Brexit: Some conceptual clarifications concerning EFTA and the EEA

Dr. Michael Sánchez Rydelski and Cath Howdle*

*Respectively Member and Deputy Director of the Legal Service of the EFTA Surveillance Authority. Nothing in the present article binds or necessarily reflects the views of the EFTA Surveillance Authority.

1. Introduction

This contribution does not intend to offer a solution to the Brexit conundrum: that is a matter for governments and negotiation teams. The following comments are merely intended to serve as a guide to some of the more important aspects of the European Free Trade Association (“EFTA”) and the European Economic Area (“EEA”).

In the present contribution, we aim to explain briefly what EFTA or EFTA-EEA membership may offer the United Kingdom (“UK”), to clarify the relationship between EFTA and the EEA, to articulate how each option might be exercised, and to debunk a few misconceptions that have been doing the rounds.

2. The approaching vacuum

Once the transitional period ends, the UK’s definitive exit from the European Union (“EU”) will create a vacuum, in terms of preferential trade and market access arrangements with the UK’s current trading partners. It is commonly understood that at the point of its final departure, the UK will lose its preferential market access to the EU’s Single Market, unless an arrangement can be agreed. However, what is less commonly articulated is the consideration that the UK will simultaneously find itself empty-handed concerning trade with its non-EU partners, as it will also lose its participation in a number of free trade arrangements the EU has concluded with third countries, such as Canada, Singapore and South Korea.

How the UK will fill this vacuum is still unknown. However, it is already clear that concluding a new free trade agreement with the EU, while negotiating free trade agreements with non-EU partners, will be a time-consuming and resource-intensive exercise. No serious predictions can be made as to how long it will take to finalise - let alone ratify - these arrangements, but it is obvious that this will not be a quick fix.

In addition, the processes of negotiating a new relationship with the EU and a whole host of new arrangements with non-EU partners will be intertwined. Non-EU partners might be reluctant to finalise trade arrangements with the UK until the position between the UK and the EU has been sorted out. This process will be likely to have a negative impact on the UK’s economic development.

3. Existing models

Given this dilemma, the legitimate question needs to be raised whether existing models could be used to overcome this uncertainty in the short to mid-term perspective.

Two ideas for the UK have been raised over the course of the last few months:

-          to re-join EFTA as a means of maintaining at least free trade with non-EU partners, while ceasing to be a party to the EEA Agreement (“the EFTA option”); or

-          to re-join EFTA while remaining a party to the EEA Agreement (“the EFTA-EEA option”).

4. The EFTA option

4.1. What would the EFTA option look like?

EFTA is an intergovernmental trade organisation comprising four Member States, namely Iceland, Liechtenstein, Norway and Switzerland. The UK was a founding member of EFTA in 1960,[i] before leaving in 1973 to join the then European Community. EFTA functions on the legal basis of the EFTA Convention, which promotes free trade between its existing four EFTA States (intra-EFTA trade).[ii] EFTA is also a platform for an extensive network of free trade arrangements between the EFTA States and third countries.

There are some important factors to consider with regard to the EFTA option:

First, EFTA membership is not based upon joining a customs union or single market. Foreign trade policy remains at national level. The EFTA Convention established a free trade area, not a customs union.

Second, the UK’s EFTA membership could be envisaged without participation in the EU’s Single Market. EFTA is a classical international trade organisation and membership of EFTA does not mean having to remain a party to the EEA Agreement.

Third, unlike the EU, EFTA does not envisage political integration. There is no element of “ever closer political union” in the EFTA Convention, the focus is on economic integration. Nor is there a direct mechanism for incorporating EU rules into the EFTA Convention.

Fourth, EFTA does not establish any supranational institutions: there is no specific EFTA compliance mechanism or court. Chapter 17 of the EFTA Convention, entitled “Consultations and Dispute Settlement”, provides for a dispute settlement mechanism to deal with any matters of controversy arising from the Convention. This enforcement mechanism follows a classical arbitration approach, distinguishable both from the judicial procedures available under EU/EEA law and from the more judicial dispute settlement procedure under WTO rules.

Any new EFTA membership would entail the acceding State applying to also become a party to the Free Trade Agreements (“FTAs”) EFTA has negotiated with third countries. EFTA has currently a network of 27 concluded FTAs, covering 38 countries, which cover substantially similar areas as those of the EFTA Convention.[iii] Among these 27 FTAs are trading partners such as Canada, Chile, Colombia, Hong Kong, South Korea, Mexico, Morocco, Peru, Philippines, Singapore, the Southern African Customs Union, Tunisia, Turkey and the Ukraine.

