Brexit: A new relationship

Evanna Fruithof, Alexandria Carr and Gordon Nardell QC set out possible models for the UK’s relationship with the EU post-Brexit

Following the vote to leave on 23 June, the EU awaits formal notification by Her Majesty’s government of the UK’s intention to withdraw from the world’s largest trading bloc, a notification required by the terms of Art 50 of the Treaty on European Union (TEU). 

Article 50, introduced by the Lisbon Treaty, governs the terms of such departure, but is as yet untested. Whether the mechanism it contains covers both the negotiations for withdrawal, and those for the UK’s future relationship with the EU, is a matter of some debate. This is important, since once the process is triggered, Art 50 provides a maximum two-year period for the negotiations, extendable only if all member states agree. Regardless of the eventual model for the future relationship (explored in more detail below), few would argue that it can be agreed in that timescale.

A few basic ground rules

Given that almost half Britain’s exports go to the rest of the EU, concluding a post-Brexit agreement with the EU that provides maximum possible access to the single market, in particular for services, will be crucial to future prosperity.

The nature of the UK’s future relationship with the EU will determine not only whether UK law and lawyers can continue to enjoy the benefits of free movement, but also much of the content of individual areas of domestic law and policy. The various types of new relationship will each involve, to a differing extent, a probable need to replicate:

  • at international level, the current rules in the EU treaties on mutual access to markets for goods and services (and, on some scenarios, free movement of persons), as well as corresponding rules in the EU’s external trade deals with states which will be continuing trading partners of the UK; and
  • within the UK, legal rules corresponding to the current EU acquis in many areas, particularly those linked to the single market for goods and services.

Depending on the nature of the new arrangements, the need for replication would arise either as a matter of legal obligation, or as a likely practical necessity flowing from the conditions imposed on the UK in return for a new deal. In some areas, EU law itself currently precludes the Union, or member states, from trade with the UK (or any third country) unless its law is aligned with that applicable within the EU: for example, the ‘safe harbour’ rules for processing of EU data in non-member states.

The possible models

From a legal point of view there are three main kinds of negotiated relationship with the EU that the UK is most likely to aim for post-withdrawal. It is true that the EU has dozens of trading relationships with different countries or groups of countries worldwide, all with small variations. It is also true that a customs union (like that between the EU and Turkey) or trading with the EU and the rest of the world under World Trade Organisation (WTO) rules, would also be possible, but the disadvantages are such that they are not considered feasible. The models shown here (see boxes) are based on three existing EU relationships, considered the most practicable for the UK.

UK trade with third countries

Quite apart from its relationship with the EU itself, the UK will need to agree free-trade deals with other non-EU countries to replicate the free-trade deals from which it currently benefits (and to which it is subject) as a member of the EU. This will be a huge practical challenge because the UK no longer has an extensive body of its own trade negotiators; and there is a considerable risk that the UK alone would not be able to command terms as favourable as those secured by the EU acting as a bloc.

What if no agreement is reached in time?

If the two-year period provided by Art 50 TEU were to expire without extension or agreed transitional arrangements, and before the satisfactory conclusion of negotiations with the EU, then the UK leaves the EU. In those circumstances, the default legal position would be that UK/EU relations would be governed by a framework of international agreements to which they are already parties, primarily the WTO system established under the post-war General Agreement on Trade and Tariffs (GATT), as supplemented by measures such as the General Agreement on Trade in Services (GATS) and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). These provide a number of backstop protections in relation to trade in goods and certain services, but would involve the imposition of tariffs on goods and services.

A. European Economic Area (EEA) eg Iceland, Lichtenstein and Norway

Iceland, Lichtenstein and Norway have access to the internal market as EEA states (all EU member states are also EEA member states). The EEA Agreement provides for the inclusion of EU legislation covering the four freedoms (the free movement of goods, services, persons and capital) throughout all EEA states. In addition, the Agreement covers cooperation in other areas such as research and development, education, social policy, the environment, consumer protection, tourism and culture, collectively known as ‘flanking and horizontal’ policies. The Agreement guarantees equal rights and obligations within the Internal Market for citizens and economic operators in the EEA. The EEA Agreement does not cover:

  • common agriculture and fisheries policies (although the Agreement contains provisions on various aspects of trade in agricultural and fish products);
  • customs union;
  • common trade policy;
  • common foreign and security policy;
  • justice and home affairs (even though the present EFTA countries have agreed to participate in the Schengen area, a step the UK is most unlikely to take); or
  • monetary union (EMU).

