As Parliament debates the Withdrawal Agreement, there have been calls for the UK to continue its membership of the European Economic Area (“EEA”) as an interim step before progressing to a more usual free trade agreement arrangement. This has been called ‘Norway then Canada’. It is also now emerging as a potential Plan B in case the Prime Minister’s (PM) deal fails in the Commons. We first look at the mechanics by which continued EEA membership might be achieved, and then go on to describe the reasons why remaining as a member of the EEA even for a short period would be damaging to the UK. Far from being a compromise, the EEA option even without the Customs Union attachment (the plus of Norway plus) is even more restrictive for the UK than the PM’s deal. Liam Fox testified to this effect in the International Trade Committee on December 5th where he stated that “In many ways it closer to EU membership than the agreement being put forward today. I find it unbelievable that those who can’t agree with the current agreement put forward by the government would want EEA or EFTA status.” There are three variations to the EEA model: Not joining the European Free Trade Association (EFTA) and ‘continuing’ as party to the EEA Agreement Joining EFTA, and then becoming party to the EEA Agreement as an EFTA member Joining EFTA as an Associate Member and then becoming an EFTA party to the EEA Agreement. The EU would still claim all of these options require the UK to remain in a customs union with the EU to avoid a ‘hard border’ in Ireland. All of these options require other parties to concede to the UK’s actions, whether in joining EFTA, or renegotiating the EEA agreement. But time is running out for these negotiations and there is currently little evidence of political will. Variation one (non-EFTA) can be discarded as the EEA Agreement is explicit about only applying to EFTA or EU members. This is not easily altered as it is built into the ‘institutional provisions’ of the EEA Agreement. The EU could still claim there needs to be a backstop in the event that the UK eventually leaves to pursue a ‘Canada +’ deal. Variation two precludes membership of the Customs Union, as EFTA members must apply to become party to all EFTA Free Trade Agreements (FTA). Article 50 does not give the EU competence to negotiate this with an existing member state. Britain would need to leave the bloc first. Variation three would require a renegotiation of the EFTA convention, and it would not be guaranteed that a new ‘associate member’ would be allowed into the EEA by the EU. As with option two, Britain would need to leave the EU and then negotiate this. Even if the legal and political difficulties could be surmounted, all of these options simply delay the process of leaving, creating additional work in the interim for businesses, without dealing with uncertainty over the final arrangements. The difficulty of leaving current arrangements demonstrates how challenging it would be to move out of EEA membership once in. Once in, there are also further difficulties: The UK would be unable to end free movement. The UK would not have regulatory autonomy, and this would make any serious trade policy with countries like the US, or Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) accession impossible. This is because the UK would be unlikely to commit to the regulatory provisions of CPTPP given we would not have control over our regulatory system, and any deal with the US would fall at the first hurdle because we would not be able to offer regulatory concessions; especially on goods and agriculture. Part 1 – Getting in The Proposal This proposal appears to be a rebrand of an idea promoted by some MPs in spring this year: joining EFTA in order to accede to the EEA Agreement. The re-brand proposes that joining EFTA and remaining in the EEA for a time could replace the “implementation period” under the Withdrawal Agreement currently being negotiated by the EU and the UK. It would enable the UK to negotiate and transition to a more usual state to state free trade agreement with the EU, often called “Canada +”. Variations on this theme include not joining EFTA because our membership of the EEA Agreement will continue as we are a contracting party in our own right, and becoming an ‘associate member’ of EFTA. EFTA membership (currently comprising Norway, Iceland, Switzerland, and Liechtenstein) does not by itself give continued preferential single market access. EFTA is a free trade agreement between its parties. The link with the EU for EFTA countries requires signing the European Economic Area (EEA) Agreement, as Norway, Iceland and Liechtenstein have, or negotiating separate bilateral deals as Switzerland has done. For the purposes of this briefing we will concentrate on the EEA route, which its proponents consider to be an off the shelf route to achieving continuity and frictionless trade, as we continue our negotiation for a bespoke free trade agreement. Option 1 – Remaining in the EEA First, let’s address the variation under which we simply rely on being a member of the EEA Agreement at present and do not give notice to withdraw. This assumes that because we are named as a party to the agreement, the rights and obligations under the agreement must continue whether or not we are a member of the EU or EFTA. Given the wording of the EEA Agreement, it is clear that this is not the case. It is specifically stated to apply only to the territories of the EU and the EFTA parties, known as the two pillars – the EU pillar and the EFTA pillar. The provisions that deal with managing and decision making under the agreement, the so-called “institutional provisions” are expressly designed to create a balance between the EU pillar and the EFTA pillar. The EFTA Secretariat is of the view that these provisions would not allow the UK to continue as a functioning EEA party in its own right. In its FAQs on its website it states the following: Article 126 of the Agreement on the EEA makes it clear that the EEA Agreement only