BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES a Swedish perspective

Transcription

1 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES a Swedish perspective MATS RINGBORG AND PETER KLEEN

2 2 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE In this paper we review the trade policy implications and challenges that arise as a result of the UK decision to withdraw from the European Union. The purpose is to assist the Swedish government in its preparations for the forthcoming negotiations between the EU-27 and the UK. In particular, we identify various options for future trade relations between the parties, including the question of UK s access to the Single Market and UK participation in the EU Customs Union. Our recommendations: The EU and the UK should conclude a bilateral high standard free trade agreement. Such an FTA should as far as possible maintain present levels of free movement of goods and services and include a separate framework for the movement of persons; The FTA should contain i.a. chapters on investment, government procurement, technical barriers to trade, SPS, state aid, competition and dispute settlement; EU-27 should, throughout the negotiations, safeguard the integrity of the EU integration project and maintain the indivisibility of the four freedoms that form the basis for the Single Market; Preparations for an FTA should, as far as possible, be conducted in parallel with the negotiations on the withdrawal agreement, during the 2-year period foreseen in Article 50 of the Treaty on European Union; It will not be possible for an FTA to enter into force simultaneously with the UK s exit from the EU. The Swedish government should support proposals for a transitional period on a maximum of five years, in order to avoid serious trade disruptions. Authors: Mats Ringborg and Peter Kleen 1 1 We are grateful to Håkan Jonsson, Erik Lagerlöf, Sheila Page, Ulf Svidén and Per Magnus Wijkman for their comments on an earlier version of this paper. Published March 2017 Layout: Annika Modigh Front page photo: JJFarq / Shutterstock.com Design: Stockholm komm ISBN:

3 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE 3 INTRODUCTION For Sweden, Brexit will have negative consequences in a number of areas, both directly and indirectly. The UK plays an important role in Swedish foreign trade. In 2015, the UK was our 4th largest export market, accounting for about 6 % of Swedish exports. UK is our second largest trading partner in services, and the third largest investor in Sweden. The importance of the service sector for Sweden s trade with the UK is particularly apparent (58 %) of the engaged in the exports to the UK are employed in different service sectors. Approximately Swedes live in the UK. About 1000 Swedish companies have subsidiaries in the UK, including the major multinationals and the banks. Brexit is a serious setback for European integration and unity and will make EU weaker, at least in the short run. This is particularly unfortunate in the present situation when both the United States and Russia support anti-eu sentiments and efforts to undermine European unity and ropean values. There is, at present, an existential threat to the European Union and to everything it has achieved since its foundation. This threat has been reinforced by Brexit and by forces that Brexit has unleashed. Consequently, it is of paramount importance to reinforce European cooperation and unity and to uphold the values on which the EU is based. As a result of Brexit, EU will also lose a strong voice for free trade and thereby an important ally for Sweden. In the field of trade policy, Brexit raises a number of important and difficult issues. The purpose of this paper is to review these issues. We identify the options and objectives for future trade relations between the EU and the UK, including the question of UK s access to the Single Market and participation in the EU Customs Union. We also review questions that arise from UK s WTO membership and obligations, as well as the consequences of Brexit for future trade relations with third countries, both for the EU and the UK. We hope that the paper could be useful for the Swedish government when it prepares for the discussions among the EU-27 on EU positions in the upcoming negotiations with the UK. We end the paper with certain concluding remarks and recommendations.

4 4 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE CONTENTS Procedural issues 5 Points of departure for the UK 7 Points of departure for the EU-27 9 The trade regime after Brexit The plurilateral free trade option EEA (the Norwegian model ) The EU Customs Union A bilateral free trade agreement (FTA) Key elements in an EU-UK FTA Questions of principle regarding the Single Market 18 Trade relations with third countries after Brexit Re-establishing schedules of concessions for the UK in the WTO Consequences for EU s existing FTAs with third countries Future trade deals between the UK and third countries 23 Need for a transitional arrangement 25 Concluding remarks and recommendations 27

