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#Brexit, EU-exit under a negotiated arrangement

Extract from the House of Commons Library, Research Paper No. 13/42

Beyond the MFN position discussed in the previous chapter (see http://wp.me/p3ZV5A-1FO), there are a host of more preferential trade arrangements between the EU and UK that may be negotiated, although there is likely to be a trade-off between the level of access to the single market (i.e. freedom from tariff and non-tariff barriers to trade), and freedom from EU product regulations, social and employment legislation, and budgetary contributions.

Under a ‘Swiss’ or an EEA model, assuming such an arrangement could be negotiated, the restrictions on trade outlined above would be significantly reduced. In particular, the EEA has full, tariff-free access to the internal market, and the EU’s ‘four freedoms’ concerning movement of goods, services, capital and labour, apply equally to Norway, Iceland and Liechtenstein as they do to full Member States. However, relative to a position of full Membership, a number of restrictions on trade would still apply under an EEA or ‘Swiss’ approach. These are discussed below.

Rules of origin

Because the EU operates with a common external tariff, goods entering from outside can travel freely within the Union once that tariff has been paid (e.g. a mobile phone imported into the UK from China can be re-exported to the rest of the EU tariff free). The same is not true of goods that enter the EU via the EEA (e.g. a mobile phone from China re-exported to the EU from Norway) or via other countries with which the EU has a free or preferential trading relationship, because they do not share the EU’s common external tariff. Determining where a good originated, and hence whether it should attract tariffs, is done through the EU’s Rules of Origin. Given the complexity of some global supply chains and the range of preferential trading relationships the EU operates, this can be a difficult, time-consuming and often subjective process.60 Some of this burden, according to the Trade Policy Research Centre, would fall on UK firms in the form of administrative and compliance costs; they note that “the process of adapting to rules of origin-based duty-free trade under a new UK-EU free trade agreement would be tedious, costly and disruptive to trade”.

In its briefing on Rules of Origin, the US Congressional Research Service also noted that satisfying their requirements could be costly for businesses:

The benefit conferred by the preferential schemes in certain cases becomes marginal in comparison with the administrative workload and cost to plan the product mix to comply with the preferential ROO. This often leads to instances where firms, although meeting the necessary conditions for origin, decide that it is simpler and cheaper to pay the MFN tariff rates.

The briefing cites a 1992 study in connection with the EC-EFTA agreement that found that the cost of border formalities to determine the origin of products amounted to at least 3% of the value of the goods concerned.61

Anti-dumping and other non-tariff barriers

Were the UK in the EEA or adopted the Swiss model, goods would still be susceptible to anti-dumping action by the EU; for instance, in 2005, the EU imposed a 16% duty on Norwegian salmon. As discussed in Chapter 4, membership of the EEA or the negotiation of bilateral agreements analogous to those in Switzerland would also require the UK to adopt EU product standards (and other regulations) across the whole economy.

Restrictions on services trade

As part of the EU’s internal market, EEA countries like Norway are able to conduct services trade on the same basis as other Member States. However, as in other areas, they lack direct influence over how services are regulated at EU level. The loss of influence over the regulatory agenda and the ability to push directly for further services trade liberalisation may be particularly important for the UK, given that it has a comparative advantage in a number of sectors, and runs a services trade surplus with the EU. Many voices in the financial services industry believe that the UK’s ongoing influence over the regulatory agenda is important, particularly as the eurozone crisis brings about a wave of euro area-specific regulation and reform that could be potentially discriminatory to the City. In evidence to the Foreign Affairs Committee, TheCityUK, the lobbying body for the financial services industry, wrote:

… the provision of financial services in the UK by non-UK firms has become to a large degree dependent on the maintenance of [a] common EU legal framework and the UK’s part in devising it and operating within it. The evolutionary character of this common legal framework means that the UK must be engaged at all levels of policy development.

An example of such regulation is the effort by the European Central Bank (ECB), backed by France and Germany, to require clearing houses that deal in significant volumes of euro-denominated transactions to be located within the euro area;62 the UK Government is currently challenging these proposals at the European Court of Justice on the grounds that they contravene the single market principles of free movement of services and capital across the Union. On the other hand, sceptics might point out that the very fact that the UK failed to secure concessions for its financial services industry, despite demanding them at the December 2011 Council summit at which it eventually wielded its ‘veto’, illustrates its powerlessness to influence the agenda even within the EU.63

Were it to leave both the EU and the EEA, in negotiating a trade relationship with the EU, the UK may face particular difficulties, firstly in securing ongoing access to services markets, and secondly in ensuring it benefits from further liberalisation of trade in services within the EU. For instance, despite extensive negotiations on the matter, there is no general and encompassing agreement on the free movement of services between the EU and Switzerland. Financial services trade is an area that could be particularly affected by a ‘Swiss’ approach.brexit



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