UK: Possible Post-Brexit Models For Engaging With The EU

Last Updated: 20 May 2016
Article by Richard Isham

A lot has been written about the economic effects of Brexit, much of it contradictory – for example: The 100 "worst" EU derived regulations are consistently said to cost the UK economy £33 billion per year, but this has been challenged by research that has looked at the Government's impact assessments (always undertaken as part of any consultation concerning the implementation of new regulations) done in respect of each of these 100 regulations and which concludes that the UK economy benefits from them to the tune of £58 billion per annum. Can there be any more certainty about the legal effects of a Brexit?

If we left the EU, it seems likely that we would wish to continue to have a relationship with it – if only because over 50% of what we export currently goes to the EU. How could such a continuing relationship be achieved?

EEA membership

The European Economic Area (EEA) is made up of the EU member states, plus the European Free Trade Area (EFTA) states, namely:  Norway, Iceland and Lichtenstein. The EEA is obliged to accept most of the directives/regulations that are made by the EU but do not have the opportunity to influence the EU decision making and legislative process.  What appears to be a key issue in the Brexit debate, immigration/control of our boarders, would not be helped by EEA membership because the EEA agreement with the EU incorporates the principle of the freedom of movement of labour (as well as other EU directives, such as: the Agency Workers Directive, the Working Time Directive, the Acquired Rights Directive (TUPE), the Posted Workers Directive, the Parental Leave Directive, the European Works Council Directive, the Part-Time Workers Directive, the Collective Redundancies and the Equal Treatment Directives.

Furthermore, the EFTA Court, which interprets the EEA rules, is obliged to follow the decisions of the European Court of Justice. 

It is also the case that EEA membership is not a forgone conclusion; the UK would have to join EFTA and then apply to join the EEA; this would give existing members (and EU members) the opportunity to negotiate the terms on which the UK could join.

The Swiss model

Switzerland is a member of EFTA, but not the EEA.  Over a number of years, Switzerland has negotiated more than 120 bilateral agreements with EU member states.  Many of these agreements incorporate EU law as a "price" for having the agreement.  Accordingly, Switzerland has EU compliant data protection laws, discrimination laws, collective redundancy and working time laws and the Swiss courts refer to the decisions of the European Court of Justice and often follow them.

The (current) Turkish model

Turkey, prior to its membership of the EU, currently has (limited) access to the EU internal market by virtue of having a "customs union" with the EU – the " Ankara Agreement".  Under this agreement, goods may travel between Turkey and the EU member states without any customs restrictions.  However, the customs union does not cover agriculture (which is subject to separate bilateral trade concessions negotiated between Turkey and certain EU member states), services or pubic procurement.

As part of the "price" for the customs union, Turkey has to incorporate EU regulatory standards into its own laws and thus has to comply with the decisions of the European Court of Justice, whilst not having a Turkish Judge as a member of the Court.

Furthermore, the Ankara Agreement is part of the process, pursuant to which, Turkey wishes to obtain full EU membership.  Accordingly, it may not be an appropriate (or available) model for the UK post Brexit.  Additionally, as the services sector, including financial services, is very important to the UK (but less so for Turkey) if followed, the Ankara Agreement would have to be varied significantly if the UK's financial services sector is to benefit from the ability to continue to provide services on equal terms with EU members (but we would be theoretically free to regulate our own services sector without regard for EU laws).

Negotiate a free trade agreement with the EU

This would potentially give the UK the same status as Mexico and, if it is concluded next year, Canada.  Such negotiations do, however, tend to take time:  Mexico entered into a partnership agreement with the EU (the EU-Mexico Economic Partnership, Political Coordination and Cooperation Agreement) in 1997, which led to a free trade agreement coming into force in October 2000 which covers goods, services, public procurement, intellectual property and investment.  A Joint Committee and various Special Committees monitor the relationship and meet once a year; a Joint Council meets biannually.

The free trade agreement with Canada (the Comprehensive Economic and Trade Agreement (CETA)) began in earnest in 2007 and was only concluded in late summer/autumn 2014.  Since then, the agreed text has been the subject of a comprehensive legal review and translation into the other 22 languages of the EU.  The legal review has only just been released in February this year and the parties are confident that CETA will be formally signed off in 2016, so as to come into force in 2017, making it a 10 year process. Could the UK afford the time for this approach?

Rely on our WTO membership

The UK is a member of the World Trade Organisation (WTO), as are all the other EU member states and the EU itself, as a separate legal personality.  The European Commission, represented by the EU Trade Commissioner, represents the EU in the General Council of the WTO – it is the General Council of the WTO which represents that organisation's highest decision making body, namely the Ministerial Conference.  The Ministerial Conference meets at least every two years but the General Council meets more regularly and in different configurations, for example: the Dispute Settlement Body and the Trade Policy Review Body.  The European Commission also represents the EU in WTO's subsidiary bodies such as the Council for Trade in Goods and the Committee for Trade and the Environment.

Under the rules governing the WTO, the EU is defined as a "customs union" and accordingly its members can no longer set their own tariffs or do their own special bilateral deals with other countries – compare the North American Free Trade Area (NAFTA) which is not defined as a "customs union" under the rules governing the WTO.  In relation to trade with the EU, once the common tariff has been paid, so as to allow the product into the EU, the product can circulate freely within the EU's Single Market.

If the UK left the EU, it would no longer be part of the Single Market and so unable to fulfil the obligations that it has under the WTO and which are owed to the other WTO members.  This would result in the UK having to renegotiate its membership of the WTO, including its own tariff commitments.  In a worst case scenario, this could involve negotiations with all 162 members of the WTO.  Additionally, because on exit the UK could no longer meet its WTO obligations without being a member of the EU, the UK could face a "non-violation complaint" against it by other WTO members.  Such a complaint is possible, even if no agreement has been violated, on the basis that another WTO member considers that the government of the UK, by leaving the EU, has deprived that other member of an expected benefit (e.g. access, via the UK, to the EU Single Market).

Conclusions

Bremain – results in, perhaps, continuing frustrations with existing relationships, but the ability to influence them and yes, uncertainty due to "Events, dear boy, events" (Harold Macmillan).

Brexit – will require a huge amount of time and effort being put into negotiations which, even with goodwill on all sides, will require compromise if they are to be successful.  Also, on the question of time, Article 50 of the EU Treaty provides for only a two year exit process unless all the EU member states agree to an extension – some may consider that having the two year "window" will allow the EU to extract more favourable concessions out of the UK, e.g. in relation to any attempt by the UK to maintain access to the Single Market so as to be able to continue to fulfil its WTO obligations. On top of "events", we will have the uncertainty in relation to our status and the many obligations that we currently owe to our trading partners – for example, the German carmaker, BMW, and the German government on their behalf may wish to have a bilateral trade deal with the UK, but neither BMW, nor the German government, can achieve this on a bilateral basis because Germany remains part of the EU. 

In a competitive (and combative) world, we would, arguably, be naïve to believe that, having exercised our right to leave the EU, the EU and its member states will then do all that they can to secure a place for the UK in the Single Market on terms that are more advantageous to us.  The EU is and remains under considerable pressure in relation to finances (recent quantitative easing), the refugee crisis and internal political pressures – both France and Germany are facing elections in 2017 and both of those countries have factions that would like to see them leave the EU.  Against this backdrop, it would be reasonable to assume that the EU will be astute to avoid making concessions to the UK that appear to (let alone actually) reward the UK for their decision to leave.

From a legal perspective, a decision to Brexit gives the UK the opportunity to renegotiate its trading relations with the rest of the world, but also gives the rest of the world, including the EU, an opportunity to extract concessions from the UK.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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