN provisions are likely to be
particularly sensitive in respect of broadcasting.
80 Q527
81 Q543
82 Q545
22 The future UK-EU relationship
40. An association agreement is a treaty between the European Union and a non-EU
country that creates a framework for co-operation between them. Its legal basis is defined
in Article 217 of the Treaty on the Functioning of the EU which provides for “an association
involving reciprocal rights and obligations, common action and special procedures”. The
EU uses an association agreement to create “privileged links” with a non-member country.
These privileged links can involve setting up a free trade area between them, or creating
broader economic and political co-operation in areas of mutual interest–for example,
on defence and security, migration, environmental protection and energy, science, and
education. As they can cover areas beyond trade, they can be more extensive than free
trade agreements.
41. The EU’s association agreements include Stabilisation and Association Agreements
with Western Balkan countries and those that include a Deep and Comprehensive Free
Trade Area (DCFTA), namely those with Ukraine, Georgia and Moldova. The DCFTAs
in the three agreements with Ukraine, Moldova and Georgia are new to EU association
agreements. They cover: market access for goods; trade remedies; technical barriers to
trade, standardisation, metrology, accreditation and conformity assessment; sanitary and
phytosanitary measures; customs and trade facilitation; establishment, trade in services
and e-commerce; current payments and movement of capital; public procurement;
intellectual property; competition; trade-related energy; transparency; trade and
sustainable development; dispute settlement; mediation mechanism; approximation;
rules of origin; mutual administrative assistance in customs matters; and participation in
EU programmes.
43. Access to the EU’s Internal Market in the agreements is staggered over a number of
years, as Dr Tamara Kovziridze, the Georgian former Chief Negotiator of EU-Georgia
Association Agreement, explained to us:
One of the key elements of this agreement is conditionality and the legal
approximation process. The very logic is that the three countries are
supposed to bring their legislation and implementation practice close to
the European Union, and this will take about 10 years. The maximum
83 Q861
The future UK-EU relationship 23
These countries are still distant from the EU in terms of their level of
regulatory approximation, so how the legislative framework as well as
its implementation works is still different. The whole objective of those
agreements is to bring those two regulatory frameworks closer. More
specifically in this case, it means that it has to become similar to the
European Union in the case of Ukraine, Georgia and Moldova.91
50. A study by Guillaume Van der Loo noted the broader political context to these
agreements, as all three countries were part of the EU’s Eastern Partnership (EaP) policy:
When the EaP was launched in 2009, one of the key objectives of the EU
was to conclude a new generation of association agreements with the
partner countries establishing an ambitious form of political association
and economic integration. The latter objective was to be realised by the
conclusion of “Deep and Comprehensive” Free Trade Areas (DCFTAs).92
52. On 14 March 2018, the European Parliament adopted a Resolution on the framework
of the future EU-UK relationship. The Resolution sets out an Association Agreement
between the UK and the EU as the European Parliament’s preferred option. The Resolution
stated that the European Parliament would only endorse a framework for the future EU-
UK relationship if it maintained:
safeguarding of the EU legal order and the role of the Court of Justice of the
European Union (CJEU) in this respect.94
91 Q836
92 Guillaume Van der Loo, A Comparative study of the Association Agreements and DCFTAs concluded with
Ukraine, Moldova and Georgia, 26 June 2017
93 Q844
94 European Parliament Resolution of 14 March 2018 on the framework of the future EU-UK relationship
The future UK-EU relationship 25
53. The Association Agreement with Ukraine sets out the procedures for dispute
resolution. Mr Tupchiienko explained that WTO arbitration was the model primarily
used and the CJEU is “mentioned only in terms of it being beneficial to use the precedents
as guidance in spirit and in fact, but not an obligatory issue”.95 Mr Emerson added that:
The main game is arbitration: one appointed by each side and one third
party; binding arbitration. The European Court of Justice comes in if there
is a controversy over interpreting European Union law, in which case it is
invited to deliberate on the subject.96
54. The EU’s Association Agreements with Ukraine, Georgia and Moldova cover
most of the Internal Market. They also provide for selective participation in many of
the agencies and programmes of the EU. Furthermore, free movement of persons is
not included and the financial obligations on these countries are minimal. Binding
arbitration is provided for dispute resolution and referrals to the Court of Justice of
the EU are limited to interpretations of EU law.
55. We also note that the European Parliament supports the option of an Association
Agreement. Although these Association Agreements have been reached with countries
converging rather than diverging, these agreements do illustrate the EU’s ability to
think creatively and apply bespoke arrangements to form a deep and comprehensive
relationship with politically important neighbours.
56. However, the mix of rights and obligations that the EU will look to offer in an
Association Agreement will depend on its assessment of its long-term strategic
objectives and the priorities of the Member States. If the UK is to look to negotiate
such an agreement, it needs to set out a clear vision of its future strategic relationship
with the EU, and the Committee notes that such a vision has yet to be fully articulated.
Switzerland
57. Relations between Switzerland and the EU are governed by over 120 bilateral
agreements, stretching back over many decades. The most significant cover free trade
in industrial products; insurance (excluding life insurances); customs facilitation and
security; free movement of persons; technical obstacles to trade; public procurement
market; agriculture; research; civil aviation; overland transport; Schengen/Dublin;
taxation of savings; fight against fraud; processed agricultural products; MEDIA (Creative
Europe); Environment; Statistics; pensions; education, vocational training, youth; Europol;
Eurojust; co-operation with the European Defence Agency; Co-operation of competition
authorities; Satellite navigation (Galileo, EGNOS); European Asylum Support Office; and
company taxation.97
58. Switzerland’s bilateral agreements selectively apply parts of the EU’s acquis as it
existed at the time, as Professor Clive Church, Emeritus Professor of European Studies at
the University of Kent, drew to our attention:
95 Q850
96 Q852. Article 322 of the Ukraine Association Agreement covers dispute settlement relating to regulatory
approximation, and Art.322(2) includes “The ruling of the Court of Justice of the European Union shall be
binding on the arbitration panel.”.
97 Swiss Federal Department of Foreign Affairs, Switzerland and the European Union
26 The future UK-EU relationship
59. According to a paper by Christa Tobler, since the most recent round of bilateral
agreements, the EU has insisted on a renewed institutional framework for relations with
Switzerland. It has demanded an institutional overhaul along the lines of the institutional
framework of EEA law, failing which it declared it was not prepared to conclude any new
market access agreements with Switzerland. Negotiations on the ‘institutional matters’,
as they are commonly referred to in Switzerland, began in spring 2014 and are ongoing.99
60. At a Swiss-EU meeting in November 2017, it was reported that there was no progress
on negotiations for a Swiss-EU framework agreement, although European Commission
President Jean-Claude Juncker reportedly said that things were moving in the right
direction and an agreement could be on the table by next spring if the last stretch of
negotiations was tackled with the necessary flexibility.100
61. The selective, static, application of the EU’s acquis is a significant reason why the EU
has officially expressed its dissatisfaction with the relationship between Switzerland and
the EU, as John Springford, Deputy Director of the Centre for European Reform, told us:
62. This was reiterated by Professor René Schwok, Associate Professor at the University of
Geneva. He told us that “the EU does not want this experience, model or regime any more.
It wants something more difficult for Switzerland in terms of sovereignty”.102 However, he
questioned whether this official position was reflected at the highest levels of the EU. He
told us that he had conducted research into the EU’s attitudes towards the relationship
and found that:
High-level servants and legal experts within the Commission are frustrated
with these agreements, because there is no institutional dimension to them.
[…] But higher people in the Commission […] including Michel Barnier—
were not aware of this issue. They said, “We do not care. What are you
talking about? I did not know.” […] [Barroso] told me, “We never mentioned
this in the Commission at the highest level. It was of no interest.” I talked to
several politicians: Ministers in France and Italy. They told us, “We do not
care so much about it.”103
98 Q915
99 Tobler, One of many challenges after ‘Brexit’: The Institutional Framework of an Alternative Agreement –
Lessons from Switzerland and Elsewhere? 2016
100 Swissinfo, EU-Swiss ties: Happy with progress but obstacles remain, 23 November 2017
101 Q906
102 Q906
103 Q906
The future UK-EU relationship 27
63. The majority of the bilateral agreements provide for a Joint Committee to oversee
the functioning of the agreement in question. The Joint Committees serve as a platform
for the exchange of information, for advice and for consultation. They also play a key role
should differences of opinion arise. Decisions are made unanimously within the scope of
the powers afforded by the respective agreement.
64. The Court of Justice of the EU does not therefore play a direct role in the relationship,
as Professor Schwok told us:
65. He added that the EU has been pushing for a formal role for the CJEU:
66. Trade between Switzerland and the EU is facilitated to an extent by some mutual
recognition, but this is primarily a one-way process, as Professor Schwok explained to us:
67. The EU’s Internal Market is governed by the Cassis de Dijon principle, from the
European Court of Justice case of the same name. This applies to all rules in the EU/
EEA which have not been harmonised—that is, replaced with supranational EU rules
common to all member states. It means that any product lawfully sold in one country
can automatically be sold in another even if the product does not fully comply with the
technical rules of the other.107
104 Q928
105 Q929. See Swiss soften line on foreign judges in bid to bolster EU ties, FT, 5 March 2018
106 Q923
107 Institute for Government, Mutual recognition: can the UK have its Brexit cake and eat it?, 1 September 2017
28 The future UK-EU relationship
68. Professor Schwok explained to us that, from the Swiss perspective, the mutual
recognition in the Swiss-EU agreements was akin to that provided under CETA, and
therefore inferior to the Cassis de Dijon principle. Furthermore, mutual recognition is
applied asymmetrically in the agreements:
The Swiss accept products from the EU on the Cassis de Dijon principle
mechanism, but the EU does not recognise the Cassis de Dijon towards
Swiss products.108
69. Switzerland has a bilateral agreement with the EU on the free movement of persons.
It is also part of Schengen, which adds a further dimension to its border management, as
Professor Schwok explained:
The way that it works is similar to the technological solution that the
Government put forward in their options paper for customs. There are
cameras on pretty much every road crossing into Switzerland, where they
take number plates and match those number plates to any car or lorry that
has been flagged as a potential risk for smuggling or any kind of illegal
activity. If that car or lorry goes over the Swiss border, it is checked.110
They sometimes do what they call a “customs blitz” where for two or three
hours they will stop all lorries that are going across a particular crossing.