Iceland, Lichtenstein and Norway are obliged to implement all internal market rules in exchange for access to the internal market but they do not take part in the negotiation of those rules. They also contribute towards the EU budget. In Norway’s case, this amounts to around 90% of Britain’s net payment per head. Further, they are obliged to accept persons migrating from EU states in exercise of EU free movement rights.

In order to join the EEA, the UK would need to negotiate access to the European Free Trade Area (EFTA – EEA member states plus Switzerland) and then EEA membership with EEA and EFTA members. Given the obligations attached to membership of the EEA, there seems little advantage to the UK in pursuing this option and it is considered unlikely. As Nikolai Astrup, a Norwegian Conservative MP stated in 2013: ‘If you want to run Europe, you must be in Europe. If you want to be run by Europe, feel free to join Norway in the European Economic Area.’

However, EEA membership is the only option that would guarantee the financial services sector similar access to the internal market as it enjoys under EU membership.

B. Bilateral agreements (under EFTA membership) eg Switzerland

Switzerland, though an EFTA state, is not part of the EEA Agreement. Instead it has over 120 bilateral agreements with the EU, negotiated over many years, that give access to the single market for goods, but not most services. Switzerland also contributes to the EU budget. In 1999 the EU and Switzerland signed an agreement on freedom of movement under which each gave the other’s citizens the right to enter, live and work in its territory. Switzerland is an associate member of Europe’s border-free Schengen area and a full participant in the Dublin system for dealing with asylum claims. The EU has closer ties with Switzerland than any other non-EEA state, but bilateral relations are strained since the February 2014 Swiss anti-immigration initiative, the outcome of which called into question the principles of free movement of persons and the single market that underpin those relations.

The network of agreements is complex and sometimes incoherent. There are no proper mechanisms to adapt the agreements to evolving EU legislation. There are not any surveillance nor efficient dispute settlement mechanisms. The EU has determined not to give Switzerland any further access to the internal market without establishing a framework agreement, but negotiations on that have stagnated.

Given the difficulties experienced with the Swiss relationship, the EU would surely need to be persuaded to establish a similar relationship with another non-EEA state. However, if this were possible in principle, it would be expected to operate on a similar basis, ie the UK would have to negotiate a range of bilateral agreements with the EU. The extent to which each individual agreement required implementation of the EU acquis and new legislation by the UK would be negotiated on a case-by-case basis.

C. Free Trade Area eg South Korea, Canada

This option contemplates a single bilateral free trade arrangement, rather than the ‘EFTA plus bilaterals’ relationship applicable to Switzerland. The wider and deeper that agreement, the more the UK would be bound by EU regulation (eg labour market, health and safety, competition rules) without having a say in its content.

The EU is a party to trade agreements and other agreements with a trade component both in the WTO context and bilaterally with certain countries and regions. Countries including South Korea and Canada have free-trade deals with the EU that do not require observance of all its rules, payment into the budget, or acceptance of persons exercising free movement rights. The EU has 53 such deals. The EU also has, or is negotiating, free-trade deals with the US (the controversial Trans-Atlantic Trade and Investment Partnership – TTIP), China and India. A post-Brexit Britain would no longer be included in those deals. Such deals have not usually prohibited non-tariff barriers, nor do they cover all services.

Post-withdrawal, the UK would have to try to agree a free-trade deal with the EU to gain access to the internal market. On the basis of trade lawyers’ experience of such arrangements to date, such a deal would be likely to be more restricted than the current intra-EU or EEA arrangements. The process would be lengthy and its precise outcome uncertain.

Although not necessarily attractive, this outcome presently seems, objectively, the most likely post-Brexit UK-EU relationship, given the obvious lack of attraction of the EEA or EFTA options.

Contributors Evanna Fruithof is Consultant Director of the Bar Council’s Brussels Office, Alexandria Carr is Vice Chair, and Gordon Nardell QC Chair, of the Bar Council’s EU Law Committee

This is an adapted extract from the Bar Council’s fact-based analysis of the legal and constitutional implications of the EU Referendum.

Tags: 
Issue: 
Author details: 
Evanna Fruithof

Evanna practised at the Bar in London until 1990, then spent two years with the European Commission. She worked at Freshfields and as deputy director of an EU thinktank. She established the Bar Council’s Brussels Representation in 1999 and has served as its consultant director ever since.

Gordon Nardell QC

Gordon practises in EU and international trade, investment and energy law at 20 Essex Street.