applies to the territories of the EU, in addition to Iceland, Liechtenstein and Norway. Under the present wording of the EEA Agreement, it is therefore impossible to be a party to the EEA Agreement without being a member of either the EU or EFTA. Even if the UK government were to change course and seek to claim that the UK’s membership of the EEA Agreement continues unabated by having left the EU, if the other parties don’t agree we would be caught up in protracted negotiation and even potentially litigation. Given the current state of negotiations, such a change of course would not, one imagines, be popular with the EU and EFTA members. Option 2 – Joining EFTA So why not join EFTA and then accede to the EEA Agreement in the normal course? This is not an off the shelf model. Membership of these agreements is not available as of right. It must be applied for and conditions must be met. Although both EFTA and EEA membership can be terminated on 12 months’ notice, neither envisage temporary membership (other than in order to move from EEA membership into full membership of the EU). It is highly questionable that the four EFTA members, all of whom would have to agree the UK’s accession to EFTA, and then the 27 EU member states who would have to agree the UK joining the EFTA group of the EEA Agreement, would agree such a disruptive process and time consuming negotiation in the knowledge that it would only apply for a period of two or three years. A more recent iteration of the Norway then Canada model proposed by MP Nick Boles concedes this and proposes that the UK would agree not to exercise its right to terminate EEA membership “while the EU is working in good faith to conclude a new set of agreements that preserve in perpetuity no hard border on the island of Ireland”. The prospect of ever leaving the EEA in that scenario seems vanishingly small, given that the effort to guarantee no hard border in perpetuity is exactly what has led us to the current impasse as the EU claims there is no way to achieve this without Northern Ireland remaining in its customs union and internal market for goods. In any event there is not enough time to negotiate EFTA membership and transition to the EEA pillar of the EEA Agreement before 29th March 2019. This would require new negotiation guidelines to be agreed by the EU27 and ratification, by the UK, all the EFTA states, and all EU Member States. Relevant schedules and governance arrangements would all have to be renegotiated if the UK wished to be able to have any special arrangements to reflect our circumstances, for Gibraltar, for example or for the needs of financial services or other sectors. Even if there were the political will to do so (which seems unlikely for a time limited arrangement), in practical terms the process could not be completed to take effect as a transition. The prime minister of Norway has already indicated that the interim membership approach would not be welcomed by the exiting members, noting that “to enter into an organisation you are preparing to leave at the same time is also a little bit difficult for the rest of us”. There is a more serious obstacle before any such negotiations could even be contemplated. The EU’s position is that it cannot negotiate such agreements with an existing member state, as Article 50 does not give sufficient competence and the other relevant provisions of the EU treaties do not cover negotiations with current EU members. Many commentators consider that the boundaries of article 50 have already been strained beyond its limits by including in the Withdrawal Agreement an ongoing customs union and single market arrangement for Northern Ireland, and even more extending this to the whole of the UK, even on a temporary basis, and even as a backstop. It would be very difficult for the EU to stretch this further and re-negotiate the EEA Agreement under Article 50 and doing so would almost inevitably be subject to legal challenge, making it risky and uncertain. This means that to join the EEA, the UK would have to leave the EU with no deal in March 2019 and continue negotiations for the future relationship. This takes away a large part of the claimed benefits of the EFTA/EEA model, as the disruption from leaving with no deal would already have happened and it would be more sensible at that point to focus on bilateral negotiations with the EU and wider trade policy. The other critical reason why the EEA route does not resolve the current impasse is that whether it is temporary, permanent or indefinite, an EFTA/ EEA arrangement does not resolve the issues that the EU has raised in respect of the Irish border. EEA membership does not comprise, and in fact being an EFTA member precludes, membership of a customs union, so there would still be customs formalities for cross border trade between Ireland and Northern Ireland. The Norway Plus proposal which includes a Customs Union removes all independent trade and regulatory policy. The solution in the draft Withdrawal Agreement includes the whole of the UK remaining in a customs union with the EU. This is incompatible with the EFTA Convention, which prohibits customs duties and quantitative restrictions between members (which the UK could not commit to if it were bound to the EU’s tariffs, quotas and trade remedies) and binds acceding members to apply to become party to FTAs concluded by EFTA Members. The UK would not be able to do this if in a customs union with the EU, it could only enter into FTAs with countries that the EU has FTAs with, and only on the terms agreed by the EU. Option 3 – Associate EFTA membership It has also been suggested that we could work around the need to be an EFTA member to join the EEA Agreement in the EFTA pillar by becoming an “associate member” of EFTA. This would presumably be intended to allow the UK to be in a customs union with the EU but still an EFTA member for the sake of EEA Agreement formalities. Let us be clear that there is no such thing as associate membership of EFTA. The EFTA Convention