They cannot do it for any longer than that because word gets around the
lorry drivers and they will avoid the crossing. […] There is also quite
strong collaboration between Swiss customs officials and German, French
and Italian customs officials, to the extent that they do joint operations,
go in each other’s helicopters and that kind of thing, to try to track down
smugglers.111
108 Q921
109 Q938
110 Q908
111 Q908
The future UK-EU relationship 29
72. Mr Springford also drew our attention to evidence given to the Northern Ireland
Affairs Committee by a senior Swiss customs official indicating they stop around 2% of
lorries that are crossing the border.112 There are different aspects to Switzerland’s border
management, as Professor Schwok explained:
For me, there are four types of barriers, frontiers or hurdles. One is the
so‑called customs. Those customs frontiers were removed in 1972 on
industrial products, but not on agricultural products. The second type of
customs is about non‑tariff, technical barriers. They have been removed
mostly through bilateral agreements, but not on the Cassis de Dijon. […] The
third type of frontier or barrier is the so‑called indirect fiscality: VAT, excise
duties, et cetera. There is no agreement between Switzerland and the EU on
removing fiscal barriers … The fourth one is so‑called physical barriers:
Schengen. You do not have to check people entering into Switzerland.113
73. Overall, although not obtrusive in general, the border between Switzerland and its
EU neighbours does require checks to be undertaken and some physical infrastructure, as
Mr Springford explained to us:
On infrastructure, there are border cameras. One of the issues with the
UK’s current strategy of leaving the customs union is that, yes, we can
minimise the amount of border infrastructure that there is, but any kind
of customs border requires some kind of border. It requires some checks
to stop smuggling. It means that you have to have some checks to ensure
that, say, animal standards are kept to. There are some Single Market-type
checks that have to be kept up.114
[…] We can talk about the amount of friction, but it is clearly not zero. If you
want to export a good across from Switzerland to the EU, you have to fill in
quite a lot of paperwork. You have to pay tariffs if that good has significant
content that has been imported to Switzerland from outside the EU. There
are spot checks on lorries. There are other customs issues, like VAT. The
Swiss are not part of the EU’s VAT regime, which means there are spot
checks to ensure that VAT has been paid. It is not a very friction‑full border.
It is one of the lighter-touch borders, but you cannot say it is frictionless.115
74. Relations between Switzerland and the EU are governed by a series of bilateral
agreements and negotiations towards an institutional framework have been ongoing
for a number of years. While we were told that the EU would not be willing to replicate
such an arrangement for the UK, it is clear that Switzerland has been able to establish
its own unique arrangement with the EU.
112 Q38
113 Q909
114 Q938
115 Q949
30 The future UK-EU relationship
75. Trade between the two covers some areas of the Internal Market and includes
some mutual recognition, albeit of an asymmetrical nature. Switzerland accepts the
free movement of persons and is part of Schengen. The management of borders is not
intrusive, but there is physical infrastructure at the border and checks and controls
are applied there. Switzerland does set a precedent for a country enjoying selective
participation as a third-country in the EU’s Internal Market, agencies and programmes.
76. However, the Swiss arrangement has evolved out of a process through which
Switzerland had seemed to be moving towards EU accession, rather than being seen by
the EU as a desirable end-state in itself.
78. The EEA Agreement guarantees equal rights and obligations within the internal
market for individuals and economic operators in the EEA. It provides for the inclusion
of EU legislation covering the four freedoms—the free movement of goods, services,
persons and capital—throughout the 31 EEA States. In addition, the Agreement covers
co-operation in areas such as research and development, education, social policy, the
environment, consumer protection, tourism and culture, collectively known as “flanking
and horizontal” policies. Apart from the main body of the Agreement, there are twenty-
two Annexes.117
79. The EEA Agreement does not bind a country to the EU in the following areas:
Common Agriculture and Fisheries Policies, Customs Union, Common Trade Policy,
Common Foreign and Security Policy, Justice and Home Affairs, or Monetary Union. It
does not have a goal of ever closer union.118 In addition to the EEA Agreement, Norway
has 80 agreements with the EU,119 and participates in Europol, Eurojust, and Frontex, and
is a member of the Schengen Agreement.
80. EEA Members are not in the Customs Union, but participate in the EU Single Market,
and so are able to operate a separate trade policy, albeit within constraints. Pascal Lamy
told us:
116 We use EFTA EEA states to describe Norway, Iceland and Liechtenstein. (Switzerland is a member of EFTA but
not party to the EEA Agreement.)
117 For example, Annex I is on Veterinary and phytosanitary matters, Annex XI is on Electronic communication,
Audio-visual Services, and Information Society (and includes the AVMS Directive) Annex XV is on State Aid
118 Q1037
119 Oral evidence to the House of Lords, 15 September 2016, Q25 [Sverdrup]
120 Q1125
The future UK-EU relationship 31
EEA Members are not directly subject to the jurisdiction of the CJEU and the concept
of direct effect does not exist within the EEA. The CJEU and the EFTA Court engage in
judicial dialogue and the EFTA Court has established precedents, that the CJEU has later
followed. Professor Baudenbacher told us:
The sovereignty issue was dear to the heart, in particular, of the Nordic
EEA EFTA states, because they come from a very dualistic tradition when
it comes to constitutional law. They wanted to avoid, for instance, the EEA
Agreement producing direct effect. In fact, the EFTA Court has given an
interpretation to protocol 35 where we said no direct effect and no primacy.121
EEA Members are able, following the precedent enshrined in Protocol 15, unilaterally
to apply different controls to the free movement of people, compared to those currently
operating in the UK, by applying the Article 112 emergency brake and entering into
Article 113 negotiations, to agree a long-term solution. Financial contribution to the EU
are linked to the level of EU Single Market access and participation in EU programmes.
EEA Members only accept the rules deemed relevant by the EEA Joint Committee and all
of these rules must be passed into domestic legislation by contracting parties.
81. Professor Yarrow said that the EEA Agreement is “nobody’s favourite” as a model for
the UK, as he thought it did not appeal to either end of the Brexit debate. He told us, in
his opinion, that “it is what most people in the country would prefer”.122 Mr Sverdrup said
that the EEA Agreement had been good for Norway, “primarily due to the fact that there
are no other good alternatives or better alternatives that are politically feasible.”123
In total, Norway pays to the EU about £740 million annually, or about £140 per person.
The UK pays £14 billion as a full member, or about £220 per person.124
121 Q1028
122 Q966
123 Q1000
124 FullFact, Norway’s EU payments, August 2016 and Norway and the EU: Financial contributions
32 The future UK-EU relationship
83. In her Lancaster House speech, in January 2017, the Prime Minister said:
And because we will no longer be members of the Single Market, we will not
be required to contribute huge sums to the EU budget. There may be some
specific European programmes in which we might want to participate. If
so, and this will be for us to decide, it is reasonable that we should make
an appropriate contribution. But the principle is clear: the days of Britain
making vast contributions to the European Union every year will end.125
84. In her Florence speech, in September 2017, the Prime Minister said the UK wanted
to continue working together in ways to “promote the long-term economic development”
of Europe, continuing to take part in policies and programmes “that promote science,
education and culture–and those that promote our mutual security.” She said the UK
would “make an ongoing contribution to cover our fair share of the costs involved.”126 In
March 2018, in her Mansion House speech, the Prime Minister said the UK Government
wanted to remain part of three EU agencies, and that “We would, of course, accept that this
would mean abiding by the rules of those agencies and making an appropriate financial
contribution.”127 The three agencies she mentioned are the European Medicines Agency,
the European Chemicals Agency, and the European Aviation Safety Agency. While the
European Chemicals and Aviation Safety Agencies include provisions for third country
membership, the Medicines Agency does not. Membership of the Medicines Agency is
only open to EU and EEA states. Under current rules, therefore, the only way in which the
UK can be a member of the Medicines Agency from outside the EU is through membership
of the EEA.
86. Professor Alla Pozdnakova, University of Oslo, said there were several differences
between the EFTA Court and the CJEU, notably:
• an opinion of the EFTA Court on the interpretation of EEA law is advisory not
binding;
• the EFTA Court and the EFTA Surveillance Authority only have competence
with respect to the EFTA pillar of the EEA Agreement; and
• the EFTA Court can rule that an EFTA EEA state has violated EEA law and has
to comply with it but cannot impose any financial penalties for that violation.130
125 Lancaster House speech 17 January 2017
126 Florence speech 22 September 2017
127 Lancaster House speech 17 January 2017 and Mansion House speech, 2 March 2018
128 At present Iceland, Liechtenstein and Norway
129 Michael-James Clifton, EEA: Another Side to Europe, 17 October 2016
130 Q989. See also Q1028 [Baudenbacher]
The future UK-EU relationship 33
Complainants to the EFTA Court from Norway were generally businesses unhappy with
how Norway applies its EEA obligations.131
87. She told us that Norwegian courts have started to take their own view about what EEA
law is and have said, “We do not really agree with how the EFTA Court understands EEA
law.”132 Similarly, Professor Baudenbacher said that both the Supreme Court of Iceland
and of Norway have stated that they are “not only entitled but obliged under national law
to assess independently whether they will follow” the opinions of the EFTA Court.133 The
EFTA Court has also demonstrated it does not always follow the CJEU and that, when the
EFTA Court tackles a legal question first, then the CJEU may follow it. This is helped by
“very intense judicial dialogue.”134
88. It has been suggested that the UK might “dock” with the EFTA Court, so it could rule
on the UK pillar on the interpretation and compliance with the withdrawal agreement.