5 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE 5 PROCEDURAL ISSUES In her speech to the Conservative Party conference on 2 October 2016, Prime Minister Theresa May announced that the formal notification of the UK to withdraw from the EU under Article 50 of the Treaty on European Union will be submitted to the European Council at the end of March 2017 at the latest. According to Article 50, the EU Treaties shall cease to apply to the UK from the date of entry into force of the withdrawal agreement, or failing that, two years after the date when the notification to withdraw was submitted, unless the European Council, in agreement with the UK, unanimously decides to extend this period. On 3 November 2016, the High Court in London ruled that the UK government does not have the authority to proceed with an invocation of Article 50 without approval of the UK parliament. This ruling was appealed by the government to the Supreme Court, which in its decision on 24 January 2017 upheld the ruling of the High Court. Following this, the government presented a short bill to the parliament on 26 January. In the bill the government asked for a formal authorization to commence the withdrawal by invoking Article 50. On 8 February, the bill was passed overwhelmingly by the House of Commons without a single amendment. Final passage of the bill will probably take place in early March, after having been considered also by the House of Lords. The UK government has made it clear that there will be no second referendum on the outcome of the negotiations with the EU. However, parliament will have a vote on whether to approve the withdrawal agreement or not. As soon as Article 50 has been invoked, EU-27 will meet to determine its position in relation to what the UK has declared in its withdrawal notification. The European Council will have to agree by a qualified majority on a mandate for the EU negotiating team, and then seek the consent of the European Parliament under the procedural rules for international agreements (Article 218 of the Treaty on the Functioning of the European Union). This may take some time in view of the elections that will be under way in France, the Netherlands and Germany. However, while this may delay the

6 6 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE start of the negotiations, it will not alter the deadline set by Article 50. The negotiations are expected to start in late spring/early summer. The EU chief negotiator Michel Barnier has stated that the negotiations on the withdrawal agreement will have to conclude by October 2018, in order to provide time for ratification by Member States and approval by the European Parliament before expiry of the two-year deadline prescribed in Article 50. Mr Barnier has also indicated that a free trade deal between the UK and the EU-27 will have to be negotiated after agreement has been reached on the withdrawal agreement. According to Barnier, the EU-27 can only conclude a free trade agreement with a third country, and the UK will become a third country only after Brexit. However, in Art. 50, it is stated the negotiations on the withdrawal agreement should be effected taking account of the framework for its (the UK s) future relationship with the Union. Our interpretation of this is that the two processes could run in parallel, with preparatory talks on an FTA being held during the Art 50 two-year period. This should also be the Swedish position.

7 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE 7 POINTS OF DEPARTURE FOR THE UK UK s objectives for the negotiations with the EU-27 have been outlined in two speeches by Theresa May on 2 October 2016 and 17 January 2017 and in a white paper presented on 2 February. In this paper, the British government basically reiterates the positions outlined in Mrs May s speeches, underpinned by some basic facts. In her October speech, Mrs May emphasized that we are going to be a fully independent sovereign country that is no longer part of a political union with supranational institutions. On the future relationship with EU-27, she underlined that the process we are about to begin is not about negotiating all our sovereignty away again. Specifically on immigration, she said that we are not leaving the European Union only to give up control of immigration again, and we are not leaving only to return to the jurisdiction of the European Court of Justice. On trade issues, she made it clear that it is not going to be a Norway model. It is not going to be a Switzerland model I want it to give British companies the maximum freedom to trade with and operate in the Single Market and let European businesses do the same here. The implication of the speech was that she rejected not only joining the European Economic Area (EEA), but also participation in the EU Single Market and Customs Union. In Mrs May s January speech important clarifications were made, but there are still several issues in the trade policy field that are outstanding. She rejected partial membership of the European Union, associate membership of the European Union, or anything that leaves us half-in, half-out. We do not seek to adopt a model already enjoyed by other countries. We do not seek to hold on to bits of membership as we leave. She made it clear that the UK cannot and will not be a member of the Single Market 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 four freedoms, without having a vote on what those rules and regulations are.

8 8 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE It would mean accepting a role for the European Court of Justice that would see it still having direct legal authority in our country. It would to all intents and purposes mean not leaving the EU at all. She underlined that the UK, as a priority, will pursue a bold and ambitious Free Trade Agreement with the European Union. Through such an agreement, the UK will seek the greatest possible access to the Single Market on a fully reciprocal basis. In the white paper, the UK government declares that it will prioritise securing the freest and most frictionless trade possible in goods and services between the UK and the EU and that it will pursue... a new strategic partnership with the EU, including an ambitious and comprehensive Free Trade Agreement and a new customs agreement. Furthermore, Mrs May stated that I want Britain to be able to negotiate its own trade agreements that means that I do not want Britain to be part of the Common Commercial Policy and I do not want us to be bound by the Common External Tariff. These are the elements of the Customs union that prevent us from striking our own comprehensive trade agreements with other countries. But I want us to have a customs agreement with the EU. Whether that means we must reach 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, I hold no preconceived position I want Britain to be free to establish our own tariff schedules at the World Trade Organization. Mrs May s references to an associate member of the Customs Union in some way, or remain a signatory to some elements of it, do not reappear in the white paper. The reason is probably a realization that such ideas are unrealistic. It appears from the paper that what the British government has in mind when it refers to a customs agreement is rather an agreement on facilitating trade procedures ( we want to ensure that cross-border trade with the EU is as frictionless and seamless as possible ).

