Staying in the EU Customs Union after exit

“The” Customs Union, “a” Customs Union, and aligning tariffs with the Customs Union

The idea of the UK staying in the European Union’s Customs Union after we exit from the EU has once again risen into political discourse.

This idea is expressed in different ways. One way is for the UK to stay “in” the European Union’s existing Customs Union. Another way is for the UK and the EU to join together to form “a” customs union between them. Quite what the practical difference is between these two formulae is not clear. A third way it is expressed is for the UK to maintain its external tariffs in alignment with EU tariffs. Vague suggestions are made that this might only be “partial”, ie covering some sectors of goods but not others.

But all these formulae come to the same thing. They all involve us giving up our right to set and decide the tariffs which are applied to goods entering the UK from the rest of the world. But it is not just about tariffs. Customs also operate a vast range of non-tariff controls on goods, all the way from health and other standards controls on food to, for example, safety of children’s toys. In order to operate any of the variously desribed schemes, the UK would also have to apply this vast range of EU mandated legislation as well.
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4.1 What is the EU Customs Union?

What is the EU customs union?

The EU customs union is a system under which all the Member States follow a set of common rules in exercising customs controls over goods entering the EU from the outside. The core of this system of controls is the levying of tariffs and the imposition of trade quotas under the EU’s Common Customs Tariff; but the controls exercised by customs also extend far beyond tariffs to a huge range of other matters, such as checking food for compliance with health standards and checking that consumer goods comply with safety rules (such as limiting lead in children’s toys).

The very nature of the EU customs union requires that the common rules be interpreted and applied in a uniform manner by all Member States. If this failed to occur, it would result in goods entering the EU via the ports of a Member State with laxer controls and then circulating freely inside the EU into the markets of other Member States. Obviously, this cannot be tolerated under a system where no routine customs controls are exercised on the flow of goods inside the EU between Member States, especially since importers might be tempted to “game the system” by diverting their imports into the EU to flow through the ports of a Member State where they had found a weakness.

If the weakness involves failing to impose tariffs in a uniform manner, that would have economic and fiscal effects in allowing lower-cost imported goods into the whole EU market; if the weakness is in safety or environmental standards the risk to consumers could potentially be very serious.

The European Commission makes no bones about the nature of the customs union on its website.

About the EU Customs Union

The Customs Union is a foundation of the European Union and an essential element in the functioning of the single market. The single market can only function properly when there is a common application of common rules at its external borders. To achieve that,  the 28 national customs administrations of the EU act as though they were one.

These common rules go beyond the Customs Union as such – with its common tariff – and extend to all aspects of trade policy, such as preferential trade, health and environmental controls, the common agricultural and fisheries policies, the protection of our economic interests by non-tariff instruments and external relations policy measures.

Today, in an era where terrorism and other serious crimes operate on a cross-border and trans-national basis, customs authorities are increasingly called upon to carry out non-fiscal tasks aimed at improving internal EU security. The customs are thus facing new challenges: they must ensure the smooth flow of trade while applying necessary controls on the one hand, and also guarantee the protection of the safety and security of the Community’s citizens on the other hand.”

The basics part 1: features of a customs union

The European Union’s customs union means that goods which come into the EU from outside are subject to a common external tariff, but once they have entered through an external port and any duty which is due on them has been paid, they can then circulate freely inside the customs union.  And goods which are produced inside the customs union can likewise circulate freely without being subject to tariffs at the internal borders within the customs union.

The main problem with a customs union is that it requires all its members to operate identical external tariffs. This means that each country of the EU must implement the common tariff even where that is contrary to its own economic and national interests. For instance, the UK has to levy high tariffs on many kinds of foodstuffs which are not grown in the UK but are grown elsewhere in the EU, mainly in Southern Europe. Even assuming for the sake of argument that tariff protection can be beneficial (a proposition strongly disputed by some knowledgeable economists) it makes absolutely no sense to levy high tariffs on goods which you do not make inside your own country.  This just drives prices to consumers up above world prices, but any benefits to producer interests from this tariff wall go solely to producers in other countries elsewhere in the customs union.

The requirement that each customs union member must have the same external tariffs causes a further problem.  To be specific, individual members of a customs union cannot negotiate trade deals with non-member countries which involve reductions or waiving of tariffs. The reason is that goods could then flow in from the non-Member State with which the deal had been done without paying the external tariffs, and then circulate inside the customs union into countries who are not parties to the trade deal.  Therefore only the customs union as a whole, and not any individual Member State, can enter into any form of trade agreement involving tariff concessions with non-member countries.

