16 August 2017

The free movement of persons occupied a high profile role during the EU referendum debate and continues to do so now. It is a widely accepted principle of EU law that the four fundamental freedoms (the freedom of goods, services, people and capital) are linked to the single market, and therefore, if the UK wishes to abandon the right to free movement of people, it must also give up its access to the single market.

The deal struck between the UK and the EU is likely to be unique given the circumstances, however the current arrangements in place with the EU, and their effect on the free movement of people, are considered below.

EEA

If the government pursues a ‘soft’ Brexit, the UK could remain a member of the European Economic Area (EEA). The EEA Agreement entered into force on 1 January 1994 and was established to allow European non-EU countries access to the single market. The EEA is comprised of all EU member states plus Iceland, Liechtenstein and Norway.

This model is the one most closely aligned with EU membership. The EEA was set up with the aim of guaranteeing the four fundamental freedoms throughout all 32 EEA states. In return for access to the single market, EEA members must implement certain EU rules, including environment, competition and consumer protection policy. However, the common policies in the fields of agriculture, fisheries, taxation, foreign trade and currency are not part of EEA law. The EFTA Surveillance Authority was set up to ensure the uniform application of EU rules throughout all EEA states, mirroring the role of the European Commission in the exercise of its surveillance role. Similarly, the EFTA Court fulfils the judicial function within the EFTA system and operates in parallel to the Court of Justice of the European Union. Those who wish to relinquish access to the single market altogether would not welcome the adoption of an approach of this kind.

EEA states do not have formal access to the decision-making process within the EU institutions, however they can participate in “decision-shaping” at the early stages of preparing a legislative proposal, and have the right to participate in the European Commission’s expert groups, comitology groups and programme committees. Despite this, if the UK were to pursue this kind of arrangement with the EU it would lose its considerable influence in the EU decision-making process and would be bound by legislation and rules in which it had little say in drafting and negotiating.

Bilateral Agreements

Switzerland
Another potential route for the UK to consider would be to adopt a similar model to that used by Switzerland. Switzerland, along with Iceland, Liechtenstein and Norway is a member of the European Free Trade Association (EFTA) but not the EEA. Switzerland does not make any contributions to the EU budget and instead pays directly into particular EU programmes.

If the UK were to adopt a similar model, it would have the opportunity to negotiate bilateral agreements with the EU through which it would gain partial access to the single market. The UK could potentially have a degree of flexibility regarding the EU policies and initiatives it wished to implement, however, this would depend upon the approval of the remaining EU member states. This has often been referred to as an ‘à la carte’ approach and is unlikely to be accepted by the EU.

Switzerland is excluded from several service industries, including professional, banking and financial services. In addition, Switzerland is also barred from ‘passporting’ rules (the rules which enable firms authorised to trade in any EU or EEA state to trade freely in any other with minimal additional authorisation) and as a result, a number of Swiss banks need to operate through subsidiaries in the EU. The UK may consider this to be an unattractive option given the importance of financial services to its economy.

A similar problem exists under this model as under the EEA model, in that the UK would have no representation in EU decision-making and yet would have to abide by a considerable volume of EU legislation.

Turkey
Alternatively, the UK could seek to join the EU’s Customs Union. Turkey’s arrangement as a member of the Customs Union allows Turkey access to the single market for goods (provided they comply with the relevant regulations) but not for services. Turkey also complies with EU competition and state aid rules. However, as with Switzerland, Turkey must abide by certain EU laws and regulations without having a say or any influence on the terms it operates in.

It is important to bear in mind that the EU’s arrangements with both Switzerland and Turkey were put in place in the expectation that both countries would ultimately join the EU and it is questionable whether there is any desire within the EU to arrange such a deal with the UK.

Canada
The EU has recently negotiated a free-trade agreement with Canada with the aim of eliminating tariffs in respect of industrial, fisheries and some agricultural products. Many Brexit supporters consider that an arrangement of this kind would be the best option for the UK. The Comprehensive Economic and Trade Agreement (“CETA”) was approved by the European Parliament on 15 February 2017 and requires ratification by the EU national parliaments before it takes full effect. CETA also removes certain non-tariff barriers in selected services sectors, although the passporting provisions are not included in this deal.

WTO
If the UK were to leave the single market entirely and abandon the fundamental freedoms, then the UK’s trade with all countries globally (including those in the EU) would be governed by the WTO (World Trade Organisation). Under WTO rules, countries cannot discriminate between their trading partners and the same tariffs are charged to all WTO members. This means that the UK exports to the EU could face tariffs. Under this approach the requirement to allow free movement of persons would be abolished.

The debate surrounding the government’s position regarding the single market and the fundamental freedoms has come under increasing scrutiny of late. A pro-European think-tank named British Influence has argued that Parliament should have a vote on whether or not to trigger Article 127 EEA, which prescribes the method in which a country may exit the EEA: “Each Contracting Party may withdraw from this Agreement provided it gives at least twelve months' notice in writing to the other Contracting Parties”. Their legal challenge was rejected on the grounds that it was premature, however, it is possible that this question will be re-addressed as March 2019 approaches. In addition, business leaders have added to the pressure on the government by stating that the UK should stay in the single market until a final Brexit deal is agreed in order to minimise disruption.

What is clear is that there remains a great deal of uncertainty regarding the UK’s position as the date for withdrawal from the EU advances.

Contact: Jeremy Glen, Partner jsg@bto.co.uk T: 0141 221 8012.