House of Lords on Brexit Options

On 13^th December the House of Lords European Union Committee published a Report on “Brexit: The Future Options for Trade” (HL Paper 72)

This helpful 87 page report draws on the extensive expertise for which the House of Lords is well known and is likely to be influential on Government and widely consulted across the EU. The Report looks at the negotiation process and seeks to develop some ideas about the stages of negotiations and internal UK preparation while underlining the central importance of a transitional agreement.

The Report begins by noting that the Government plans to trigger Article 50 by the end of March 2017 and that the UK’s current trading arrangements with the EU will stop at the end of two-years (March or April 2019) unless the other 27 EU member states agree unanimously to extend the period.

It then outlines the main possible frameworks for UK-EU trade from then on:

• joining the European Economic Area (EEA),
• a customs union with the EU,
• a Free Trade Agreement (FTA) or
• trade based on World Trade Organisation (WTO) rules.

The distinction between ‘access to’ and ‘membership of’ the Single Market is forcefully highlighted:

“Many countries have ‘access to’ the EU’s Single Market, either through agreed tariffs at the WTO or via a FTA. However, the only countries which have full membership of the Single Market—which entails the liberalised movement of goods, services, people and capital (the ‘Four Freedoms’), secured through common rules interpreted by the European Court of Justice (CJEU)— are EU Member States.”

The EEA agreement does not include a customs union, while inclusion in a customs union, as in the case of Turkey, does not entail free movement of services, people or capital.

The Report examines the trade-offs involved in negotiations of this kind and notes the pressure on the other 27 EU states to avoid the collapse of the EU by taking a tough line with the UK. The Report concludes that:

“the prospect of fundamental modifications to the ‘off-the-shelf’ models is unlikely. Reform of the EEA Agreement to limit free movement and include voting rights on EU legislation is improbable. Creating a customs union arrangement with the EU would limit the UK’s ability to have an independent trade policy. Even in areas not covered by the customs union, pressure would be put on the UK to shadow the EU’s trade negotiations.”

The Committee argues that an FTA provides the best chance of a bespoke deal combined with wider UK-EU co-operation after Brexit through an Association Agreement, but that trade on terms equivalent to full membership of the Single Market (especially in services) could not be achieved on this basis. That is ominous for financial services businesses.

In the Committee's view it will not be possible to negotiate a comprehensive UK-EU FTA within two-years and that the Government needs to plan for possible transitional arrangements before invoking Article 50 to safeguard current trade and provide adequate time for negotiations.

According to the Report, a temporary extension of participation in the customs union could be “one important element of a transitional arrangement”. Failing that, two years after Article 50 is triggered, UK-EU trade and UK trade with the rest of the world will take place under WTO rules. In that case, the UK would need to have its own schedules of trade concessions, and negotiate its share of tariff rate quotas and subsidies with the EU. Negotiations with the EU and other WTO members at that stage could add further uncertainty.

The Committee recommends that the Government focuses initially on its future trading relationship with the EU and its WTO schedules and makes an early decision on whether the UK should stay in the customs union. It could then sequence trade deals with other countries accordingly. The committee also urges the Government to clarify:

“whether and to what extent the withdrawal negotiations with the EU will encompass negotiations on the future UK-EU trading relationship.”

That is because the Report suggests that a transitional agreement will “almost certainly be necessary” to allow negotiations to be conducted in a less pressured environment, benefiting all concerned.

The Committee notes how tight the timetable is for Government to consult the business community and other stakeholders in the light of these issues. 

We must hope that Government take on board all these points as soon as possible in the interests of safeguarding the business community and ensuring stability over the difficult period that we now face.