The obligation for Member States not to conclude individual trade agreements with non-member countries has been embedded in the EU treaties since the original Treaty of Rome, which conferred “exclusive competence” on the European Commission to negotiate external trade agreements.

A further consequence of operating a customs union under the EU system is the collection of the tariff revenue into a common central pot. This is because when tariffs are collected at a port of entry, it is unknown where the goods will end up inside the EU and therefore which consumers in which country will ultimately bear the tariffs. This system of sharing tariff revenue is particularly disadvantageous to the UK because it has the highest percentage of its trade outside the EU of any Member State. (See the Eurostat trade statistics table in Brexit – doing a deal with the EU).

It should be appreciated that these restrictions on the rights of the individual members of a customs union are intrinsic in the very nature of a customs union.  They cannot be negotiated away, or it ceases to be a working customs union.

For these reasons, there are not many customs unions in the world which contain substantial countries, apart from the EU itself. There are quite a number of customs unions where very small states or territories form a customs union with a neighbouring or surrounding big state. But the more usual form of trading relationship between larger states is the free trade area.

The basics part 2 – free trade areas

Although many people do not understand the difference between a customs union and a free trade area and tend to lump them together, they operate differently.  Similar to a customs union, a free trade area also achieves reduced or zero tariffs on trade in goods between its members. However, it operates in a different way, which allows its individual members to operate their own differing external tariffs on imports from non-members, or indeed to conclude trade deals with non-members which provide for zero or reduced tariffs.

Free trade area agreements typically apply zero tariffs to goods which originate within a member, but not to goods from outside which are simply imported into and pass through another member of the FTA.  This means that a country’s own tariffs are not subverted by goods from outside the FTA which pass through the ports of another FTA member.  There is, however, an administrative cost in that customs controls between the FTA members are required in order to check whether or not the goods originate within the other FTA member according to “rules of origin”, and levy tariffs if they do not originate within the FTA. Such rules of origin controls are not needed inside a customs union.

The EU is itself a customs union, but it has free trade area relations with almost all European states outside the EU. The non-EU EEA States, Norway, Iceland and Liechtenstein, have a free trade area relationship with the EU, not a customs union. This means that despite being inside the single market, they do have autonomy on external tariffs and therefore are able to operate an independent trade policy from that of the EU.  Switzerland has a separate bilateral FTA agreement with the EU, and in addition, has zero tariff arrangements between itself and Norway and Iceland via EFTA (which as its name implies is a free trade area and not a customs union).  Most other European territories (apart from Belarus) also have FTAs with the EU.

So, whether to enter into a customs union or an FTA agreement involves a trade-off between the administrative costs of operating rules of origin controls within an FTA,  and the economic and political costs of being forced to operate inappropriate tariffs and not being able to conclude international trade agreements with non-member countries.

In the case of the UK leaving the EU, it is also obvious that the disadvantages of being in a customs union with the EU increase markedly once we cease to be an EU member.  While we are an EU member, at least we have a vote in setting the common tariffs and in the EU’s attempts at negotiating and concluding external trade agreements. Once we cease to be an EU member, if we were to remain in a customs union with the EU, we would simply have to take and follow the EU’s policies on tariffs and external trade without having any effective means of securing that these would reflect our own interests.

Customs union – the control mechanisms

It is inherent in the nature of a customs union that there must be very tight harmonisation of the interpretation of the common rules. This is because a weakness in interpretation of the rules by one customs union member compared with others may well result in goods of the kind in question flooding in through the ports of the member which applies the weaker treatment and then fanning out throughout the customs union because of the lack of internal controls between customs union members.

This issue applies most obviously to tariffs, where even seemingly small differences in treatment (e.g. categorising certain goods within a lower tariff category) can have this kind of effect. If the customs union also applies to non-tariff customs controls such as technical standards or e.g. health checks on imported foodstuffs then those controls will also have to be harmonised in detail.

Within the EU, the harmonisation of the rules and of their interpretation is carried out at the first level by the European Commission which operates the common tariff (and special variations to the tariffs such as anti-dumping duties) and gives legal and administrative guidance to national customs authorities. At the next level, the interpretation of the common rules is carried out by the ECJ on preliminary references from courts and tribunals of Member States.

