British people voted last June to leave the EU and that should have been respected from day one, yet there have many attempts to bypass their will, including by some MPs who have tried to stop, delay and water down the European Union (Notification of Withdrawal) Bill. The Bill was overwhelmingly approved, unamended, by the House of Commons on 8 February and it is expected to pass the House of Lords in the next few weeks, empowering the Prime Minister, Theresa May, to trigger Article 50 and begin the process of leaving the EU. The Government is determinate to respect the wishes of British people and will trigger Article 50 TEU by the end of March. As the Prime Minister said in the House of Commons “It is time to get on with leaving the European Union and building an independent, self-governing, global Britain.”
Theresa May announced at the party conference that the UK would take control of its borders and leave the jurisdiction of the European Court of Justice hence the Prime Minister’s speech at Lancaster House has not come as a surprise. Nonetheless, the speech made clear that Brexit means Brexit. The UK is not only leaving the EU but also the single market and the EU’s customs union. Theresa May set out in her speech the plan for Brexit negotiations based on 12 principles, which were then further explained in the white paper, The United Kingdom’s exit from and new partnership with the European Union. The White Paper, published on 2 February, not only outlines the Government’s strategy in negotiating a new partnership with the EU but it also confirms its determination to build a stronger, fairer and more Global Britain.
British people voted to leave the EU not to remain part of the single market and be subject to its laws and ECJ’s jurisdiction. Hence, only full withdrawal from the EU will respect the outcome of the referendum and will end the supremacy of EU law.Britain will regain the right to legislate for and govern the British people through the authority of the Westminster Parliament, as the Government will take “back control of our laws and bring an end to the jurisdiction of the European Court of Justice in Britain.” Theresa May has stressed that “Leaving the European Union will mean that our laws will be made in Westminster, Edinburgh, Cardiff and Belfast. And those laws will be interpreted by judges not in Luxembourg but in courts across this country.”
There has been a lot of discussion on whether the UK should remain in the single market and/or in the customs union after leaving the EU. Several MPs have been saying that the UK must keep the membership of the single market and of the custom union whatever the cost. However, it is important to note that, as Bill Cash has been saying, the single market is not the jewel in the crown of EU membership. The single market is much more than a traditional ‘free trade area’. The 1986’s single market, whose purpose was to remove trade tariffs and barriers on goods among the EU member states, is no longer the same. The single market encompasses not only freedom of goods and services but also freedom of capital and people and comprises a substantial body of legislation. One cannot argue that there is a need to have common laws and regulations to reduce trade barriers. However, whereas the EU hardly uses the principle of ‘mutual recognition’, whereby member states are required to recognise each other’s regulations and standards, in order to allow free circulation of goods and services, it extensively uses regulatory harmonisation. It is important to recall that the single market is the main tool for European integration. The EU adopts therefore an endless list of legislation, under the single market umbrella, which all member states have to implement and enforce. The single market is indeed over regulated and has been entailing a regulatory burden for British businesses. There have been some benefits from the single market but the large costs of the EU regulations, and they negative impact on competitiveness, by far outweigh any benefit from the EU single market membership. Although the single market policies are aimed at promoting growth, competitiveness and jobs they have achieved the opposite. In fact, the single market suffers from economic failure, massive unemployment and low growth. Moreover, one cannot forget that the UK runs a large trade deficit with the EU and a surplus with the rest of the world. It is therefore clear that the single market does not represent British people interests and aspirations.
It is important to recall that the European Communities Act 1972 provides for the incorporation of EU law into the UK domestic legal order. Under the ECA 1972 the EU’s Treaties provisions as well as all EU’s secondary legislation that have direct effect, namely all EU regulations, are automatically incorporated and binding in national law, without the need for a further Act of Parliament, regardless Government policy. The other EU law measures, not directly effective, such as directives and decisions, are implemented by secondary legislation. The Act also gives effect to the ECJ’s doctrine of supremacy of EU law over national law. Hence, although the EU Treaties will cease to apply when the UK leaves the EU it is important to repeal this Act to ensure,beyond any doubt, that UK legislation is made by the British Parliament and interpreted and apply by the British courts.
By repealing the ECA 1972, all EU regulations and all provisions of EU law that have direct effect would no longer be valid in UK law, and any existing secondary legislation, implementing EU directives, would lapsed.The Great Repeal Bill, that the Government will introduce into Parliament this year, will repeal the European Communities Act 1972 (ECA), which will then cease to apply on the day the UK leaves the EU.The Repeal Bill would end the supremacy of EU law and will transform all EU law into British law. It would remove the jurisdiction of the ECJ in the UK, consequently the UK would no longer recognise the ECJ jurisdiction as well as that the UK’s laws derived from EU law would no longer be changed/interpreted according to ECJ’s rulings.
Theresa May has made “certainty and clarity” one of the government’s negotiating priorities. The Prime Minister explained that the repeal bill by converting the existing EU law into British law will provide certainty for business and everybody else, as the same rules and laws will apply after Brexit. All existing EU laws, directly applicable and implemented in the UK, will be converted into domestic law, keeping, in this way, all existing rights and obligations before Brexit. Bill Cash’s repeal bill, drafted before the referendum, contained clauses providing for secondary legislation made under the ECA 1972 as well as all EU directly applicable legislation, which would be transpose into UK law, to remain in force except and until subsequently amended or repealed. The Government has already shown interest in Bill Cash’s proposal to incorporate a Henry VIII clause, which would allow secondary legislation, after Brexit, to repeal or replaced primary and secondary UK law which implemented EU measures. According to the White paper, “the Bill will enable changes to be made by secondary legislation to the laws that would otherwise not function sensibly once we have left the EU, so that our legal system continues to function correctly outside the EU.”
It is important to stress that all EU legislation would be deemed Westminster law. It would continue to apply until Parliament decides what best suits the British people interests.Upon withdrawal, Parliament will start the long process of reviewing Acts of Parliament and statutory instruments. It will then then decide which pieces of legislation deriving from the EU, whether directly from Treaty’s provisions or from regulations adopted under it, or indirectly from directives, should be preserved, amended or repealed.
Upon withdrawal the UK no longer has to accept and comply with EU legislation and the final jurisdiction of the ECJ’, unless it wants to and/or it has agreed to under the withdrawal agreement or any future agreement. There would be provisions of the existing acquis communautaire which Parliament might want to keep. Moreover, Parliament would have to take into account the agreement negotiated with the EU, if any, as national law will need to reflect that. In order to trade with the EU the UK will have to continue to comply with certain EU laws, namely to meet the EU standards for trade in goods and to meet an equivalence assessment for trade in services, and eventually take into account ECJ rulings, as its decisions can affect non-EU Members. But, the EU derived law would no longer be EU law but UK law, under the authority of Westminster, and would be adjudicated by the Supreme Court and not by the ECJ.
As mentioned above, the UK would cease to be bound by the EU Treaties eitherfrom the date of entry into force of the withdrawal agreement or, if no agreement is reached, twoyears after notification of its intention to withdraw. Hence, it is important to stress that the Treaties, as well as all the EU aquis, including the single market and the customs union will cease to apply to the UK. By leaving the EU, the UK also leaves the single market and the EU customs union.
The European Economic Area (EEA) Agreement allows EFTA countries, Norway, Iceland and Liechtenstein, to almost fully participate in the single market, as it extends the rules of the TFEU on the internal market to these countries. In fact, in order to ensure the “homogeneity of the internal market”, all the relevant EU legislation in this area has been incorporated through protocols and annexes attached to the EEA Agreement. The Government is absolutely right in saying that the UK is a party to the EEA agreement by virtue of the EU membership. Consequently, when the UK leaves the EU it would automatically leave the EEA, as it would cease to be a member. As the EEA membership entails either EFTA or EU membership, the UK could apply to become a member of EFTA and then apply for EEA membership. This would require a treaty regulating the terms of accession to EFTA and then a treaty to deal with the accession to the EEA, which would require the approval of the EFTA countries and of the EU and its member states respectively. The UK could indeed seek to do this in order to maintain full access to the single market.