provides for the creation of an association between EFTA and any other country or body in agreement with reciprocal rights and obligations, common actions and procedures. This is not a form of membership. It would be open to the EFTA members and the UK to create a form of associate membership if they wished, but this would be a matter of negotiation between them, requiring amendment to the EFTA Convention and they would not be able to compel the EU to recognise such associate status as qualifying for the EFTA Pillar of the EEA Agreement as of right. While we know that it is in fact possible to attend to these matters without physical infrastructure or the routine interventions at the border, this has not been accepted by the EU side to date. An EFTA/EEA solution does not appear any more viable for the whole UK than a normal (“Canada-style”) FTA is, given the EU’s current negotiating position. The EU’s insistence on the backstop as a commitment that would apply in perpetuity means that even EEA membership and a customs union would not remove the perceived need for the backstop: the EU would wish to be able to trigger the protections they consider necessary for the Irish border if in the future the UK gives notice to leave the EEA or customs union, or both, and the EU side does not consider that the border arrangements meet its requirements. Even if it were politically and practically deliverable, the Norway then Canada proposal would make life harder, not easier, for business. It would mean another system they would need to understand, in between EU membership now and fully leaving EU regulation, later. This would suggest that, even if the EU were satisfied on the Irish border, the eventual move out of the ‘Norway phase’ would be met with as much resistance as leaving the EU is encountering at present, and would in fact never happen. The same cliff edge arguments would be made by the CBI and others if we were ever to choose to leave the EEA, and the political forces in the UK would conspire to ensure that the UK did not trigger the notification provisions. Once in, it is extremely unlikely that we would leave, especially since being in would eliminate our independent trade and regulatory policy completely so none of the benefits of Brexit could be realised. Continuity EEA Membership in own right EFTA Pillar UK bespoke EEA Membership EFTA Associate Membership Is it Available No Yes No No Is it Negotiable No Possible, but only if not in customs union and likely with with major concessions, for example on fisheries Unlikely Unlikely Is there Time No No No No Part 2 – Why would we want to be in? Control of Laws What is the EEA? Well according to the EEA Agreement itself, it is an association formed to “promote a continuous and balanced strengthening of trade and economic relations between the Contracting Parties with equal conditions of competition, and the respect of the same rules, with a view to creating a homogeneous European Economic Area” Already we can see some big clues as to why continuing to be part of this arrangement would not achieve the objective of taking back control of laws, and why, even if intended to be for a short period, it would be damaging to the UK’s interests. In order to achieve the “same rules” and “homogeneous” conditions, the EEA Agreement provides for the EU to harmonise laws in in-scope fields with the EFTA EEA members. This is monitored by the EFTA Surveillance Authority and enforced through the EFTA Court, which broadly follows the rulings of the European Court of Justice. EFTA EEA members have to adopt EU laws that are marked as “text with EEA relevance” into their laws. This is not optional – there is no veto and they have no vote in the European Council or Parliament. Norway’s prime minister has said clearly “We do accept that decisions on the four freedoms are done in Brussels”. It is often claimed that the EFTA EEA countries can shape and influence EU laws as they are consulted at an early stage in the law-making process. Although the EEA Agreement provides for consultation and communication at the early stages of formulating single market legislation, in practice, as described by the European Parliament, EFTA countries “have little influence on the final decision on the legislation on the EU side”. If an EFTA EEA country does not implement an in-scope EU rule into their law, the EU will take action against them, as Norway found out when it tried to get out of implementing a directive on postal services and was threatened with losing market access for its fisheries products. As a result, the right of reservation in the EEA Agreement has never been used, and is, in essence, a theoretical construct that allows EFTA EEA states to respect their constitutions and claim that democracy is respected. This illustrates the severe immediate political costs of even temporary EEA membership without a known end date (which as explained in Part 1 is unlikely to be negotiable so indefinite membership is the more likely scenario, which is of course even worse). Think about how this would work in the context of issues that are important to the UK economy. EU financial services regulations are “text with EEA relevance” so EFTA EAA members are obliged to implement them. We know that the stated aims of many EU member states to win business away from the UK, and we know that the direction of travel of EU rules in financial services has been towards greater levels of intervention and integration, often in ways that have been detrimental to the UK even while we were a member. So, imagine what EU member states could do with regulation in this area to undermine the competitiveness of the UK market, knowing that the UK us obliged to accept it, with no real voice in the process. Solvency III? MiFID III? And if our Parliament were to resist, the EU would be able to respond by withdrawing market access not just in financial services, but in unrelated fields like food or automotive. This is why firms and industry bodies in the City have moved on from prioritising