Docking was originally proposed by the EU to Switzerland to try and place the Swiss-
EU bilateral treaties under the jurisdiction of the EFTA Court. Professor Baudenbacher,
president of the EFTA Court, explained that docking would be a partial participation in
the EEA. (It is likely that the UK would need the agreement of the EU and the three EFTA
EEA countries.135) It was Professor Baudenbacher’s view that the UK would be welcomed
into the EFTA Court, because the Court would become more important, and he believed
the EU was considering the EFTA Court as an option for the future UK-EU relationship.136
89. In her Florence speech in September 2017, the Prime Minister drew attention to
the fact that membership of the EEA would mean the UK having to adopt automatically
new EU rules which the UK would have little influence over and no vote. She said that
such a loss of democratic control could not work for the British people and would risk “a
damaging re-opening of the nature of our relationship in the near future”.137
90. Norway has agreed to follow almost the entire Single Market acquis—a body of
nearly 900 EU directives and over 3,600 regulations—and relevant CJEU case law. This
acquis includes about 45% of all EU directives, which amounts to about 30% of all EU
legislation that the UK currently adopts as an EU Member State. Nearly two-thirds of
that acquis accounts for goods-related regulations, such as technical rules, and food safety
and animal health regulations, while only 16% constitute services-related regulations.138
However, the amount of EU law that applies to EEA states appears to vary. The Icelandic
government, for example, considers that only 10% of EU legislation applies in Iceland.139
131 Q998
132 Q990
133 Q1028
134 Q1029
135 Q1031
136 Qq1026–1027
137 Florence speech 22 September 2017
138 Institute for Government, Trade after Brexit Options for the UK’s relationship with the EU, Dece 2017
139 Iceland has adopted 10% of EU laws, Iceland Monitor, 21 October 2015
34 The future UK-EU relationship
140 Q975
141 Q978
142 Q978
143 EU facts behind the claims: Norway. 25 April 2016; Norges hovedinnlegg på EØS-rådsmøte, Brussel, 19 November
2013
144 Q979
145 George Yarrow, Brexit and the Single Market Revisited, December 2017
146 EFTA Bulletin of July 2015
The future UK-EU relationship 35
147 Q993
148 Q996
149 Q997
150 Q1000
151 Q981
152 Q980
36 The future UK-EU relationship
Border management
96. Professor Michael Dougan, Professor of European Law at the University of Liverpool,
told us that the Norway-Sweden border is about as closely integrated a border as you can
get outside the Customs Union and “pretty much full regulatory alignment” and co-
operation, but that there are still “checks, formalities, physical infrastructure and so on.”157
Alla Pozdnakova said the biggest impact on border management in terms of people was
not when Sweden joined the EU, but when Sweden joined the Schengen area. This led to
Norway and Finland joining the Schengen Agreement.158 Ulf Sverdrup said:
If you go to the border now, you see that the trucks are stopped. They are
in a long line to declare their papers, but most trucks can pass through
rather rapidly because they have done some kind of electronic declaration
up front. That requires a pretty advanced electronic system, combined with
a good, trust-based system, with a lot of information about the economic
operators. Then, of course, you have these risked-based random checks.159
97. Dr Lars Karlsson, author of Smart Border 2.0, a report he produced for the AFCO
Committee in the European Parliament, gave evidence to this Committee on 20 March.
He outlined three aspects to consider when designing a border: the laws, conventions,
rules and regulations governing trade; the trade policies of the countries either side of
the border, and issues around security and safety. He said: “The level you will see at the
153 Q980
154 Qq971–972
155 Q973
156 Qq1003–1005
157 Q393
158 Q984
159 Q986
The future UK-EU relationship 37
border depends on the level the two partners would like to have in each of these three
dimensions.”160 He acknowledged that his report was commissioned and published before
the Joint Report was agreed in December, and it was not the only report presented to the
European Parliament.161 His report was written to consider the future UK-EU border
in a general sense, for example at Eurotunnel, and not only to meet the aim of avoiding
physical infrastructure, checks and controls at the Northern Ireland border.162 He had not
been approached subsequently by the UK Government for advice in designing a border
which would comply with the terms of the December 2017 agreement.
98. Dr Karlsson said the technology and processes existed that could make a frictionless
border without any physical infrastructure on the border itself. The Norway-Sweden
border, often held up as near as possible to a smart border, was only 60–75% smart—there
is physical infrastructure and checks at the border.163 He said it could be 100% smart but
a decision was taken to avoid the additional investment necessary because the border
functioned satisfactorily as it was. When asked about what could be in place by the end of
transition in December 2020, he said this would depend on what the partners could agree
in respect of the development of a trusted trader scheme, the infrastructure for checks
(at some point away from the border) and the extent to which the private sector could be
engaged and involved.164 He acknowledged that the system would have to be designed to
allow for the traders who wished to trade across the border without trusted trader status,
to make sure the system captured those who wilfully or accidentally avoided compliance.165
There are already low levels of physical checks for non-EU trade entering the Republic
of Ireland. David Campbell Bannerman MEP pointed out that, according to the WTO,
Ireland only carried out physical checks on 1% of non-EU trade and there is no reason
why this low level of physical checks should be higher for trade from the UK after we leave
the EU.166
99. On 5 March 2018, the Prime Minister said she was aware of the Smart Border 2.0
report and that she had asked officials to look at it very carefully.167 At Departmental
questions on 15 March, Suella Fernandes, the Parliamentary Under Secretary of State for
Exiting the EU, was asked about the Smart Border 2.0 report produced by Dr Karlsson for
the European Parliament.168 She replied:
The report to which he refers is an interesting document, but it does not go
as far as the commitment made by the United Kingdom. Our unwavering
commitment is to not introduce any physical infrastructure at the border.
We have explicitly ruled that out. The report is interesting, but it does not
go all the way.169
On 21 March, at Northern Ireland Office questions, Karen Bradley, the Secretary of State
for Northern Ireland, said she was not familiar with Dr Karlsson’s report.170
160 Q1163
161 Q1170
162 Qq1167-1169
163 Q1172
164 Qq1184-1185
165 Q1183
166 Q1123–1225
167 HC Deb 5 March 2018, col 25 Statement on the UK/EU Future Economic Partnership
168 Smart Border 2.0 Avoiding a hard border on the island of Ireland for Customs control and the free movement of
persons, November 2017
169 HC Deb 15 March 2018, col 980
170 HC Deb 21 March 2018, col 263
38 The future UK-EU relationship
100. Norway accepts the EU’s principle of freedom of movement: its citizens are entitled
to be treated in the same way as EU nationals, which includes the right to live, work and
access public services and benefits. Article 112 of the EEA Agreement allows for a EEA
EFTA country to trigger a safeguard measure unilaterally if “serious economic, societal
or environmental difficulties of a sectorial or regional nature” arise and are deemed
liable to persist. The safeguard measures “shall be restricted with regard to their scope
and duration to what is strictly necessary in order to remedy the situation” and relate
to the procedures laid down in Article 113, which set out a process for consultations in
the EEA Joint Committee with a view to resolving the dispute.171 The Joint Committee
also monitors any such safeguard measures with a view to their abolition or limitation in
scope. Professor Yarrow has said that the EEA Joint Committee has recognised explicitly
that free movement of persons is to be interpreted differently in EU contexts than in the
EEA Agreement context.172 In the EEA, the four freedoms serve the Article 1 purpose of
promoting “a continuous and balanced strengthening of trade and economic relations”
between EEA members,173 whereas for the EU the four freedoms serve the fundamental
political purpose of “ever closer union”.
101. Norway has never used the safeguard measures. Iceland used the safeguard measure
to control movement of capital after the financial crisis in 2008.174 In 1998, the EEA
joint committee agreed that Liechtenstein should be allowed to issue residence permits
to Norwegian, Icelandic and EU nationals owing to its “specific geographical situation”.
Liechtenstein is the only EEA member currently allowed to impose such restrictions on
free movement. The Liechtenstein variant of the emergency brake applies only to physical
residence and not to work—it limits residence permits—moreover, its small size and specific
geographic location within Europe—with high levels of cross-border commuting—make
it difficult to compare to the UK. Liechtenstein has a population of around 37,000 and a
land area near 160 km2. It is substantially smaller than the Isle of Wight in population
(138,000) and land area (258 km2). Nevertheless, the precedent of Liechtenstein shows
some flexibility in the requirements of EEA membership in respect of free movement.
Landlocked Liechtenstein has an unusually high proportion of its workforce commuting
daily across its border, but this is not the case in the UK where a limit on residence permits
would be difficult to distinguish from a limit on work.
102. The precedent of Liechtenstein however shows some flexibility in the requirements
of EEA membership in respect of free movement. The Protocol adjusting the EEA
Agreement to enable this to happen was signed in 1993 to reflect the changes made
following Switzerland’s decision not to ratify the Agreement. The Adjusting Protocol
deleted Switzerland from the Agreement, including from Protocol 15 on transitional
periods on the free movement of persons. As Protocol 15 was originally drafted to enable
171 The EEA Joint Committee (EEA JC) is responsible for the management of the EEA Agreement and typically
meets six to eight times a year. It is a forum in which views are exchanged and decisions are taken by consensus
to incorporate EU legislation into the EEA Agreement. Before the Lisbon Treaty, the EEA JC comprised the
ambassadors of the EEA EFTA States and representatives of the European Commission.