The EEA Agreement does not cover the customs union and common trade policy. The three EFTA states are free to control their own external trade policy. Hence, by joining the EFTA/EEA, the UK would no longer be in the EU customs union, resuming, consequently its own seat and vote at the WTO. It would be able to regain its ability to negotiate and conclude its own FTAs and to pursue its own commercial policy. Moreover, the UK, as the other EEA/EFTA states would not be bound by the common agriculture and fisheries policies, the Common Foreign and Security Policy, Justice and Home Affairs and the Economic and Monetary Union. The UK would have therefore almost full access to the single market in goods, with the exception of agriculture and fish products, as trade of these products is either based on bilateral treaties or if there is no FTA the EU imposes tariffs on goods imported from non-EU EEA countries. It would also have full access to the single market in services, including financial services. However, it is important to note that the EEA EFTA countries are full participants in the single market because they have committed to the most stringent approach in the implementation of the relevant legislation. As the EU member states, they must follow the EU single market rules, including future rules, and must interpret and apply them in a uniform manner. Iceland, Norway and Lichtenstein do not participate in the EU’s decision-making procedures but they must implement all the relevant EU single market legislation.
By joining the EEA the UK would continue to be subject to the single market rules. If the Government has decided to join the EEA, through EFTA membership, in order to ensure participation in the single market, the UK would have been legally obliged to implement all aspects of EU law as applied to the single market, namely all EU legislation that encompasses the four freedoms and related policies including competition, transport, energy public procurement, company law, intellectual property, consumer protection, environment, social policy and economic and monetary cooperation. It would be therefore required to keep existing as well as to adopt future EU laws relevant to the single market in the same way as an EU Member State, while having no say in the EU decision-making process and accepting the jurisdiction of the EFTA Court, and consequently, by extension, the rulings of the ECJ, as this court most of the time follows the ECJ rulings. Yet, the obligation to comply with all relevant legislation, the acceptance of the four freedoms and contributions to the EU budget would not only defy the objectives of the vote leave but it would also be incompatible with the repealing of ECA1972. It would have made any sense to repeal the Act and then continued subject to all the rules relating to the single market, it would have been a contradiction and unacceptable to the British people who voted to regain control of their laws, borders, money and policies.
Switzerland is an EFTA member but it is not part of the EEA consequently the legal basis for Switzerland participation in the single market is not the EEA agreement but several bilateral intergovernmental agreements covering the single market and related areas such as taxation, social policy, environment and transport.Switzerland has gained access to specific parts of the single market in return for accepting the relevant parts of the acquis, including free movement of people. Switzerland has no say in the decision making process of the EU either, but it does not have to adopt all the relevant EU single market legislation as the EEA countries. Moreover, there is no automaticity element thus the bilateral agreements are renegotiated on a case-by-case basis. The Swiss agreements are managed by political/diplomatic processes and there is no surveillance authority to ensure their implementation. There is a last resort sanction, which is the suspension of the respective agreement.
The EU’s Customs Union covers all trade in goods, but it does not cover the other three freedoms, services, capital and people. All goods circulate freely within the EU territory, there are no tariffs, any quotas or customs controls and customs duties on imports and exports and of all charges having equivalent effect are prohibited between Member States. The EU imposes a common external tariff on all goods entering the union.
It is important to note that the EU’s customs union is an integral part of the EU. The EU customs union consists of all the EU member states, Monaco, and some territories of the UK which are not part of the EU. But, when the UK leaves the EU it would no longer be part of it. The EU customs union, as the single market, is regulated by the EU treaties and secondary legislation. However, whereas the EEA Agreement has made possible for the single market acquis to be transposed into EEA law and consequently applicable to third countries there is no treaty framework that allows third countries to participate in the EU customs union. The EU’s customs union is ruled by the Union Costumes Code, which is legally based on the EU Treaties and it only applies in the EU customs territory, although there are provisions that can apply to third countries when that is specifically provided in their agreements with the EU. Hence, the UK cannot remain inside the EU’s customs union after leaving the EU, even if it wanted to, unless the EU Treaties as well as the Customs Union Code are amended, which is highly unlikely to happen. There is therefore a difference between having a customs union with the EU and being part of it. Most of the existing trade agreements between the EU and third countries are FTAs, but the EU has concluded customs unions with Turkey, Andorra, and San Marino. The coverage of these customs unions is different from that of the EU’s customs union, as it does not cover all products. The goods covered by a customs union may circulate freely providing they are wholly obtained or produced in the respective custom union or they come from third countries and have been through all the required customs formalities, including, when necessary, the payment of customs duties. The rules of origin do not apply within a custom union.
Turkey has access to the single market by virtue of a customs union with the EU. The EU-Turkey customs union provides for the elimination of import or export customs duties and charges having equivalent effect between the EU and Turkey as well as for the prohibition of quantitative restrictions on imports and exports and all measures having equivalent effect. The EU customs union with Turkey only covers industrial goods, and tariffs still applied on agricultural goods. Turkey is required to harmonize its legislation as far as possible with EU legislation in those areas which are relevant to the operations of the customs union. All the countries that have a customs union with the EU are required to impose a common external tariff on all goods entering the union; this includes preferential arrangements as well as harmonization of commercial policy measures. Turkey is required to align itself with the common customs tariff and, progressively, with the preferential customs regime of the EU. Turkey is required to harmonise its commercial policy with that of the EU, as it is obliged to grant tariff free access to goods from a country with which the EU has negotiated a free trade agreement, without having a say in the negotiations. Yet, Turkey is only able to get tariff-free access for its goods into the market of that country if it negotiates a parallel trade agreement. Thus, Turkey has to open its market to countries with which the EU conclude trade agreements but those countries have no obligation to reciprocate. Hence, Turkey is not free to negotiate trade agreements with other countries for all goods that are covered by the customs union with the EU.
The EU also offers access to the single market through association agreements, which provide a framework for co-operation with third countries. In 2015 the EU launched negotiations on a Framework Association Agreement with Andorra, San Marino and Monaco which can provide a high degree of integration into the EU to those countries, including partial or full participation in the single market, including free movement of people. The association agreements negotiated by the EU usually provide a high degree of access to the single market, mainly covering three freedoms, but not the free movement of people. The EU-Ukraine Association Agreement and Deep and Comprehensive Free Trade Area, which is based on tariff-free access for goods. The DCFTA removes customs duties on imports and exports, 99.1% and 98.1% of duties in trade value respectively. The agreement also includes WTO rules on non-tariff barriers on trade in goods, such as national treatment, and prohibition of import and export restrictions. Unlike other FTA, the DCFTA also provides for both the freedom of establishment in services and non-services sectors, subject to reservations identified in a negative list. Ukrainian firms will be granted access to the EU internal market for financial services, telecommunications services, postal and courier services, and international maritime services when Ukraine concludes its legislative approximation to the EU. Nonetheless, there are reservations. The Ukraine has committed itself to take over the existing and future EU acquis in the abovementioned sectors. It is required to comply, with all the EU relevant legislation and policies, including public procurement, competition, state aid and intellectual property. The DCFTA does not include free movement of people, which clearly shows that the four freedoms are divisible.
The Government has already announced that will seek to continue to cooperate with the EU in areas other than trade, such as science and research, crime and terrorism, as well as foreign policy and defence. However, the Government won’t seek to agree to an association agreement which is mainly an instrument for EU integration without membership. Horizontal cooperation in these areas is likely to be approach on a case by case basis.
The main point of leaving the EU was to regain sovereignty and no longer be subject to the EU law, to the EU institutions and to the ECJ jurisdiction and jurisprudence. By seeking to be part of the single market and/or to have a customs union with the EU, the UK would have continued subject to the EU law but without having a say. The UK would not be able to fully regain its sovereignty. Hence, the Government is absolutely right for not pursuing this path, as this would have given the worst of both worlds. In her speech at Lancaster House, Theresa May recalled the EU leaders’ position “that membership means accepting the “four freedoms” of goods, capital, services and people” and noted that “being out of the EU but a member of the Single Market would mean complying with the EU’s rules and regulations that implement those freedoms, without having a vote…” as well as “accepting a role for the European Court of Justice…” This, as Theresa May said “It would to all intents and purposes mean not leaving the EU at all.” Hence, the Government won’t “hold on to bits of membership” and it will not seek membership of the single market or to adopt any existing model.
Obviously, the Government wants the UK to continue to trade with the EU as well as with the rest of the world. Theresa May is determinate to “get the right deal for Britain” and will pursue a new “strategic partnership with the EU”. The Government will seek “the greatest possible access to the Single Market on a fully reciprocal basis, through a comprehensive Free Trade Agreement” which “should allow for the freest possible trade in goods and services between Britain and the EU’s member states.” Theresa May wants to negotiate the broadest and comprehensive UK-EU free trade agreement as possible which would not replicate existing models of relationships with the EU but might include elements of existing single market arrangements in certain areas.