The term “FTAs” needs to be qualified, as EFTA as such is not a party to these agreements. The Contracting Parties to an FTA are the EFTA States on the one side and the partner country on the other, since foreign trade policy remains within the competence of the EFTA States.[iv] The UK would consequently be free to negotiate its own bilateral FTAs. Still, negotiating future market access in a group with four other economically successful countries enhances the scaling effect and will provide more weight in negotiations.

Finally, EFTA also deals with the relationship between some EFTA States, namely Iceland, Liechtenstein and Norway, and the EU by way of the EEA Agreement, through which these EFTA States participate in the EU’s Single Market.[v] Consequently, EFTA membership would also leave the door open to consider later possible EEA membership.

4.2. How could the UK take the EFTA option?

The procedure for re-joining EFTA is not highly formalistic. EFTA membership is open. Article 56(1) of the EFTA Convention provides for the possibility for other States to accede to it. The EFTA Convention does not contain any specific conditions for accession. The terms of accession would be determined in the negotiations with the applying State. Upon completion of these negotiations, the EFTA Council[vi] would take a decision approving the accession, setting out the terms and conditions thereof. The EFTA Convention would enter into force in relation to an acceding State on the date stipulated in an EFTA Council decision.[vii]

5. The EFTA-EEA option

5.1. What would the EFTA-EEA option look like?

The EEA Agreement was signed in 1992 and came into force in 1994. This is an agreement between the European Union and its Member States, on the one hand, and three EFTA States, namely Iceland, Liechtenstein and Norway (“EFTA-EEA States”), on the other. The UK is a signatory to the EEA Agreement as a member of the EU. Switzerland, the fourth EFTA State, is not a Contracting Party to the EEA Agreement. The relationship between Switzerland and the EU is based upon a series of bilateral agreements.

There are three important factors to consider regarding the EFTA-EEA option:

First, the EEA Agreement does not establish a customs union but it does set up a single market. The EEA Agreement aims to ensure a balanced playing field between the EU Member States and the EFTA-EEA States through provisions on free movement of goods and capital, freedom of establishment and freedom to provide services. It also sets out State aid and competition law parallel to the EU’s rules. If the UK were to become an EFTA-EEA State, it would not be prevented from making a customs arrangement with the EU.

Second, the EEA single market is more limited than the EU Single Market. It is limited in terms of the material scope of what it covers – for example, it does not cover fisheries and agriculture, or VAT. There is no “EEA citizenship” – this is not a part of EU law which is reflected in the EEA. Similarly, there is no Charter of Fundamental Rights, and no requirement for a State which is party to the EEA Agreement to also be a member of the European Convention on Human Rights (although all 31 States are parties to the ECHR, and the EFTA Court has made reference to human rights). Nor does the EEA Agreement cover any of the justice and home affairs parts of the EU Single Market (so no European Arrest Warrant, for example). However, EFTA-EEA States have the possibility to “opt in” by agreement to initiatives in the area of freedom, justice and security, or can conclude treaties with the EU based on these arrangements, which are separate from the EEA. While every EFTA State participates in the EU’s Schengen system, this is also legally separate from the EEA.

Third, the EEA ensures access to the EU Single Market based on regulatory alignment and is self-policing.

The EFTA-EEA States can access the single market if they adhere to the rules set out in the EEA Agreement, and if their regulations are aligned with those in the EU. The chosen mechanism for doing so is to incorporate EU regulations and directives into the annexes to the EEA Agreement, and then to make those regulations and directives part of national law in the EFTA-EEA States.

This is a model of regulatory alignment which is not a million miles away from the current proposal for a UK/EU transitional agreement.[viii] The EFTA-EEA model has two advantages over this proposal. First, the EFTA-EEA States can participate in the preparatory stages of the EU legislative process (a voice which would be louder if the UK were part of the EFTA-EEA bloc). Second, the process of incorporation of a piece of EU legislation into the EEA Agreement’s annexes comes with the opportunity to negotiate adaptation texts. Furthermore, the EFTA-EEA States can also notify “constitutional requirements” (notably a vote in the national parliament) before accepting a piece of EU secondary legislation into the annexes to the EEA Agreement. This, however, can create delays in ensuring full regulatory alignment – as we have seen in the financial services sector.

In ensuring compliance with the EEA Agreement, the EFTA-EEA States have established two independent bodies; the EFTA Surveillance Authority (“ESA”) and the EFTA Court. ESA monitors the EFTA-EEA States’ implementation and application of the EEA Agreement and all regulations and directives in the annexes. If the EFTA-EEA State has not met its obligations, it can be brought before the EFTA Court. The EFTA Court also delivers judgments in cases brought against ESA decisions, and delivers judgments interpreting EEA law (known as advisory opinions) in cases which are referred from national courts.