172 Catherine Yarrow and George Yarrow, The European Economic Area Agreement: A short introduction, March
2017
173 See Catherine Yarrow and George Yarrow, The European Economic Area Agreement: A short introduction,
March 2017
174 Oral evidence to the Lords EU Committee in September 2017, Q29
The future UK-EU relationship 39
Switzerland and Liechtenstein to introduce similar but not identical temporary measures
to restrict free movement, it would suggest the Protocol was not drawn up solely for the
specific circumstances of a microstate.
103. Ulf Sverdrup told the House of Lords EU Committee that Liechtenstein was allowed
a special exemption on the free movement of persons when it entered the EEA Agreement,
on the basis of its size and the high proportion of non-Liechtenstein nationals working
there. The exemption from the free movement of persons was initially temporary. Mr
Sverdrup explained the background to the exemption and questioned its potential
applicability to the UK:
This [exemption] expired in 1998 and the EU would not extend it further.
Then Liechtenstein used Article 112 to say that they needed a limitation
on free movement of persons. But when the EU was enlarged in 2004, the
parties made some sort of adjustment as an annex to the EEA agreement
[…] basically accepting that this exception is going to be integrated
permanently into the agreement. In general, I do not think the Article
112 strategy is designed for countries that want to be left out of the free
movement of persons.175
He told us:
The United Kingdom is a great country with a great history. Liechtenstein
is also an interesting country but a small principality. It is not comparable.176
104. Ulf Sverdrup said that, if the UK joined the EEA, it would then have to be committed
to take on the obligation of free movement of persons as in the agreement, and then trigger
article 112 as some kind of a security measure.177 He said:
You are then back to the situation that Cameron negotiated before you had
your referendum. What kind of special situation is it now where you can
have some negotiations? Are there some special circumstances related to
the UK labour market that enable some kind of legitimate claim to pull this
security clause? […] That being said, we have to remember that article 112
is a security clause for some kind of exceptional situation. It is not supposed
to last as some kind of permanent thing, so you have to find some kind of
transition arrangement and find a solution to that problem. It would be in
breach of the spirit of the agreement.178
105. Others have written on the outcome of the UK’s renegotiation of its relationship with
the EU—the attempt by David Cameron to secure an emergency brake on migration.
Professor Barnard, University of Cambridge, has pointed out that the Conclusions of
the European Council from February 2016 used the language of the free movement of
workers,179 and that while free movement of workers is an integral part of the internal
market, both differing levels of pay and the diversity of social security systems across
Europe may incentivise workers to move. The Conclusions said that:
And that,
if overriding reasons of public interest make it necessary, free movement of
workers may be restricted by measures proportionate to the legitimate aim
pursued. Encouraging recruitment, reducing unemployment, protecting
vulnerable workers and averting the risk of seriously undermining the
sustainability of social security systems are reasons of public interest
recognised in the jurisprudence of the Court of Justice of the European
Union for this purpose, based on a case by case analysis.181
Mr Yarrow said Article 112 and 113 altered the balance to the UK in terms of control:
All these things reduce to questions of power. The EEA would give the UK,
in the EFTA pillar, the unilateral right to trigger the safeguard measures,
and it would also give it the unilateral right to use what I think is the more
important freedom of movement provision, which is the first line of article
28(3). That is a more permanent way of dealing with freedom of movement
issues.182
He said that if the UK was in the EFTA pillar then “the control and sovereignty is with the
UK”.183 Article 28 of the EEA Agreement allows for freedom of workers to accept offers
of work actually made, to move freely for that purpose, and to stay in another territory
for the purpose of work. This right is “subject to limitations justified on grounds of public
policy, public security or public health”.184
106. Professor Pozdnakova pointed out that the EEA Agreement does not include
provisions on EU citizenship in the EU, and that the gap between EU law and the EEA
in this area, while reducing, is still developing.185 She pointed out that Norway, and the
EFTA EEA states, have implemented the EU Citizens’ Rights Directive even though there
is an absence of provisions on EU citizenship in the EEA Agreement.186 Professor Yarrow
also commented on the difference between the EU and the EEA position on citizenship:
treaties are different. I go back to a point earlier that was made. It is not just
that the EEA is a sub-component of the European treaty; it also has some
differences, and where the differences occur they are profound.187
When asked what Norway might think of the UK joining EFTA EEA, Ulf Sverdrup said:
108. The EFTA Court is not the CJEU. The opinions of the EFTA Court are not binding
and it allows scope for national courts to question its interpretation of law as it relates
to the EEA Agreement. Docking with the EFTA Court would provide the UK with
a ready “off-the-shelf” arbitration mechanism for the ongoing UK-EU relationship.
Docking was originally a solution proposed for Switzerland and the EU, so should
garner support from the EU.
109. Being a party to the EEA Agreement and not the Customs Union (nor the
Common Fisheries Policy) means countries such as Norway operate an independent
trade policy. It is noteworthy that Norway and the EFTA countries have chosen to
negotiate free trade agreements with third countries that pre-empt or follow the free
trade agreements negotiated by the EU.
187 Q1015
188 Q969
42 The future UK-EU relationship
110. Norway has recognised there is a trade-off between being outside the EU Common
Fisheries Policy and the Customs Union, but inside the Single Market. Norway has
control over its own fishing waters, the ownership of its own fleet and retains flexibility
to negotiate its trade in fish. However, this is balanced against tariffs on its exports of
fish into the EU and Norway choosing to align its veterinary checks with EU rules to
reduce the need for compliance checks at the EU border.
111. The Norway-Sweden border has been held up as an example of a possible model
for the Northern Ireland-Ireland border. Norway is in the Single Market but not the
Customs Union. Sweden is in the Single Market and the Customs Union. Both countries
are in Schengen. The two countries have been co-operating on how to manage the
border for several years, but there are still checks and there is physical infrastructure.
112. Article 112 and Article 113 of the EEA Agreement provides a safeguard measure
that could be used to address “serious economic, societal or environmental difficulties
of a sectorial or regional nature” if they arise. This could provide a route for the UK to
operate a temporary emergency brake on free movement, and a more permanent way
of dealing with freedom of movement issues through Article 28. The EEA Agreement
also provides a mechanism through the EEA Joint Committee to discuss how to resolve
the matter rather than immediately seek a judicial outcome.
113. Norway’s EEA membership gives it the economic benefits of being a member
of the Single Market but at the cost of having limited and informal participation in
decision-making on the rules of the Single Market. It has chosen to accept the principle
of freedom of movement, one of the UK Government’s red lines. There is a trade-off to
this. EEA States, such as Norway, have to accept all EEA relevant EU legislation, which
is estimated to account for up to 30% of all EU legislation that currently applies to the
UK as an EU Member, while being informally invited to provide expert advice at an
early stage of the Commission drawing up legislation. They do not have a vote. The
Norwegian Parliament has a role in debating EU related legislation and voting on the
financial contribution to the EU. Norway has found a balance in its relations with the
EU that meets its needs.
114. The Government has rejected applying for EEA Membership because its view is
that this entails accepting both free movement and EU law. Should the negotiations on
a deep and special partnership not prove successful, EFTA/EEA membership remains
an alternative and would have the advantage of continuity of access for UK services.
The EEA option is available off-the-shelf and could be negotiated relatively quickly.
115. The EU’s Customs Union is made up of EU Member States, and includes the Isle of
Man and the Channel Islands. Under Articles 28, 30, 34, 35 and 36 of the Treaty on the
Functioning of the EU, individual Member States are not permitted to introduce charges
that have an effect equivalent to that of customs duties on goods; nor are they permitted to
impose quantitative restrictions or quotas. This means Member States are obliged to allow
goods that are legally produced and marketed in other Member States to be circulated and
placed on their domestic markets.
The future UK-EU relationship 43
116. The EU’s Customs Union has a Common External Tariff, which is imposed on all
goods imported from third countries. Uniform implementation of the Common External
Tariff by customs authorities across the EU’s external borders is ensured through the
Union Customs Code. Almost 80% of the revenue generated by tariffs go directly to the
EU’s budget (in 2015, this made up 13.6% of the EU’s total budget).
117. Goods imported into the EU need to comply with Internal Market legislation. In
support of this, the EU has legislated to harmonise regulations (such as product standards
and safety requirements) and to enforce the principle of mutual recognition (which
requires Member States to accept each other’s certification and conformity practices).
118. Goods imported into the EU need to follow rules of origin, which determine where
a product and its components were produced in order to ensure that the correct customs
duty is levied. If goods consist of materials from more than one country, special rules
apply to determine which country will be judged to be the country of origin. These are
based on the origins of the materials, the value added in the process, and where the final
substantial production phase took place. Such formalities are not necessary for goods
manufactured inside the Customs Union.189
119. Following its Association Agreement with the EU (the Ankara Agreement, signed
in 1963), and the opening of accession negotiations, Turkey signed a Customs Union
Agreement with the EU in 1995. This states that:
From the date of entry into force of this Decision, Turkey shall, in relation
to countries which are not members of the Community, apply provisions
and implementing measures which are substantially similar to those of the
Community’s commercial policy.190
120. Turkey’s customs union with the EU covers all industrial goods, but not agriculture
(except processed agricultural products), services or public procurement. It also excludes
the free movement of labour. Although Turkey and the EU have negotiated to extend
and deepen their Customs Union Agreement to include services and public procurement,
these negotiations were suspended in 2002. The EU foresees that Turkey will align its
national legislation with a number of essential Internal Market rules, notably on industrial
standards.191 Trade arrangements for coal and steel products result from an Agreement in
1996 between Turkey and the then European Coal and Steel Community. Those products
remain outside of the scope of the Customs Union Agreement.