The EU institutions and the EU leaders have been arguing that the single market is indivisible. However, the single market is not indivisible when the EU engages in trade negotiations with third countries. Obviously, trade agreements between the EU and third countries do not have the same scope as the single market, but they have elements of the single market freedoms, mainly components of the free movement of goods. In fact, most of the existing FTAs between the EU and third countries do not provide for free movement of people or services. The EU has free trade agreements with more than 60 third countries, which do not provide full access to the single market but different levels of access to parts of single market, as they can cover trade in goods, services, commercial aspects of intellectual property and foreign direct investment. The EU applies preferential tariff rates to free trade agreements that it has entered with third countries. Depending on the agreement, FTAs negotiated by the EU might provide for reduced or free tariffs for a limited or extensive number of products, removal of quotas and removal or reduction of technical and non-tariff barriers to trade. Several EU’s bilateral trade agreements provide for a significant liberalisation of trade in goods and include provisions covering non-tariff barriers and trade in services. The FTA with Canada (CETA) is the most ambitious and comprehensive free trade and investment agreement the EU has negotiated so far. It contains provisions including market access for goods, trade remedies, technical barriers to trade, sanitary and phytosanitary measures, customs and trade facilitation, subsidies, investment, cross-border trade in services, temporary entry and stay of natural persons for business purposes, mutual recognition of professional qualifications, financial services, international maritime transport services, telecommunications, electronic commerce, competition policy, state enterprises, government procurement, intellectual property, regulatory cooperation. CETA will progressively eliminate all tariffs on industrial and fishing products traded between the EU and Canada and it will remove 93.8% of tariff on agricultural products. There are agriculture products which have only be granted duty-free access for limited quantities and others which are not covered by the agreement. The CETA is mainly based on EU rules of origin, which determine the country of origin of the goods traded in order to decide whether they benefit from reduced or zero tariffs in the EU.
It is important to stress that any country can trade with the single market, however not every country has preferential access to it. The UK would continue to have access to the single market after leaving the EU, but it remains to be seen on what terms that trade would take place because it obviously depends of the negotiations. The EU has made very clear that UK cannot be part of the single market without complying with all the rules, including the four freedoms. Consequently, as above mentioned, the government will not seek membership of the single market but will pursue “the freest and most frictionless trade possible in goods and services between the UK and the EU”, as it wants the UK to have “the greatest possible access” to the single market “through a new, comprehensive, bold and ambitious Free Trade Agreement”.
Theresa May made clear that the UK will seek a bespoke agreement. The EU has different types of agreements with third countries, customs unions, association agreements, stabilisation agreements, (Deep and Comprehensive) free trade agreements, economic partnership agreements, and partnership and cooperation agreements. It is important to stress that there are different ways and levels of participation and access to the single market, as third countries can have limited or almost full access to the EU single market. For instance, Turkey is outside the single market but it has access to the single market for industrial goods but tariffs still applied on agricultural goods. The Free Trade Agreement between Switzerland and the EU liberalises trade in industrial products. The CETA will also progressively remove all tariffs on industrial and fishing products but it won’t cover all agricultural products. Access is not the same as membership of the single market. Presently, only the non-EU EEA countries have almost full access to the single market, but trade of agriculture and fishery products is either based on bilateral treaties or if there is no FTA the EU imposes tariffs on goods imported from those countries.
One of the single market main features is to standardise product requirements, and the EU member states have to comply with an extensive regulatory harmonisation. It is important to note that access to the single market goes along with EU regulations i.e more access to the single market more compliance with EU law is required and more third countries have to align with EU regulations and procedures, namely product regulations and health standards.
In order to circulate freely in the single market, products must comply with the relevant EU/EEA rules. The EU has adopted harmonised product requirements for a wide range of product sectors. The EEA’s country’s products must comply with those common harmonised requirements to be sold on their national markets and then circulate without additional approval or testing. The principle of mutual recognition is aiming at ensuring the free movement of products that are not subject to EU harmonised legislation. Goods from the EEA countries are not checked for compliance with EU technical rules and standards, as they have to comply with EU regulations in order to be put into the EEA market but this means that all goods, even goods that are just for national market have to comply with EU rules.
All goods that enter the EU territory must comply with single market legislation, namely EU standards and safety requirements. Goods are checked for compliance with EU technical rules and standards at the border particularly if the country in question does not have a mutual recognition agreement enabling products to be trade freely without further conformity assessment procedures. The EU has concluded several Mutual Recognition Agreements (MRAs) with third countries to facilitate market access, as they grant the country in question the right to certify products for the European market. These agreements allow goods to be inspected and declared in conformity with single market rules by approved bodies before they are exported to the EU, consequently they are not checked at the EU border.
A FTA does not provide totally free trade but preferential market access. There are indeed several countries, European countries in particular, that enjoy tariff free access to the EU single market. Although some of the abovementioned agreements provided for a substantial access to the single market there is no precedent of free trade agreements negotiated between the EU and third countries providing equivalent terms of trade as the EU member states have between themselves, particularly in what concerns non-tariff barriers. Presently, there is no FTA between the EU and third countries that provides the level of market access for goods, let alone services, that the UK currently enjoys by being part of the EU.
It is important to note that the FTAs agreements that the EU has negotiated so far are intended to progressively move the country in question towards more integration into the single market. Hence, the UK-EU negotiations for a new relationship, including a broad and comprehensive FTA, would be unprecedented. The Government will seek to negotiate with the EU a bilateral, free trade, agreement covering free trade in goods and services, granting the UK equivalent level of access to the single market to what it currently enjoys as an EU member state. It seems that the Government wants to have the greatest possible access to the single market, not only on industrial goods, as the majority of FTAs, but also on agriculture and fisheries products as well as on services. Unlike other countries that want to negotiate trade agreements with the EU, the UK already has zero tariffs on goods and has the same regulatory framework. The UK already adopted all the relevant single market rules and common standards thus, it should be, in theory at least, easier and quicker to agree and implement an agreement. The White Paper points out that the negotiations are “about finding the best way” for the UK and EU businesses to continue to trade, for both mutual benefit, through a new free trade agreement.” As David Davis said the UK has “a unique position” as it has “the exact same rules, regulations and standards as the rest of the EU.” Moreover, he pointed out that the negotiations won’t be “about bringing together two divergent systems but about managing the continued cooperation of the UK and the EU” likewise it won’t be “about removing existing barriers or questioning certain protections but about ensuring new barriers do not arise.”
British companies would still have to comply with EU regulatory standards to trade in the EU, with sanitary and phytosanitary measures and with regulatory requirements to address health, safety or environmental concerns. But, it is important to ensure that British businesses won’t face new barriers to trade, particularly technical barriers, and more red tape when exporting into the single market.
If there is good will, the UK can continue to have access to the single market, free of tariffs and barriers, as presently, at least as far as goods are concerned. The UK already complies with all EU regulations and procedures, namely EU product regulations and health standards as well as with agriculture and food safety measures and animal welfare legislation. Hence, the UK products can continue to be deemed to comply with EU requirements. The UK presently has the same technical regulations and standards to those of the EU. The UK and the EU could easily agree on market access based on a mutual recognition of technical requirements and standards, so that both EU and UK businesses would not be required to obtain different certifications of compliance with technical or safety standards. Moreover, it is important to note that most of the EU technical standards originate from international organisations and related to international treaties.
The Great Repeal Bill will convert the existing EU law into British law providing certainty for business, as it will keep the existing rights and obligations. It will be then for the British Parliament to decide whether to change, repeal or keep it. Obviously, attention shall be paid to the agreement negotiated with the EU, as national law needs to reflect that. It is important to note that under the repeal Bill the UK can have the same regulations as the EU but subject to the authority of Westminster and jurisdiction of the Supreme Court. It is also important to bear in mind that the single market is constantly developing, meaning that new rules are frequently adopted. As the EU constantly adopts new laws the UK might have to align itself with new EU regulations but it would not necessarily need to replicate them, if it demonstrates that national law has an equivalent effect. As Bill Cash pointed out “we would be able to run parallel operations where it was in our mutual interests to have regulatory arrangements in the UK equivalent to those elsewhere in the EU—and, indeed, internationally, as well.” This would allow the UK to continue to trade under mutually recognised technical regulations.