One example is Case C-338/95 Wiener SI GmbH [1997] ECR I-6495 where the ECJ was asked by the Bundesfinanzhof (German Federal Tax Court):

“Is the term “nightdresses” within the meaning of tariff heading 60.04 of the 1985 Common Customs Tariff, specifically tariff subheading 60.04 B IV b 2 bb, to be interpreted as covering exclusively “other” under garments which, in view of their characteristics, are clearly intended only to be worn as nightwear, or does it also cover products which, on the basis of their appearance, are intended mainly, but not exclusively, to be worn in bed?”

Despite a suggestion by the ECJ’s Advocate-General, Sir Francis Jacobs, that the Court might decline to rule on this question because it was so detailed and trivial, the Court did rule, apparently because it was essential for the ECJ to give this kind of detailed ruling for the proper functioning of the Common Customs Tariff across all Member States. In a 23-paragraph judgment, which included reference to a previous case in which it had ruled that ‘pyjamas’ covered clothes mainly worn in bed as well as clothes only worn in bed, the ECJ ruled that the term ‘nightdresses’ in the Common Customs Tariff “must be construed as covering undergarments which, by reason of their objective characteristics, are intended to be worn exclusively or essentially in bed.”

This somewhat comic example illustrates how detailed needs to be the system of interpretation of the common rules of the EU’s customs union.

Being a member of the EU customs union outside the EU

The only major state which is not an EU member but in customs union with the EU is Turkey. (There are also some micro-States, e.g. the Vatican and Andorra, in customs union with the EU). In fact, the customs union with Turkey is not complete since it does not extend to most agricultural goods.

The agreement between the EC (as it then was) and Turkey under which the EU-Turkey customs union operates is set out in a 1995 Decision of the EC-Turkey Association Council.  Its provisions are extremely one-sided, as can be seen from its final Article on interpretation:

“Interpretation

Article 66

The provisions of this Decision, in so far as they are identical in substance to the corresponding provisions of the Treaty establishing the European Community shall be interpreted for the purposes of their implementation and application to products covered by the Customs Union, in conformity with the relevant decisions of the Court of Justice of the European Communities.”

Turkey is required to “align itself with Common Customs Tariff” (Article 13(1)) and also to “adjust its customs tariff whenever necessary to take account of changes in the Common Customs Tariff” (Article 13(2)). Turkey has no right to be involved in the EC’s decisions on changing its Tariff, but under Article 14(1) is to be “informed” of such decisions “in sufficient time for it simultaneously to align the Turkish customs tariff on the Common Customs Tariff.

More generally, Article 56(1) says:

“1. Where it adopts legislation in an area of direct relevance to the functioning of the Customs Union as defined in Article 54 (2), the Community shall immediately inform Turkey thereof within the Customs Union Joint Committee to allow Turkey to adopt corresponding legislation which will ensure the proper functioning of the Customs Union.”

Similar provisions require Turkey to adopt EU Regulations and ECJ case law in the area of competition law (Article 39(1)(a)).

Turkey, of course, has no vote on such legislation, merely a right to have Turkish experts “informally consulted” on occasions when Member State experts are consulted (Article 55(1)).

Regarding trade with non-Member countries, Turkey is required by Article 16 to harmonise its commercial policy (i.e. trade deals with non-EU countries) with that of the EC. Thus Turkey is obliged to grant tariff-free access to goods from a country with which the EU has negotiated a free trade agreement, without having a vote or a say in the negotiations.

However, this does not mean that Turkey will then necessarily get tariff-free access for its goods into the market of that non-Member state. That is dependent (under Article 16(1)) on Turkey being able to negotiate a parallel trade agreement with that non-Member state.

Nor can Turkey negotiate its own free trade agreements with non-Member states. Doing so would breach the requirement to align its tariffs with the Common Customs Tariff.

For these reasons, the Turkey/EU customs union agreement has been compared by critics to the Capitulations of the Ottoman Empire, under which traders from Western countries entering the Ottoman Empire were exempted from local prosecution, local taxation, local conscription, and the searching of their domicile.

The manifest inequalities in the relationship between Turkey and the EU under the customs union agreement have led to a World Bank Report. Its recommendations have not been implemented.