passporting rights in the single market. Groups like UK Finance and the CityUK realise that the risks from being regulated from Brussels with no vote or voice is worse for the future of financial services in this country than the loss of passporting rights. Control of Borders Another issue that is of vital interest to the British people is immigration. Free movement of workers is a fundamental part of the EEA Agreement and EFTA EEA members are subject to all the EU legislation supporting it. It is unrealistic to suggest that a Lichtenstein-style immigration control could be agreed, or that the UK government could simply make better use of the controls on free movement that are already available. The movement of workers safeguards are designed to apply in emergency situations. Liechtenstein was able to negotiate an enduring safeguard due to its unique position with a tiny population and mainly rural geography. It was made clear to David Cameron during his attempted renegotiation before the referendum that the EU does not consider that the UK is encountering any difficulties that would justify deploying such emergency measures. It is also clear that the existing controls that allow member states to remove immigrants from EEA countries who do not meet the criteria of being a worker or economically self-sufficient cannot be effectively used by the UK unless we introduce registration and identity systems (which would have to be for UK nationals as well as immigrants, otherwise they would be discriminatory) and make access to welfare benefits and healthcare much more rigorous. These would be serious changes to the way we run the country and, in many respects, would operate directly against the concerns of many voters. The Policy Implications The UK cannot cherry pick its model as a member of the EEA. The foundational principle of the EEA and its institutions is homogeneity of regulations and their application across the single market. And the direction of travel is towards more areas becoming more integrated. Iceland’s finance minister recently said “Those that are for integration are stepping up the pace and if that is realised there will be even less tolerance for special implementation in the European Economic Area”. Carving out special treatment for sectors or to deal with movement of workers would mean seeking to reverse this and undermine the principle of homogeneity. Why would the 30 EEA members agree to unbalancing their relationship and destabilising established structures for the UK, especially if they think we will leave in a couple of years? The impact of EEA membership on financial services and immigration alone should kill it stone dead (even if the basic argument for democracy and accountability in who makes our laws, and how, are not sufficiently persuasive). Even if the supporters of this model are right that these matters could be satisfactorily negotiated, for example to give UK regulators a voice in financial services regulation, or by allowing the UK a Liechtenstein-style ‘brake’ to cap immigration, there is no way that they could be negotiated in time to take effect on 30 March 2019. But there’s more – what about the impact on the UK’s international trade policy, which the government still claims to want? If not combined with a customs union, as an EFTA EEA member the UK would be technically able to negotiate free trade agreements in the way that EFTA members do, either individually or as a bloc. But the FTAs that EFTA countries have are not the kind of comprehensive and truly progressive deals that the UK would be looking for, in particular addressing services and regulatory barriers, because these matters would remain subject to EU laws so could not be negotiated by the UK with other countries. All of the reasons why the EU and the USA were unable to progress the proposed FTA between them (the TTIP) would still apply, and the UK would be even less able to work through them, so a UK/US FTA, one of the great opportunities from Brexit, would be unobtainable. If we do not have control of our regulatory system, we could not in good faith sign up to the provisions of the CPTPP on regulatory coherence, and the CPTPP countries would not want to have a member that was unable to engage in deeper liberalisation among members including regulatory recognition. Over this we would have no control. UK accession would be like asking CPTPP members to allow the UK trojan horse to smuggle the EU rule book into the CPTPP, something none of its members would want. Even the Japanese, perhaps the most vocal proponent of UK CPTPP accession, partly on the basis that this would encourage the Americans to come back to the table, will understand that allowing the UK in on this basis would repel rather than attract the US. Conclusion The EEA option will be hard to get into and likely harder still to leave. The Norway phase would also have to be combined with either a customs union, or facilitations for the Irish border that the EU has as yet refused to accept. Such a mechanism would end any pretence of the UK having an independent trade and regulatory policy. Once inside, the EEA Agreement would prevent the UK from exercising control over its borders and would give control of important areas of lawmaking in services to the EU without the UK having a vote or real influence. The proposal also does not remove the need for a backstop in the future, should the UK seek to leave, furthering the chances that it becomes an accidental end state. This is unlikely to be politically acceptable, given that the EEA has already been rejected as an end point by the Prime Minister due to concerns over the free movement of people and by the City due to the potential for new regulations to disadvantage our financial services industry. It would more completely take independent trade and regulatory policy off the table than even the PM’s deal. When we referred to the PM’s deal as the worst of all worlds, we did not anticipate that an even worse construct could be seriously being proposed.