22 July 2017

Scottish Centre on European Relations: Smoke and Mirrors of a Brexit Transition Deal: 10 Key Questions

The UK cabinet now thinks that the UK would indeed need a transition arrangement after March 2019 and that this might involve continued free movement of people for 2-4 years. But are the EU27 open to such a deal and on what terms? And could the UK really stay in the single market and customs union?

(1) How long might a transition deal be?

The European Parliament’s resolution in April on Brexit insisted that any transition should last no longer than 3 years. The European Commission also favours a time-limited, short transition. Talks on a final EU27-UK trade deal could take several years, but an open-ended transition will not focus minds or ensure certainty sooner rather than later – and it would shift bargaining power away from the EU27 to the UK. At the same time, the EU have long been clear that no trade deal can be negotiated until the UK is a third country outside the EU and that it may take several years to negotiate – so for the EU a transition arrangement is vital to avoid a ‘cliff edge’ in March 2019.

(2) Can the UK negotiate a transition deal ‘close to’ the single market and customs union?

This is highly unlikely. In Brussels, the view is that there is neither enough time to agree a bespoke transition nor any need when the European Economic Area option is there if the UK wants to stay in the single market in the short term.

The customs union is more complicated: only EU member states can be in the full EU customs union. But negotiating a bespoke one, like Turkey’s, would take time and won’t ensure fully open borders. Turkey’s deal only covers industrial goods, so arrangements for agriculture and fisheries trade would still be needed, unless the UK wanted to ask to include those in a temporary customs union deal too. The EU27 have not so far commented on any special transition deal they might or might not offer on a customs union deal – after all, the UK has not yet asked for one.

In the longer term, the European Commission’s view has been clear for a long time: either the UK can stay in the EEA, and respect all four freedoms, or it can have a Canada-style trade deal (with major, negative impacts on UK trade flows to the EU). There is no ‘almost’ single market deal on offer.

(3) Who decides if the UK can stay in the EEA and customs union?

The only countries eligible to be in the EEA are EU member states (who must join) and EFTA member states (who can choose to join). Outside the EU, the UK would need agreement of the four EFTA states to first join them in EFTA (Iceland, Liechtenstein, Norway and Switzerland) and then agreement of all the EEA states to join the EEA as a non-EU member state (i.e. the EU 27 and the 3 EEA/EFTA countries (Switzerland being only in EFTA)).

Creating a customs union with the EU27 would be their – and the UK’s – decision alone. But there is an important technical issue here: countries joining EFTA are meant to ask to sign up to their existing 27 trade deals with 38 countries (Article 56/3 of the EFTA Treaty) – but you can’t both be in a customs union with the EU and in a set of EFTA trade deals. You have to choose which trade policies you are adopting. This will need to be resolved.

(4) Who decides the transition deal?

The transition arrangement will need to be part of the UK’s divorce or exit deal with the EU27. Then it will come under the Article 50 rules that specify a super-qualified majority to agree the deal – and a majority vote in the European Parliament. If the transition arrangements were treated as a separate deal, they would risk needing ratification across EU member states.

The European Council decision on the transition deal, within the exit deal, will have to be squared with arrangements for the UK to be temporarily in the EEA (i.e. the EFTA and EEA four will need to be brought on board). There may be concerns on the UK unbalancing the EEA (and EFTA) but equally, without an EEA transition, Norway, Switzerland, Iceland and Liechtenstein face their own potential cliff edge in terms of the future trade deals they will need to agree with the UK (separately from the EU27) when the UK leaves the single market and customs union.

(5) Is the EU27 only concerned about free movement of people for transition?

Not at all. There seems to be a presumption in the UK that as long as it goes along with free movement of people and a role for the European Court of Justice, that transition via the EEA (and possibly the/a customs union) is straightforward. But this will depend firstly on where other parts of the exit deal have got to – not least money. The budget contributions the UK would make as an EEA member would become, in effect, one part of the wider exit bill negotiations. UK budget contributions from within the EEA might well ease those negotiations.

But how easy an EEA transition deal will be will also depend on what both sides agree on for the goals of a future, eventual UK-EU27 trade deal, and on a transition via a customs union. The EU27 are very concerned, for example, about retaining access to UK waters for their fishing industry. Agreeing a smooth transition for the UK via the EEA may well be conditional on a broad commitment on future fisheries access. And there will be many other examples of cross-bargaining across different issues – across exit, transition and future trade deals.

(6) Will there still be a risk of a cliff edge?

Until a UK-EU27 trade deal is agreed and ratified, there will always be a risk of a ‘cliff-edge’/no-deal outcome with the UK and EU trading under WTO rules alone. But a 3-year transition should allow time to agree a basic free trade deal. It would also allow time to set up some of the organisational, regulatory and institutional infrastructure that will be necessary – customs procedures and facilities on both sides, for example.

A transition may also give the UK more time to establish some of its own regulatory structures as well as to negotiate associate links to some of the EU’s 34 regulatory bodies. But the EEA countries are not in all of the EU’s regulatory organisations, so many regulatory and supervisory arrangements will still need to be established before the UK leaves the EU.

(7) Will there be a deep and comprehensive UK-EU27 relationship at the end of a transition period?

This looks unlikely. A Canada-style trade deal might, just, be agreed by 2022 but deeper arrangements, and ones that would allow much better access for services than the Canada deal does would take much longer, perhaps a decade. And, whether it’s a Canada-style or deeper trade deal, successful ratification across the EU27 parliaments (national and regional) is not a foregone conclusion.

(8) Could the UK end up deciding to stay in the EEA – a soft Brexit?

This is a possible outcome. If the UK asked for a temporary transition arrangement to be made permanent, that could be agreed by the EU27, EFTA and EEA countries. Negotiations on a free trade deal would then stop at that point. The UK would retain full access to the single market but not be part of agriculture, fisheries and justice and home affairs policies – and talks on future UK-EU27 relationships on those issues and wider foreign policy cooperation would still be needed. But the UK, as an EEA member, would be a rule-taker, having given up its voice and vote in the EU. The EEA allows for some consultation on new EU legislation but there is little influence – hence the Norwegian discussion of the major democratic deficit it faces being part of the EEA, but not EU.

(9) Could the UK end up staying in a customs union with the EU27?

If the UK had a customs union deal with the EU27 like Turkey (i.e. covering industrial goods but not agriculture), then it would have to adopt and apply EU tariffs agreed by the EU27 in trade deals that the UK was not actually part of. It could, in theory, negotiate its own services trade deals – but these are notoriously hard to agree.

(10) If the UK has a single market and customs union transition, could it decide at the end of the three years to stay in or re-join the EU?

If the UK were in the EEA on a transitional basis, that would mean it had left the EU in March 2019. To re-join the EU, it would need to apply under Article 49 of the Lisbon Treaty. Those negotiations would take some time and would not involve the UK retaining all the current opt-outs it has nor would it keep its budget rebate. Any agreement for the UK to re-join would need agreement of all 27 EU member states.

Full analysis

© Scottish Centre on European Relations