Back to Guide to Brexit Contents Page

from: https://www.lawyersforbritain.org/eu-deal-customs-union.shtml

3.1 Brexit and International Trade

One consequence of the UK’s membership of the EU is that many aspects of the UK’s external relations are now conducted partly or wholly through the EU. As a result of Brexit, the UK will be able to re-assume direct control of its external relations, including trade relations.  The pro-Remain camp suggested in the campaign that Brexit would result in years of uncertainty while the UK renegotiates its international trade arrangements.

This contention is not supported by the facts and evidence.  As we explain in more detail in this research piece:

  • The UK cannot currently decide the level of tariffs which we levy on imports because these are set at a uniform level for the EU as a whole under the EU’s customs union. After exit, WTO rules will apply which will allow the UK to decide the level of our own tariffs on imports, provided that they are at or below tariffs under the EU customs union.
  • Again, because of the EU customs union and ‘common commercial policy’, the UK is not able to negotiate its own trade agreements with non-member countries — we can only negotiate trade agreements collectively as part of the EU. The UK will be able to participate in new trade agreements with non-member countries from the day after exit, or at least the day after the transition period if that goes ahead.  The process of negotiating new trade deals can legally be started during the 2-year Article 50 notice period leading up to Brexit, with a view to bringing them into force on or soon after the date of exit or the end of the transition period.
  • The EU has existing free trade agreements which currently apply to the UK as an EU member.  Most of these EU agreements are with micro-States or developing countries and only a small number represent significant export markets for the UK.  Both the EU and the member states (including the UK) are parties to these agreements. The UK could simply continue to apply the substantive terms of these agreements on a reciprocal basis after exit unless the counterparty State were actively to object. We can see no rational reason why the counterparty States would object to this course since if they objected,  it would subject their existing export trade into the UK market, which is currently tariff-free, to new tariffs. This is the simplest course to “roll over” the substantive terms of these agreements as they stand, with a view to improving them in the future.
  • The UK was a founder member of EFTA but withdrew when we joined the EEC in 1973. We could apply to re-join with effect from the day after Brexit. the UK is one of EFTA’s largest export markets.  However, the UK’s huge economic and population size would swamp those of the four EFTA states and they would probably prefer an external free trade and cooperation agreement with the UK, in order to continue uninterrupted free trade relations with the four EFTA countries, and also to participate in EFTA’s promotion of free trade deals with non-member countries around the world.
  • The EU is seriously encumbered in trying to negotiate trade agreements by the many vociferous protectionist special interests within its borders.  The UK will be able to negotiate new trade deals unencumbered by these special interests much faster than the EU, and with a higher priority for facilitating access to markets for our own export industries including services.
  • It is completely untrue that a country needs to be a member of a large bloc like the EU in order to strike trade deals.  The actual record of the EU compared to that (for example) of the EFTA countries demonstrates the direct opposite.
  • The baseline of our trade relationship with the remaining EU states would be governed by WTO rules which provide for non-discrimination in tariffs and outlaw discriminatory non-tariff measures. From this baseline, and as the remaining EU’s largest single export market, the UK would be in a strong position to negotiate a mutually beneficial deal providing for the continued free flow of goods and services in both directions.  We explain what such a deal would look like in our section on Brexit – doing a deal with the EU.

The EU and the common commercial policy

The EU is a customs union, not simply a free trade area.  We will explain some of the intricacies and consequences of the difference between a customs union and a free trade area later.  But the point of a customs union is that all its members operate a single unified system of customs tariffs so that any particular category of goods will be charged the same tariff whether it enters the EU via, say, Rotterdam or via Felixstowe.

Because the external tariff wall is identical for all members, the members of a customs union need to operate as a bloc when they enter into trade agreements involving tariffs with other countries.  An agreement to reduce or eliminate tariffs on imports from another country necessarily involves the customs union as a whole.  For example, if one country in the customs union acting alone were to reduce tariffs on goods from an external country, those goods would then flow in through its ports and circulate around the whole customs union, by-passing the higher tariffs imposed at the ports of the other customs union members.

For this reason, a common external trade policy was built into the Treaty of Rome from the inception of the EEC, as a necessary counterpart of the customs union created by that Treaty.  This was called the “common commercial policy”. Under that policy, the European Commission is entrusted with the primary responsibility for negotiating trade agreements, under the supervision of the Member States acting through the Council of Ministers.  Trade agreements may then be concluded by the EEC (now the EU) in its own name, which has so-called “exclusive competence” to conclude agreements with non-member countries falling within the field of the common commercial policy.  The word “competence” here has the French legal meaning of the legal power to do something.