Asymmetric relationship
121. Turkey imposes the EU’s Common External Tariff on all goods imported from
non-EU countries that are covered by the Customs Union Agreement. Turkey has no
involvement in decisions about the Common External Tariff or setting the direction of the
Common Commercial Policy. It is also not able automatically to secure additional market
access via EU FTAs with third countries, but these third countries have access to Turkey’s
189 House of Lords Report, Brexit: the options for trade: Chapter 4: Membership of the EU’s customs union
190 Decision No 1/95 of the EC-Turkey Association Council of 22 December 1995 on implementing the final phase of
the Customs Union
191 European Commission, DG Trade: Turkey
44 The future UK-EU relationship
122. The Customs Union Agreement with Turkey reduces the need for checks, for instance
on rules of origin, but does not remove them entirely. This is because although industrial
goods may be exempt, checks may still take place to ensure compliance with the rules
of the Internal Market, for example on phytosanitary products, as Dr Pinar Artiran,
Assistant Professor and WTO Chair Holder at Bilgi University, explained to us:
123. The Institute of Directors has called for the UK to negotiate a partial customs union
with the EU based on the Turkish experience.194 In practice, a partial customs union
arrangement also necessitates checks for other reasons, as Dr Peter Holmes, Reader in
Economics at the University of Sussex, set out to us:
124. He also told us that Turkey has the obligation under parts of the Customs Union
Agreement to operate regulatory alignment, but that itself did not guarantee mutual
recognition of the testing and certification in Turkey:
You still have to have goods stopped at the border, even if there are no
tariffs, if there is any possibility that they may not satisfy [sanitary and
phytosanitary measures] or conceivably some sort of non‑food‑safety
standards.196
125. Dr Holmes gave us an example of when the EU put anti-dumping duties on televisions
from Turkey, also requiring border checks:
Turkish manufacturers were then selling them across the border to Georgia.
They got Georgian certificates of origin, and then they were trundled back
across Turkey into the EU, and there was a big dispute about whether they
126. By dealing with rules of origin, a customs union arrangement like Turkey’s can still
be beneficial, as Sam Lowe, Research Fellow at the Centre for European Reform, pointed
out to us:
There are studies that show that, if [Turkey] exited the customs union, but
liberalised everywhere else and went into a deep and comprehensive free
trade agreement, reducing non‑tariff barriers, it still would not make up
for the cost of having to deal with rules of origin after leaving. Estimates
of the cost of rules of origin vary. It is usually put between 2% and 6% of
the value of the product, but the real cost is that companies just find it too
complicated, and do not use a free trade agreement.198
Jersey example
127. Mr Lowe suggested that a customs union arrangement based on Jersey, Guernsey
or the Isle of Man could provide a solution to avoid a hard border between the UK and
Ireland/EU. Mr Lowe set out such a complete customs union arrangement:
The starting basis was how you fix the Irish border issue, for one. We think
it does that. Secondly, would the European Union go for it? We are not sure.
We think maybe, and the reason for that is because it is a comprehensive
customs union. A customs union is an already‑defined relationship that
the EU has, in part, with another country, in Turkey, and it is also defined
within the WTO GATT agreement. […] The UK gets the ability to regulate
its own economy in the area of services […] It would also have the ability to
negotiate agreements on services, investment, and data with other countries
around the world.200
197 Q1065
198 Q1065
199 Q1068
200 Q1069
46 The future UK-EU relationship
129. Turkey has a customs union arrangement with the EU covering industrial goods,
but not agriculture (except for processed agricultural products), services or public
procurement. It is bound by the EU’s Common External Tariff, but it is not involved in
setting the direction of the Common Commercial Policy. Nor is it able to automatically
secure market access via the EU’s FTAs, whereas those third countries have automatic
access to Turkey’s market.
130. The incomplete nature of its customs union arrangement means checks still take
place at the Turkey-EU border and there can be long delays. The examples of Jersey,
Guernsey and the Isle of Man show an invisible border can be maintained through
participation in a full customs union and adherence to the rules of the Single Market in
respect of trade in goods. Such an arrangement could make it easier for the UK to roll-
over the EU’s existing FTAs. The UK would also need to negotiate a consultative role
in the EU’s future FTAs, as well as a legal mechanism in future FTAs which prevented
them from entering into force unless the third-country in question extended market
access to the UK.
WTO terms
131. The UK has said it wishes to seek a negotiated outcome. At the same time, the
Government maintains the position that the option of no deal is part of its negotiation
strategy. In the Lancaster House speech, in January 2017, the Prime Minister said that
“while I am sure a positive agreement can be reached–I am equally clear that no deal for
Britain is better than a bad deal for Britain.”201 In her Mansion House speech, the Prime
Minister did not use the words “no deal” but said that “given the uncertainty inherent in
this negotiation, [the Government was] preparing for every scenario.”202
132. On Michel Barnier’s slide, trading on World Trade Organisation (WTO) terms is
classified as the default in the event of exiting the EU with no agreed future trading
relationship. This would satisfy some of the stated UK red lines—no free movement, no
payments to the EU if the UK does not want to be involved with any aspect of the EU,
such as research or EU agencies. There would be no obligation to follow the rulings of the
CJEU and the UK would be free to follow an independent trade policy. However, it would
fail, according to the Government’s own analysis, on the Mansion House speech test that
Brexit must ‘protect people’s jobs and security’. Pascal Lamy, former Director-General
of the WTO, told us he thought there would be no difficulty in the UK becoming an
independent member of the WTO outside of the EU. There may be technical negotiations,
around tariff rate quotas and governance, but Mr Lamy saw no legal impediment.203 The
UK would rely upon its commitments regarding tariffs on goods and the commitments
made on services in the General Agreement on Trade in Services (GATS).
133. However, Pascal Lamy described the WTO regime as league three in world trade,
inferior to bilateral trade agreements and the internal market. Explaining what this meant
in practice, Mr Lamy said that for goods, there would be an average tariff of 4% to 5%, with
10% in the automotive sector, around 7% for footwear and textiles, and higher levels in
agriculture. He said the level of openness is “very, very low” under WTO terms compared
to the internal market of the EU. The consequence of trading under the WTO regime,
which is much less open than the bilateral agreement, would result in costs and controls.204
134. Some of the evidence we have heard echoes the view that trading with the EU on
WTO terms would have a negative effect on trade. Dr Andy Williams, AstraZeneca, told
us in Cambridge:
I think if we were to just leave now or whenever it is, in March next year,
we would go back to WTO rules, which would obviously affect trade.
We have estimated that would cost AstraZeneca around $30 million a
year in additional trade costs. Our bigger concern to some extent is the
bureaucracy associated with that, which we would be able to handle, but
smaller companies may not be able to.205
135. Evidence from the automotive sector to the Business, Energy and Industrial Strategy
Committee said trading on WTO terms, and the application of current WTO tariffs on
the automotive sector (10% on cars, 4.5% for components) was described by the Society
of Motor Manufacturers & Traders as an “incredible challenge” as it could make UK
manufactured vehicles “uncompetitive”. The BEIS Committee concluded that “For the
automotive sector, no deal would undoubtedly be hugely damaging. The Government
should not seriously contemplate this outcome.”206
136. The British Retail Consortium (BRC) said that leaving the EU without a deal would
mean tariffs on food products imported from the EU could be in the order of 22%. The
BRC said that 79% of food imported by their members into the UK comes from the EU-27,
and that:
Higher tariffs would impact on the price of imported goods, and diminish
living standards for consumers. Our research points to potential rises in the
price of cheese in the order of 6–32%, on tomatoes of 9–18%, and on beef
of 5–29%. We also note other similar studies which show a similar picture,
and that consumers would suffer the highest detriment.207
However, the BRC also said that “non-tariff barriers would be the most burdensome” and
that this would have an effect “in relation to customs, and for meat and plant-derived
products, from health or veterinary checks stemming from sanitary and phytosanitary
requirements.”208
204 Q1106
205 Q651
206 Business, Energy and Industrial Strategy Committee, Leaving the EU: Implications for the Automotive Industry,
HC 379, para 12
207 Written evidence from the BRC, NEG0010
208 Ibid.
48 The future UK-EU relationship
137. A joint statement between the UK Chemical Industries Association and the European
Chemical Industry Council, representing chemical and pharmaceutical companies—
which add £14.4 billion of value to the UK economy every year from total annual turnover
of over £40 billion, said that “Brexit without a new trade agreement between the UK and
the European Union would be the worst possible outcome”.209
138. Very few countries trade solely on WTO terms. All large trading countries are party
to other bilateral agreements facilitating relations between two countries / parties, such
as customs co-operation and managing data flows. These still require negotiation and
agreement. Only seven countries trade with the EU on WTO terms alone,210 and research
by the Institute for Government found that:
In 2016, of the top 10 trading partners with the EU by total trade, the US,
China, Russia, Japan and India have a substantial number of bilateral
agreements that go well beyond the terms of WTO trade. Of the top 20,
there are no countries that trade on WTO rules alone with no bilateral
agreements and no free trade deals.211
139. On the other hand, it is not necessary to have a specific Free Trade Agreement to
enable trade. Lamy pointed out that:
The reason why we do not have a free trade agreement with the US is
because we are both the most open large economies. With that we can trade
relatively easily, but not as much as we theoretically could, which is why the
TTIP negotiation was launched some years ago.212
Border management
140. Pascal Lamy said that once the UK was no longer a Member State, and whether it had
a bilateral agreement or traded on WTO terms, then this “will necessitate a border.” There
need to be checks on both goods and people. If there were duties then duties would need
to be paid. He said that if the UK chose to operate a unilateral zero tariff, there would still
be checks, as a precaution, on the safety of products such as children’s toys or cars, and
checks on food products for disease or residues.213
141. One of the WTO’s principles of trade is the Most Favoured Nation rule, whereby
a preferential treatment for one trading partner has to be offered to others, unless it is
as part of a free trade deal. This would, in theory, require the UK to operate the same
regime at all its borders as it did at the Northern Ireland-Ireland border.214 If the UK-EU
negotiations end in a no deal, and the UK wanted to offer zero tariffs unilaterally to the
EU, it would have to offer zero tariff to all its trading partners.215
209 European chemical industry unites over post-Brexit future for the continent’s manufacturing backbone, 14
November 2017; See also oral evidence on 18 October 2017 Q111 [Steve Elliot]
