United Kingdom

On 27 June 2016, the European Free Trade Association (“EFTA”) held its summer Ministerial meeting at which the outcome of the UK’s referendum on EU membership and its possible implications were discussed. According to an EFTA press release, the EFTA States underlined the importance of maintaining close trade relations with the UK which is one of its major trading partners. Subsequently, CNBC reported that some of the EFTA States said that they are open to letting the UK re-join EFTA (which the UK helped to establish over 50 years ago) and that Swiss President Johann Schneider-Amman believes EFTA would be strengthened should the UK re-join the association.

In this briefing we outline what EFTA is, and the rights and obligations associated with being an EFTA State.

Overview

EFTA is an association which was established in 1960 to promote economic cooperation, integration and free trade for the benefit of its States which, at that time, included the UK. It was an alternative association for European countries that were either unable or unwilling to join the then European Economic Community (“EEC”). In 1973, the UK left EFTA to join the EEC which later became the European Community and is now known as the European Union (“EU”). Today, EFTA consists of 4 members: Iceland, Liechtenstein, Norway and Switzerland.

EFTA and its members are governed by the EFTA convention which provides the legal basis for the organisation. It does not, however, create any significant level of supranational government.

What are the benefits of EFTA?

Free movement of goods

The EFTA Convention allows for free movement of goods between EFTA States. In particular, customs duties on imports and exports between EFTA States are prohibited. Similarly EFTA States cannot impose internal taxes on imported products from other EFTA States in excess of taxes imposed on similar domestic products. EFTA States also cannot impose taxation which affords indirect protection to other products. Finally, quantitative restrictions on imports and exports to and from EFTA States are forbidden.

There are some carve outs from the rules. For example, the free movement of goods does not apply to certain agricultural products. There are also specific rules regarding seeds and organic agriculture. EFTA States can impose some restrictions on free movement of goods on certain grounds including public morality, public policy, and public security amongst others, so long as the measures do not constitute arbitrary discrimination or a disguised restriction on trade between EFTA States.

The EFTA States are also signatories to the Regional Convention on Pan-Euro-Mediterranean Preferential Rules of Origin which extends across the EU, EFTA, and various states in the Balkans, North Africa and the Middle East. Rules of origin determine the country of origin of a product for the purposes of international trade and free trade agreements in particular.

Freedom of establishment

The EFTA Convention provides for the freedom of establishment between EFTA States. This means that companies established in accordance with the laws of one EFTA State and having their registered office, central administration or principal place of business in one of the EFTA States can establish themselves in any of the other EFTA States. Different EFTA States impose their own carve outs to these rules, which are incorporated into the EFTA Convention.

Free movement of people and services

The EFTA Convention allows for the free movement of people between EFTA States. Nationals of one EFTA State can enter another EFTA State to work, provide services or reside in that country. However, the EFTA free movement rules are not as extensive as those of the EU. For example, the provision of services in another EFTA State is only allowed for up to 90 days without a residence permit.

Access to Free Trade Agreements

Unlike the EU, EFTA is not a customs union and does not have its own tariff setting mechanism. It does, however, have a coordinated trading policy and concludes free trade agreements on behalf of its members. To date, EFTA has concluded free trade agreements with over 35 jurisdictions including Canada, Hong Kong (China), Israel, Republic of Korea, Mexico, Singapore and the UAE. It is also in negotiations with a number of other countries including India, Indonesia, Malaysia and Vietnam.

The free trade agreements normally grant duty-free access for all industrial products (including fishery products) and agricultural products. Furthermore, they include trade remedies as well as provisions on competition, the protection of intellectual property, and on payments and transfers. In addition, many of the free trade agreements contain substantive rules liberalising trade in services, investment and public procurement, as well as provisions on trade facilitation and sustainable development.

If the UK were to join EFTA, it would not automatically become a party to the free trade agreements that EFTA has already concluded. However, those agreements do provide for additional members acceding to those agreements subject to the approval of all parties to those specific agreements. For example, Article 39 of the free trade agreement between EFTA and Canada states that: “The Parties may invite any State to become a Party to this Agreement. The terms and conditions of the participation by the additional Party shall be the subject of an agreement between the Parties and the invited State.”

In addition to the EFTA free trade agreements, EFTA States are able to negotiate their own free trade agreements with other third countries.

World Trade Organisation

Unlike the EU, EFTA is not a member of the World Trade Organisation (“WTO”). However, all EFTA States are WTO members. The UK would, therefore, have its own seat at the table at WTO discussions.

What would the UK have to contribute to EFTA?

All EFTA States make a financial contribution to the EFTA budget. By way of example, in 2015 Switzerland contributed approximately €8 million and Norway contributed approximately €11 million, which is considerably less than the UK’s current contribution to the EU budget. We estimate that, at worst, the UK’s EFTA contribution would be around 1% of its contribution to the EU budget.

How would the UK join EFTA?

If the UK decided to join EFTA, it would have to apply for accession to the EFTA Council which is composed of the heads of the permanent delegations to EFTA. Each EFTA State has one vote at the EFTA Council and their unanimous consent would be required for the UK to re-join EFTA.

Do EFTA States have access to the Single Market?

Being an EFTA State does not provide access to the Single Market. However, currently three (Iceland, Liechtenstein and Norway) of the four EFTA States are also members of the European Economic Area and, therefore, have access to the Single Market on this basis. Switzerland has negotiated access to the Single Market by means of bilateral agreements with the EU.

Conclusion

As the UK Government considers its trading options outside the EU, EFTA could provide access to a number of already negotiated free trade agreements with jurisdictions such as Canada and the Republic of Korea whilst still enabling the UK to negotiate its own trade agreements. Although the UK would have to comply with the provisions of the EFTA Convention, it is clear that EFTA is open to derogations from its rules.

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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