The WTO Agreements and “mixed competence”

In practice,  trade agreements almost always extend to cover broader subject matter than just tariffs and related matters falling within the scope of the EEC/EU common commercial policy.  Where an external agreement contains provisions which extend beyond the scope of the common commercial policy or the EU’s other powers to conclude external agreements in its own name, it is necessary for the Member States as well as the EU to be parties to the agreement.  This is called a “mixed” or “shared” competence agreement: where part of the competence to conclude the agreement belongs to the EU, but part of it remains with the Member States.

One particularly important series of mixed competence agreements were the World Trade Organisation (WTO) Agreements which were concluded in 1993 as a result of the Uruguay Round Multilateral Trade Negotiations.  This linked series of Agreements form the bedrock of global trade.

Both the individual Member States including the UK, and the EU itself, are parties to the WTO Agreements. The respective legal powers of the EC (as it then was) and the Member States were ruled upon by the European Court of Justice in Op 1/94 Re the Uruguay Round Agreements [1994] ECR I-5267.  The Court rejected a contention by the European Commission that the EC had across-the-board competence to conclude the WTO Agreements in its own name.  Although the core provisions of the WTO Agreements relating to trade in goods fell within the EC’s exclusive competence under the common commercial policy, the Court ruled that other areas covered by the WTO Agreements relating to services (parts of the General Agreement on Trade in Services – GATS) and the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) were outside the EC’s competence or were areas where the EC’s competence was shared with the Member States.

The upshot of this “mixed competence” scenario is that vis-a-vis other parties, the EC/EU is responsible for compliance with, and entitled to the benefit of, certain aspects of the WTO Agreements; while the Member States individually remain responsible for, and entitled to the benefit of, the remaining aspects.  The boundary between EC/EU and Member State competences is not stationary: under the ECJ’s Lugano doctrine, the EU acquires external competence in areas where internal EU harmonisation occurs, and a significant shift in competence took place under the Lisbon Treaty which made the trade-related aspects of intellectual property part of the EU’s commercial policy.  While this fluctuating boundary line may be confusing for other WTO members, it is in general accepted by them.

However, the consequence of this after Brexit is straightforward.  The EU will cease to have any competence in respect of the UK’s trade or other external relations, and the UK will automatically assume rights and responsibilities in respect of 100% of its relationship with other members under the WTO Agreements.  In addition, trade relations between the UK and the remaining EU (“the r-EU”) will cease to be governed by the EU treaties, and will automatically be governed by the framework of the WTO Agreements – unless of course a replacement trade agreement is negotiated between the UK and the r-EU which comes into force on exit.

There is no question of the UK having to leave the WTO or to re-apply for membership. The UK is one of the original founding members of the WTO, as laid down by Article XI(1) of the WTO Agreement:

Article XI
Original Membership
1. The contracting parties to GATT 1947 as of the date of entry into force of this Agreement, and the European Communities, which accept this Agreement and the Multilateral Trade Agreements and for which Schedules of Concessions and Commitments are annexed to GATT 1994 and for which Schedules of Specific Commitments are annexed to GATS shall become original Members of the WTO.

Rights and obligations under the WTO Agreements

The WTO Agreements provide the present-day framework for global trade and contain a number of very important principles and rules, as well as a mechanism for the adjudication of disputes under the World Trade Organisation.  Resort to the WTO disputes mechanism is at present precluded to the UK in any disagreement with the EU or other Member States by Article 344 of the Treaty on the Functioning of the European Union (TFEU), which states that:

“Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein.”

One of the key principles of the WTO Agreements is non-discrimination in trade relations.  This means that WTO members are not allowed, for example, to charge different tariffs on goods imported from different countries except in clearly defined and limited circumstances.  Thus, following Brexit and assuming for the sake of argument that no trade agreement was reached between the UK and the r-EU, the r-EU would apply its standard external tariff rates to imports from the UK but would not be allowed to discriminate by charging higher rates to the UK than to other non-EU countries.  Similarly, the UK would apply its standard external tariffs to imports from the r-EU.