210 The Economist, Brexiteers claim that trade on WTO terms would be fine. Wrong, 30 November 2017
211 Institute for Government, Bilateral Agreements, June 2017.
212 Q1108
213 Q1121, Q1112
214 Q1126
215 The economist, Brexiteers claim that trade on WTO terms would be fine. Wrong, 30 November 2017
The future UK-EU relationship 49
142. Mr Lamy said that UK customs may want to check to make sure all the products
crossing the border from Ireland are of EU origin. This may depend on the tariff regime
operated by the UK, and whether the UK was concerned about allowing Chinese goods
into the UK market via the Irish land border. Mr Lamy agreed that the WTO rules would
not stop the UK unilaterally deciding to not have checks, “but that will not mean that
there is no border.”216 The UK could not determine what the EU did on the other side
of the border, and to what extent the EU wanted to carry out precautionary checks on
products for safety reasons.217 He referred to the Norway-Sweden border as the example of
where it was most likely for there to be a ‘virtual border’ but “It is nothing like that.” The
Sweden Norway border has “a border post and you have border control.”218 When asked
if there was any country in the world that has an open door to all trade with anybody, Mr
Lamy said:
No, I do not think so, because the country doing this would have no leverage
to gain market access in third markets, which of course is your negotiating
currency. If you have totally open trade, why should others give you access
to their market? They have duty-free, quota-free access to your market.219
143. If the UK exited the EU without an agreement on its future trading relationship,
it could do so on WTO terms. Eleven of the twelve studies in the Government’s EU
Exit Analysis show that trading on WTO terms would be particularly damaging to
the UK economy, compared to other scenarios modelled. The UK could still look to
negotiate a series of bilateral arrangements with the EU. These might include terms of
co-operation with the EU in areas such as customs or aviation. It would remain to be
seen how quickly they could be negotiated, or how deep and comprehensive they would
be compared to the current Single Market relationship.
144. The UK could choose to offer zero tariffs on goods between the EU and the UK,
outside of a trade deal and would be able to use a ten-year exemption before offering
the same tariff rates to other nations if the UK were negotiating a trade deal with the
EU at that time. After this period, if the UK did so, it would have to offer the same
zero tariff to all its trading partners. This would leave domestic producers exposed
and remove significant negotiating leverage for the UK in respect of future trade deals.
145. The UK and the EU have both said that they do not want to reintroduce a hard
border between Ireland and Northern Ireland. If the UK wanted to trade with the
EU on WTO terms, then it could choose to reduce all its tariffs to zero, or it could
choose not to collect duties at the border. However, there would still be the need to
check some goods crossing the border for reasons such as the safety of goods, or health
of agricultural products, or for rules of origin. There are currently checks to prevent
excise fraud or illegal imports of arms and drugs.
We need to base our exit negotiations and preparations on the best possible
evidence and analysis. Analysing the potential impact of different exit
scenarios is an unprecedented challenge.
The analysis sets out the factors creating uncertainty and warns that it does not seek to
provide a definitive single point estimate:
147. The scenarios modelled by the analysis are an EEA-type scenario (equivalent to
Norway’s relationship with the EU); and FTA-type scenario (analogous to the CETA deal)
and trading on WTO terms. Notably, the analysis does not seek to model the impact of
moving to the relationship that the Government is looking to achieve, the model set out by
the Prime Minister’s speeches in Florence and Mansion House. The analysis uses a range
of methodologies to inform a computable general equilibrium model (CGE). DEXEU
describes it as a “state of the art structural model”, and emphasises that this is not the
same model used before the referendum which was based on gravity modelling. The CGE
model is informed by gravity modelling but also draws on other techniques. It is claimed
that this analysis is much more sophisticated and also factors in the benefits of new trade
deals and any gains from de-regulation. The analysis states that “non tariff barriers are the
most important driver of trade impacts”.221
148. The analysis indicated that, compared to indicative GDP growth, and spread over 15
years, the EEA-type scenario would result in -1.6% less growth, the FTA-type scenario
would result in -4.8% less growth, and the WTO scenario would result in -7.7% less
growth.222 The analysis states that:
149. On 15 January the Scottish Government presented the latest analysis of the implications
for Scotland’s economy.224 This is the only other Government analysis to be published in
the UK. It concluded that Brexit will significantly weaken the Scottish economy and result
220 EU Exit Analysis Cross Whitehall Briefing, January 2018
221 Ibid. page 9
222 Ibid. page 16
223 Ibid. page 17
224 Scotland’s Place in Europe: People, Jobs and Investment, 15 January 2018
The future UK-EU relationship 51
in lower economic growth and lower incomes in Scotland. The same three off-the-shelf
options were modelled. The results showed the following negative impacts on headline
macroeconomic indicators, relative to a baseline of full EU membership, to 2030:
• EEA: GDP -2.7%, real disposable income -1.4%, business investment -2.9%;
• FTA: GDP -6.1%, real disposable income -7.4%, business investment -7.7%;
• WTO: GDP -8.5%, real disposable income -9.6%, business investment -10.2%
150. Economists for Free Trade, a group of economists including Professor Patrick Minford,
Dr Gerard Lyons, Julian Jessop and Roger Bootle has published its own “Alternative Exit
Analysis” report which concluded:
151. This Alternative Brexit Economic Analysis has, in turn, been criticised for its
assumptions, such as the UK having no tariffs or non-tariff barriers with any country, and
that border costs with the EU will be zero. This does not represent current Government
policy.225
152. The Government’s estimates are comparable to those of the National Institute of
Economic and Social Research (NIESR), the OECD and the World Bank. Several analysts
- Oxford Economics, PWC/CBI, IEA and Open Europe - offer a relatively more optimistic
analysis, in particular for the scenario of trading under WTO rules, but each forecast a
negative impact on UK GDP arising from trade on this basis (with only the IEA and Open
Europe suggesting a small positive impact from trading on an EEA basis or on the basis of
an FTA). Economists for Free Trade have produced the only analysis suggesting a positive
impact on GDP of moving to WTO terms.226
153. The Government has modelled the impact on UK GDP of the three potential
scenarios for future UK-EU trade that we have examined in the course of our work.
There is near consensus that moving from trading with the EU as a Member State to
trading with the EU on WTO terms would have a significant negative impact on the
UK economy. According to most analyses, this negative impact would be mitigated
in part by agreeing a “Canada-style” FTA, and further reduced by trading within the
Single Market (but outside the Customs Union) as an EEA State. Each of the three
scenarios modelled in the Government’s EU Exit analysis factored in the transitional
adoption of all existing EU FTAs, and includes the effects of a bilateral UK-US trade
deal, which is estimated to bring a benefit of 0.1–0.3% of GDP over the long term, but
excludes any other potential FTAs, which the Analysis estimates could add a further
0.1–0.4% of GDP.
225 The latest pro-Brexit analysis has got its sums badly wrong, Financial Times, 21 February 2018
226 Ibid., page 17
52 The future UK-EU relationship
155. He told us that he envisaged the Future Partnership based on four pillars: Trade,
Justice and Home Affairs, Common Security and Defence Policy and Foreign Affairs,
and thematic ‘areas of specific co-operation in areas of shared interest’. The Future
Partnership could be agreed through several agreements, some of which will be treaties.227
Thematic areas could include research, university co-operation, fisheries, and aviation
and we believe that services, including financial and professional business services, justify
a separate pillar of co-operation. The Future Partnership will be based on a legal basis
other than Article 50 and agreements would, most likely, be mixed agreements, requiring
ratification by each Member state. The Article 50 withdrawal agreement will be subject to
qualified majority voting in the Council and approval by the European Parliament.
156. Similarly, the UK has said it wishes to have a relationship based on broader matters
than just trade. The Prime Minister’s Lancaster House speech from January 2017 listed
twelve priorities for the negotiating objectives, including co-operation in the fight against
crime and terrorism and future and in science and innovation.