9 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE 9 POINTS OF DEPARTURE FOR THE EU-27 From the outset, EU-27 have clearly stated that no negotiations on a withdrawal agreement or a future trade agreement can take place before the UK has invoked Article 50. At the same time, leading representatives of the EU have underlined certain basic principles that will guide the Union s negotiating positions maintaining the integrity of the EU project, and the indivisibility of the four freedoms that constitute the basis for the Single Market. The President of the European Council Donald Tusk has declared that there is no such thing as a soft Brexit the question is a hard Brexit or no Brexit. The German Chancellor Angela Merkel has stated that if we don t insist that full access to the Single Market is tied to a complete acceptance of the four basic freedoms, then a process will spread across Europe whereby everyone does and is allowed what they want. At a press conference on 6 December 2016, Mr Barnier emphasized the following four points that will guide the position of EU in the coming negotiations: Preserve the unity and the interests of EU-27; Third countries can never have the same rights and benefits as member states; Negotiations will not start before notification; The single market and its four freedoms are indivisible. Cherry-picking is not an option. Mr Barnier has reportedly subsequently referred to the possibility of a special post-brexit relationship with the UK in the field of financial services.

10 10 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE THE TRADE REGIME AFTER BREXIT In this section we will review various options 2 for a future free trade area between the EU and the UK after Brexit. Even if some of these options have been rejected by Mrs May we include them in our analysis since bits and pieces of them could be relevant in a future trade deal. We have not elaborated on the libertarian option, namely that the UK after Brexit unilaterally would cut all tariffs and apply a free trade model vis-à-vis the rest of the world. Such a move would certainly run into opposition from certain domestic industries and agricultural producers. In addition, it would remove the leverage that the UK has in inducing other countries to grant preferential treatment to the UK. As two observers put it: The dirty secret of trade negotiations is that leverage comes from having market protection to trade with, not from an ambitious approach to free trade in itself The plurilateral free trade option EEA (the Norwegian model ) The EEA from 1994 is the most far-reaching free trade area 4 which the EU has concluded with any third countries. It covers trade (and a number of other things) between the three EFTA states Iceland, Liechtenstein, Norway and the EU. The remaining EFTA state Switzerland has not joined the EEA (see further below). The non-eu members of the EEA are committed to adopting most EU legislation concerning the Single Market excluding laws regarding agriculture and fisheries. These members make payments to the EU budget and are subject to the decisions of the EFTA Surveillance Authority and the EFTA Court. However, the non-eu members do not participate in the EU Customs Union for goods. All trade in goods between these members and the EU are therefore subject to customs procedures. Likewise, the non EU-members do not benefit from EU s trade agreements with third countries but can of course conclude their own trade and investment deals with such countries. Interesting to note is that antidumping-, countervailing and other safeguard measures between the EU and the non-eu members are prohibited for imports of all products except fish and agricultural products. 2 The description of various options in this section relies heavily on the white paper which the British government issued in March 2016 on possible alternatives to membership in the EU. 3 Adams & Capparelli (2016), p According to the criteria of GATT:s Article XXIV:8.b)

11 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE 11 From a Swedish point of view, an EEA solution for UK s future relationship with the EU would carry important advantages. The UK would be committed to implement all the regulations and decisions taken within the EU in order to achieve the objective of free flow of goods, persons, services and capital. Similarly, Swedish and other EU-based companies would not be faced with unilateral UK rules and regulations that would hinder these companies from working in the UK. The risk of antidumping and other import protection measures would also be eliminated. However, it is hardly surprising that Mrs May has rejected the EEA-model. Becoming a non-eu EEA member would significantly restrict the UK s ability to limit the free movement of persons. It would also require the UK to adopt existing and future EU laws relevant to the EEA Agreement in the same way as an EU Member State, without having any voting rights. It would also carry an obligation to pay to the EU budget. 2. The EU Customs Union A common commercial policy, including a common external tariff schedule, is a cornerstone in the European unification project. If a country leaves the European Union, it also leaves the Customs Union. There is simply no way a third country can be a part of that union and the common commercial policy. However, the idea of UK remaining a part of the EU Customs Union, and consequently being a part of the common EU commercial policy, has apparently been discussed at several UK Cabinet meetings. This has been done in spite of the fact that it could be argued that you don t really exit if you are still a member of the Customs Union, and consequently committed to the common commercial policy. The reason why this discussion has been going on is that remaining in the Customs Union would carry important advantages. Costly administrative procedures would be avoided no need for rules of origin, border controls (including between Northern Ireland and the Republic of Ireland), and no need for a new UK tariff schedule in the WTO. Remaining in the Customs Union might also mean that UK companies would continue to benefit from preferential access to countries with which the EU has concluded FTAs. This is why the business community and many economists have strongly argued in favour of remaining in the Customs Union. The disadvantages from a UK government point of view are also clear the UK would not regain sovereignty in trade policy, and it could not conclude its own bilateral FTAs with third countries. Trade deals with third countries would continue to be negotiated by the European Commission, and the UK would