However, the UK would not be obliged to charge tariffs on its imports at the same rates it is obliged to charge while it is a member of the EU customs union, and would certainly have the legal right to reduce them as it sees fit.  The EU has given a large number of commitments in multilateral trade talks not to increase its tariffs above certain levels (so-called “bound tariffs”).  Because, as explained above, these commitments were given by the EU itself on a matter falling within its exclusive competence and not by the individual Member States, it is probable, as a matter of legal theory, that the UK after exit would not be bound by these commitments and therefore could in theory raise its tariffs above the levels of the EU’s bound tariffs.

However, in practice, it is very unlikely that the UK would wish to raise tariffs after exit, and the Department of International Trade for reasons of simplicity has opted to replicate the EU’s Schedules of bound tariffs at the WTO. As a global trading nation, the UK has a strong interest in the general reduction of tariff levels around the world and would certainly not wish to act in a way which contradicted the spirit if not the letter of the WTO Agreements. Under Article XXIV of GATT 1994, when a customs union is formed its overall weighted average of tariffs needs to be the same as or lower than the weighted average of tariffs of its component states,  and the UK would certainly wish to apply a  similar principle when it leaves; i.e. to keep its average tariffs the same as or lower than under the EU’s current tariff regime.

This is an important point.  The UK would be under no obligation to maintain its tariffs at the same level as it is currently obliged to impose under the EU customs union. In many cases, EU tariffs are set at high levels in order to protect industries in other parts of the EU where the UK has little or no domestic industry to protect,  such as textiles and clothing, shoes and many kinds of heavily protected agricultural produce. In these cases the UK receives no benefit but pays twice over for the privilege of protecting foreign industries from lower-cost competition in the world market:  our consumers pay higher prices than they need for the products concerned, and on top of that and to add insult to injury, we have to hand over the tariffs collected at our ports to the EU as part of its so-called “own resources”.

One astonishing aspect of the pre-Referendum May 2016 Treasury study purporting to demonstrate the economic disadvantages of leaving the EU was its assumption that the UK post Brexit would continue to levy tariffs on imports at the same levels as those imposed under the EU customs union, so needlessly punishing our own consumers by forcing them to pay higher prices than available on world markets.  It would be a clear and unequivocal benefit of leaving the EU to have the right to set tariffs at levels which suit our own circumstances and probably, as a nation with a bias to free trade, reducing or eliminating them in many cases.

As a lawyers’ group, we do not feel qualified to attempt to quantify this potential benefit in monetary terms but point to the study published by Prof Patrick Minford and others of Economists for Free Trade which suggests that leaving the EU and adopting a liberal tariff and trade policy will decrease prices and greatly boost GDP.

Under Article XXIV paragraph 5 of GATT 1994, members of the WTO are entitled to form customs unions or free trade areas and to abolish tariffs between themselves without this being regarded as discriminatory against other countries.  The EU is a customs union.  After Brexit, the UK could, therefore, maintain a zero tariff regime in both directions between itself and the r-EU either by continuing to belong to the EU customs union or by entering into a free trade agreement.

According to the latest figures (2015, ONS “Pink Book”) the UK exported £134.3bn worth of goods to the r-EU but imported £223.0bn.  This indicates that the imposition of tariffs on bilateral trade between the UK and the r-EU after Brexit would be very substantially more painful for r-EU exporters than for UK exporters, were it allowed to occur.

We deal with the likely terms of a UK-EU post-Brexit trade agreement,  in a later section.  In this section, we concentrate on the UK’s post-Brexit trade relations with non-EU states.

The EU’s Free Trade Agreements and the UK

The EU has concluded a number of free trade agreements with non-member States.  These provide for the elimination of tariffs on trade in most goods, and typically also seek to eliminate or at least reduce non-tariff barriers.  A number of these agreements provide for free trade in services as well as goods.

For the reasons explained above about ‘mixed competence’, the EU Member States (including the UK) are normally parties to these free trade agreements as well as the EU itself.  This has important implications when it comes to Brexit, as we shall explain.

Taking, for example, the EU-Korea Free Trade Agreement concluded in 2011, both the EU itself and the Member States are parties to the treaty with the Republic of Korea.  The definition of the Parties in Article 1.2 refers to the “mixed competence” explained above:  the ‘EU Party’ is defined as ‘the European Union or its Member States or the European Union and its Member States within their respective areas of competence as derived from’ the EU Treaties.

The substantive obligations in the agreement are expressed to apply between the Parties.  Thus, for example, the obligation in Article 2.5 to eliminate customs duties states that “each Party shall eliminate its customs duties on originating goods of the other Party in accordance with its Schedule included in Annex 2-A.”  The FTA also contains mutual obligations regarding freedom to provide services, intellectual property, and other matters.