Both the UK and EU Member States will continue to benefit from a free and close trading relationship. As the White Paper points out “The EU is the UK’s largest export market and the UK is the largest goods export market for the EU27 taken as a whole.” However, the EU sells more to the UK than the UK sells to it. It is important to recall that the EU has a massive trade surplus with the U.K. The UK has a trade deficit with the EU of over £60 billion per year while it has a trade surplus with the rest of the world of over £30 billion. In 2015, around 44% of UK exports in goods and services went to the EU worth £230 billion while the UK imported £291 billion worth of goods and services from the EU. The other EU member states need the UK as a costumer for their markets. On the other hand, the UK is an important exporter of motor vehicles, chemicals products and financial services, which are important for the EU economy. Most of the EU FTAs do not cover trade in all agriculture and fisheries products but both the UK and the EU have interest in continue having equivalent market access after Brexit. In 2015, the UK exported £11 billion worth of agriculture, fisheries and food products to the EU whereas imports were worth £28 billion. Likewise, both the UK and the EU have interest in reaching “mutually beneficial deal” on fisheries products. The EU relies on UK waters, as in 2015 EU vessels caught fish worth £484 million revenue while the UK’s vessels catch in Member States’ waters worth £114 million revenue. According to The Guardian a document from the European Parliament’s Committee on Fisheries states “Every agreement that guarantees UK access to the EU domestic market has to guarantee an access to the UK fishing grounds for the EU fleet.” The document suggested the European Parliament would seek “reciprocal access for the EU and UK fleets to the fishing grounds in the UK and the EU waters,”.
It is important to note that the single market in services is far from being complete. In fact, the EU has failed to deliver a genuine single market in services and restrictive practices and barriers to entry among the EU member states are still in place. The right to provide services is a significant concern for British businesses. The UK has a £28 billion surplus in services with the EU. It would be more difficult for the UK to negotiate access to the single market in services. There are several EU’s trade agreements that cover services but they are far for granting full or almost full access, as most third countries have restricted access to trade in services.
The EU “single passport” has been extended to cover the EEA countries. Thus, financial services operators which are registered and regulated in any EU or EEA state are allowed offer their services across the EU/EEA area, without further authorisation requirements. The EEA countries have incorporated the EU financial services legislation into their own domestic law. By becoming part of the EEA, the UK’s financial policy and legislation would continue to be determined by the EU. The UK would not be able to regain regulatory sovereignty over financial and baking matters and the City would not be able to regain its competitiveness. The Government is absolutely right in not following this path. Switzerland has bilateral agreements covering services but it has no general access to the EU’s single market for financial services, i.e. it does not have a financial services passport. Consequently, Swiss-based financial companies in order to sell their services they have to set up subsidiaries in an EU or non EU-EEA states in order to have access to the EU market.Yet, Switzerland has a strong financial services industry. The CETA provides for free trade in services based on the so called “negative list” approach, i.e. all service markets are liberalised except those explicitly excluded. Yet, it still contains several reservations to free access to services. For instance, financial services firms can only offer their services cross-border in a limited number of sectors, such as certain insurance and banking services.
Upon leaving the EU the UK would become a “third country” and, consequently would no longer benefit from the EU passport for financial services. It could be indeed harder for UK-based financial services firms to sell products and services into the EU/EEA market when the UK leaves the EU. Third country institutions or service providers not governed by an equivalence regime must ask for authorisation from the competent supervisor in each Member State where they wish to operate. If the UK based financial services companies want to continue to provide services and sell products across the EU they would have to seek a license in individual EU member states or establish an EU/EEA subsidiary to enable them to trade.
Third countries are entitled to ask for “equivalence” treatment by the EU. But such equivalence is not available for all services and can only be requested where it is explicitly provided for in EU legislation. These regimes allow third country based firms to offer a restricted number of services into the EU if their home country regulatory regime is accepted as being ‘equivalent’ to those of the EU. Such equivalence varies from one piece of legislation to another and it is conditional on reciprocity by the third country. Wholesale financial services may take advantage from passport like rights under equivalence clauses in specific cases but this is never provided for retail financial activities. The investment services and activities for eligible counterparties and professional clients in the Markets Financial Instruments Regulation (MIFIR) is an equivalence clause which is passport like rights. Hence, if equivalence is approved, third country firms are allowed to operate anywhere in the EU to serve professional clients. The CRD IV/CRR does not provide passport like rights for wholesale banking business. The wholesale and retail commercial banking have equivalence clauses which only covers the prudential treatment of exposures to foreign institutions. The MIFID investment services and activities for retails clients are equivalence clauses but not passport like rights. As far as insurance is concerned, Solvency II, insurance and reinsurance activities have equivalence clauses but they are only passport like rights for reinsurance companies. The European Market Infrastructure Regulation (EMIR) central clearing counterparties have equivalence clauses which are only passport like rights for central clearing counterparties. Any equivalence request from a third country is assessed by the European Commission. This might be a long process and there is no 100% guarantee that equivalence would be granted. Moreover, such decisions can be withdrawn at any time and unilaterally if the EU considers that the third country’s regulatory regime no longer provides a satisfactory equivalent outcome.
The UK could seek to access to the EU financial market on a case by case basis, asking the Commission to agree to mutual recognition and deemed equivalence on different financial regulations. Presently, the UK’s regulatory regime is the same as the EU. The UK follows and applies the same EU financial services regulations and directives as the rest of the other EU member states. Although the EU would not be particularly keen in allowing a large fraction of the EEA’s financial business to pass out of its direct control it is hard to believe the UK wouldn’t get third country equivalence. It is important to note that such decision is taking by the Commission and it is subject to the so called comitology procedure, whereas the Commission and qualified majority of the EU member states would have to agree to it. However, the UK would have to comply with existing and future EU regulations and directives to maintain its equivalence. But, it is important to note, that equivalence does not require harmonisation thus the UK, in principle, to just has to demonstrate that national regulations are equivalent. Nonetheless, the City must be protected from the burdensome EU regulations while still having access to the single market. Due to the QMV and the ordinary legislative procedure the UK has been forced to accept EU measures against its will, such as a cap on bankers’ bonuses, the regulation on short selling and certain aspects of Credit Default Swaps (CDS). The UK will qualify to achieve access to the EU based on equivalence, as the upcoming repeal bill will turn into British law all existing EU legislation. But, then the Parliament would decide whether to keep it, amend it or repeal it. There will be therefore opportunity to deregulate, which will enhance the city global competitiveness.
Theresa May said “In our new strategic partnership agreement we will be aiming for the freest possible trade in financial services between the UK and EU Member States.” It seems that the government will seek to maintain the EU’s system of financial passporting for the UK’s financial institutions, which are presently allowed to do business within the EU/EEA, based on a single European approval. It is indeed in the interests of both the UK and the EU to agree “mutual cooperation arrangements” to prevent “market fragmentation and the possible disruption or withdrawal of services.” It has been claimed that the UK has more to lose than the EU if the City loses passporting rights, but a good deal for the UK in services it is also in the interest of the EU. If the UK loses passporting rights the financial institutions of the EU member states will lose passport rights in London. There are fears businesses will move from London to Paris or Frankfurt, something that particularly France is very keen on. But businesses may also leave the EU, which won’t be beneficial for the EU. The EU also needs the City of London, and the EU also has economic interests in not raising trade barriers against the UK as well as continuing to provide and have access to the UK financial services and products. The European Parliament Economic and Monetary Affairs Committee stressed that “The exclusion of the main European financial centre from the internal market could have consequences in terms of jobs and growth in the EU. It is in the interest of EU 27 and the UK to have an open discussion on this point.” Moreover, it warned “Given the considerable interdependence between the UK and the EU economy and financial systems, it is critical that a workable agreement is achieved that not only maintains high regulatory standards but also delivers growth and jobs across the EU …”
Theresa May will seek to keep as much as possible the existing access to the EU financial market but that is unlikely to be accepted by the EU leaders.The EU has been stressing that if the UK wants access to the EU’s market in financial services and retain the passporting rights it has to comply, in return, with the four freedoms of the single market, and to fully apply EU regulations and directives. Jeroen Dijsselbloem, who chairs the eurogroup said to the European Parliament, “We cannot allow a third country to have access, full passporting rights, to financial services markets in Europe, if at the same time we allow them to deviate in terms of capital standards, requirements, consumer protection etc,” he then stressed “There is no alternative there.”It remains to be seen whether the EU agrees a bespoke deal based on a framework for mutual recognition and regulatory cooperation that goes beyond the existing equivalence regimes.
