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EU trade facts, WTO and other bilateral agreements

Withdrawal, UK/EU27 trade, and transitional agreements: Article 50 of the TFEU sets out, in broad terms, the process and timeline the UK and EU27 will need to adhere to in the negotiation of a withdrawal agreement. And while Article 50 also states that it should take into account the withdrawing country’s future relationship with remaining EU member states, it is silent on the process or scope for agreeing a new UK and EU27 trade agreement, and does not offer any mechanism to deal with the possible cliff-edge effects associated with moving the UK’s current relationship with the EU to a new and different relationship. Nonetheless, the latter issue is considered – to varying degrees – in both Mrs May’s Article 50 letter and the European Council’s draft guidelines.

The Article 50 letter suggests that a new comprehensive agreement could be reached within two years, but also states that both sides would benefit from implementation periods to adjust to the new arrangements in a smooth and orderly fashion. In contrast, the European Council’s draft guidelines do not anticipate that a full agreement can be reached in two years. Nonetheless, it does suggest – subject to sufficient progress being made on (i) the divorce bill and (ii) clarity and legal certainty for affected citizens, businesses, stakeholders and international partners – that an overall understanding on the framework for the future relationship could be identified and that the negotiations may seek to determine transitional arrangements to provide bridges towards the foreseeable framework for the future relationship. Neither document considers an extension – at some time in the future – to the Article 50 two-year timeline for the purposes of reaching a trade deal.

In the remainder of this subsection (and those that follow) we set out a number of considerations that arise from the EU treaties that will inform the upcoming negotiations and which are reflected in:

  • The UK’s stated goals as set out in the Article 50 letter and Lancaster House speech: to leave the single market and secure a new comprehensive agreement (taking in both economic and security cooperation) that would allow the UK to establish its own WTO tariffs and reach trade agreements with the EU27 countries outside of the Union.
  • How the European Council’s requirement that clarity and legal certainty be provided to international partners (as well as citizens and businesses) manifests itself in relation to the WTO.

Article 26.2 on the Functioning of the European Union (TFEU) states that:

The internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the Treaties.

Trade in goods and services is covered under Articles 28 to 37 of the TFEU. Article 28 clearly states that the Union shall operate as a customs union, Article 29 covers the treatment applies to goods from third countries and Article 31 states that common customs tariff duties are fixed by the Council on a proposal from the Commission. As such, member states lack any capacity to independently forge trade agreements on, for example, tariff levels with countries outside of the EU.

The prohibition on restrictions on the freedom to provide services within the Union is covered under Articles 56 to 62 of the TFEU, and the prohibition on restrictions on the movement of capital within the Union is covered under Articles 63 to 66 of the TFEU, with Article 64 covering the movement of capital between member states and third countries. Article 64.2 states:

Whilst endeavouring to achieve the objective of free movement of capital between Member States and third countries to the greatest extent possible and without prejudice to the other Chapters of the Treaties, the European Parliament and the Council, acting in accordance with the ordinary legislative procedure, shall adopt the measures on the movement of capital to or from third countries involving direct investment – including investment in real estate – establishment, the provision of financial services or the admission of securities to capital markets.

EU-only trade agreements versus ‘mixed trade’ agreements: Article 216 of the TFEU concerns the EU’s mandate to conclude agreements on behalf of member states. It states:

  1. The Union may conclude an agreement with one or more third countries or international organisations where the Treaties so provide or where the conclusion of an agreement is necessary in order to achieve, within the framework of the Union’s policies, one of the objectives referred to in the Treaties, or is provided for in a legally binding Union act or is likely to affect common rules or alter their scope.
  2. Agreements concluded by the Union are binding upon the institutions of the Union and its Member States.

The division of competences between the EU and member states are set out in Articles 3 and 4 of the TFEU, so where the EU negotiates and concludes an international agreement, it has either exclusive competence (as specified under Article 3) or competence which is shared with member states (as specified under Article 4). Where it has exclusive competence, the EU alone has the power to negotiate and conclude the agreement. However, where its competence is shared with member states, the mixed agreement is concluded both by the EU and by the member states, and member states must give their consent.

Article 3 of the TFEU states:

  1. The Union shall have exclusive competence in the following areas: (a) customs union; (b) the establishing of the competition rules necessary for the functioning of the internal market; (c) monetary policy for the Member States whose currency is the euro; (d) the conservation of marine biological resources under the common fisheries policy; (e) common commercial policy.
  1. The Union shall also have exclusive competence for the conclusion of an international agreement when its conclusion is provided for in a legislative act of the Union or is necessary to enable the Union to exercise its internal competence, or in so far as its conclusion may affect common rules or alter their scope.

Article 4 of the TFEU states:

  1. The Union shall share competence with the Member States where the Treaties confer on it a competence which does not relate to the areas referred to in Articles 3 and 6.
  1. Shared competence between the Union and the Member States applies in the following principal areas:

(a) internal market

(b) social policy, for the aspects defined in this Treaty

(c) economic, social and territorial cohesion

(d) agriculture and fisheries, excluding the conservation of marine biological resources

(e) environment

(f) consumer protection

(g) transport

(h) trans-European networks

(i) energy

(j) freedom, security and justice

(k) common safety concerns in public health matters, for the aspects defined in this Treaty

  1. In the areas of research, technological development and space, the Union shall have competence to carry out activities, in particular to define and implement programmes; however, the exercise of that competence shall not result in Member States being prevented from exercising theirs.
  1. In the areas of development cooperation and humanitarian aid, the Union shall have competence to carry out activities and conduct a common policy; however, the exercise of that competence shall not result in Member States being prevented from exercising theirs.