There would be no difficulty in the UK continuing to comply with the substantive obligations of this FTA after Brexit, and Korea on a reciprocal basis would have no difficulty continuing to apply these substantive provisions both to the UK and the r-EU.  This step would not require any renegotiation of the substantive provisions of the FTA:  all that would be needed would be a statement by the UK that it intended after Brexit to continue to operate the terms of the FTA between itself and Korea, and an acknowledgement by Korea that it would likewise continue to do so.

There are also procedural provisions in the FTA which involve bilateral joint committees or bilateral disputes and arbitration procedures between the EU and Korea.  Clearly, it would not be appropriate for the UK to continue to be represented by the European Commission or other EU organs in its relations with Korea after Brexit, so these would need to be operated on a bilateral UK/Korea basis in respect of the UK’s obligations under the FTA.

In order to provide for the smooth and continued flow of trade in both directions on Brexit, no new FTA or renegotiation of the substantive terms of the EU-Korea FTA would be necessary.  All that would be required would be a simple acknowledgement by the UK and Korea that they would continue to operate its substantive terms on a mutual basis until further notice, and to set up bilateral UK/Korea machinery to mirror the bilateral EU/Korea machinery of the FTA.  It is likely that after Brexit the UK would wish to go further and both strengthen and deepen existing FTAs such as the one with Korea and negotiate new FTAs with other parties; but this longer-term process would in no way prevent the rolling over of the terms of the existing EU FTAs into UK FTAs.

Korea could, in theory, object to the rolling over of the FTA in this way, but it is impossible to see what conceivable reason it would have for doing so.  If Korea were to bring to an end the existing free trade relationship between itself and the UK as an EU Member State, it would result in the renewed imposition of tariffs on Korea’s goods exports to the UK, which are substantial and include cars and electronic goods.

We have taken the EU-Korea FTA as an example, but very much the same points would apply to the EU’s other FTAs (which normally include the UK and Member States as treaty parties as well as the EU for the reasons explained above).  In fact, this “rolling over” of treaty obligations is a familiar process in international law.  It happens in cases of “State succession” whereby an existing State splits and the component parts wish to continue existing treaty relationships with other States.  For example, when Czechoslovakia split into the separate states of the Czech Republic and Slovakia on 31 December 1992, both new States agreed to assume and continue to honour the treaty obligations of the former State of Czechoslovakia, and other States and international bodies accepted the succession as being effective,  where necessary agreeing new machinery for the separate representation of the two new States.

The exit of the UK from the EU is not legally a case of State succession. As explained above, the UK will reassume the full powers of its existing Statehood by re-assuming rights and responsibilities for its own international relations in areas at present where its interests are represented via the EU.  However, the practical issues involved are very similar and there is a similar mutual interest in preserving the continuity of existing treaty arrangements, particularly those which affect day-to-day existing trade, unless there is some good and concrete reason for changing those arrangements.  It follows that the international counterparties to the existing EU FTAs will almost certainly follow general State practice in State succession cases and accept the rolling over of FTA arrangements so that they continue to apply to the UK after Brexit.

The European Free Trade Association (EFTA)

The UK was a founder member of the European Free Trade Association (EFTA) when it was formed in 1960.  EFTA operated as a free trade area in Europe alongside the EEC and contained, in addition to the UK, Norway, Sweden, Denmark, Switzerland, Austria, and Portugal.  In 1973, the UK and Denmark joined the EEC and, as a result, withdrew from EFTA.

As explained above, the EEC is a customs union and it is not possible for individual member states who are within a customs union to belong to a free trade area with external countries: it is necessary for the customs union as a bloc to belong to a free trade area.  It was clearly not desired for the UK and Denmark to terminate their free trade relationship with the other EFTA states when they joined the EEC in 1973, and the solution adopted was for the EEC as a whole to enter into free trade agreements with the remaining EFTA states.  This preserved the free-trade relationship between the UK and Denmark and the other EFTA states, and indeed expanded it so the EFTA members also came into free trade relations with the other EEC Members (the original Six).