The fact of the UK’s based financial businesses being able to trade with the EU’s member states is an asset to the UK’s economy. But, on the other hand, the EU has highly regulated the financial services industry and the EU burdensome regulations deeply affect the UK’s businesses. There might be indeed risks for losing passporting rights and full access to single market however once the UK leaves the EU it will be able to conclude trade agreements with countries around the world, which can also include access to services markets. It is important to mention that the WTO is negotiating a new General Agreement on Trade in Services (TISA), which is likely to substantially open-up access to service industries. It is being negotiated by 23 WTO members including the EU. The UK would be able to take fully advantages of TiSA when it is concluded. The risks of losing passporting rights and access to single market could be overcome by new business opportunities around the world, which would also allow the UK to maintain its position as a leading international financial centre.
As abovementioned, the UK cannot be part of the EU customs union after leaving the EU. Nevertheless, the UK does not have any interest in remaining part of the EU customs union, as it would have to apply the EU’s common commercial policy and accept the ECJ jurisdiction. It is important to recall that due to the EU membership, the UK has been unable to pursue an independent external trade policy. Just as being part of the EU single market implies applying all the relevant single market aquis, being part of the EU customs union implies applying the EU’s common commercial policy. By leaving the EU, and its customs union, the UK will regain its freedom to trade with the rest of the world and to set its own trade policy. The Government could indeed negotiate a separate customs union with the EU, as Turkey has, which could granted the UK free tariffs, no quotas and no rules of origin for the goods covered. However, as the Turkey-EU customs union arrangement clearly shows, that there are no advantages in seeking such a deal, a part from not being required to comply with rules of origin, as the goods may circulate freely providing they are obtained or produced in the respective custom union or come from third countries and have been through all the required customs formalities, including. A customs union with the EU, would limit the UK autonomy in pursuing an independent trade policy, as the UK would have to follow the EU’s external trade policy and tariffs. The UK would be required to have its external tariffs in line with the EU common customs tariff as well as to accept the terms of trade agreements reached by the EU with third countries, without having a say on how they are negotiated. Moreover, it would be required to harmonize its legislation as far as possible with EU legislation in those areas which are relevant to the operations of the customs union and it would continue to be bound by ECJ rulings on the interpretation of the common rules of the customs union. Hence, UK has no interest in negotiating a customs union with the EU, as it won’t be able to regain its freedom to negotiate trade deals with other countries. Theresa May could not stress more that she wants the UK to be free and able to strike its own trade agreements. Hence, the Government does not want Britain to participate in the Common Commercial Policy and does not want to be bound by the Common External Tariff, which are, as the prime minister said, “…the elements of the Customs Union that prevent us from striking our own comprehensive trade agreements with other countries”.
It is important to note that the FTAs that the EU negotiates with third countries remove tariff barriers, in whole or in part, as well as technical barriers to trade but they do not remove customs barriers, otherwise it would not be possible to check whether a product comes from a partner country. Businesses must show that goods come from the EU trade partner in question in order to benefit from the preferential tariffs agreed under the FTA. They have therefore to comply with rules of origin which are intended to avoid third country goods entering the single market and circulating freely without complying with the tariff rules set by the customs union.
The EU uses the non-preferential rules of origin, to determine the origin of a good, when implementing all the non-preferential commercial policy instruments, namely application of the most-favoured-nation treatment, anti-dumping duties and safeguard measures. Products imported into the EU are considered to have origin in one country if they are wholly obtained or produced there. If the product is produced in more than one country it would be considered an originating product from the country where the last substantial transformation took place, which is subject to interpretation. The EU preferential rules of origin are used to decide whether a product exported from an EU trade partner may be considered as sufficiently linked to that country and consequently originating there in order to receive from the EU the tariff preference granted to that country. There are different types of proof of origin, depending on the arrangement that the EU has with the trade partner in question, which is required before the product reaches the EU customs and only then the tariff preference can be claimed. The EU has preferential trade arrangements with several countries, and rules of origin vary from one partner country to another, ones are more favourable than others. Usually, an origin protocol attached to the agreement between the EU and the country concerned contains the rules of origin applicable to that country products.
By leaving the EU there would be inevitably some customs difficulties. However, despite what has been said, there is no point in having a customs union with the EU to overcome this issue. The customs cooperation between the EU Member States is regulated by the UCC. This code does not apply to the EFTA countries but the EEA Agreement foresees customs cooperation. The EEA countries are involved in the EU’s customs cooperation through a protocol that seeks to simplify procedures for trade in goods. For instances, Norway has signed an agreement with the EU in order to ensure that security rules relating to trade between the EU and third countries, with a view to strengthening efforts to reduce health and environmental hazards and combat terrorism, do not obstruct trade flows between Norway and the EU. Consequently, Norwegian businesses are not required to provide information for security purposes prior to the import or export of goods to the EU but Norway is required to apply customs security measures that are equivalent to those applied by the EU in its trade with third countries. The Agreement on the Carriage of Goods and the Agreement on Customs Facilitation and Security simplify customs procedures between Switzerland and the EU. In fact, the EU has signed Customs Cooperation and Mutual Administrative Assistance Agreements with several third countries, Korea, Canada, Hong Kong, US, India, China and Japan and Partnership and Co-operation Agreements with countries such as Russia and Ukraine, which cover customs co-operation and include a protocol on mutual administrative assistance. These agreements provide for simplification and harmonisation of customs procedures in order to facilitate trade.
The UK does not need to be part of the single market or have a customs union with the EU to negotiate a customs cooperation agreement with the EU, which can be a separated agreement or incorporated in a free trade agreement. The UK already complies with the EU customs legislation. As the White Paper points out the UK “possess a world-class customs system which handles imports and exports from all over the world” and “the vast majority of customs declarations in the UK are submitted electronically and are cleared rapidly.” The UK and the EU should be able to agree a customs cooperation agreement to simplify customs requirements and formalities and facilitate trade.
As abovementioned, the Government does not want to be part of a customs union with the EU and bound by the common external tariff, so that the UK can be free to reach new trade agreements with countries around the world. But, it wants “to ensure that cross-border trade with the EU is as frictionless and seamless as possible.” Theresa May has made clear that she does not want the main elements of the EU’s customs union, but the prime minister wants to have access to elements of the customs union and to reach that is considering “a completely new customs agreement, become an associate member of the Customs Union in some way, or remain a signatory to some elements of it…” She stressed “I have an open mind on how we do it. It is not the means that matter, but the ends.” The Government will look at other customs agreements between the EU and third countries but stressed that it won’t “seek to replicate another country’s model and will pursue the best possible deal for the UK.” Hence, the Government will seek custom arrangement with the EU which will be, by far, more ambitious than other of the above mention arrangements. The Government “will seek to maintain many of the facilitations that businesses currently enjoy, whilst aiming that, if there are requirements for customs procedures, these are as frictionless as possible.” It is indeed “in the interests of both the UK and the EU to have a mutually beneficial customs arrangement to ensure goods trade between the UK and EU can continue as much as possible as it does now.” It remains to be seen what Theresa May has in mind and whether it would be legal under EU law and WTO rules. The EU leaders will not accept the UK having the advantages of a customs union without accepting the common commercial policy and without being bound by the common external tariff.
It is important to recall that outside the customs union, all goods exported to and imported from the EU must be declared to the customs authorities, which entails delays, customs checks, value declarations, inspection certification, advance cargo declarations, and, obviously costs for businesses. It should be noted that EEA countries are not part of the EU customs union consequently the preferential treatment under the EEA Agreement only applies to products that originate in the EEA. Thus, the EEA Agreement contains rules of origin that determine to what extent a product must be produced or processed within the EEA in order to obtain status as a product of EEA preferential origin. Hence, customs borders are still in place between the EU and EEA countries. Likewise, customs clearance still takes place at the EU/ Switzerland borders, as well as any other country which has a FTA with the EU in order to ensure that only goods originating in the EU or in country in question are able to benefit from the preferential conditions of the FTA.
