The House of Lords EU Internal Market and External Affairs sub‑committees have produced, this week, a report on the issue of the future trading framework between the UK and the EU, after the UK leaves the EU.

The purpose of the report is to provide an early basis for parliamentary consideration of the trade options before Article 50 is triggered. The text of the report can be found here.

The report emphasises the importance of distinguishing between “access to” and “membership of” the EU Single Market. It notes that many countries have access to the Single Market through trade agreements and the rules of the World Trade Organisation, but that only EU member states have full membership of the Single Market, setting, implementing and enforcing all of the EU’s rules to enjoy “highly liberalised trade” in all of the areas that the Single Market operates.

The report notes the UK Government’s aspiration to secure a bespoke agreement with the EU to ensure open and free trade and control over the UK’s borders and laws, but concludes that this is in tension with the fundamental principles of the Single Market which require members to accept the so-called four freedoms, including the free movement of people.

The UK Government is urged to establish a clear plan for a transitional arrangement at the outset of the negotiations once Article 50 has been invoked, noting the importance of such an agreement between the UK leaving the EU and full implementation of any new trade terms.

The report makes the following key points:-

A Customs Union

The UK Government must decide whether or not the UK will remain in a customs union with the EU. The report cites the example of Turkey as a country outside of the EU having a customs union with the EU, but notes that Turkey’s participation is fundamentally different from the UK’s participation as a full EU member state. It notes that the UK, continuing in the customs union, would mean no border checks for goods between the UK and EU, but that this would come along with a restriction on the UK’s ability to sign trade deals with the rest of the world.

Future Trading Relationship

The UK Government has made clear its desire to open negotiations on the future trading relationship between the UK and the EU as part of the negotiations under Article 50, but that this desire will only be fulfilled if both sides agree. Negotiation of a free trade agreement between the UK and the EU would be unprecedented and, whilst it would be the most flexible option and could lead to a bespoke deal, negotiations to establish a free trade agreement would be complex and slow moving. As such, it would be impossible to agree a free trade agreement within two years.

World Trade Organistation Rules

If a preferential trade deal were not reached with the EU, then World Trade Organisation rules would govern the trade between the UK and the EU, which would lead to “the most dramatic change” in terms of the UK’s terms of trade with the EU. Significant tariffs for goods would result, and increased restrictions on services.

The report concludes overall that negotiations on a new trade relationship with the EU will be conducted against “an extraordinarily difficult political and institutional backdrop” and that complete regulatory sovereignty whilst engaging in comprehensive free trade with partners is based on a misunderstanding of the nature of free trade. As such, the liberalisation of trade requires states to agree to limit the exercise of their sovereignty – “the deeper the trade relationship, the greater the loss of sovereignty”.