12 12 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE be bound by the outcome of these negotiations as approved by the member states. It would hardly be possible for the UK as a non-member to take part in the Council s decisions in these matters. It seems clear that the idea of remaining in the EU Customs Union has been rejected by the UK government. At the same time it seeks, as we have already noted, a mutually beneficial new customs agreement to ensure that cross-border trade with the EU is as frictionless and seamless as possible 5. It is difficult to envisage how such an agreement would look like but the idea as such should be supported by the Swedish government. 3. A bilateral free trade agreement (FTA) The UK government has made it clear that it will aim at concluding an FTA with the EU. It has not been specific as to the scope and content of such an FTA other than it should be unique, comprehensive, bold and ambitious. In the debate on Brexit and in the literature, various possible models for free trade arrangements besides the EEA have been mentioned. Among those are the FTAs which EU has concluded with Switzerland (from 1972) and Canada (2016 but not yet ratified). To this list also could be added the comprehensive FTAs which the EU has concluded with Singapore (2014) and the Republic of Korea (2011). Switzerland s trade relationship with the EU is based on a series of bilateral agreements. Over the last two decades it has negotiated 120 such agreements, covering market access in different sectors. Switzerland has only partial access to the Single Market. It has free access mainly in trade in goods except for some agricultural products. Switzerland has limited access to trade in services. The bilateral agreements only provide partial coverage, with only some sectors covered, such as some types of insurance and public procurement. Switzerland has no general access to the EU market in financial services. It is not part of the passporting system that minimises the regulatory, operational and legal barriers to the provision of financial services across the EU. Since Switzerland does not have a bilateral agreement with the EU on banking, Swiss banks need to establish a subsidiary in an EU/EEA country in order to obtain financial services passporting rights. UK banks would need to do the same inside EU-27 when the UK leaves the EU, if no agreement is concluded on separate solutions. The Swiss agreements are static in nature. While the other EFTA countries are required to ensure that their domestic law complies with any EU legislation that forms part of the EEA Agreement, Switzerland does not have the same 5 HM Government (2017), p.40 and 46.

13 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE 13 direct obligation. But if it fails to introduce domestic legislation reflecting certain EU rules, the EU can block Switzerland from access to the related parts of the Single Market. To avoid this, Switzerland chooses in most cases to align with new EU laws as they are adopted. This, in practice, means that Switzerland has a similar position as the non-eu EEA states it is obliged to follow EU rules in its own laws. As a result, Switzerland has to comply with large numbers of EU laws, but without any say over those laws and without full access to the EU market. The EU is not likely to be willing to offer the UK a similar arrangement (and the idea has as we have already noted been rejected by Mrs May). The EU-Swiss bilateral agreements are complicated, and increasingly controversial both within the EU and Switzerland. In 2010, the EU Council of Ministers described the model of EU-Swiss relations as complex and unwieldy to manage and [it] has clearly reached its limits. The web of bilateral agreements between Switzerland and the EU took many years to negotiate. The recently concluded FTA between EU and Canada CETA 6 goes further than any existing EU bilateral trade deal but would still involve less favourable terms for access to the Single Market than those that the UK presently enjoys. This is particularly the case for services. For example, entire sectors (such as audiovisual and the majority of air services) are not included and financial services companies are not able to benefit from passporting under the agreement. Based on the CETA model, UK agricultural and manufacturing exporters would face restrictions in some areas. Even where tariffs had been liberalised, there would still be quotas, customs checks and onerous rules of origin requirements. Under CETA, Canada is not obliged to contribute to the EU s budget. And since Canada is not part of the Single Market, there is no obligation to accept the free movement of persons, although the agreement does involve a requirement to accept arrangements for the temporary movement of professionals working in service sectors. In contrast to the situation within the EEA, antidumping, countervailing and other safeguard measures could be applied to imports of all products in CETA (as well as in all other bilateral FTAs which the EU has concluded with third countries). Yet another template is of course the now almost moribund Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US, where the negotiations seem to have been suspended. The originally high ambition for the TTIP and the elements included in the negotiating mandate could mu- 6 Comprehensive Economic and Trade Agreement

