The rules of free trade are undeniably complex, and are the product of many decades of agreements negotiated by numerous bodies. That is why extricating the UK from the EU is so very difficult, writes Philip Allott (University of Cambridge). He sets out why the ‘Norway option’ holds little appeal.
The level of ignorance that surrounds the effort to withdraw the UK from membership of the European Union can only be justified by the complexity of the underlying legal situation which is as complicated as any legal situation can be. It involves the interaction of four different legal orders. National law. EU law. World Trade Organisation law. General International Law. This situation is at the root of the chaotic negotiations between the British government and the EU institutions.
The global trade system is governed by the World Trade Organization (1995). There are 164 members of the WTO, including the US, China, India and Japan, all the member states of the EU, and the EU itself. The WTO is a continuation and massive amplification of the General Agreement on Tariffs and Trade (1947) which was part of the economic reorganisation of the world after World War Two, together with the IMF and the World Bank which stabilised the world financial system.
GATT was designed to put an end to one aspect of the economic chaos of the 1920s and 1930s. It embodied a policy of ‘free trade’ that had arisen after the Napoleonic wars in Europe and which had given way to chaotic protectionism in the 20th century. The policy of free trade includes an idea that net global wealth will be increased if goods are allowed to move freely from countries where they are best produced (for reasons of climate, resources, skills, or manpower) to countries where they are wanted.
With the dramatic economic development of the US (after the end of the Civil War in 1865), Japan (after the Meiji Revolution of 1868), Germany (after its creation in 1871), and Russia (after the revolution of 1905), the wars of the 20th century were the product of a tectonic clash between frenetically modernising economies and age-old systems of crude diplomacy and war. The EU is another product of that event.
The WTO system incorporates the GATT Agreement, including the most fundamental principle of free trade known as the ‘most favoured nation’ principle (Article I). You cannot give trade preferences to one country which you do not give to all the other members of the WTO.
The MFN rule would presumably apply to the UK if it were no longer a member of the EU. The EU itself has trade agreements with 43 other countries. The UK’s position in relation to those countries would have to be renegotiated. The UK has investment treaties with many other countries. They are not trade agreements, but give a legal basis to protect mutual capital investments. They would presumably be affected by UK withdrawal.
The EU has concluded more than 300 international agreements. The UK and the EU are separately parties to the UN Law of the Sea Convention, giving effect to their respective responsibilities in the field. There are hundreds of other intergovernmental organisations with decision-making powers. For example: UN Law of the Sea Tribunal; International Centre for the Settlement of Investment Disputes; Interpol; World Health Organization. 158,000 treaties have been registered with the UN since 1946. Such is the ‘sovereignty’ of states. Making a treaty is a sovereign act. Every treaty is a limitation of sovereignty. Self-interest chooses common interest.
The original WTO system consists of thousands of pages of legal texts, to which have been added many further international agreements, countless further texts produced by its governing bodies, and very many decisions of its quasi-judicial dispute-resolution system which can lead to a decision ordering a member state to cease a practice contravening WTO law – analogous to the role of the European Court of Justice. Why this monstrous complexity of the WTO system?
The problem is that, in an immensely dynamic global economy, the rules of free trade are extremely difficult to enforce. When traditional protectionism (customs duties and quotas) is removed, there remain countless other ways of directly or indirectly restricting imports and distorting world trade, invented by the fertile intelligence of civil servants under the influence of ruthless industrial and commercial enterprises.
Dumping (exporting a product at an unnaturally low price that undercuts the same product made in the importing country). Government assistance to national industries, including tax breaks. Above all, so-called non-tariff barriers to trade.
There is a mass of national law governing trade and industry and commerce. In the public interest, you may have laws prohibiting the sale of goods that do not satisfy technical standards, say to protect health and safety or the environment, or to protect the holders of national patents or copyright, or to prevent anti-competitive behaviour (collusion among companies, or the behaviour of a company that grows so large that it can exclude its competitors from the market), and countless others. All of these can be used to restrict or prevent the import of goods and services that do not satisfy the laws of the importing state.
The WTO system has two great exceptions to its fundamental rule. Customs unions. Free trade areas. A customs union has free trade among its members and a single trade policy vis-à-vis non-member countries, including the making of trade agreements. A free trade area has the first characteristic, but not the second. NAFTA, the Trans-Pacific Partnership, and the proposed Asia-Pacific Free Trade Area are examples. The UK sponsored the European Free Trade Area (1960) which allowed it to retain its external trade policy, including Commonwealth Preference and the Sterling Area financial system.