Status of World Trade Organization (WTO) Agreements: In 1994, the European Court of Justice (ECJ) rejected the European Commission’s contention that it had across-the-board competence to conclude the WTO Agreements in its own name. In short, the Court stated that while the Commission’s exclusive competence under the common commercial policy applies to the trade in goods – the core provisions of the WTO Agreements – other areas covered by the WTO Agreements relating to services were outside the Commission’s competence or were areas where the EC’s competence was shared with the Member States. This decision has potentially significant implications for Brexit.

LawyersforBritain.com argues that this ECJ decision means the UK will automatically assume rights and responsibilities in respect of 100% of its relationship with other members under the WTO Agreements. The group also argues that trade relations between the UK and the EU27 will cease to be governed by the EU treaties, and will automatically be governed by the framework of the WTO Agreements in the event that an agreement between the UK and the remaining EU member states is not reached within two years of Article 50 of the Treaty of the European Union being triggered.

While other commentators have suggested the UK will have to ‘regularise’ its position with regard to WTO membership, LawyersforBritain.com have also noted that UK does not need to leave or reapply given that it is a founding member of the WTO as laid down by Article XI(1) of the Agreement establishing the WTO which states that:

‘The contracting parties to GATT 1947 as of the date of entry into force of this Agreement, and the European Communities, which accept this Agreement and the Multilateral Trade Agreements and for which Schedules of Concessions and Commitments are annexed to GATT 1994 and for which Schedules of Specific Commitments are annexed to GATS shall become original Members of the WTO.’

The understanding that the UK is a member of the WTO in its own right was confirmed as part of the evidence obtained by the House of Lords EU Committee and reflected in an exclusive interview Roberto Azevêdo, Director General of the WTO, gave to Sky News, on 26 October 2016, where he: (i) clarified that while the UK will need to renegotiate the terms of its WTO membership, the process is relatively straightforward, (ii) confirmed that there will be no discontinuity in the UK’s membership, and (iii) stated that he will be working intensely to ensure that this transition is fast and is smooth. (These remarks were in contrast to the comments he made in the run-up to the referendum.)

Experts providing evidence to the House of Lords EU Committee (para 172–188) also identified two options for amending WTO schedules: rectification (i.e. rearrangements that do not alter the scope of a concession) and modification (i.e. a substantive change in a concession). While experts providing evidence to the House of Lords indicated that moving from an EU to a UK schedule is largely technical, the UK will have to negotiate with the EU to separate out its tariff rate quotas (TRQs) and levels of subsidies from those currently shared between the 28 EU member states. The House of Lords EU Committee was informed that once this has been agreed, the UK would have to present its schedules to other WTO members. It is at this stage that other WTO members might take the view that the changes amount to a modification in the terms of trade (from the perspective of exporting countries) for the UK and the EU, particularly where it is possible that tariffs between the UK and EU27 might be imposed.

Status of (other) bilateral trade agreements: Two schools of thought have emerged. The first is of the view that once the UK leaves, the continuation of bilateral mixed trade agreements would depend on both the EU and the third-country trading partner (as argued by the EU Law Analysis) particularly as non-EU countries take the view that it is in their interests to request renegotiations either with the UK alone or with both the EU and the UK. The second points to the Principle of Continuity in the Vienna Convention, which would militate against any finding of automatic termination or renegotiation (and which has been highlighted by EU Referendum.com). With reference to the latter, EU Law Analysis cites the Second Chapter, Division A, Section I, subsection I, Article 6 of the Report of the International Law Commission which states:

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.

The House of Lords EU Committee (para 153–158) have also gathered evidence on whether the UK could have access to mixed trade agreements and EU-only trade agreements once Brexit occurs, or whether the UK would have to revert to WTO rules. With regard to mixed trade agreements, the House of Lords were informed by one expert that even if the forthcoming negotiations provide the UK with the opportunity to become an individual signatory to these agreements, ‘either the EU or the third country would probably request some form of negotiation’. So even where the third country agreed to become a signatory to a free trade agreement on the same terms as when the UK was a member of the EU, ‘the EU could take the very drastic step of either withdrawing or terminating these types of agreements’. As a consequence, one expert suggested that it ‘might be simpler for the UK to seek to sign new bilateral agreements with these states which mirror the current agreements’.

It is perhaps instructive to note that with regard to the (yet to be ratified) EU-Canada Comprehensive Economic and Trade Agreement (CETA), the House of Lords EU Committee (para 157) was informed that it is the UK government’s assessment that:

On leaving the EU, the UK will no longer retain access to the trade preferences contained in CETA unless arrangements are put in place as part of our negotiations with the EU. This outcome will not be impacted by whether or not the existing trade deal was signed as a mixed agreement.

The status of EU trade agreements with third countries that are solely in the competence of the EU to negotiate is not widely discussed. However, the evidence gathered by the House of Lords EU Committee (para 153–154) appears to suggest that the UK’s access to those third-country markets would be governed either by the WTO rules (and the agreed UK schedules) or an alternate free trade agreement that the UK would need to negotiate. (This was illustrated by the case of duties which apply to sugar arriving from Caribbean countries.)

In light of the above, of potential interest is the 2014 report requested by the EU Parliament’s Committee on Economic and Monetary Affairs on how financial services are covered in EU trade agreements.

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