14 14 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE tatis mutandis be applicable also for a deal between the UK and the EU eventually a sort of Cross-Channel Trade and Investment Partnership. 7 Most probably, the character and contents of any form of FTA between the EU and the UK would by necessity have to be more or less tailor-made ( bespoke ) according to the requirements and priorities of the respective parties, reflecting the present trade and investment patterns and the fact that the UK as a member has subscribed to EU rules in a large number of areas that presumably will appear in an FTA. It is important to recall that the point of departure for a negotiation on a UK- EU FTA is unique and different from what has been the case in all FTAs that the EU has concluded. In those cases, an important part of the negotiation has focused around tariff reductions and market access. In the case of the EU and UK, free trade already exists, and the two parties share a common regulatory framework. From this point of view, as is pointed out in the UK government s white paper, the situation is unprecedented. Unlike other trade negotiations, this is not about bringing two divergent systems together. However, as has already been noted above, an FTA of whatever kind requires the existence of a system of rules of origin. This would impose considerable administrative burdens on the companies involved, especially since complex cross-border supply chains involving many companies and countries have become an important feature in today s integrated world economy. And any FTA will mean that customs controls at borders to the EU will have to be introduced and be effective as from the entry into force of the withdrawal agreement. This is an important point also for those third countries, with which the UK eventually will conclude FTAs, and, of course, also for companies from other countries that have invested in the UK. The need for rules of origin and the existence of border checks will be a particular problem for those industries which are dependent on parts and components from abroad and where certain components can cross the Channel many times for various stages of processing before it is finally assembled in the UK or in an EU country. This is true not least for the automotive industry and the aerospace industry. In this context, we note that the UK government has made certain commitments to Nissan, in order to ensure that this company pursues with its plans to produce a new fleet of cars at its Sunderland factory. The company had for obvious reasons expressed worries for its continued operation in the UK as a 7 Niblett (2016), p. 6.

15 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE 15 result of Brexit. The commitments apparently include a promise that no new tariffs or extra bureaucratic burdens will be imposed, and possibly also indications of government support. These promises were apparently sufficient for Nissan to decide to go ahead with their plans. As we see it, it will be difficult for the British government to honour its commitment on no new bureaucratic burdens since a system of rules of origin inevitably impose such additional burdens. Also, the fact that the Government has held out prospects for government support has raised the question of possible illegal subsidies. Furthermore, the UK has to adopt its own tariff schedule that is submitted to the WTO (see further below). The existence of such a new UK tariff schedule is a prerequisite for negotiations on any FTA with the EU, and of course also with third countries. This also means that the timing of when such a tariff schedule is adopted is of great importance. The fact that an FTA is the likely outcome of the forthcoming negotiations on future EU-UK trade relations poses a particular problem for Republic of Ireland and Northern Ireland, since an FTA necessarily leads to the reintroduction of customs checks and border controls between the UK, including Northern Ireland, and the Republic of Ireland. All parties involved have concluded that the reintroduction of such controls would be extremely unfortunate, for a host of economic, social and political reasons. We expect this matter to be high up on the agenda during the forthcoming negotiations between the UK and EU-27. Both the UK, and the Republic of Ireland on the EU side, will seek some kind of solution where new border checks are avoided. During a recent visit to Dublin, Theresa May reportedly declared that there will be no return to a hard border. In the white paper, it is said that we are committed... to minimise administrative burdens and to find a practical solution that keeps the border as seamless and frictionless as possible. No doubt, there is a high degree of understanding among the EU-27 for the special circumstances in this case and the political aspects involved. However, it remains to be seen whether a special solution for trade and movement between Northern Ireland and the Republic of Ireland is at all possible. 4. Key elements in an EU-UK FTA Negotiation of an FTA between the EU and the UK would be unprecedented. While FTA negotiations usually aim to increase market integration between two sides, the UK would start from a position of full integration, and would

16 16 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE presumably seek to maintain many aspects of the status quo while reducing integration in some areas. The integration process would thus in this case go backwards instead of forwards. In this context it is important to bear in mind that the WTO stipulates that free trade areas must liberalise substantially all the trade in goods or have substantial sectoral coverage for trade in services. This means that sectoral agreements are not legal under the rules of the WTO. We note, though, that these conditions have rarely been raised in dispute settlement procedures at the WTO and have been poorly enforced. Furthermore, there is considerable uncertainty over the definition of substantially all. Nonetheless, the UK is a member of the WTO and thereby bound by the rules laid out in the GATT and the GATS, which restrict the parameters of the deal the UK will be able to negotiate with the EU. With this as a starting point and taking into account the red lines of the UK government, we recommend that the two sides aim at concluding a high standard FTA, where the ambition should be higher than in previous, ongoing and planned FTAs (outside the EEA area) which have been concluded by the EU, aiming at the fullest possible degree of integration between the parties. Such an FTA should therefore as far as possible maintain present levels of free movement of goods and services. The following elements seem to us of special importance 8 : Tariff free treatment. The parties should agree to keep tariffs on each other s exports at zero both for industrial and preferably also agricultural products. This would be especially important to sustain integrated supply chains in for example the automotive and chemical sectors. Finding ways to avoid the need for physical border checks on UK-EU trade in goods would be a major challenge. Technical barriers to trade. In line with what has been proposed in the TTIP-negotiations, it is important to establish a mechanism for continuous consultations and coordination between UK regulators and their EU counterparts across all sectors to ensure mutual equivalence of regulations and their easy cross-certification. This would help both sides sustain the most barrier-free mutual market access possible in the future, as existing regulations and standards are adapted or new ones are introduced for new sectors, such as digital services, bio-technology and energy efficient products. Financial Services. Strong worries have been expressed for negative consequences if the possibilities to operate in other EU countries were to be impaired as a result of Brexit, and preparations have been made to move operations to other European capitals. 8 For some of the elements proposed here, see Niblett (2016), p. 6-7.

