December marked a renewed sense of optimism for Brexit negotiations: the European Council gave the green light to Phase 2 on a transition and a future trade deal. And while official negotiations on the outline of trade deal will not begin until April or later, preparations have already begun.
But an internal document published last week by the European Commission suggests that a key sticking point for the future trade deal will be around dispute settlement.
The EU has been unambiguous: any extensive bilateral trade would require both sides to adhere to similar standards and agree to a robust institutional framework that enforces joint commitments and resolves disputes.
Strong dispute resolution mechanism
Similarly, in her Florence speech, Prime Minister Theresa May recognised that “to make this partnership work, because disagreements inevitably arise, we will need a strong and appropriate dispute resolution mechanism.”
This is because any new laws or regulatory divergence between the UK and the EU27 after Brexit could create new barriers and delay trade flows. As long as the UK is inside the EU, the European Court of Justice (ECJ) acts as the ultimate arbitrator in trade disputes between member states and EU institutions.
But the UK government has made clear that it will no longer be subject to the jurisdiction of the ECJ after Brexit. Nor will it seek membership of the European Economic Area, which has a robust legal framework to ensure single market rules are respected and enforced in those EFTA countries that are party to the EEA, namely Iceland, Liechtenstein and Norway
Similarly, the EU-Switzerland trading arrangements show that “institution-free bilateralism” is only possible up to a point: the agreements in place are static, which means that the EU and Switzerland must re-open negotiations every time there is a new legislative development that impacts their trade.
When disputes arise, they are mostly resolved through diplomatic means — but talks can take several months, and incur costs for businesses and consumers. So much so in fact that the EU and Switzerland are discussing options for a new legal framework.
Earlier this month, EU chief Brexit negotiator Michel Barnier and his team presented what it saw as viable options for UK-EU27 relations post-Brexit.
The UK government’s paper on enforcement and dispute resolution in August also put forward several alternatives to the ECJ, from setting up a new joint institution to joining the EFTA Court. Each option has its own political and institutional drawbacks and it is not immediately clear which model both parties could agree on.
Perhaps the most interesting option would be for the UK to become a party to EEA institutions, without becoming a party to the EEA, otherwise known as ‘docking into’ the European Free Trade Association (EFTA) Court, the judicial body that interprets EEA rules and deals with disputes over their application in Iceland, Liechtenstein and Norway.
This idea would involve a British judge sitting in the EFTA Court, but only adjudicating on those decisions that concern U.K. bilateral trade with the EU.
This would alleviate some of the UK and the EU’s core concerns. For the EU, it would mean joining an existing court — one of whose core principle is to ensure that the EEA remains a homogeneous trade zone (although there have been some examples of regulatory divergence in the past).
One advantage for the UK is that EFTA Court rulings have no direct effect (unlike the ECJ’s) and the EFTA Court could act as the ultimate arbitrator in case of litigation. In practice, most disputes are usually resolved diplomatically.
But this decision would have important political ramifications. First, it would require the consent of all EU but also non-EU countries that are party to the EEA, any of whom may try to extract concessions from the UK in other areas, such as allowing freedom of movement of workers between the UK and the EEA states post-Brexit. The UK would also need to convince the EU27 that it offered a suitable mechanism for arbitration.
Second, with a British judge sitting in the EFTA Court, not only would the size of the Court increase, but so would its role and profile. This could upset the existing balance between the ECJ and EFTA and complicate the court’s aim of ensuring a homogeneous European economic area — particularly if the UK, due to its large commercial hub and economic priorities, deviates from EU standards. The ECJ would also be expected to become an invisible partner in the negotiations.
A technical and legal challenge
Finally, there is a long-term political risk. Docking into the EFTA Court would presuppose the UK and the EU27 agreeing to a more sectoral approach despite the European Commission’s insistence that there should be ‘no cherry-picking’ — a sentiment which was also echoed during French President Emmanuel Macron’s recent visit to the UK.
If the UK did manage to dock into the EFTA Court, other EEA countries, including EU member states, might be tempted to break away from the EU or EEA and pursue a similar path. With the EU concerned about preserving the unity of the 27, and homogeneity of the EEA, it would be instinctively cautious.
Finding a solution is as much a technical and legal challenge, as it is a political and strategic one. But while negotiations are likely to be complex, the cases of Switzerland and now of the UK demonstrate that extensive trade with the EU requires a robust institutional framework to oversee bilateral trade and resolve disputes. A more flexible Europe needs this too.
Georgina Wright, Research Assistant and Coordinator, Europe Programme.
This article was originally published in Politico.