Whichever path the UK takes to a new trade agreement with the EU, it is likely to require free movement of persons as a trade-off for access to the single market, warns Chris Pawlowska
The EU referendum generated a very one-sided debate in many respects. Though both sides oversimplified and exaggerated their arguments, there is the
sense that the Brexit arguments for control
of immigration, removal of Brussels red tape,
and sovereignty over our own country were clearer and better rehearsed. What did not come across very well were the practical benefits of
EU membership which we have come to expect
and perhaps take for granted.
Much has been made of the EU's need to keep the single market open to the UK because of the amount of business it does with the UK. However, in exit negotiations led by Theresa May and her new raft of Brexit ministers and an EU digging
in over fears of internal dissent, we could see
the benefits of the single market wither away
The core provisions governing the single market are to be found in part three of the Treaty on the Functioning of the European Union (TFEU) and have been extended via secondary legislation. Though they have undergone renumbering, development, and change, many date back to the original Treaty of Rome and have been with us since the inception of the European project, back in 1957.
They include free movement of goods, services, persons, and capital. Key provisions include tariff-free trade between states, the removal of discriminatory internal taxation, and the removal of non-financial obstacles to trade. So far, EU citizens have been free to enter any EU state to look for work, obtain employment, and obtain parity of treatment with nationals of the host state. Students are able to live and study in member states in a fairly affordable way, often bolstered by a number of EU schemes. EU nationals can open businesses and acquire housing in any member state, on the same terms as nationals of the host state. EU nationals can work, live, and retire in a host state and acquire a right of permanent residence after five years.
Brexit campaigners have lingered over the perceived ills of open-ended EU migration provisions as a justification to leave the EU.
But whatever one thinks of these rules, they do not exist in a vacuum. They come as part of a package of rules that ensure free trade with our continental trading partners. In agreeing to allow EU citizens into the UK, we have received much economic benefit. We have free trade with 27 other countries. We have also secured London as the financial centre of Europe and a core provider of financial services in Europe and beyond. Our students benefit from European study schemes like Erasmus and our researchers work on EU-funded pan-European research projects. Many of our own nationals have bought homes and retired to the sunny climes of Spain, Portugal, Italy, and France, and, of course, many of those EU migrants have jobs and contribute to UK taxes.
Any club will include some unpopular rules. Having reached a point where we have decided that we want to leave the club, how do we negotiate a relationship whereby we can retain
as many of the 'good' rules as possible?
EFTA or EEA?
There is, of course, a precedent for countries in Europe being outside the EU. The European Free Trade Association (EFTA), established in 1960, includes the European countries that have remained steadily aloof from EU membership and works on behalf of its member states to develop bilateral free trade and partnership agreements. It currently has four member states - Iceland, Liechtenstein, Norway, and Switzerland - and 27 free trade agreements across 38 countries, including Canada, Central America, Hong Kong, Turkey, and Israel.
The UK might be welcomed into the EFTA as its size and political influence could strengthen the EFTA's negotiating hand in future trade agreements, which could mean that the UK would not need to start negotiating trade agreements from scratch. This might also be a shortcut to joining the European Economic Area (EEA). The EFTA countries (excluding Switzerland) became signatories of the EEA Agreement of 1994. This is a bilateral agreement between the EFTA and the EU which seeks to create a single economic area between its signatory states.
If the UK followed this path, article 1 of the EEA Agreement would bring back the core of the EU single market rules to the UK. We would have the benefit of free movement of goods, services, capital, an EEA system of undistorted competition law, and the chance to restore closer cooperation in research, development, the environment, and education, but we would have to accept free movement of persons, even though we voted to leave the EU.
The irony then would be that we would not have recovered 'control of our borders' because the EEA Agreement requires free movement of persons as a trade-off for access to the single market. We would have to pay a significant contribution for our membership of the EEA, and we would have no right to vote on single market legislation but would be bound by it and the EFTA court, modelled on the European Court of Justice, which would mean that the EU would still, indirectly, have the final say on the meaning of single market law in the UK.
We would not, however, be bound by the Charter of Fundamental Rights, rules on social, foreign,
and security policy, or the economic and political integration aspirations which form part of the EU's near horizon.