17 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE 17 As things stand today, UK businesses are able to provide a range of financial services anywhere in the EU and in the EEA, while being based in the UK and regulated by UK authorities. This is because businesses offering financial services have passporting rights which allow them to offer financial services to the rest of the EEA while only having to follow one set of regulations. Businesses can do this either by offering their services under an establishment passport which allows them to set up branches in EEA countries, or by offering services across borders under a services passport. The City of London lobbying group has apparently dropped the idea to pursue an agreement on continued passporting rights for UK financial companies, presumably after having made the assessment that such an agreement is not possible if the UK no longer will participate in the Single Market. Instead, the City seems to hope to reach agreement on a deal on equivalence. The position of the EU in these negotiations will have to be considered very carefully, bearing in mind the importance of the City of London for the EU as a whole. The UK is currently compliant with EU directives on financial services, and there is an interest on the part of firms from EU-27 to continue to be able to operate in the UK. This is something that has been reflected in recent comments by Mr Barnier. Free movement of persons. The EU-27 and the UK should agree on a framework for the movement of persons into each other s jurisdictions but one which falls short of the present free movement arrangements. The solution in CETA to facilitate the temporary movement of skilled professionals should also be considered. It is urgent that the question of the status of EU citizens residing in the UK and UK citizens residing in the EU is resolved as soon as possible. Movement of people across borders, and the possibility of individuals to reside in another country, is particularly important for trade in services. An EU-UK FTA should also cover chapters on i.a. investment, government procurement and sanitary & phytosanitary measures. Common rules on state aid and competition would eliminate the need for antidumping, countervailing and other safeguard measures against the imports from either party. Finally, like in any FTA, dispute settlement provisions should be included. In her January-speech Mrs May stated that an FTA between the EU and the UK may take in elements of current Single Market arrangements in certain areas on the export of cars and lorries for example, or the freedom to provide financial services across national borders as it makes no sense to start again from scratch when Britain and the remaining Member States have adhered to the same rules for so many years.

18 18 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE Such cherry-picking might be hard for the EU-27 to accept, for reasons of principle. At the same time it should be noted that the EU already has granted non-member states some aspects of Single Market freedoms - whether it is mutual recognition of testing and certification for autos (in the Korea agreement) or access for some services sectors (in each of the Korea and Canada agreements). It is hard to see why the EU would want to completely reject such options when it has included them for smaller and more distant markets Questions of principle regarding the Single Market In order to avoid confusion and misunderstanding, it is important to understand the difference between access to on the one hand, and membership of, or participation in the Single Market on the other. All countries have access to the EU s Single Market in the sense that they can export to the EU, provided that the goods exported comply with EU regulations concerning health, safety and the environment, either on the basis of tariffs agreed in the WTO, or via an FTA. The only countries which have full membership of the Single Market are the EU Member States. The EEA states enjoy partial membership 10. According to the Treaty on the Functioning of the EU, the Single Market shall comprise an area without internal borders or other regulatory obstacles to the free movement of goods, persons, services and capital. Member States are not allowed to apply laws or regulations which unjustifiably prevent or discriminate against goods and services imported from other Member States. Member States are committed to harmonisation of laws and regulations in order to eliminate barriers which prevent the realisation of the objectives of the Single Market. The Single Market can be referred to as a regulatory union where members are committed to collectively agree on measures to attain these objectives. EU Member States have concluded that they benefit from the creation of the Single Market since it enhances competition, growth and a more efficient allocation of resources. It is an essential part of the European integration project, and it offers business opportunities that no country can offer alone. The European Commission monitors the application of EU law and can launch infringement proceedings against EU countries that do not comply. Disputes can be brought to the European Court of Justice, which has jurisdiction over disputes that arise in relation to the functioning of the Single 9 Gasiorek et al. (2016), p House of Lords (2016), p. 17.

