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 article doesn’t offer a Brexit solution, leaving that to governments and negotiators. Instead, it provides guidance on key aspects of the European Free Trade Association (“EFTA”) and European Economic Area (“EEA”).
We’ll briefly explain what EFTA or EFTA-EEA membership could offer the United Kingdom (“UK”), clarify their relationship, outline how each option might work, and debunk common misconceptions.
2. The approaching vacuum
The UK’s exit from the European Union (“EU”) creates a void in preferential trade and market access with its current trading partners. While losing preferential access to the EU’s Single Market is understood, the UK will also lose participation in EU free trade agreements with non-EU countries like Canada, Singapore, and South Korea.
How the UK will address this is unclear. Negotiating new free trade agreements with both the EU and non-EU partners will be lengthy and demanding. The timeline remains uncertain, but it won’t be a quick process.
Moreover, these negotiations will be intertwined. Non-EU partners might hesitate until the UK-EU relationship is settled, potentially hindering the UK’s economic development.
3. Existing models
Given this, it’s worth considering existing models to address short-to-mid-term uncertainty.
Two options have emerged for the UK:
Re-joining EFTA to maintain free trade with non-EU partners while leaving the EEA Agreement (“EFTA option”).
Re-joining EFTA while remaining in the EEA Agreement (“EFTA-EEA option”).
4. The EFTA option
4.1. What would the EFTA option look like?
EFTA, founded in 1960, is an intergovernmental trade organization with four members: Iceland, Liechtenstein, Norway, and Switzerland. The UK, a founding member, left in 1973 to join the European Community. EFTA’s foundation, the EFTA Convention, promotes free trade among its members. It also serves as a platform for free trade agreements between EFTA states and other nations.
Key points about the EFTA option:
EFTA membership doesn’t require joining a customs union or single market. Foreign trade policy remains under national control. The EFTA Convention established a free trade area, not a customs union.
The UK could be an EFTA member without joining the EU’s Single Market. EFTA is a traditional international trade organization; membership doesn’t necessitate being part of the EEA Agreement.
Unlike the EU, EFTA doesn’t pursue political integration. There’s no “ever closer political union” element in the EFTA Convention, only economic integration. There’s no mechanism for incorporating EU rules into the EFTA Convention.
EFTA lacks supranational institutions. There’s no specific EFTA compliance mechanism or court. Chapter 17 of the EFTA Convention, “Consultations and Dispute Settlement,” uses a traditional arbitration approach, unlike the EU/EEA’s judicial procedures or the WTO’s more judicial dispute settlement process.
New EFTA members must join the Free Trade Agreements (“FTAs”) EFTA has negotiated with other countries. EFTA has 27 FTAs covering 38 countries, encompassing similar areas as the EFTA Convention. These include Canada, Chile, Colombia, Hong Kong, South Korea, Mexico, Morocco, Peru, Philippines, Singapore, the Southern African Customs Union, Tunisia, Turkey, and Ukraine.
“FTAs” require clarification, as EFTA isn’t a direct party. Contracting parties are individual EFTA states and the partner country since foreign trade policy remains under national control. The UK could negotiate its own bilateral FTAs. However, negotiating as part of a group with four other successful economies increases leverage and provides more weight.
Finally, EFTA connects Iceland, Liechtenstein, and Norway to the EU via the EEA Agreement, granting them access to the EU’s Single Market. Thus, EFTA membership keeps the door open for potential future EEA membership.
4.2. How could the UK take the EFTA option?
Re-joining EFTA is straightforward. Article 56(1) of the EFTA Convention allows other states to accede. It doesn’t specify conditions; these are determined through negotiation with the applicant. The EFTA Council then decides on the accession, outlining terms and conditions, and the EFTA Convention comes into force for the new member on a date set by the EFTA Council.
5. The EFTA-EEA option
5.1. What would the EFTA-EEA option look like?
The EEA Agreement, signed in 1992 and effective since 1994, binds the European Union and its members with three EFTA states – Iceland, Liechtenstein, and Norway (“EFTA-EEA States”). The UK, as an EU member, is a signatory. Switzerland, the fourth EFTA state, has a series of bilateral agreements with the EU instead.
