Brexit and EU-UK trade relations with third states

‘Our trade relations with the rest of the world remain unchanged’ (Lord Lawson, 29 Feb 2016)– or not….

By Dr Markus W. Gehring, Lecturer in Law, University of Cambridge*

*Markus teaches EU External Relations Law, and is a member of the Centre for European Legal Studies and a Fellow of the Lauterpacht Centre for International Law. J.S.D. (Yale), LL.M. (Yale), Dr iur (Hamburg), MA (Cantab)

Some Brexit campaigners take a very cavalier attitude to European Union (EU) law in general but recent claims concerning the trade relations with the rest of the world require some reflection. In the quote above and elsewhere they seemed to have argued that we should not be worried about the rest of the EU penalising the UK if it withdrew from the EU, because of continuing World Trade Organisation (WTO) obligations on both sides. However, the UK’s membership in the WTO and all other mixed trade agreements (trade treaties which concluded by both the EU and its Member States) could be in jeopardy if the UK exited without a successful transitional agreement with the EU.

Since the late 1960s the EU successively assumed the exclusive competence over what it calls the common commercial policy, i.e international trade. This EU power does not concern purely commercial deals, like the sale of British trains to India; that remains the power of each Member State. Rather the EU power over trade deals concerns general policies like the tariffs (border taxes on imports) and government regulation that might be a barrier to trade.

Some might ask why we EU Member States are not allowed to strike their own trade deals with other countries. The reason is quite practical and not at all some form of EU overreach. The exclusive competence over trade is a direct consequence of the EU being a customs union, as defined by the WTO. So unlike in the North American Free Trade Area (NAFTA), members of a customs union can no longer set their own tariffs or do special bilateral deals with other countries. A product for which the common tariff has been paid has the right to roam freely in the entire Union and of course the imposition of individual tariffs upon goods by each Member State would require customs inspections which run counter to the free movement of goods and the single market. To conclude as concluded in the Balance of Competence Review by the UK Department of Business, Skills and Innovation: “gaining greater control over such relations with third countries means giving up benefits of access to the Single Market [in the EU].” (p. 82)

No Freedom of Trade Principle in International Law

It perhaps should be noted that there is no general principle of international law which would allow for free trade as such. The reason we need agreements like the General Agreement on Tariffs and Trade (GATT) or the WTO (which now includes the GATT) is that it is within each state’s sovereign decision to choose to engage in trade relations or not. While there is a clear economic imperative to do so, states have chosen not to engage in international trade in the past and could do so in future. The pro-Brexit campaign seems to emphasise that UK trading partners will have an economic incentive to come to an agreement but they seem to downplay the same economic incentives with regards to the EU. In my view there is an inherent contradiction in their position because if the UK is allowed to decide ideologically about EU Membership, we can safely assume that other countries will also decide ideologically whether to engage in free trade deals with the post-Brexit UK. The vision that French farmers would block roads to force the EU to strike a free trade deal with the post-Brexit UK is quite fanciful given the French farmers general position on free trade.

EU membership assists trade relations with non-EU states

While negotiations for a new multilateral trade deal in the WTO system have been slow, more states (and the EU) are resorting to bilateral or multilateral trade deals. The EU has concluded trade agreements with about 50  countries (see map here) and is negotiating many more.  

Admittedly the UK could probably sign more trade deals with non-EU countries if it left, but there are two caveats. First, those deals aren't easy to agree while maintaining important protections such as a public health system like the NHS and public education which are areas for keen liberalisation for other countries. Second, as seen from the example of the Trans-Pacific Partnership (TPP), even if the EU has nothing to do with them, such treaties can take ages to negotiate and they remain controversial. The Transatlantic Trade and Investment Partnership (TTIP) between the EU and the USA would probably be a mixed agreement, so the UK would have a veto on it given that it would require ratification by the UK. Even if the UK left the EU and the UK forwent the considerably increased weight that the EU commands in negotiations, the USA would surely ask for similar things in TTIP from the UK even after Brexit or even more. This assumes that the US would want to negotiate one, which US officials have thus far denied. This also then counters the argument that Brexit could somehow avoid the ‘evil’ TTIP. Indeed, there would be considerably more pressure on the UK to quickly conclude a trade deal and sensitive areas, especially in services, which are liberalised in the US but not in the UK, could be on the table.

Of course some existing international agreements that are exclusive to the EU (ie no Member States are parties to them) would no longer apply to the UK in the case of Brexit.[1]This is not just a minor footnote in trade relations. Rather, some of these agreements are very sensitive for the UK and in particular for Scotland. For example the 'Scotch whisky' name is protected in Annex IV of the EC/Canada agreement on trade in wines and spirits, to which no EU Member States are parties. Even more important is the equivalent agreement with the USA, which constitutes the number one market for Scotch whisky. The EU/South Africa agreement covers another key market. Risking the continuation of these agreements could be hugely detrimental for the UK.

