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Brexit and the future of Britain part 2 - EFTA
The EFTA trade block
Is the EFTA a safe port in the post-Brexit storm?
This is the second part in a series of articles looking at the options a post-Brexit Britain faces in its future relationships with the EU. Redefining this relationship is likely to take years if no the better part of a decade and is likely to employ a great amount of Parliament’s time and civil service resources to put into place. Whilst there are many options available to the UK and EU, options such as the UK joining the EEA or EFTA are being widely discussed in the media, business lobbies and political circles. Both these options do notionally hold to the mantra ‘Brexit means Brexit’.
In my first part I looked at the EEA option with the benefits and hurdles the UK could face. In this second part I look at the EFTA or European Free Trade Association. The EFTA is commonly referred to as the ‘Switzerland option’.
The EFTA, on the outskirts of Europe
What is the EFTA
In the aftermath of the Second World War, different groups of European nations started forming various (and overlapping) treaties and cross border organisations such as the Brussels, Paris and Rome treaties. The UK participated early on in some of these treaties before her focus was drawn to the Commonwealth which was entering a transitional period. When in 1957/58 the European Economic Community (forerunner of the EC and from 2007/9 EU) was formed the UK was wary of entering such a close economic relationship.
This reticence to join the EEC led the UK to take a leading role in creating the EFTA as an alternative trading bloc for nations who were either unable or unwilling to join the EEC. The main difference between the EEC and EFTA was that the EEC had a common external customs tariff. This enabled each EFTA to coordinate their trade policies but also free enough to engage in any bilateral trade agreements with third countries.
At the time the EFTA was formed the EEC membership consisted of France, West Germany, Italy, Belgium, Luxembourg and the Netherlands, the ‘Inner Six’. The EFTA initially consisted of the UK, Norway, Switzerland, Austria, Denmark, Sweden, Denmark, Finland and Portugal, known as the ‘Outer Seven’.
What should Britain's future relationship with the EU be?
What should Britain's future relationship with the EU be?
How does the EFTA differ from the EU?
Whilst the EU started out as a set of trade treaties to harmonise business practices, reduce and remove tariffs and bring national labour laws into line whilst it has become much more integrated. Today as well as common external trade policy, the EU is also concerned with social, environmental and legal harmonisation as well as creating an economic and monetary union. The harmonisation of these social and supposedly ‘non-economic’ policy areas is to reduce what are called non-tariff barriers for cross-border trade. Tariffs are direct taxes applied to goods and services. Non-tariff barriers can include things such as quotas placed on imports, product standards and administrative and regulatory differences and even exchange rates between currencies.
One could see the eventual endgame of harmonisation and monetary union project as the creation of a pan-European superstate.
The EFTA is a much looser trading agreement. It is designed to remove tariff barriers to trade whilst leaving member states still free to determine which non-tariff barriers and policy areas to harmonise and which are more beneficial to operate differently. Whilst EFTA states are party to the single internal market. This means that they implement the four freedoms, of goods, capital, labour and services. These are implemented for the three EEA states (Iceland, Liechtenstein & Norway) through horizontal provisions.
To find out more about Switzerland’s relationship to the single internal market, visit the European parliament website.
Switzerland, in the EFTA but not integrated into the EEA, is still party to the European single internal market (which is separate to the European Union). It’s access is via 120 bilateral agreements, two major sectoral agreements and membership of the Schengen area. The EFTA, via the EEA includes provisions for participation in EU flanking policy areas (policy areas outside the four freedoms).
Read more about the EFTA participation in flanking and horizontal policy areas.
The EFTA also negotiated a series of bilateral and multilateral trade agreements and treaties with countries spanning every major economic centre. You can view the blocks different trading relationships and statues around the world in this interactive map.
EFTA trading relationships
The benefits of EFTA membership
Perhaps the ‘single’ biggest benefit of EFTA membership is participation in the single internal market, without being in the European Customs Union.
Relationships of different European political bodies
This means nations, or specifically Switzerland, are free to trade with the single market, but also free to apply their own customs tariffs (those main barriers to trade we looked at earlier) and negotiate trading relationships with third party countries. If the UK joined the EFTA we would retain preferential access to the single market and could retain access to the single market in services, should the UK be willing to apply free movement of people.
In a Blog for the London School of Economics Ruth Lea lays out the economic case for (re)-joining the EFTA in a more cogent way than I. She lays out the premise that for the UK’s trading patterns and policy, membership of the EFTA could be a benefit for the UK.
With a combination of single market access, participation in existing EFTA trading relationships, bilateral agreements and treaties as well as the ability to negotiate free trade agreements. Tangentially, Switzerland signed a free trade agreement with China in 2013, after three years of talks; whilst after 16 sumits the EU has still to sign a full FTA with China. Bilateral negotiations tend to go quicker than multilateral ones.
Hurdles to Overcome
As with membership of the EEA, the hurdles to joining would be less economic and more political. Membership would require the UK to keep (notional) freedom of movement in place which would continue to be a barrier to successive governments public target to reduce net migration. It is also politically difficult due to the nature of the Brexit campaign which was fought with immigration as a core issue.
There would also be payments into a common budget, as there are with any multinational organisation. Some of these payments do funnel back to the EU for participation in the single market and other flanking policy areas, as well as bilateral grants. Again budgetary contributions formed a central part of the leave campaign, remember the bus and the £350 million pounds a week campaign.
Other hurdles are perhaps less tangible. There are questions as to how much sovereignty the UK repatriates from the EU and what the trade off is. The Leave Alliance has a good article which address the ‘no-say’ fallacy which is often thrown as an argument against the EFTA and EEA options. The demonstrate the intricate and interlinking organisational relationships between the EU, EFTA and EEA.
In conclusion we can see that from the UK perspective, politically and economically there maybe clear benefits of EFTA membership over EEE or full EU membership. With a Swiss-style deal, the UK could gradually extracate itself from the bulk of those parts of EU membership, deference to the EU Commission, Schengen & Euro membership, application of the CAP and CFP policies, common trade agreements and ‘ever closer union’ which are not currently politically palatable. Even many remain voters have serious concerns with one or more of these aspects.
Perhaps an EFTA deal which kept freedom of labour as set out pre-Maastricht Treaty (where there were still visas for labour) and allowed a theoretical migration cap could be a solution. Whether this could be sold to enough UK voters and bought by the EU institutions would be a much larger question.
In the third part of my series I will look at the WTO or World Trade Organisation option.
An interview with European Commission President, Jean Claude Junker
And for a little bit of something different, here is an interview with Jean Claude Junker, President of the European Commission.