With the Brexit timetable becoming increasingly tight, the UK government has finally set out the details of the post-Brexit relationship it wants with the EU in a White Paper. The domestic reaction to the White Paper has been, to say the least, mixed – with negative reactions from both sides of the Leave/Remain divide (see below) and a proposal from Justine Greening (the former Education Secretary and Remain supporter) that there should be a second referendum to break the Parliamentary deadlock as to the way forward. However, even if these home-grown hurdles can be overcome by the government, how far will its proposal be acceptable to the EU?
What is being proposed?
In terms of the future economic relationship with the EU, the White Paper proposes an arrangement that is similar in substance to the Swiss model, which effectively allows participation in the Single Market for goods, but only to a limited extent for services. However, the UK proposal differs in the following important respects:
- Frictionless trade in goods: the Swiss model involves border controls with the EU. To avoid this, the UK is seeking a highly complex arrangement relating to customs and border controls which aims to preserve current levels of frictionless trade (whilst allowing the UK to conclude trade deals with third countries, as Switzerland is able to do). In this respect, the UK proposal could be described as "Switzerland plus."
- Free movement of people: unlike the Swiss deal, there is no acceptance of the principle of free movement of people; there is merely a proposal for a "mobility framework". In this respect, the UK proposal could be described as "Switzerland minus".
The problem is that the EU is known to dislike its arrangements with Switzerland. On the face of it, this suggests that the UK’s proposal is unlikely to be acceptable to the EU. But let’s assume that the White Paper represents an initial negotiating position and the UK expects to give at least some ground in order to secure agreement. What are the prospects for compromise?
Just as Switzerland makes a financial contribution in return for its effective participation in the Single Market for goods, so the EU is likely to expect the UK to make similar payments. Although the White Paper makes no offer on this, it does not appear to rule it out either – it merely calls for an end to payment of “vast sums” to the EU, which may allow room for compromise on this issue.
Form of the agreement
One of the EU’s objections to the Swiss model is that it is based on an unwieldy patchwork of numerous, separate, bilateral agreements. The UK White Paper, however, suggests that the appropriate vehicle for the EU-UK future relationship should be an association agreement, which is the model adopted by the EU for its relations with Eastern European states such as Ukraine. Such an over-arching framework could be sufficient to overcome EU concerns about avoiding the complex, piecemeal structure of the current Swiss arrangements. For more on the association agreement model, click here.
Supervision and enforcement mechanisms
However, the EU also has more substantive objections to the Swiss model. In particular, it is known to be concerned that it lacks:
- an independent body (such as the EFTA Surveillance Authority in the case of the EEA Agreement or the European Commission in the case of the EU) which monitors compliance with the rules and to which individuals or businesses can complain; and
- an independent court (such as the EFTA Court or the ECJ) to ensure consistent application of the rules.
In practice, this means that hundreds of highly technical disputes involving individual businesses can only really be dealt with through the high level, political “state–to-state” mechanisms in the existing EU-Swiss arrangements – which often means that they are never resolved at all. The UK proposal does not envisage any independent supervisory body. Whilst it appears that businesses and individuals could potentially seek remedies through the UK courts, there would be no mechanism for references to an independent court such as the ECJ or the EFTA Court. The EU is therefore likely to have concerns about this aspect of the White Paper.
A possible compromise could involve using the institutions of the EEA Agreement (i.e. the EFTA Surveillance Authority and the EFTA Court) to supervise and enforce the EU-UK arrangements on goods (discussed further here). This would allow the UK to maintain that its red lines on ECJ involvement had been largely respected – although it is unlikely to be welcomed by advocates of a “purer” form of Brexit.
Frictionless trade in goods
To date, the EU has been sceptical about the UK’s proposals for achieving “frictionless trade” after Brexit, on the grounds that they are based on untested technology and processes. Such arrangements would also require a high degree of trust between the parties; as we have outlined previously, recent experience of smuggling and VAT/customs fraud with links to the UK may make the EU equally sceptical about the UK’s commitment to protecting the EU’s interests in any such arrangement.
