Why ‘Norway for Now’ is deeply flawed

Michael Emerson is an Associate Senior Research Fellow at the Centre for European Policy Studies (CEPS), Brussels.

Various British MPs have started advocating a proposal, termed “Norway for Now”, as a solution to the Brexit quagmire. Nick Boles, a Conservative MP, has been the most vocal advocate, setting out his ideas on a new website and in an article in The Times. This paper addresses the proposal as set out in four steps on the website.

In summary the idea is to join the European Economic Area (EEA) like Norway for an interim period of indefinite length, but probably around three years to allow for negotiation of a Canada-type free trade agreement instead of the Chequers plan.

This sounds simple and straightforward, but the plan is deeply flawed to the point of being a non-starter. In addition several specific arguments are illusions or mistaken.

Why it is flawed

In substance the interim EEA membership is already entirely covered by what has been agreed for a transition period, while involving additional institutional and legal problems that make it impractical. The main difference is that the proposed interim EEA membership would have no fixed time limit, whereas the agreed transition period would be time-limited, to the end of 2020, although some possible extension beyond this date seems to be under discussion.

So the EU’s likely position, if the UK government followed the proposal, is “you already have what you want and more in the transition agreement; if you want to extend the time horizon let us know and it will be considered. But the EU will never agree to an open-ended temporary transition”.

Since an open-ended transition or interim arrangement would in any case further prolong and aggravate the uncertainty factor for business, it would be prejudicial to British economic interests that demand clarity and certainty.

Step 1 – “Take back control of the Brexit negotiation”

The authors reject both the two-year transition agreement that would see continued application of EU rules, and the withdrawal agreement, including the provisions for payment of £39 billion.

The assertion that this means taking back control is hard to understand, since the alternative of an interim membership of the EEA means precisely remaining subject to EU rules and substantial payments to the EU budget.

Also rejected is the Northern Irish ‘backstop’, but this leaves unspecified how otherwise a hard border with the Republic of Ireland would be avoided. In this respect the proposal is critically incomplete. Presumably the authors do not know what to do on this. However the EU would not be willing to negotiate a deal which ultimately envisaged a Canada-style agreement without now agreeing a backstop.

The outright ‘rejection’ of what has so far been negotiated with the British government would break the modicum of trust and good faith established between the Prime Minister and the EU side. It would increase support in the EU for letting the time now up to 29 March run out with a ‘no deal’ Brexit.

Step 2 – “Negotiate interim membership of the EEA…”.

The document asserts that the UK has the legal ‘right’ to remain part of the EEA after withdrawal. This is incorrect. Withdrawal from the EU entails withdrawal from all the EU’s external agreements and treaties with other states, which includes its EEA agreement with the three EFTA states. The UK would have no ‘right’ to remain part of the EEA.

It is correctly stated that to continue in the EEA from outside the EU first requires accession to EFTA. However it is unlikely that either the existing EFTA member states or the EU would agree to this. Their reasoning would be that both the EFTA and EEA treaties are seen as permanent institutional arrangements, with the factor of trust and reputation in their stability standing as primary assets. It would be unattractive to them to undermine these qualities, and make complex legal and institutional arrangements to serve just as a tactical device (as seen by the authors) to help strengthen the UK’s negotiating position with the EU.

In any case, from a legal standpoint, accession to EFTA would require treaty ratification procedures that can take a long time (years), adding a further reason why the idea would be an impractical proposition for an arrangement needed by the end of March 2019. It can be argued that the EU’s trade agreements often provide for ‘provisional application’ of much of the substance while waiting for ratification procedures to be completed, but this would have to be agreed with the EU, which is unlikely; it is not an automatic provision.

There is a lengthy legal argument annexed to the Better Brexit document, arguing that international law would support a British claim for there to be an automatic continuation of the UK’s participation in the EEA, in the absence of a request to the contrary[1]. However, this is irrelevant since the UK would stop being an EU-EEA member state, and would become something quite different, namely an EFTA-EEA member state. This change requires a treaty and ratification.