This may be too hard a pill for our politicians to swallow. A vote to leave the EU could result in our re-entry into the single market, but only on terms that force us to open our borders to EU migrants.
The EU would, via the EFTA court, reimpose some of the authority of the European court within the UK.
It would also exact a contribution which might be equivalent to our contribution to the EU (which
the Brexiteers were hoping to transfer to the NHS) and, adding insult to injury, exclude us from the decision-making process on internal market legislation which we would nonetheless be compelled to apply in the UK.
The Swiss option
Another alternative might be for the UK to join the EFTA but stay outside the EEA and negotiate its own, entirely new trading relationship with the EU as part of the exit negotiations under article 50 of the Treaty on European Union.
Switzerland has managed to take a path which is analogous in some ways to that now envisaged for the UK. If we follow that path, we should be aware that it is risky and costly. Switzerland has never joined the EU but it has negotiated a raft of bilateral agreements, over many years, with the
EU. The most interesting ones are a set of seven agreements on a variety of areas which came into force in 2002. These were subject to an overarching condition that if one of the agreements was not renewed or otherwise denounced, all seven agreements would cease to apply after six months. This has sometimes been referred to as the 'guillotine clause'.
Switzerland has always been keen to engage in the single market while avoiding the social or political aspects of integration. It pays a large EEA-style financial contribution for the privilege
of trading with the EU but has also had to accept compromises for that privilege. Switzerland is a member of the Schengen Area and, among its seven agreements, signed a treaty with the EU back in 2002 allowing for the free movement of people within EU rules.
In 2014, however, a Swiss referendum supported the restriction of free movement of citizens and, applying its 'guillotine clause', the EU was swift to react. The other six agreements were collapsed, which had an almost immediate effect on Swiss students and universities being excluded from Erasmus programmes and European Research Council grants. This proved to be temporary as the EU's aggressive stance brought Switzerland quickly back to the negotiation table.
If there is a lesson to be learnt from the Swiss experience, it is that there is no single deal to be had but a large bank of bilateral agreements on a wide range of areas which will surely take longer than two years to conclude. Switzerland is the EU's fourth largest trading partner but that has not stopped the EU taking swift punitive action in
the face of non-compliance with agreements.
The UK may be a valuable trading partner of the EU, but we are a country of 65 million and, without us, the EU is still a market of nearly 450 million.
It can probably afford to play hardball. The economic uncertainty in the UK is having an immediate effect on the investment and financial services sectors and the French and German governments are poised
to lure investment away from the City by offering advantageous, alternative EU financial centres.
An EFTA/EEA arrangement may offer a quicker solution to accessing the single market from the outside, but may in some ways place us in a weaker position than we were in as members of the EU.
The compromises on free movement and steep financial contributions undermine the very foundation of the Brexit vote and, as a country, we lose our power to shape and vote on legislation through the EU institutions. We will be able to avoid the euro, the Charter on Fundamental Rights, perhaps the Schengen Agreement, and an 'ever closer Union', but even from within, we had already opted out of most of this. There is a painful and pointless circularity here.
One final thought
One final option might be to reject all existing formulae for trading with the EU that seek to impose free movement of citizens as a trade-off for access to the single market. This could result in completely new bilateral trade agreements. One draft trade agreement, in its final stages, may offer a model for redefining the UK’s relationship with the EU. This is the Comprehensive Economic and Trade Agreement (CETA) negotiated by the EU and Canada, which, when finalised, will remove 99 per cent of tariffs between the two economies. It has been identified by David Davis, the newly appointed Brexit minister, as an example of how the UK might reconstruct it relationship with the EU.
The problem for the UK is that CETA is nearly 2,000 pages long and took nearly seven years to negotiate, even with Canada’s expert team of about 300 trade negotiators working on it. The UK has no recent history of drafting trade deals, as the EU has for decades negotiated them on behalf of its member states. Here, the EU has a major advantage over the UK and the UK will need to lure senior trade negotiators, perhaps from the European Commission, before it activates article 50. If this is where the UK finally ends up, all bets for a timely set of trade deals will be off and the lingering cost of uncertainty will be with us for years.