A possible compromise might be some form of compensation mechanism for EU member states which have suffered loss resulting from a failure of the UK authorities to police the proposed arrangements effectively. If that were not acceptable to the EU, the UK could potentially seek the “Jersey option” of being subject only to EU rules on goods (including those relating to the Customs Union). This should be sufficient to preserve current levels of frictionless trade but would probably rule out an independent trade policy for the UK in relation to goods.
Indivisibility of the four freedoms
A more fundamental objection to the White Paper is that it violates the indivisibility of the four freedoms – goods, services, capital and people – by effectively cherry-picking just one of those freedoms (goods) without accepting any of the others. In practice, the EU has sometimes been prepared to compromise the principle of indivisibility – for example, Switzerland only accepts two of the four freedoms (goods and people), whilst Ukraine only accepts three of them (goods, services and capital). There is, however, no precedent for a non-EU territory of any significant size only accepting one out of the four freedoms, as proposed in the White Paper.
Assuming that the EU is prepared to compromise on this issue (which is by no means a given, as the UK economy is far larger than either Switzerland or Ukraine), it seems likely that the UK would also need to shift its position as regards one or more of the other three freedoms.
Free movement of people
One possibility is that the EU decides not to insist upon free movement of capital or services, but maintains that participation in the Single Market for goods requires acceptance of free movement of people – which is the position it has adopted vis-à-vis Switzerland. Finding a compromise would be difficult and might involve a degree of “kicking the issue into the long grass.” For example, the EU might agree that the UK could apply certain restrictions on EU migration for a period of years with a commitment to review them at a later date – perhaps on the understanding that if progress was not made towards their removal, the UK’s participation in the Single Market for goods could be curtailed.
There is some precedent for restrictions of this type. For example, Switzerland is understood to have been offered temporary restrictions on free movement of people when it was considering becoming a party to the EEA Agreement – but these were never actually utilised, as the Swiss people rejected the idea of EEA membership in a referendum. Liechtenstein was also offered restrictions on free movement on joining the EEA and has managed to maintain them ever since, despite the fact that they were only supposed to be temporary – although its population is obviously much smaller than that of the UK. For more discussion of this issue, see Q9 of our Q&A on the EEA Agreement.
A compromise too far?
This article has sought to argue that there may be room for the UK to reach a compromise with the EU based on the White Paper - provided both sides are prepared to show flexibility in relation to at least some of their respective “red lines”. However, we can already see that the political reaction in the UK to the proposals may mean that they do not even make it to the negotiating table. The proposals set out in the White Paper are at risk of joining both Leavers and Remainers in an unholy alliance of concurrence, but for materially different reasons – Leavers see the "rule-taking" elements of the model as supportive of a hard Brexit to ensure the UK government fulfils its political promise to take back control of its sovereignty over trade, customs and immigration policy, while Remainers see those exact same elements as an admission by the government that the economic and political (i.e. the break-up of the UK Union) costs of Brexit are simply too great for the British people and that, as it would be folly to lose our voice in future EU policy by renouncing our seat as a Member of the European Union, we should remain within the bloc.
With amendments to Brexit legislation which arguably undermine the White Paper being tabled on a daily basis, highlighting the deep divisions within government, the future of the White Paper proposals looks precarious. Additionally, early polling results suggest that the publication of the White Paper has led to a material transfer of support from the Conservatives directly to the previously dormant UKIP. If that trend is maintained, the Government's resolve to press on with its proposals will clearly be severely tested. Under fire from within and without, there must be a serious question as to whether the White Paper can survive.
As a consequence, there remains a significant risk of a hard Brexit and businesses should be making contingency plans for this eventuality. Click here to find out more about how we can help with Brexit risk assessment and contingency planning.
Competition and Commercial
Travers Smith LLP
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