Britain might sign a mutual recognition agreement with the EU, so that the UK goods are not checked for compliance with EU technical rules and standards. But, it is important to note that even if a favourable EU-UK trade agreement is reached, customs inspections and clearance will still take place at UK/EU borders in order to ensure that imported goods only benefit from the preferential rules of the free trade agreement if they have their origin in the EU or in the UK. British businesses will have to comply with rules of origin and obtain proof of origin certificates from chambers of commerce to guarantee that the product, or a percentage of the product, depending on the agreement, originates in the UK. The rules of origin would be part of a protocol attached to the FTA. The Government is determinate “to have a good rules of origin scheme, just as any other free trade area has.”
The EU has included dispute settlement mechanism based on the WTO dispute settlement mechanism in all of its Free Trade Agreements since 2000 to ensure the agreements can be enforced and that disputes can be settled. Such mechanisms include consultations, mediation and arbitration procedures. Ultimately, parties to an agreement rely on each other to the agreement to be comply with under international law, whilst some pressure might be apply through trade sanctions.
It should be noted that any ruling of an arbitration panel is binding on the parties but it cannot create any rights or obligations to physical or legal persons. Hence, since 2009 the EU has started to include the so called investor-to-state dispute settlement (ISDS) mechanisms in trade and investment agreements, which allow investors to bring a case before an international tribunal alleging that one of the investment protection obligations has been breached. But the EU wants to replace this dispute settlement mechanism with a permanent Investment Court System (ICS). Such multilateral investment court has been already included in the CETA and in the EU-Vietnam FTA. These have been very contentious issues, as international courts or tribunals must comply with the principle of autonomy of the EU legal order, consequently they cannot be empowered to interpret EU law to the effect that it binds the ECJ. The ECJ has the exclusive power to interpret EU law in order to ensure its uniform interpretation consequently it will reject any external body that will interpret or apply EU law. In its Opinion 1/09, the ECJ found that the draft agreement establishing an EU-wide patent court incompatible with the EU Treaties, as the proposed patent court would have competence to interpret and apply EU law without the involvement of the ECJ. Likewise, in its Opinion 2/13 the ECJ held that the draft agreement providing for the accession of the EU to the European Convention on Human Rights (ECHR) was incompatible with the EU Treaties, as the European Court of Human Rights (ECtHR) would be able to declare an EU measure in conflict with the ECHR, which would have undermine the powers of the ECJ.
The European Commission believes that both ISDS and ICS are compatible with EU law, as it has been rejected any binding effect of the Investment Court’s interpretations on domestic or EU law. However, although the Investment Court’s interpretation of EU law is not formally binding on domestic courts or on the ECJ it might have an impact in the meaning given to EU law. If that is the case the ICS will impinge on the powers of the EU courts to rule on EU law issues. It is important to note that the FTA with Vietnam and CETA provide no mechanism for prior involvement of the ECJ in investment disputes, which concern the interpretation or appreciation of EU law. Consequently, these trade/investment agreements are likely to be considered to breach the principle of autonomy of EU law. The ECJ is most likely to find that CETA’s ICS is incompatible with the EU Treaties and request considerable changes to ensure such system is compatible with EU law.
The White Paper recognises that a dispute resolution mechanism would be required in order to ensure equal interpretation, implementation, application as well as enforcement of the UK-EU future relationship. The government will seek to negotiate “a new approach to interpretation and dispute resolution with the EU.” There have been some calls for the government to seek stronger dispute settlement mechanisms, including a UK-EU court however, it should be note that those type of arrangements are most likely to be considered incompatible with EU law, particularly with the ECJ’s powers. The government wants to agree resolution mechanism arrangements with the EU “that respect UK sovereignty, protect the role of our courts and maximise legal certainty, including for businesses, consumers, workers and other citizens.” Ultimately, a FTA with the EU will be biding under international law.
No one can deny that free trade involves regulatory harmonisation in order to eliminate non-tariff barriers, as well as surveillance and dispute resolution mechanisms to enforce the terms of the agreement in question. To some extent, it always entails limitations to sovereignty in exchange of market access. But the EU single market has exceeded all limits, as the member states have to comply with an endless list of rules, are subject to the European Commission supervision and enforcement by the ECJ. It entails therefore a substantial loss of sovereignty. Upon leaving the EU, the UK will regain its sovereignty. In order to continue trading with the single market, the UK would always be required to accept EU regulations and standards.It is important to note that access to the single market goes along with EU regulations i.e greater access to single market more the UK would have to stay closer to the EU regulatory framework. The Government would therefore seek a balance between access to the single market and the rules that it would be required to comply with in order to have access to it, so the UK remains in control of its own decisions and legislation. Businesses must be protected from the burdensome EU regulations, particularly UK businesses that have no intention of exporting to the EU.
The government could not have stressed more that it is in the UK’s interest for the EU to succeed politically and economically. Theresa May believes that it is possible to achieve “A partnership for a strong EU and a strong UK… as it would entail more trade and consequently more jobs and more growth, fulfilling in this way both the UK, the EU and its Member States’ interests, whilst trade barriers would entail the opposite. It is important to recall that Article 50 TEU suggests that some kind of relationship will still remain between the EU and the withdrawing Member State, the UK, after the withdrawal has come into effect. Moreover, Article 3 (5)TEU provides that “In its relations with the wider world, the Union (…) shall contribute to (…), free and fair trade, (…), as well as to the strict observance and the development of international law…” The EU treaties promote free trade agreements, particularly with neighbouring countries. The EU should therefore comply with the principles and direct the negotiations accordingly.
The Prime Minister is aware of the “voices calling for a punitive deal that punishes Britain” which, as she rightly says, it “would be an act of calamitous self-harm for the countries of Europe.” Sir Ivan Rogers, former UK Permanent Representative to the EU, told the House of Commons European Scrutiny Committee that, “The view of many will be that the implications for the UK of walking away without any deal on the economic side and without any preferential arrangement and walking into a World Trade Organisation-only world are – from their perspective, which may be a misreading of us – so unpalatable that we won’t do it.” Yet, the prime minister is ready to leave without a deal, if the UK does not get a good deal. Theresa May left a clear message to the EU leaders that leaving without an agreement on access to the single market would be more harmful to the EU member states than to the UK. The UK will continue to have access to the single market, under the WTO rules, would be able to agree new trade deals across de world and have a more business friendly economic model, which would entail “competitive tax rates and embrace the policies that would attract the world’s best companies and biggest investors to Britain.” There is a general believe in Brussels that Brexit will bring more economic damage for the UK than for the EU. However, the UK is a very important market, as the EU has a substantial trade surplus with the UK. As Theresa May said no agreement would put at risk £290 billion worth exports from the EU to Britain, which would affect jobs and businesses in the EU. It is important to mention that a‘ High Level Group on Brexit’, set up by Belgian ministers published a report which concluded that one in four jobs in the country could be under threat if no agreement is reached, as exports of Belgian products like, chocolate and beer would suffer if trade barriers were imposed.
The EU leaders welcomed Theresa May for providing clarity and by outlining her plan for negotiating a new partnership with the EU. But, it is important to recall, that last December the Heads of State or Government of 27 Member States, as well as the Presidents of the European Council and the European Commission issued a joint statement insisting “that access to the Single Market requires acceptance of all four freedoms.” The EU leaders are not just saying that membership or being part of the single market requires compliance with all freedoms, they are referring to access to the single market. The EU leaders have been saying that the UK won’t have access to the single market unless it complies with all the rules, including free movement of people. Angela Merkel also reiterated that “access to the single market can only be possible on the condition of respecting the four basic freedoms. Otherwise one has to talk about limits.” As above mentioned there are different levels of access to the single market. For instance, Canada and the EU negotiated a comprehensive and ambitious free trade agreement but it won’t provide Canada with the same level of access to the single market as an EU member state.