Readers who are familiar with the EU system of monitoring and oversight will not find the EEA system wholly unfamiliar. There are, however, three important differences. First, there is no possibility for ESA to obtain penal damages against an EFTA-EEA State which continues to infringe EEA law after an EFTA Court judgment against it. Instead the matter is resolved by recourse to the Joint Committee of the EEA (comprising representatives from the EFTA-EEA States and from the EU). Second, advisory opinions are non-binding and leave the referring court free to follow a different course of action in reaching a judgment (subject to the rules on loyal cooperation, and the potential for follow-up action from ESA if the judgment leads to an infringement of EEA law). Third, the EFTA Court cannot annul legislation.

It is worth noting that the compliance system established by the EEA is rather unique in terms of its set-up as an international law compliance system, in two respects.

First, unlike the classical model of dispute resolution for international agreements (involving a tripartite tribunal of one person appointed by each side and a neutral arbiter) the EEA model is self-policing. The EFTA-EEA States each nominate a College member to lead ESA (which is an independent organisation charged with ensuring compliance) and each nominate a judge to sit on the EFTA Court. The appointments are made by the EFTA-EEA States jointly: there is no EU involvement. Nor is there an EU appointee or representative in ESA or on the EFTA Court bench.

The absence of an EU judge is compensated for by the principle of homogeneity; which provides that there should be a level playing field across the two parts of the EEA (in the EU and in the EFTA –EEA States). However, this does not mean that the EFTA Court always follows the CJEU: the CJEU has also followed the EFTA Court. There is also extensive judicial dialogue between the two courts. Moreover, representatives from the EFTA-EEA States and ESA are entitled to be heard in cases before the CJEU (and vice versa). This system would benefit the UK in that it would not lose its voice when EU rules are interpreted by the CJEU (with an obvious knock-on impact in situations of regulatory alignment).

Certain commentators have suggested that the CJEU is able to overrule the EFTA Court in the event of disagreement. However, this is not the case: if there is a serious and sustained divergence in the case-law (which there never has been, despite some differences in interpretation), the Joint Committee may be convened to deal with this issue (which it never has been) and if it fails to reach an agreement on an interpretation of EEA law, it may choose to refer a matter to the CJEU for interpretation. This does not amount to an ability for the CJEU to overrule the EFTA Court.

The second respect in which the EEA compliance system differs from the classical international model is that it is not simply state-to-state dispute resolution. The system of preliminary references established in the EU (which permits citizens to exercise their rights more effectively) is mirrored in the advisory opinions process at the EFTA Court: an ordinary person or business can bring a case before a national court, and if a question of interpretation of EEA law arises then it can be answered by the EFTA Court (instead of the same citizen or business having to try to bring their country to justice before an international tribunal for an incorrect interpretation, or to rely on a state-to-state action).

Similarly, ESA’s compliance activities are triggered by complaints and ESA has extensive contact with citizens, businesses and NGOs, in order to ensure that people who derive rights from EEA law can take advantage of those rights. Likewise, interested parties can bring cases before the EFTA Court in the event that they consider an ESA decision to be ill-founded. This is a system which does not simply leave dispute resolution in the hands of a state versus state court, but brings citizens into the picture in the exercise of rights granted under law.

5.2. How could the UK take the EFTA-EEA option?

The UK is already a party to the EEA Agreement, as one of the EU Member States, and so would take the EEA option by becoming an EFTA-EEA State.

It would be impossible for the UK to remain as a “floating” state: the EEA Agreement’s articles refer repeatedly to the EU Member States on one hand and the EFTA-EEA States on the other. However, if the UK became an EFTA-EEA State, then only the preamble and Article 126 EEA (plus some of the protocols and annexes) would need significant amendment. Such amendments would require the agreement of the other 30 EEA States.

6. Conclusion

It is with some surprise that the authors note that political debate in the UK has not yet reached a firm conclusion as to what the EU-UK arrangements should be at the end of the transitional period. It is hoped that the present note at least helps to clarify two of the possible options.

Brussels, 13 June 2018

Barnard and Peers: chapter 27

Photo credit: www.cruise-norway.no

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[i] The negotiations on the establishment of EFTA were concluded with the signing of the EFTA Convention in Stockholm on 4 January 1960.

[ii] The EFTA Convention establishing EFTA is available at: www.efta.int

[iii] An overview of all concluded FTAs is available at: www.efta.int

[iv] EFTA States are in principle free to conclude unilaterally FTAs with third countries.

[v] Whereas the trading relationship between Switzerland and the EU is based on series of bilateral agreements.

[vi] The EFTA Council is the highest governing body of EFTA with responsibility for all matters concerning the relations between the EFTA States and between EFTA and third countries (Article 43 of the EFTA Convention).

[vii] Article 56(1), third sentence, of the EFTA Convention.

[viii] TF50(2018)33.