When the European Economic Community (1958; known as the EU from 1993) was proving to be a spectacular success, the UK had to become a member (1973). Given that so much of UK trade was with EEC countries, the UK was subject to law and government in the making of which it played no part.
The problem was that, in the meantime, the EEC had become a vast legal and governmental system with masses of further agreements, laws, secondary legislation, subordinate agencies, committees of civil servants from the member states interpreting and applying the legal rules at the most detailed level, and countless decisions of the European Court of Justice. Why? For the same reason that explains the complexity of the WTO.
Removing the two traditional barriers to trade (customs duties and quotas) is relatively easy. Creating a level playing-field for trade and industry and commerce, and enforcing it, are extremely difficult things. In capitalist terms, you have to create a market in which market-forces can determine production, distribution and exchange, and in which government economic intervention should assist in achieving that aim.
What came to be called the EU ‘single market’ is the creation of that level playing-field market, using EU institutions to create EU law integrated into the legal and governmental systems of the member states. Non-tariff barriers to trade had to be dealt with.
The EU had to undertake the massive and unending task of eliminating or harmonising non-tariff barriers to trade (shape of tomatoes, doctors’ qualifications, etc.), including aids to industry by national governments, and control of anti-competitive behaviour by companies. Movement of persons and of investment capital in response to market forces had to be freed, and the movement of those who provide professional services.
In highly developed economies, you cannot have a customs union without a single market. They are inseparable. You cannot be in the EU custom union and not be part of the single market. If you are outside the EU customs union, your economic activity in a EU member state will be subject to the ever-changing legal regulations laid down by the EU institutions and integrated into the law of the member state where you do business. For example, EU competition law applies to US companies trading in the EU. Cars imported into the EU must satisfy EU emissions standards.
There is talk of a ‘Norway’ solution to the problem of UK withdrawal. That is to say, that the UK’s new relationship with the EU would be on the lines of the European Economic Area. For an outsider, the EEA is difficult to understand. The following tentative opinion is subject to the views of the Legal Services of the European Commission and the European Council who invented the EEA:
1. In World Trade Organization terms, the EEA is presumably seen as a free trade area containing Iceland, Liechtenstein and Norway (three of the four members of the European Free Trade Area), the EU itself, and the EU member states. If so, it would be a free trade area that contains a customs union (the EU) as a member.
2. In return for free trade with the EU, the non-EU EEA member states agree to accept the application of the single market system to their trade with the EU (in the form of a shared ‘internal market’), creating a level playing-field between them and the EU member states, so that the non-EU members of the EEA do not have an advantage over the EU members.
3. However, the non-EU members of the EEA are not represented in the EU institutions that make single-market law and its implementing law and subordinate decision-making.
4. The EEA relationship is made under general international law. The EEA agreement is a treaty integrated into the law of the non-EU members, the laws of the EU member states, and into EU law. It presumably counts as a trade agreement of the EU, in the conduct of the external trade policy of the EU customs union.
5. If the UK became a member of the EEA, or if a new enlarged EEA were created, the treaty to do that would also take effect under general international law, subject to parliamentary ratification in all the remaining 27 members of the EU and in all the members of EFTA, by legal acts within the EU, and by ratification by the Government of the UK, where treaties are not ratified by Parliament, but are given legal effect in the UK by statute law (Acts of Parliament).
6. For the UK, the net effect of a ‘Norway’ solution, as compared with the UK’s present situation, would seem to be that we would still apply single-market law but would no longer be represented in the EU institutions that make single-market law and its implementing law and subordinate decision-making.
It seems unlikely that a major trading-nation doing very much of its trade with member states of a customs union that includes the legal system of a single market would choose not to participate in the institutions that create and control that system.
It so happens that UK withdrawal is not the worst of the EU’s current problems. The relationship between a government and the market in capitalist systems is all-consuming and fundamental. The EU is in that relationship with the overall EU economy. But this means that the relationship tends to reach into higher and higher levels of the public policy which ultimately determines the distribution of the burdens and benefits of a society, perhaps even fiscal policy. In a liberal democratic capitalist system, this means that there must be politics.
The EU has the substance of traditional liberal democratic institutions, but it does not have the essence of liberal democracy, which rests on the relentless daily struggle of public opinion, causing and justifying law-making and government and administration. Resolving that problem is an urgent priority. Another urgent priority is to establish the EU in its rightful place as a great power on the global stage.
This post represents the views of the author and not those of the Brexit blog, nor the LSE. It first appeared at the UK Constitutional Law Association blog.
Philip Allott is Professor Emeritus of International Public Law at Cambridge University.