WTO Membership

The EU is a founding member of the World Trade Organisation (1 January 1995) and very nearly could have completely replaced its Member States if the Court of Justice in Opinion 1/94 had not decided that the final WTO Agreement and its subsequent agreement were mixed agreements in which both the EU and its Member States jointly exercise their competences. Claiming that the EU just represents its Member States as it does in other international fora is completely wrong and ignores the fact that the EU has the exclusive competence over common commercial policy (Art. 3 TFEU). Or put differently, Lord Lawson in this interview misinformed the public. He claimed that the all UK trade relationships with the rest of the world would remain unchanged and he had ‘no doubt about it’. WTO Membership is economically and geopolitically important because the organisation has 162 Member States.

But what about the claim by Brexiteers that UK trade relations with the rest of the world remain unchanged. To clarify the obvious – Lord Lawson’s assessment the UK could just continue to take part in existing trade (and new!) deals if it left the EU has no basis in the law. Rather, he inadvertently highlighted another potential uncertainty for the UK. Brexit could force the renegotiation of the terms of the UK’s WTO Membership. This is not a case of treaty succession as both entities (the UK and EU) retain their international legal personality after Brexit. So this is quite dissimilar to the discussions of treaty membership for Scotland because Scotland, unlike the UK, is not currently a party to international treaties in its own name.

Commentators have highlighted that “[a]ssuming the UK does not enter into a customs union with the EU after its withdrawal, it would no longer be part of the common [tariff] schedules. In this scenario, the UK must submit its own new schedules after the conclusion of an exit agreement with the EU if it is to remain a WTO member. These schedules need to be accepted by all other WTO members in consensus and certified following certain procedures, which might create difficulties.”[2]

While continued WTO membership of the UK as such might not be doubtful, it would have to extensively renegotiate its own tariff commitments, which has proven difficult even for important trading nations such as Russia and China. Some other WTO members who might have an interest in exerting special liberalisation commitments from the UK might even consider a non-violation complaint against the UK upon Brexit. This type of complaint is possible, even if no agreement has been violated, but if another WTO member feels that a government action or specific situation deprived it of an expected benefit. This is particularly sensitive for the GATS schedules (which concern trade in services) where further liberalisation pressure might be exerted by the UK’s trading partners.

Even if we leave EU law aside and view the matter from a public international law perspective, renegotiation of the terms of the UK’s WTO membership is inevitable. While the UK and the EU both enjoy international legal personality and the mere composition of the latter changes, this does not mean that international treaties and UK membership in international organisations such as the WTO remain wholly unaffected. While automatic termination of that membership under this perspective seems to be a bit far-fetched, the need for extensive renegotiations may nevertheless arise. The reason is a very simple one. The UK cannot honour its obligations under these agreements without being part of the EU single market. WTO membership entails extensive liberalisation commitments which are premised on the fact that the imported goods can roam freely in the Union and are treated as EU goods once customs has been cleared. 

Under this perspective the UK’s continued WTO membership as such is not doubtful but the UK alone cannot fulfill all the obligations that the EC (now the EU) entered into on behalf of its then Member States. This would require at the very least a separate submission of a tariff schedule which could be subject to negotiations with all other WTO Members. Even if the UK just copied and pasted the existing tariff commitments of the EU, the formal act of re-issuing the schedule could give rise to negotiations.

FTAs

If the UK left the EU in an unorderly fashion, the UK is unlikely, contrary to what was claimed in the last Economist, to be able to conclude trade agreements with existing EU Member States. The EU’s exclusive competence over foreign trade would also apply to negotiations between say Germany and the UK. So even if German car makers have a huge interest in a trade deal with the UK, other countries might not. 

EU Member States are not free to conclude trade agreements unilaterally which fall within the exclusive competence of the Union.  While it is unlikely that EU would not want continuing trade relations with the UK, such continuation is far from automatic. A solid understanding of EU external relations law (as for the question of the legal bindingness of the Tusk Brexit Deal) is necessary for this analysis.

Even the European Economic Area (the EEA: the agreement on access to the single market, between the EU, Norway, Iceland and Liechtenstein) is explicitly only open to EU Member States and European Free Trade Area (EFTA) states. This means that the UK would have to join EFTA and then apply to join the EEA, according to the accession clause in the EEA Treaty. It should also be highlighted that as a member of the EEA many EU legislative acts are applicable (try searching EEA relevance in Eur-Lex, the EU law database) and EEA states have no discretion as to whether they participate or not if they want to maintain market access in that particular sector. In many ways the EFTA Court set up to rule on the EEA agreement has been even more liberal in its free movement of persons jurisprudence than the Court of Justice which might not be in the interest of those proposing Brexit.

In other words, if the EU wanted to make life difficult for the UK in trade relations (the Foreign Secretary called it showing the UK a rude gesture), it could. Active EU resistance might not make any economic sense but then there have been a couple of political decisions in the EU that were contrary to conventional economic wisdom recently. The thought that French farmers would demonstrate and block roads in order to actively reach a Free Trade Agreement with the UK (as suggested by Chris Grayling (at 2h36min) is absolutely illusionary and just displays that even the current Leader in the House of Commons does not understand French politics. 