Therefore for both legal and political reasons the idea of temporary membership of the EEA starting on withdrawal day is a non-starter[2].

Permanent EEA?

If the UK asked for permanent membership of the EEA the EU’s position would be less negative, regarding this as a legitimate possible choice on the part of the UK. Whether Norway and the other EFTA-EEA member states would welcome the idea is less certain, since the entry of the big UK could destabilise the current smooth running of the EEA. The more relevant point for the “Norway for Now” proposal is that Norway would likely take a more negative view of temporary membership of the EEA, unsettling existing institutions and practice for no long-term benefit.

It is also said that joining the EEA as an EFTA member would mean leaving the jurisdiction of the European Court of Justice. While superficially correct legally, it is hardly meaningfully different. There would be jurisdiction instead of the EFTA Court of Justice, but in practice this court does not and cannot diverge from the case law of the European Court of Justice on matters of single market law.

There is also the puzzling assertion that the UK would be able to restrict free movement of EU workers in accordance with the EEA agreement. Free movement of labour is fundamental to the EEA as to the EU. Some exceptional provisions have been agreed for the micro-state of Liechtenstein (population 37,800), but the EU would not accept this as a precedent for the UK.

The EEA agreement does not include participation in the EU customs union for the EFTA members. However the authors propose “continuity in our customs arrangements”, which sounds like staying in the customs union, as in the transition agreement, but the text is not clear on this point. The phrase “our customs arrangements” is a bizarre choice of words. There are no ‘customs arrangements’ as of today except for participation in the EU’s ‘customs union’. Are the authors seeking to evade this contested issue by using woolly language?

The text also proposes that acceptance by the EU of the temporary EEA membership would be a condition for agreeing to the £39 billion divorce settlement in the withdrawal agreement. However, there is an internal inconsistency in the proposal here since in the EEA Norway and the others member states make substantial financial contributions to EU policies. So in principle there would have to be a fresh financial negotiation here, to ascertain whether these contributions, scaled up for the UK, would be more or less than the existing divorce settlement.

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Step 3 – “Negotiate a Canada-style free trade agreement as the second stage…”

The frequent citations of a Canada-style FTA as model is invariably failing to acknowledge how unsuitable in its substantive content the model is for the UK. Anything ‘Canada-style’ sounds positive because Canada is a decent country, as long as one avoids looking at the actual content of its FTA with the EU.

A first and major illustration of the unsuitability of the Canada-style FTA for the UK concerns how non-tariff barriers are handled, i.e. technical product standards for industrial goods and sanitary regulations for agri-food products. These technical barriers to trade are recognized to be even more important that tariffs. Canada and the UK/EU use different technical standards and regulations compared to those of Canada, and in the EU-Canada FTA there is no mutual recognition of each other’s standards. There is only the much more limited mutual recognition that each other’s conformity assessment agencies can certify conformity that the exporter is conforming to the importing country’s standards, which far from removing non-tariff frictions.

What this means is that UK-based firms would lose their frictionless access to the EU’s market, both for services and for goods.

There are many other linkages between the UK and the EU that common sense would want to retain, and which are not available under a Canada-style FTA (for example scientific cooperation that goes way beyond ‘Canada’, etc.).

It is further proposed to negotiate “deep and comprehensive FTAs with key trading partners around the world, taking EFTA’s 26 FTAs with 36 partner countries as our starting point.” This sentence shows that the authors are not aware of some basic trade policy facts. EFTA’s FTAs are not ‘deep and comprehensive’, but thin and limited. The ‘deep and comprehensive’ label is used by the EU for its FTAs that involve substantial alignment on EU standards and regulations, such as in the case of close neighbours like Ukraine, which is precisely what the authors say they wish to avoid in order to ‘take back control’.

Step 4 – “Prepare properly for trade on WTO terms”

This seems to amount to the ‘no deal’ scenario although the wording is avoided, since it is generally considered to be a recipe for disastrous economic results.