Obviously, denying access to the single market would entail a trade embargo and this will not happen. Every country in the world trades with the single market, the UK will have access to the single market, under the EU or WTO terms. The EU leaders seem willing to agree to a FTA, tariff free trade but not with the extent that the Government wants. The Government is seeking the greatest possible access to the single market through a new, comprehensive and ambitious free trade agreement, which should provide for free tariffs with specific commitments to avoid non-tariff barriers, mutual recognition on product standards, preferential treatment as regards the rules of origin, that should be kept to a minimum, as well as customs clearances. It should also maintain services trade and contain specific agreements on financial services access. The prime minister in her recent visit to Paris stressed “This cannot, however, mean retaining membership of the single market” and then clarified “We do not, to borrow the phrase, seek to cherry-pick which bits of membership we desire.” Theresa May wants the UK to have equal or similar level of access to the single market on goods and services to what it presently has. However, the EU leaders have been saying that the UK cannot expect to leave the EU while retaining full access to the single market, in goods and services, without complying with the single market obligations, namely all four freedoms, contributing to the EU budget, and accepting the jurisdiction of the ECJ. The EU leaders are therefore unlikely to accept an ambitious and comprehensive FTA maintaining the maximum possible access to the single market. The EU leaders would not agree to give the UK the same level of access to the single market as it has as an EU member state. Donald Tusk, the EU Council president said several times “There will be no single market à la carte,”. The former EU trade commissioner Karel de Gucht has said, “I don’t believe Europe will be ready to have a very far-fetched trade agreement giving them [the UK] almost free access to the internal market and let Great Britain be a kind of a tax haven at the borders of the EU. That would be the big trade-off.” The European Parliament’s chief Brexit negotiator Guy Verhofstadt said “it is an illusion to suggest that the UK will be permitted to leave the EU but then be free to opt back into the best parts of the European project, for instance by asking for zero tariffs from the single market without accepting the obligations that come with it.” The EU leaders as well as the EU institutions have made clear that they are not willing to leave the UK in a better position than being inside the single market and being an EU member state. Joseph Muscat, the Prime Minister of Malta, which holds the rotating presidency of the EU’s Council of Ministers, said, “We want a fair deal for the UK but that deal necessarily needs to be inferior to membership.” Christian Kern, the Austrian Chancellor, also said, “A member of a club must have better conditions than somebody who isn’t a member of this club – our British friends must be aware that nothing else can come out of these negotiations.” Guy Verhofstadt also said, “we shall never accept a situation in which it is better to be outside the European Union”. Yet, Britain will demonstrate that it is possible to succeed outside the EU and that will encourage other Member States to leave and seek a new relationship with the EU based on trade and political co-operation. Britain will set once again an example for Europe to follow.
Theresa May also stressed that the UK would no longer “contribute huge sums to the EU budget” but it will make “appropriate contribution” to participate in “some specific European programmes”. Yet, it is important to take into account the U.K.’s financial liabilities to the EU, as the European Commission and the EU leaders are planning to present a bill of €60 billion to the UK for commitments under the EU seven-year financial framework that runs from 2014 to 2020. Such bill is likely to be presented after the negotiations under Article 50 but before the opening of negotiations of any FTA whereas the Government is not willing to pay such amount, and definitely not before a new trade relationship is agreed. According to Sir Ivan Rogers the U.K.’s financial liabilities to the EU, in terms of budget commitments and pension contributions for EU civil servants is likely to create a united position among poorer EU states and net contributors to the EU that the U.K. must pay. He believes that if the UK refuses to pay the EU leaders are unlikely to agree a preferential trade deal. In a speech to the Belgian Federal Parliament, the president of the European Commission said, “It will be a tough negotiation which will take two years to agree on the exit terms. And to agree on the future architecture of relations between the United Kingdom and the European Union we will need years.” He then stressed “The British people have to know, they know already, that it will not be at a discount or at zero cost. The British must respect commitments they were involved in making. So the bill will be, to put it a bit crudely, very hefty.”
The EU is determinate to keep “a unified front” during the negotiations. But, the member states will not only look for a deal that is good for the EU but also for them. Ultimately, the negotiations will depend of the economic, political, and policy interests of 27 Member States on the UK-EU agreement, which are most likely to vary. The UK has a trade deficit with most EU’s member states but not with all of them.
The EU leaders are well aware of people discontent with the EU, people are clearly saying No to more Europe and further EU integration. If citizens of the majority of the EU member states were given the chance to have they say in a referendum they will most likely vote to leave the EU. In fact, Donald Tusk pointed out that euroscepticism is growing not only in the EU but also in countries outside the EU, namely the US. The president of the European Council called on all EU leaders to unite and defend the EU integration, and take it “to the next level.” However, according to Bill Cash “They are effectively going in the wrong direction.” As he rightly pointed out, the 27 EU’s member states “by promoting ever closer, more centralised and unreformed political union, they are creating the very circumstances that they claim to want to avoid and depriving themselves of the trust of the citizens they claim to represent”. The EU leaders might not want to punish the UK for leaving the EU but they definitely do not want other countries to follow, which the UK withdrawal is likely to encourage. There is indeed a general concern in Brussels that if the EU makes concessions to Mrs May, other member states would follow Britain’s example. Hence, the EU will drive the negotiations by political and economic interests but political interest will come first. Brussels and the EU’s member states are therefore willing to sacrifice their own economic wellbeing to “make a political point”, that only EU’s member states can have full and best access to the single market, protecting in this way the so called EU’s unity and the values and principles of the EU’s integration project.
The withdrawal agreement would be negotiated in accordance with Article 218(3) TFEU which provides for the procedure for the negotiation and conclusion of agreements between the EU and third countries. Following the UK’s notification the EU leaders will convene an extraordinary European Council to discuss and establish guidelines that will define the framework for negotiations, setting out the position and principles that the EU will pursue throughout the negotiation. The negotiations shall be conducted in line with the European Council guidelines and the Council negotiating directives. The Commission has already nominated Michel Barnier as chief negotiator, who will be required to report to the European Council and the Council. The European Parliament will also be informed of the negotiations. The Commission, taking into account the European Council’s guidelines, will submit recommendations to the General Affairs Council, which shall then adopt a decision authorising the opening of negotiations. The UK would not be able to participate in the Council or the European Council discussions on its withdrawal and it would not be able to vote on the terms of the withdrawal agreement. The Council, acting by a qualified majority, after obtaining the consent of the European Parliament (assent procedure) will conclude the withdrawal agreement on behalf of the EU, if at least 72% of EU Member States vote in favour (21 Member States), representing at least 65% of the EU’s population. The European Parliament may accept or reject the Council decision but cannot amend it. The MEPs can therefore veto the withdrawal agreement, by not giving their consent. On the other hand, the EU may offer a deal that does not suit the UK and the Government would have to reject it. The withdrawal agreement is not a condition for withdrawal, thus, if the EU and the UK fail to reach an agreement the withdrawal becomes effective two years after notification. In fact, the UK could unilaterally withdraw by denouncing the EU treaties, using its own constitutional processes, repealing the ECA 1972 and then notify the Council and wait for two years for the withdrawal to be effective at the EU level.
The withdrawal agreement will determine the terms and conditions of withdrawal, including any legal consequences regarding the rights and obligations for any natural persons and legal entities affected by it. Although the negotiations for a FTA can be run in parallel with the article 50 process, if the EU agrees to do so, there cannot be any formal negotiation on a FTA till the UK leaves the EU.
The Government is likely to face several legal challenges while negotiating a new relationship with the EU. In fact, the negotiation, conclusion and implementation of international agreements, namely Association Agreements and Free Trade Agreements, has been raising legal, political and practical questions about competence, scrutiny and jurisdiction. The Council authorizes the Commission to negotiate on behalf of the EU by QMV, but it is required to act unanimously for the negotiation and conclusion of agreements in the field of trade in cultural and audiovisual services. For instance France refused to approve the Commission mandate to negotiate the TTIP unless the audiovisual sector was excluded. Once the negotiations are completed, the Commission presents the deal to the Council and the European Parliament. Then the Council adopts a decision authorizing the signing of a trade agreement and a decision concluding the agreement by QMV. It is important to note that the European Parliament not only has to approve the withdrawal agreement but also any new agreement regarding the EU’s new relationship with Britain. The MEPs are well aware of that and have been stressing that the European Parliament has the last say. The Council must obtain the consent of the European Parliament before adopting a decision concluding any EU trade agreements (assent procedure).The European Parliament may accept or reject the Council decision but cannot amend it. David Davis noted that the European Parliament will have a “limited and peripheral” role in Brexit negotiations however the Government should not underestimated the power of the European Parliament. The Parliament’s involvement in the negotiations remains indeed limited to a right of information and access to documents from the Commission; however, it can put pressure on negotiators by threatening to veto the agreement. The MEPs have stressed several times that the European Parliament’s position should be taken into account at all stages of negotiations, as the “Parliament has teeth and can bite”. The European Parliament has the power to reject an international trade agreement, since the entry into force of the Lisbon Treaty and it has already used it. In 2012 the European Parliament rejected the Anti-Counterfeiting Trade Agreement (ACTA) which was then shelved. In 2010 the European Parliament postponed its consent for renewal on the Passengers Name Record agreement (PNR) with the U.S. and requested a renegotiation of the agreement. The MEPs also rejected the SWIFT Agreement (on banking data transfers to the USA via the SWIFT network) and only gave consent after their requested data protection standards in the agreement were improved. Hence, the European Parliament can reject a FTA between the UK and the EU as well as request a renegotiation of the agreement and only give its consent if its requests are incorporated into the agreement, which would add delays.