19 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE 19 Market. There will be considerable pressure from the UK business community that UK regulations are harmonized with the regulations of the EU also after Brexit. From this point of view, it is a problem that Brexiters seem to believe that such regulations simply can be done away with (since they come from Brussels). The notion of unnecessary regulations imposed by Brussels bureaucrats is a recurring theme in the UK debate about the EU. For example, the UK Exit Secretary David Davis declared last July that the UK can significantly improve our growth rate by stopping the flood of unnecessary market and product regulation. Those who make this point do not seem to understand that these regulations have been jointly enacted in order to create conditions for the realisation of the Single Market, to protect European consumers, and to harmonize appropriate standards in the field of health, safety and the environment. In this context, we believe that the UK government greatly underestimates the problems of how to treat the EU body of secondary law, the acquis communautaire, after Brexit. The acquis presently consists of around legislative acts, of which Single Market legislation is a very important part. In her October speech Mrs May stated As we repeal the European Communities Act, we will convert the acquis into British law. When the Great Repeal Bill is given Royal Assent, Parliament will be free subject to international agreements and treaties with other countries and the EU on matters such as trade to amend, repeal and improve any law it chooses. But by converting the acquis into British law, we will give businesses and workers maximum certainty as we leave the European Union. The same rules and laws will apply to them after Brexit as they did before. Any changes in the law will have to be subject to full scrutiny and proper Parliamentary debate This statement brings two problems to the fore one political, one legal. The political problem is that by just rolling over all of the acquis and formally making it UK law, the government has not delivered on the key promise by the Leave campaign. On the contrary, all the laws are, at least initially, kept. The legal problem is that the legislative development does not stop just because the UK is leaving and transferring the acquis to its national rule book. European law will continue to change, through amendments decided upon in Brussels and Strasbourg, and through court cases in Luxembourg. The UK version, for its part, will develop on its own. Over time, in a way that will be

20 20 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE very difficult to keep track of, the two versions will deviate from each other, unless the UK parliament decides to constantly change its laws, to reflect the EU version. This is not likely to happen but it would of course be welcomed by the business community. Over time, the UK parliament might wish to regain control, and deliver on the promise of fewer regulations by amending parts of the acquis. However, this will be an almost unsurmountable task. Even with a rushed agenda, it would take decades to change only half or a third of the body of the acquis in a way that comes close to the pledges in the referendum campaign of a significantly more light-touch regulatory environment for UK business. And how do you select those regulations which have been collectively agreed by EU members, including the UK which are considered unnecessary? UK firms that wish to export to the EU will have to adapt to EU product standards. It is quite possible that any future FTA between the EU and the UK will have provisions on technical barriers to trade where the EU will set the standards. And if the UK adopts national standards that deviate from EU standards, UK companies will have to adapt to these as well, which creates additional complications for business. And lower standards in the field of health, safety and environment may not have been what the British people voted for in the referendum. The notion that a country can have complete regulatory sovereignty while engaging in comprehensive free trade with partners is based on a misunderstanding of the nature of free trade. Modern FTAs involve extensive regulatory harmonisation in order to eliminate non-tariff barriers, and surveillance and dispute resolution arrangements to monitor and enforce implementation. The liberalisation of trade thus requires states to agree to limit the exercise of their sovereignty. All FTA options described in this section require different trade-offs between market access and the exercise of sovereignty. As a general rule, the deeper the trade relationship, the greater the loss of sovereignty 11. This is true also for a future FTA between the EU-27 and the UK. 11 House of Lords (2016), page 71 and 76.

21 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE 21 TRADE RELATIONS WITH THIRD COUNTRIES AFTER BREXIT 1. Re-establishing schedules of concessions for the UK in the WTO The UK is a member of the WTO in its own right. It does not, however, have individual schedules of concessions: it is part of the EU s combined schedules. In leaving the EU, the UK will have to separate its schedules from the EU and decide on its own schedules of concessions for each of the WTO agreements, including agriculture, industrial goods and services. In agriculture, this applies to both market access, domestic support and export subsidies. Before submitting its schedules to the WTO, the UK will have to negotiate formally with the EU to exit from its share of tariff rate quotas and levels of subsidies from those currently shared between the EU s 28 Member States. There are about 100 tariff rate quotas nominal tonnages of imports subject to a lower tariff rate beyond which a higher import duty applies. For example, how much of the EU s tons of beef imports benefiting from lower tariffs will be transferred to the UK? 12 All this has to be done before the UK could negotiate its own FTAs, including with the EU. It is not possible for any country to negotiate a trade agreement with a country that has not adopted WTO schedules, since the negotiations centre around the question of market access and concessions in a broad sense. To establish a new national single, universal set of most-favoured-nation tariff rates in the WTO would be an extremely complex exercise involving a review of every tariff line over 5,000 to determine what rate the UK would wish to apply. This will have to be done also with the service commitments and exemptions which follow from the GATS. Depending on the level which the UK government chooses for these tariff concessions and service commitments, this could lead to renegotiation with some or several of the other WTO members. However, in order to avoid the extremely complex and time-consuming task of establishing a completely new national tariff schedule, the UK could of course adopt the existing EU tariff schedule and service commitments as its own. 12 Adams & Capparelli (2016), p. 3.