Even where both the EU and the Member States (including the UK) are Parties to an agreement (like for the WTO or the majority of existing EU Free Trade Agreements (FTAs)) trade relations of the UK are very likely to change. In other words it can be argued that mixed agreements concluded by the EU and its Member States could be subject to automatic termination as far as the UK is concerned. [3] A legal reason could be the provision which determines the application of the agreement in question. Some FTAs contain a clause which defines Parties as Member States of the EU. This could call the continued participation by the UK in such an FTA into question.[4] There are also clauses which determine the territorial scope of these FTAs. For example Article 360 of the Association Agreement between EU and Central American States restricts the application of the agreement to countries, in which the EU Treaties apply and again this could call the continued application of these treaties to the UK into question.[5] In any case the third country will have the right to terminate its trade relationship with the UK.[6] So “[w]hilst the UK is a party to such agreements, the rights which it has enjoyed under their provisions, as well as the obligations it has assumed, would not continue to apply automatically. For instance, mixed agreements may be of an essentially bilateral nature. This is suggested by both their context and wording.  It has also been affirmed by the Court which, in European Development Fund, held that the Lomé Convention between the EU and its Member States and African, Caribbean and Pacific states ‘established an essentially bilateral ACP-EEC cooperation’” [omitting footnotes][7].

It also has to be highlighted that it is now practice in the EU to provisionally apply mixed-agreement-FTAs as regards the EU (as distinct from its Member States). So while the UK already derives trade benefits from those agreements by virtue of its EU membership, the UK is not even a party to them yet until all EU Member States have ratified them. Since it is not yet a party to those agreements, it obviously could not remain a party to them after Brexit. This applies to the EU’s FTAs with Peru and Colombia, Central America, Eastern and Southern African States, Cameroon, more Southern African States, and most Caribbean countries,

For all FTAs the right for non-EU countries to request re-negotiations either with the UK alone or with both the EU and the UK separately arises. The non-EU countries might not have a direct economic incentive to re-negotiate trade deals and the EU, the UK and the trading partner could just amicably amend the FTAs to reflect the different status of the UK in such an arrangement. This would be the best case scenario but it will still require negotiations and a lot of good will on the side of the trading partners including the EU and all its remaining Member States.

Some have argued that the principle of continuity in the Vienna Convention on the Law of Treaties would militate against any finding of automatic termination or re-negotiation.[8]While the principle of continuity was mainly designed for state succession and changes in government, it cannot be applied in this situation. Where the UK can no longer fulfill obligations under these treaties by virtue of having left the Single Market, automatic continuity cannot be assumed.

Another reason why renewed negotiations might be necessary is the concept of fundamentally changed circumstance, which is also referred to in the Vienna Convention. Reliance on this principle of public international law by smaller trading nations in the WTO would fail, because it would only give them the right to terminate the WTO treaty, which is not in their interest.[9]However the EU and its Member States could probably invoke the concept vis-à-vis the UK and terminate their FTA relationships outside the WTO context.

As we can see even the most favourable scenario for the UK involves plenty of goodwill (and probably economic concessions by the UK) on all sides. The continuation of bilateral trade deals would depend on both EU and the third country trading partner and not the UK interest alone, so quite the opposite of “trade relations with the rest of the world remain unchanged”. 

Barnard & Peers: chapter 25

Photo credit: commons.wikimedia.org

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[1] See Panos Koutrakos “Editorial - Brexit and international treaty-making” [2016] European Law Review 1

[2] Ibid. p. 54.

[3] Katrin Fernekeß, Solveiga Palevičienė and Manu Thadikkaran “The Future Of The United Kingdom In Europe - Exit Scenarios And Their Implications On Trade Relations” Graduate Institute Trade and Investment Law Clinic Papers, 2013, 07 January 2014, Geneva, online: Tohttp://graduateinstitute.ch/files/live/sites/iheid/files/sites/ctei/shared/CTEI/working_papers/CTEI_2013-01_LawClinic_FutureUKinEurope.pdf

[4] Ibid. p. 49

[5] Ibid. p. 50. 

[6] Ibid. p. 50.

[7] Panos Koutrakos “Editorial - Brexit and international treaty-making” [2016] European Law Review 1.

[8] The relevant ILC Report stated very clearly (http://legal.un.org/ilc/documentation/english/a_cn4_120.pdf): “In consequence, the treaty obligation, once assumed by or on behalf of the State, is not affected, in respect of its international validity or operative force, by any of the following circumstances: (a) That there has been a change of government or regime in any State party to the treaty; (b) That some particular organ of the State (whether executive, administrative, legislative or judicial) is responsible for any breach of the treaty; (c) That a diminution in the assets of the State, or territorial changes affecting the extent of the area of the State by loss or transfer of territory (but not affecting its existence or identity as a State), have occurred, unless the treaty itself specifically relates to the particular assets or territory concerned. In all such cases, the treaty obligation remains internationally valid, and the State will incur responsibility for any failure to carry it out.”

[9] Many thanks to Dr Michael Waibel for highlighting this point.