National Parliaments have limited influence related to Article 50 TEU, notification about the intention to withdraw merely depends on the constitutional provisions of the UK. The UK Parliament will vote on the UK-EU’s final deal. But a No vote will simply mean that the UK will leave the EU without a deal. Theresa May made clear that if Parliament votes against the agreement, “We would have to fall back on other arrangements,” meaning the WTO rules. David Jones, Minister of State at the Department for Exiting the EU, told the House of Commons that “a vote on the final deal will cover not only the withdrawal agreement but also the future arrangement that we propose with the EU.”
It is important to note that the EU has exclusive competence to conclude international agreements, including FTAs, where this is provided in the Treaty, where the conclusion of an agreement is necessary in order to achieve one of the Treaty’s objectives, where it is provided for in EU’s legislation or is likely to affect common rules or alter their scope. Hence, in these cases the EU is able to act alone and conclude international agreements which are then binding on the EU and Member States. But, there are several international agreements, concluded between the EU and third countries, which are ‘mixed agreements’ as they cover subject matters where Member States as well as the EU exercise competence. If the EU has exclusive competence, the international agreement in question only needs to be ratified by the EU, meaning by the Council, acting by qualified majority and in some cases by unanimity, with the consent of the European Parliament. The mixed agreements must be ratified by the EU and by all EU Member States, in accordance with their own national procedures before they can fully come into effect, which obviously takes longer and can take years as some Member States require ratification by their national Parliaments. Thus, they will require, in some cases, the approval of 38 separate Parliaments and upper houses before they can enter into force. It should be recalled that there is a unilateral declaration by Belgium, attached to CETA, stressing is right to refer an international agreement to the CJEU under Article 218(11) TFEU, due to the regional Parliament of Wallonia initial veto of the agreement. The case of Wallonia and CETA shows that national and regional Parliaments can have a huge influence over free trade agreements, when these are considered mixed agreements, as they approval is needed. The non-binding referendum in the Netherlands against the the EU-Ukraine association agreement has delayed ratification.
It is important to recall that there is no certainty about the nature of the EU free trade agreement with Singapore concluded in 2014. The European Commission submitted a request for an opinion of the ECJ, pursuant to Article 218(11) TFEU, and asked the Court to clarify whether the EU has exclusive competence to sign and conclude alone that FTA. The Commission believes that the EU has exclusive competence to conclude the agreement whereas the Council and the Governments of all Member States that submitted written observations, including the UK, contend that the EU cannot conclude the agreement on its own because certain parts fall within the EU’s shared and even the exclusive competence of the Member States. The issue is not whether the EU has exclusive competence to negotiate and conclude trade deals on behalf of all Member States, which it has, but whether if the agreement needs to be further approved by member states to enter into effect. According to the Advocate General Eleanor Sharpston the Singapore Free Trade Agreement can only be concluded by the EU and the Member States acting together, as the EU’s external competence is shared with the Member States on trade in air transport services, maritime transport services and transport by inland waterway, government procurement in so far it applies to transport services and services inherently linked to transport services, non-commercial aspects of intellectual property rights, labour and environmental standards that fall within the scope of either social policy or environmental policy and dispute settlement mechanisms if those provisions apply to the parts of the agreement for which the EU enjoys shared external competence.
Hence, the ECJ upcoming opinion could have far-reaching implications for future agreements, as it will not only decide whether the EU-Singapore FTA falls within EU exclusive competence, but would most likely to set tone for future and currently being negotiated FTAs. Thus, if the ECJ agrees with the Advocate General any future EU FTAs, covering the same matters, are most likely to be considered mixed agreements. The UK made written submissions before the Court arguing for the continuing competence of the Member States, against the EU’s exclusive competence. However, these arguments are now against the UK’s interest, as it would be more difficult for the government to achieve its negotiating objectives if all EU’s Member States have a veto. It remains to be seen what would be the nature of the FTA that the government is seeking to negotiate with the EU. Theresa May is seeking a comprehensive free trade agreement on goods and services, which, in principle, belong to the EU exclusive competence. Hence, could be concluded by the EU alone, through QMV in the Council and then it would need the approval of the European Parliament. But, there is also the political dimension, as the European Commission, due to opposition of some member states, proposed the CETA as a “mixed agreement” despite its view that the agreement belongs to the EU exclusive competence. If it is deemed as a mixed agreement, it would take considerably longer time to negotiate, let alone to enter into force, as it will require not only a Council decision and the consent of the European Parliament but it would also need the agreement of all Member States, according to their domestic constitutional arrangements. This would obviously slow down the ratification of the agreement; in fact it can even sink the agreement, as national Parliaments have the power to veto it.
It is also important to note that the ECJ might get involved in Brexit issues, as the court is the ultimate arbiter on the interpretation and validity of EU law. The ECJ has indeed authority over Britain’s withdrawal from the EU, in case of a dispute over what can be included within the scope of the withdrawal agreement. As the Advocate General Eleanor Sharpston stressed ‘If you join the club and you wish to leave the club, you leave in accordance with the rules when you join the club…the rules of this club are the ones contained in Article 50, and the interpretation of those rules is a matter for this Court (the ECJ).’ Moreover, the European Parliament, the European Commission or any member state may seek an ECJ opinion as to whether any agreement on the UK-EU future relationship is compatible with the treaties, by following the mechanism foreseen in Article 218 (11) TFEU. Any agreement negotiated between the UK and the EU must be compatible with the EU constitutional framework, the EU treaties, including the single market and customs union legal frameworks, and the Charter of Fundamental Rights. The use of this procedure would cause delays or indeed stop the agreement to come into force. If the ECJ decides that the agreement in question is not compatible with the EU treaties it may not enter into force “unless it is amended or the Treaties are revised”.
If there is goodwill an agreement could be reached within the timeframe period. Yet, if the Government and the EU leaders stick to their guns there will be no agreement. Theresa May made very clear that “no deal for Britain is better than a bad deal”, the Prime Minister is therefore ready to leave without a deal, if the EU only offers a “bad deal”. Moreover, even if the Government and the EU’s leaders reach an agreement, it could be veto by the European Parliament, or if it is a mixed agreement, it could be veto by member states national Parliaments, which would have as effect the UK leaving the EU without any agreement.
Obviously, a FTA with the EU will give the UK preferential terms of trade comparing to those agreed at the WTO. But, if no agreement is reached, Britain would find itself in the same position as most third countries trading with the EU. The UK will continue to trade with the single market but under the WTO terms, namely the most favoured nation’ principle whereby WTO members cannot discriminate between themselves, and must apply the same tariffs and offer the same market access to all. Under this principle, all non-EU countries must have the same levels of access to the EU’s market, with the exception of preferential agreements.
The UK will only be able to trade with other countries when it leaves the EU. Until then, the UK will continue bound by the Common External Tariff and cannot establish its own commitments at the WTO. Upon withdrawal from the EU, the UK will then be able to regain its seat at the WTO. It is therefore essential that the UK endeavors to separate its schedules of commitments from the EU and start negotiating its new schedules which will have to be approved by all WTO members. The procedure of agreeing new schedules might take longer than one can expect, as it involves thousands of categories of goods and services. Thus, such negotiations should run in parallel with the negotiations with the EU and regardless whether a FTA is agreed. According to the Secretary of State for International Trade “work is already underway on this”. The Government wants to replicate as much as possible the EU schedules, in order to create “a mutually beneficial, simple and inclusive outcome, so that the interests of the UK and other WTO members are protected.”
The idea that Britain will be isolated and not succeed by pursuing an independent trade policy is absolutely ludicrous. Britain will prosper outside the EU, even if it leaves without an agreement. The UK will be able to regain its place as a leading trade nation.