However, the proposal involves several highly questionable economic policy propositions.

The authors propose investment in “state–of-the-art border systems for seamless customs and regulatory checks”. The only known such system is the EU’s single market and customs union. The implication of the drafting is that some such “state-of-the-art” systems exist elsewhere, but there is no indication where or what this might be. The UK government has been trying for over a year to devise some such scheme, and has proposed it in vague terms to the EU, which has declared the proposal so far to be unworkable.

The authors propose a “massive programme of investment to transform UK’s ability to trade successfully on WTO terms”. It is further advocating “support investment by manufacturing industry to secure long-term competitiveness of supply chains”.

Private or public investment?

It is not said who would do the massive investment, notably whether it would be the private or public sector.

If it is supposed to be the private sector’s own initiative, this could only be regarded as an aspiration by the authors with no real foundation. On the contrary the prospect of falling back on WTO rules would mean a major further deterioration of the business climate and a negative for new investment.

If the massive investment would be financed by the government, then a host of difficult questions arise.

Would it be a massive public infrastructure programme, if so what would it consist of, capable of “transforming” the UK’s capability to trade successfully?

Or would it be an investment subsidy scheme, going beyond present fiscal provisions? How would such schemes look in relation to WTO anti-subsidy provisions? Any “massive” subsidy scheme would probably be branded illegal at the WTO.

It is further proposed to “support investment by manufacturing industry to secure long-term competitiveness of supply chains”. We already informed of the intentions of major industries with complex supply chain relationships between the UK and the rest of the EU, such as automobiles and aerospace. Any customs arrangements resulting in border checks and delays for just-in-time deliveries will wreck these supply chain relationships. Already there is a stop on new investments. With anything like either “Canada” or a “no deal” on WTO terms the prospect would be for new investment to shun the UK, and eventually plant closures. These industries are not looking for support from the British government to offset the introduction of border frictions. Either there is seamless, friction-free border crossings, or such enterprises will progressively re-locate away from the UK.

Overall this call for massive investment sounds rather reminiscent of Labour Party manifestos of half a century ago.

Conclusions

1. The document seeks to avert “the chaos of crashing out of the European Union at the end of March with no deal”. However its outright rejection of the draft withdrawal agreement negotiated between the UK and EU would mean a breakdown of the modicum of trust the UK had been negotiating in good faith, and would make the prospect of “no deal” all the more likely.
2. This is first of all because the idea of an open-ended interim EEA membership is a non-starter, for legal reasons and political reasons. Contrary to what the document asserts, the UK would have no right to continued EEA membership.
3. The need to accede to EFTA before becoming a non-EU member of the EEA is correctly noted, but this would involve a treaty requiring ratification, which could take so long as to rule it out to begin at the end of March 2019. In addition, it is quite likely that there would not be agreement among either EFTA or EU members to the idea, for which unanimity would be required.
4. The proposal of a Canada-style FTA with the EU is advocated with no awareness of how poorly suited to the UK’s situation this would be. The issue of non-tariff barriers is cited as a major example why a Canada-style FTA would definitely not be a better solution for the UK.
5. In any case, the EU would insist on the UK now agreeing an Irish “backstop” before accepting any arrangement that could involve the country ending up with a Canada-style deal.
6. The proposal for a WTO-based trading system is coupled to advocacy of “state of the art” border systems that do not exist, and for massive support for investment that sounds implausible as offset to the disadvantages for supply chain industries. While the text is too vague to be sure, such support might well be WTO-illegal.
7. The overall conclusion is that the proposal has serious flaws each of the four steps envisaged.

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[1] George Yarrow, ‘Brexit and the Single Market Revisited’, Regulatory Policy Institute, December 2017.

[2] As also argued by Jean-Claude Piris, former chief of the EU’s legal service, The Times, 29 October 2018. The “Norway Option” …. “would not work”.

Edited by Hugo Dixon