22 22 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE This is actually what the UK government seems to have decided to do, and it would of course greatly simplify things, even if such a shadow schedule also have to be approved by all WTO members. In a speech in Geneva last September, Trade Secretary Liam Fox stated We have our own schedules that we currently share with the rest of the EU. These set out our national commitments in the international trading system. The UK will continue to uphold these commitments when we leave the European Union. There will be no legal vacuum... Maintaining the existing EU tariff schedules means that the UK doesn t really exit from an important part of the common commercial policy. Of course, after Brexit, the UK would be free to amend these schedules, for instance as a result of FTAs with other countries. Such amendments would have to be submitted to the WTO and dealt with in accordance with WTO procedures. As well as renegotiating its schedules, the UK will also have to decide on its trade defence (safeguard) measures. What will for example happen to the current over 100 anti-dumping measures that the EU applies to WTO members and which are the result of EU-wide investigations into dumping? If, for example, the UK were to try and impose EU anti- dumping measures on Chinese steel imports, the Chinese could object and demand that the UK carry out new investigations and demonstrate domestic injury and unfair trade Consequences for EU s existing FTAs with third countries The EU has concluded 39 FTAs, and other agreements with a trade component, with 65 countries worldwide. Many, if not most of these agreements, include not only trade provisions (under Community competence) but also provisions in areas in which the competence belongs to the Member States. Consequently, the agreement with for instance Chile is an agreement establishing an association between the European Community and its Member States of the one part and the Republic of Chile of the other. For the EU, Brexit means that the existing FTAs with third countries will have to be amended or where the UK is a major trading party renegotiated. Once the withdrawal process has started, the Commission should notify all parties to the FTAs that the agreements will have to cease to apply for the UK, on the day when the withdrawal agreement enters into force. 13 House of Lords (2016), p Leaving the EEA requires a separate notification.

23 BREXIT: TRADE POLICY IMPLICATIONS AND CHALLENGES A SWEDISH PERSPECTIVE Future trade deals between the UK and third countries UK exporters, on withdrawal from the EU and the EEA 14, will no longer benefit from the preferential treatment granted to EU exporters under the existing FTAs (such as EEA and the FTAs with Switzerland, Canada if ratified, Mexico, Chile, Republic of Korea etc.), unless new bilateral FTAs with similar provisions are put in place. However, for such bilateral negotiations to be meaningful and substantive, the UK has to have a national tariff schedule in place. Such a schedule cannot take effect until the agreement to withdraw from the Union has entered into force. It then has to be approved by all (now 164) members of the WTO. This means that formal negotiations with third countries on bilateral FTAs cannot take place until after Brexit. The conclusion seems to be that there inevitably will be a gap between withdrawal and the time when new UK bilateral agreements can enter into force. During this time, UK companies will find themselves in a position of competitive disadvantage. This is particularly true since the UK government seems determined that Brexit should take place in It seems to us that the UK government has not fully recognized the challenges and complications that the country will face in this field. It is perhaps likely that countries with which the EU has free trade agreements will want to continue to employ the substantive provisions of the EU FTAs to the UK after Brexit. But it will take time to settle these arrangements, even if it were possible to use a simplified procedure (exchange of letters) rather than to go through a complete formal renegotiation. As for countries without such agreements with the EU, it will be necessary to start from scratch. A clear decision by the UK that it will continue to employ the existing EU tariff schedule could of course facilitate things. According to recent reports, the UK pursues informal discussions on trade deals with at least 12 countries. Our understanding is that most, if not all, of these countries have declared that substantive discussions cannot take place until the UK has sorted out its relationship with the EU. For countries that do not have a FTA with the EU, the question will arise whether to give priority to a deal with the EU or with the UK. When Mr Fox was in Washington last July to discuss bilateral UK-US trade issues, USTR Froman declared that it was not possible to meaningfully advance separate trade and investment negotiations with the UK until some of the basic issues around the EU-UK relationship have been worked out. President Barack Obama stated later that he would give priority to the TTIP-negotia-