Key considerations for the EFTA-EEA option:
The EEA Agreement establishes a single market but not a customs union. It aims for a level playing field between EU and EFTA-EEA states through provisions on free movement of goods, capital, establishment, and services. It also aligns state aid and competition law with EU rules. The UK, as an EFTA-EEA state, could still have a customs arrangement with the EU.
The EEA single market is narrower than the EU Single Market. It excludes areas like fisheries, agriculture, and VAT. There’s no “EEA citizenship” or Charter of Fundamental Rights. It doesn’t require being a party to the European Convention on Human Rights, though all 31 states are, and the EFTA Court references human rights. It also excludes justice and home affairs aspects of the EU Single Market, meaning no European Arrest Warrant. However, EFTA-EEA states can “opt in” to initiatives in these areas via agreements with the EU. While all EFTA states participate in the Schengen system, this is separate from the EEA.
The EEA grants access to the EU Single Market through “regulatory alignment” and is self-policing.
EFTA-EEA states access the single market by adhering to EEA Agreement rules and aligning regulations with the EU. They incorporate EU regulations and directives into the EEA Agreement annexes and implement them nationally.
This “regulatory alignment” model resembles the proposed UK/EU transitional agreement. The EFTA-EEA model has two advantages. First, EFTA-EEA states participate in EU legislative processes, a voice amplified if the UK joins. Second, incorporating EU legislation into the EEA Agreement allows negotiating adaptations. EFTA-EEA states can also notify “constitutional requirements,” such as parliamentary votes, before accepting EU legislation, though this may cause delays in alignment, as seen in financial services.
The EFTA-EEA states established two independent bodies: the EFTA Surveillance Authority (“ESA”) and the EFTA Court. ESA monitors EEA Agreement implementation and compliance. If an EFTA-EEA state falls short, it faces the EFTA Court. The EFTA Court also rules on ESA decisions and provides non-binding interpretations of EEA law (“advisory opinions”) on referrals from national courts.
Those familiar with the EU system will find the EEA’s familiar but with key differences. First, ESA can’t impose penalties on non-compliant states. Instead, the Joint Committee (representatives from EFTA-EEA states and the EU) addresses this. Second, advisory opinions are non-binding, leaving national courts free to deviate (subject to cooperation rules and potential ESA action if it leads to EEA law infringement). Third, the EFTA Court cannot annul legislation.
The EEA compliance system is unique as an international law model in two ways.
First, unlike the traditional tripartite tribunal model, the EEA is self-policing. EFTA-EEA states nominate ESA’s leadership and EFTA Court judges. The EU has no involvement.
The absence of an EU judge is addressed by the “homogeneity” principle, ensuring a level playing field. However, the EFTA Court doesn’t always follow the CJEU; there’s mutual influence and dialogue. Representatives from both sides can be heard in each other’s courts. The UK benefits by retaining a voice in interpreting EU law, impacting regulatory alignment.
Some claim the CJEU can overrule the EFTA Court, which is inaccurate. The Joint Committee addresses serious discrepancies (which hasn’t occurred) and can refer matters to the CJEU for interpretation (never used). This doesn’t mean the CJEU can overrule the EFTA Court.
Second, it’s not just state-to-state dispute resolution. The EU’s preliminary rulings system, empowering citizens, is mirrored in the EFTA Court’s advisory opinions. Individuals and businesses can bring cases nationally, with EEA law interpretations provided by the EFTA Court.
Similarly, ESA handles complaints from citizens, businesses, and NGOs, ensuring their rights under EEA law. They can also challenge ESA decisions in the EFTA Court. This system goes beyond state-centric dispute resolution, involving citizens in exercising their rights.
5.2. How could the UK take the EFTA-EEA option?
The UK, already party to the EEA Agreement as an EU member, would become an EFTA-EEA state.
The UK can’t remain unaffiliated; the EEA Agreement distinguishes between EU and EFTA-EEA states. Becoming an EFTA-EEA state would require minimal amendments, mostly to the preamble, Article 126, and some protocols and annexes, requiring agreement from all 30 EEA states.
6. Conclusion
The authors are surprised by the lack of consensus in the UK on post-transition EU-UK arrangements. This note clarifies two options.
Brussels, 13 June 2018
Barnard and Peers: chapter 27
Photo credit: www.cruise-norway.no
[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.