18 May 2018

Julia Magntorn is Research Officer in Economics at the UKTPO.

While Theresa May and her cabinet are trying to agree on whether to back the maximum facilitation proposal or the customs partnership, another option, nicknamed the ‘Norway option’ which would see the UK remaining a member of the European Economic Area (EEA), has made a comeback in the Brexit debate.

Last week the House of Lords voted through an amendment on the EU Withdrawal Bill, which would require the UK government to make staying in the EEA a negotiating objective. On Monday (14 May) David Miliband, Nick Clegg and Nicky Morgan launched a cross-party initiative making the case for a soft Brexit by remaining in the EEA as well as forming a customs union with the EU. Also this week, there were some positive indications from the Norwegian Prime Minister who withdrew Norwegian objections to the possibility of the UK re-joining the EEA post-Brexit. This blog gives an outline of the key features of EEA membership and discusses why, despite some economic advantages, it remains a difficult sell politically.

The EEA is an agreement between the European Union and three members of the European Free Trade Association (EFTA), Norway, Iceland and Liechtenstein. Membership of the EEA offers much closer integration with the EU than a Free Trade Agreement (FTA), but equally also places greater constraints on the members’ policy discretion. The EEA entails an FTA, where duties are removed on most goods, and access to the Single Market with its four freedoms on goods, services, capital and labour as well as competition and state aid rules. In the main, the agreement does not cover agriculture or fisheries meaning for example that it does not include the EU’s Common Agricultural Policy or Common Fisheries Policy and that tariffs still remain, with some exceptions, on products specified in HS Chapters 1-24. Membership of the Single Market also require members to fully comply with EU regulations and directives within the policy areas of the Single Market. The EFTA court is the enforcement mechanisms for the non-EU EEA countries, tasked with ensuring that these states comply with Single Market norms. Finally, the members make an annual financial contribution to the EU.

What’s in it for the UK (or not)?

The EEA is a regulatory union, removing technical barriers to trade because states are required to incorporate all EU Single Market legislation into domestic law. This ensures that no additional checks are needed to guarantee that goods placed on the EU market by an EEA member conform to the right standards. This removes one of two principal reasons for border checks.

The EEA on its own does not, however, achieve fully frictionless trade between the members. Because the EEA is an FTA rather than a customs union the parties are free to sign separate trade agreements with third countries (as long as such agreements do not modify any technical barriers). Since import tariffs on third countries may differ between the non-EU and the EU members of the EEA, Rules of Origin (RoOs) are required to determine whether a good qualifies for duty-free access or not. This, together with the remaining tariffs that exist on some agriculture and fisheries, mean that border checks are still necessary, evidenced by the border checks in place between Norway and Sweden and is a reason why Swedish exporters tend to find exporting to Norway far harder than exporting to a country within the EU. As such, even though membership of the EEA would go some way towards establishing a frictionless border, only a combination of membership of the EEA together with a comprehensive customs union covering all goods would guarantee the frictionless trade needed to resolve the Irish border issue and avoid imposing new border formalities at other ports of entry such as Dover.

Access to the Single Market is important for trade in services. FTAs and customs unions usually deal mainly or exclusively with goods and even though the Single Market is less complete with regards to services than it is for goods, it is still a long way ahead of even the most comprehensive FTA that the EU has signed with a third party. Remaining in the Single Market would mean that UK firms could retain their passporting rights, something that is of particular importance to the UK’s financial sector. As an EU member the UK is influential in shaping EU financial legislation, however as a non-EU EEA member, the UK would largely lose its influence over EU legislation but will still be bound by it, which risks putting UK financial firms at a disadvantage.

Is it a realistic option?

Compared to a hard-Brexit scenario, remaining in the EEA has many economic benefits. However, it is a very difficult sell politically, and currently, this option has been rejected by both main parties. Staying in the Single Market would mean accepting free movement of labour, making payments to Brussels, accepting EU legislation but with almost no influence over them, and although the non-EU EEA members are not directly ruled by the European Court of Justice (ECJ), the EFTA court is closely linked to the ECJ. Combining the EEA with a customs union would further restrict the UK’s policy space as it would prevent the UK from having an independent external trade policy. All of these aspects are in clear contradiction to the government’s ‘red lines’ on Brexit. And as the advocates of Brexit realise, if one was prepared to accept the EEA plus a CU, would there be much point to Brexit anyway? However, in the fast-moving Brexit debate one quickly learns to never say never.

 

Disclaimer:

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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