Security co-operation
157. In her Lancaster House speech, the Prime Minister said that “a Global Britain will
continue to co-operate with its European partners in important areas such as crime,
terrorism and foreign affairs.” The Prime Minister’s letter triggering Article 50, sent
to President of the Council, Donald Tusk on 28 March 2017, said “we want to agree a
deep and special partnership between the UK and the EU, taking in both economic and
security co-operation.”228 In her Munich speech, in February 2018, the Prime Minister
said “Europe’s security is our security. And that is why I have said […] that the United
Kingdom is unconditionally committed to maintaining it.”229
158. The Prime Minister specifically referred to the UK’s future involvement in Europol
and the European Arrest Warrant, maintaining alignment with EU Data Protection rules,
and seeking to maintain the fast exchange of data through the Schengen Information
System. On external security she referred to continued co-operation on sanctions policy,
contributing UK defence capabilities for EU operations, using the UK’s foreign aid budget
227 Northern Ireland Affairs Committee, Oral evidence: Brexit and Northern Ireland, HC 329, Oral evidence: Brexit
and Northern Ireland, HC 329, Opening statement [Michel Barnier]
228 See also UK Future Partnership Paper, Foreign policy, defence and development, 12 September 2017
229 Munich Security Conference Speech, 17 February 2018
The future UK-EU relationship 53
161. The UK Government has said it would like to continue to collaborate with European
partners on major science, research, and technology initiatives.236 The Prime Minister
has said the UK would like to remain part of the European Medicines Agency (although
there is no provision for third states to become members or observers to the European
Medicines Agency.237) The EU draft negotiating guidelines published on 7 March 2018 said
the agreement could include co-operation on EU programmes “in the fields of research
and innovation”. We visited Cambridge and met those who worked in the life sciences,
medical research and space sectors and the university.238 Their priorities were looking
to provide certainty for their existing EU staff and ensuring that they retained access
to future talented students and staff. They were also looking to continue international
collaboration, to remain in EU wide programmes (Galileo, Copernicus, Erasmus+), to
continue to access EU-wide research funding, to remain within the EU regulatory sphere
and retain access to the EU market, and to continue participation in EU wide clinical
trials. Doubts had already arisen over future contracts because of a lack of certainty about
the long-term relationship.239
162. Professor Eilís Ferran, Pro-Vice Chancellor for Institutional International Relations,
Cambridge University, emphasised the importance of ensuring that the future immigration
system took account of the needs of the sector, including, in particular, technicians and
researchers with difficult to source skills who were below PhD level:
Simply extending the existing Tier 2 to EEA staff would not be welcomed
by us or by the sector.240
Both Horizon 2020 and Erasmus+ allow some form of participation for non-EU member
states. However, Switzerland’s participation was downgraded to partial associated status
of Horizon2020 in 2014–2016 following its decision to limit immigration.
Aviation
163. Another area of co-operation that Michel Barnier told us he envisaged coming into
the “thematic” pillar was aviation. The EU Draft negotiating guidelines are positive about
an air transport agreement and an aviation safety agreement. The UK has said it would
like to explore with the EU the terms on which the UK could remain part of EU agencies
such as the European Aviation Safety Agency, and accept that this would mean abiding by
the rules of those agencies and making an appropriate financial contribution.
164. The European Council guidelines include reference to research.241 The Canadian
Strategic Partnership Agreement includes aviation co-operation.242 Switzerland has a
bilateral agreement with the EU on civil aviation which allows for reciprocal access to the
air transport market.
Data
165. Maintaining the free flow of data between the UK and EU is essential for the
convenience of consumers and the functioning of the UK economy, and very important
for the cross-border portability of data.243 Jessica Gladstone described its inclusion in the
final EU-UK agreement as “crucial”.244 One of the CBI’s Five Steps to Protect Services Post-
Brexit is to secure an adequacy decision for the UK’s data regime to maintain the free flow
of data between the UK and EU.245
238 Oral evidence on 19 February 2018. See also written evidence Professor Graham Virgo, University of Cambridge
NEG0017
239 Oral evidence taken in Cambridge on Thursday 18 January 2018, Qq634–647
240 Q682
241 Statement by President Donald Tusk on the draft guidelines on the framework for the future relationship with
the UK, 7 March 2018
242 Q531
243 Q520
244 Q1282
245 CBI, 5 steps to protect services post-Brexit, 8 March 2018
The future UK-EU relationship 55
166. An adequacy decision from the European Commission would provide the best
comprehensive mechanism for the UK to share data with the EU. It would certify that the
standard of data protection in the UK is “essentially equivalent” to EU data protection
standards. Although the UK is currently fully aligned with EU standards, Mr Erixon told
us that this would not necessarily be simple for the UK as several Governments in the EU
will have concerns about data protection in the UK:
The starting point will be that the rest of the EU wants to have an adequacy
recognition of the United Kingdom, but it is going to raise concerns about
mass surveillance and what the Government are doing on these issues. […]
I probably would be very surprised if there were no recognition of adequacy
of the UK, providing that more or less the current regulation that applies in
the UK will apply after Brexit as well.246
David Henig said he thought the negotiations on data will be “extremely painful. […]
Because the EU is really not comfortable with sharing data. It is increasingly putting more
conditions on it.”247 Mr Erixon said the UK may be judged against higher standards of
data protection outside the EU than if it remained as a Member State since, as a Member
State it is able to invoke certain national security provisions allowing it a leeway not offered
to third countries.248
167. Alternatives to a data adequacy decision can be cumbersome and expensive. The UK
and the EU could aim for a mutual adequacy decision, with both recognising each other’s
data protection regimes.249 There are signs that the EU Commission is moving closer to the
inclusion of data in trade agreements, and it has been included in the negotiations between
Japan and the EU.250 The resistance in the EU to including data in trade agreements has
been attributed to differences of opinion between two EU Commission departments:
Trade and Justice.251
246 Q521
247 Qq1282–1283
248 Q522–523
249 No interruptions, Options for the future UK-EU data-sharing relationship, November 2017
250 Q524
251 Apparent Breakthrough in Commission Talks to Include Data Flows in Trade Deals, TechUK, 19 Jan 2018
252 Q518
253 Q505
56 The future UK-EU relationship
Anglo-Saxon race to the bottom” in terms of standards, and that “These fears about a race
to the bottom are based on nothing, not our history, not our intentions, nor our national
interest.”254
169. The European Council draft guidelines said:
Given the UK’s geographic proximity and economic interdependence with
the EU27, the future relationship will only deliver in a mutually satisfactory
way if it includes robust guarantees which ensure a level playing field. The
aim should be to prevent unfair competitive advantage that the UK could
enjoy through undercutting of current levels of protection with respect to
competition and state aid, tax, social, environment and regulatory measures
and practices.255
It said that the Agreement will include enforcement and dispute settlement mechanisms,
“as well as Union autonomous remedies”.
example, one of the things that the South Korea-EU agreement gave us was
access to their legal services market. That has been a little bit controversial
in South Korea, as I understand it. They may want to say, ‘Can we restrict
that a little bit?’ It is a negotiation, at the end of the day; we cannot say what
will actually happen as a result of that. There may also be things in there
that we would be happy to lose because they were EU-specific things that
do not really affect the UK. I would not want to predict how the negotiation
would go, but I can predict that there should be a negotiation where most
countries would have at least some things that they would ask for.262
He did not want to make generalisations about how third countries would respond
to making a deal with the UK outside the EU, some may wait to see what the EU-UK
relationship would look like, but also some might anticipate a better deal if they go
quickly.263 Some would not be straightforward to renegotiate, e.g. the customs union with
Turkey or the Swiss relationship with the EU. He also questioned if the UK Government
had the capacity to negotiate many such agreements at the same time, and if it actually
knew what it wanted from all these agreements, what it would ask for and what it would
seek to protect.”264
Conclusions
174. The EU’s different forms of relations with third countries have been driven by a
range of particular circumstances and strategic interests. While there are a number of
“off-the-shelf” models, the details of each vary widely. There is no precedent for Brexit
and any deal reached between the UK and the EU on the UK’s future relationship will,
by its nature, be bespoke. A “CETA-style” trade agreement between the UK and the EU
would reflect very different trading priorities to the Canada deal and could be part of
a very much deeper relationship with the EU in terms of security, academic and many
other areas of co-operation than that enjoyed by Canada, however the lack of access
for services in such a FTA would pose serious challenges for the UK. Even trading on
WTO terms after agreeing exit terms under Article 50 would not rule out continuing
close co-operation in areas of mutual benefit.
175. Continuing security co-operation is a priority for both sides. Our predecessor
Committee welcomed the Government’s commitment to continuing co-operation
with the EU27 on foreign policy and defence matters. That Committee called on
the Government in March 2017 to set out some detail about how such co-operation
could be made to work in practice, including the institutional and decision-making
frameworks that would underpin it. It is regrettable that no response has yet been
provided to that report and no detail has been set out. Our predecessor Committee
also welcomed the Secretary of State’s statement that the Government wants “as far as
is possible to replicate what we already have” in respect of Justice and Home Affairs Co-
operation and concluded that the UK’s relationship with the EU when outside should
be one of partnership on the basis of shared values and co-operation. Maintaining
this level of co-operation will require overcoming a number of technical challenges in
respect of agreeing data protection, judicial oversight and governance provisions. The
Prime Minister’s Munich speech acknowledges that the Government will be looking to
find positive solutions to address these challenges
176. Ensuring the continued free flow of data between the UK and the EU, once the
UK has left will be one of the most important cross-cutting issues to be resolved in the
negotiations on the future relationship. Data flows are vital for ensuring frictionless
trade between the UK and the EU and they underpin co-operation in combating
terrorism and organised crime. This is just one area of cross-over that illustrates the
relationship between both trade and non-trade elements of the future relationship.
Our scrutiny of other third country relations with the EU indicates that imaginative
solutions are possible but will require agreement over regulatory frameworks,
governance and oversight arrangements. Indeed, we welcome the greater emphasis on
alignment, rather than divergence, in the Prime Minister’s Mansion House speech.
177. Our study of the existing relationships between the EU and third countries
shows that there are trade-offs between the rights and obligations that comprise those
relationships. Michel Barnier’s “staircase” diagram takes as a starting point that the UK
Government’s existing red lines suggest a “Canada style” trade deal. The Government
is seeking a much wider CETA plus plus plus agreement. While imaginative solutions
are possible in other areas of co-operation, these red lines will also affect other aspects
of the relationship. Ending free movement will affect the extent of involvement in
programmes of academic co-operation granted to the UK. Ending the jurisdiction of
the Court of Justice of the EU and any regulatory divergence in data protection will
The future UK-EU relationship 59
place constraints on a range of programmes for justice and home affairs co-operation,
although in her Munich speech about security and policing co-operation, the Prime
Minister indicated the UK’s willingness to accept the remit of the CJEU in these areas,
respecting the sovereignty of both the UK and the EU’s legal orders. This is a very
positive approach which we encourage the Government to apply in other areas.