Sweden, Austria and Portugal also subsequently joined the EEC and as a result withdrew from EFTA, although preserving their free trade relationships with the EFTA states as a result of the bilateral free trade agreements between the EEC and the remaining EFTA countries.  EFTA now consists of Norway, Iceland, Switzerland and Liechtenstein.  As regards 3 of those States, the European Economic Area Agreement (to which the EU and the EU Member States are parties) now largely regulates free trade relations between those three states and between them and the EU.  However, Switzerland declined to join the EEA and, as a result, the trade relations between itself and the other EFTA States are still governed by the EFTA agreement (now revised and known as the Vaduz Convention).

It is logical for the UK to seek to enter into a replacement free trade agreement based on the terms of the Vaduz Convention with the four current EFTA states in order to preserve the existing free trade relations between the UK and the EFTA states, avoiding the risk of, say, Swiss exports into the UK being subjected to tariffs (and vice versa).  Notably, in 2013, the UK was Switzerland’s fifth most important export market in the world (Swiss official website), while the UK was Norway’s single most important trading partner, receiving 25% of Norway’s total exports in that year (Norway official website).

The revised EFTA convention (the Vaduz Convention) extends beyond free trade in goods and includes provisions on free trade in services and the free movement of capital and of persons. None of these should be problematical to the UK given that the Vaduz Convention only applies between its members and so would not act as a gateway for the free movement of persons from the EU or elsewhere.  All four EFTA states have standards of living comparable to or even higher than the UK so do not present any mass migration risk. (The last occasion on which uncontrolled migration from Norway was problematical was when the invading Norwegian army under King Harald Hardrada was defeated by King Harold Godwinson of England at the Battle of Stamford Bridge on 25 September 1066).

Re-associating ourselves with EFTA would have an importance beyond direct trade relations between the UK and the EFTA states.  This is because, besides facilitating and deepening free trade between its own members, EFTA also facilitates free trade relations between itself and other countries. In this regard, EFTA has been notably more successful than the EU, contrary to pro-Remain mythology peddled in the campaign which claimed, contrary to the facts and objective evidence, that it is beneficial to belong to a large bloc like the EU in order to forge trade agreements with other countries.

In fact, it is a positive barrier to the successful conclusion of free trade agreements to belong to the EU.  On 26 April 2016, El Pais reported that France and a group of other EU Member States pressed the EU Commission to delay the restart of the already heavily delayed free trade talks between the EU and Mercosur, the Latin American bloc which includes Brazil and Argentina.  Their concern was the potentially harmful effects of free trade on some sectors of EU agricultural producers who would be exposed to competition from South American producers.

More recently, the coming into force of the long-awaited Canada-EU trade agreement was delayed by the refusal of Romania to ratify the agreement because of a visa dispute with Canada, and by objections in the Parliament of Wallonia.

Similarly,  the long drawn out and ultimately abortive EU-USA attempts to negotiate a Trans Atlantic Trade and Investment Partnership (TTIP) were severely hampered by France’s requirement that the EU should insist on the French film industry being shielded from open competition from Hollywood.  Since Hollywood is one of the USA’s most important export industries,  this and other protectionist demands caused severe problems in progressing the talks and the prospect of a free trade agreement between the EU and the USA seems dead for the foreseeable future.

As a consequence of the EU’s lack of success in negotiating free trade agreements with major export markets, the EU’s trade agreements are heavily skewed towards agreements with less developed countries, in Eastern Europe and the Mediterranean and elsewhere, and a large number of micro-states (Map of EU FTAs).  These agreements may be worthwhile for reasons other than trading self-interest, for example, to assist in the development and political stabilisation of these countries, and for those reasons, the UK may well wish to continue these free trade arrangements after exit.  But as regards significant export markets, the EU has only concluded its agreement with Korea in 2011 and has only just reached an agreement with Canada after years of negotiation.

By contrast, EFTA has been notably successful in reaching agreements with large and growing export markets around the world (EFTA Free Trade Map), and has ongoing negotiations with major and growing export markets such as India, Malaysia and Indonesia.

Negotiating trade deals with non-EU countries before exit

The machinery of Article 50 of the Treaty on European Union means that there is a period of 2 years between the UK’s formal notification of its decision to leave the EU on 29 March 2017 and the actual exit date when the EU Treaties cease to apply to the UK and it ceases to be a member state. Although claims have been made to the contrary, it is quite clear that the UK is legally entitled to negotiate and conclude, during the period before exit, trade agreements which will come into force from and after the date of exit: see Negotiating International Trade Treaties before Exit.

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from: https://www.lawyersforbritain.org/int-trade.shtml

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