178. In respect of both trade and non-trade agreements, other countries will take a
close interest in the mix of rights and obligations that constitute any future relationship
with the UK and may see any special deals for the UK as a precedent. Countries such as
Switzerland and Norway will examine closely any agreement between the UK and the
EU to see if it contains better terms than their current arrangements. This, in itself,
may limit the EU’s room for manoeuvre in terms of what it is prepared to offer the UK.
179. The UK has an enormous amount to offer the EU as a third country. A deep
partnership will ensure that the UK’s defence, intelligence and security capabilities
continue to add to the EU’s resources (and vice versa), that the international financial
centre for our continent stays in Europe; and that our co-operation continues across
a wide number of important sectors. However, Ministers need to set out what they
want to achieve overall, in much more detail, in terms of the future relationship. The
absence of such detail could allow the terms of the future negotiation to be set by the
EU with the “offer” to the UK determined by the EU’s analysis of the implications of
the UK’s red lines, rather than by a proper consideration by the EU of the strategic
value of a continuing close relationship with the UK. We encourage the Government
to take a more proactive approach to the linkages between different areas of the future
relationship, given that they will be negotiated to different timescales, so that the UK
does not find that options are inadvertently closed off.
181. Whilst the UK will not be looking to replicate the relationships of other countries
with the EU, our analysis has indicated that there are a number of key tests by which
any deal agreed by October can be judged. The Prime Minister has set out her red lines
for the negotiations. However, the success of the future relationship will be judged on
the ground by the members of the public, businesses and agencies that travel to and
from, trade with and will continue to work closely with the EU and EU Member States.
The criteria by which they and we will judge the political declaration that we expect to
be reached by October will be the following:
• The border between the Republic of Ireland and Northern Ireland must
remain open, with no physical infrastructure or any related checks and
controls, as agreed in the Phase 1 Withdrawal Agreement;
• In the fight against crime and terrorism, arrangements must replicate what
currently exists in operational and practical cross-border co-operation. In
60 The future UK-EU relationship
particular, the UK must retain involvement with Europol and the European
Arrest Warrant and continue to participate in the EU’s information-sharing
systems including SIS II;
• Institutional and decision-making frameworks must be identified to ensure
that the UK is able fully to participate in foreign and security co-operation
with the EU, to meet the challenges it shares with its neighbours in the EU-27;
• In respect of trade in goods, there must be no tariffs on trade between the UK
and the EU 27;
• Trade in goods must continue to be conducted with no additional border or
rules of origin checks that would delay the delivery of perishable or time-
sensitive deliveries or impede the operation of cross-border supply chains;
• There must be no additional costs to businesses that trade in goods or services;
• UK providers of financial and broadcasting services must be able to continue
to sell their products into EU markets as at present;
• UK providers of financial and other services should be able to retain
automatically, or with minimal additional administration, their rights of
establishment in the EU, and vice versa, where possible on the basis of mutual
recognition of regulatory standards;
• There must be no impediments to the free flow of data between the UK and
the EU;
• Any new immigration arrangements set up between the UK and the EU must
not act as an impediment to the movement of workers providing services
across borders or to the recognition of their qualifications and their right to
practise;
• The UK must seek to maintain convergence with EU regulations in all relevant
areas in order to maximise access to European markets;
• The UK must continue to participate in the European Medicines Agency, the
European Aviation Safety Agency, the European Chemicals Agency and in
other agencies where there is a benefit to continuing co-operation;
• The UK must continue to participate in the Horizon 2020 programme,
the Erasmus+ scheme, the Galileo project and in other space and research
programmes in order to support the work of our world-class academic
institutions and the importance of cultural and educational exchange
between the UK and the EU 27;
• The UK must continue to participate in all relevant air safety agreements and
the Open Skies Agreement to ensure no disruption to the existing level of
direct flights.
• The UK Government must ensure maximum access to European markets
while agreeing reciprocal access to waters and a fairer allocation of fishing
opportunities for the UK fishing industry.
The future UK-EU relationship 61
Formal minutes
Wednesday 28 March 2018
Members present:
Question put, That the Chair’s draft Report be read a second time, paragraph by paragraph.
Ayes, 10 Noes, 6
Joanna Cherry Mr Peter Bone
Richard Graham Sir Christopher Chope
Peter Grant Andrea Jenkyns
Wera Hobhouse Craig Mackinlay
Stephen Kinnock Mr Jacob Rees-Mogg
Jeremy Lefroy Sammy Wilson
Seema Malhotra
Emma Reynolds
Stephen Timms
Hywel Williams
Question accordingly agreed to.
Ordered, That the Chair’s draft Report be read a second time, paragraph by paragraph.
The precedent of Liechtenstein however shows some flexibility in the requirements of EEA
membership in respect of free movement. The Protocol adjusting the EEA agreement to
enable this to happen was signed in 1993 to reflect the changes made following Switzerland’s
decision not to ratify the Agreement. The Adjusting Protocol deleted Switzerland from the
Agreement, including from Protocol 15 on transitional periods on the free movement of
persons. As Protocol 15 was originally drafted to enable Switzerland and Liechtenstein to
introduce temporary measures to restrict free movement, it might suggest the Protocol
was not drawn up for the specific circumstances of a microstate.”—(Stephen Kinnock)
Ayes, 8 Noes, 7
Joanna Cherry Mr Peter Bone
Peter Grant Sir Christopher Chope
Stephen Kinnock Richard Graham
Jeremy Lefroy Andrea Jenkyns
Seema Malhotra Craig Mackinlay
Emma Reynolds Mr Jacob Rees-Mogg
Stephen Timms Sammy Wilson
Hywel Williams
Question accordingly agreed to.
Amendment proposed, to leave out the words “The UK Government has also acknowledged
that this will involve a continuing role for the CJEU in the UK”.—(Mr Jacob Rees-Mogg)
Ayes, 7 Noes, 9
Mr Peter Bone Joanna Cherry
Sir Christopher Chope Richard Graham
Andrea Jenkyns Peter Grant
Jeremy Lefroy Wera Hobhouse
Craig Mackinlay Stephen Kinnock
Mr Jacob Rees-Mogg Seema Malhotra
Sammy Wilson Emma Reynolds
Stephen Timms
Hywel Williams
Question accordingly negatived.
Amendment proposed, to leave out from the beginning of the paragraph to “. The
EEA option” and insert “The Government has rejected applying for EEA Membership
because its view is that this entails accepting both free movement and EU law. Should
the negotiations on a deep and special partnership not prove successful, EFTA/EEA
membership remains an alternative and would have the advantage of continuity of access
for UK services.”—(Richard Graham)
Ayes, 10 Noes, 6
Joanna Cherry Mr Peter Bone
Richard Graham Sir Christopher Chope
Peter Grant Andrea Jenkyns
Wera Hobhouse Craig Mackinlay
Stephen Kinnock Mr Jacob Rees-Mogg
Jeremy Lefroy Sammy Wilson
Seema Malhotra
Emma Reynolds
Stephen Timms
Hywel Williams
Question accordingly agreed to.
64 The future UK-EU relationship
Ayes, 8 Noes, 8
Mr Peter Bone Joanna Cherry
Sir Christopher Chope Peter Grant
Richard Graham Wera Hobhouse
Andrea Jenkyns Stephen Kinnock
Jeremy Lefroy Seema Malhotra
Craig Mackinlay Emma Reynolds
Mr Jacob Rees-Mogg Stephen Timms
Sammy Wilson Hywel Williams
Whereupon the Chair declared himself with the Noes
Amendment proposed, after “trade policy.”, to insert “However, it would fail, according
to the Government’s own analysis, on the Mansion House speech test that Brexit must
“protect people’s jobs and security”.”—(Stephen Kinnock)
Ayes, 8 Noes, 8
Joanna Cherry Mr Peter Bone
Peter Grant Sir Christopher Chope
Wera Hobhouse Richard Graham
Stephen Kinnock Andrea Jenkyns
Seema Malhotra Jeremy Lefroy
Emma Reynolds Craig Mackinlay
Stephen Timms Mr Jacob Rees-Mogg
Hywel Williams Sammy Wilson
Whereupon the Chair declared himself with the Ayes.
Amendment proposed, after “consensus”, to insert “, as there was about the short-term
impact of a vote to leave the European Union,”.—(Mr Jacob Rees-Mogg)
Ayes, 7 Noes, 9
Mr Peter Bone Joanna Cherry
Sir Christopher Chope Peter Grant
Richard Graham Wera Hobhouse
Andrea Jenkyns Stephen Kinnock
Craig Mackinlay Jeremy Lefroy
Mr Jacob Rees-Mogg Seema Malhotra
Sammy Wilson Emma Reynolds
Stephen Timms
Hywel Williams
Question accordingly negatived.
Motion made, and Question put, That the paragraph stand part of the Report.
Ayes, 10 Noes, 6
Joanna Cherry Mr Peter Bone
Richard Graham Sir Christopher Chope
Peter Grant Andrea Jenkyns
Wera Hobhouse Craig Mackinlay
Stephen Kinnock Mr Jacob Rees-Mogg
Jeremy Lefroy Sammy Wilson
Seema Malhotra
Emma Reynolds
Stephen Timms
Hywel Williams
Paragraph accordingly agreed to.
Ordered, That the Report be the Fourth Report of the Committee to the House.
Ordered, That embargoed copies of the Report be made available (Standing Order No. 134)
Witnesses
The following witnesses gave evidence. Transcripts can be viewed on the inquiry publications
page of the Committee’s website.
Rt Hon David Davis MP, Secretary of State, Department for Exiting the
European Union Q1–153
Rt Hon David Davis MP, Secretary of State, Department for Exiting the
European Union Q691–835
Session 2017–19