Second Special Report

The International Trade Committee published its First Report of Session 2017–19, Continuing application of EU trade agreements after Brexit, on 7 March 2018 (HC 520). The response from the Government, and an accompanying letter from the Secretary of State, were received on 2 May 2018 and are appended below.

Appendix 1: Letter from the Secretary of State for International Trade to the Chair of the Committee

I would like to thank the Committee for its report published 7 March 2018 on the continuing application of EU trade agreements after Brexit.

Since the report’s publication, major steps have been taken towards securing continuity for EU trade agreements. The draft Withdrawal Agreement text agreed at March European Council states that the EU will notify third parties that the UK will be treated as a Member State for the purposes of existing international agreements during the Implementation Period. This will enable continuity across these agreements for the duration of this period.

This is a positive and significant step towards securing continuity in our relationships with partner countries on trade and other important sectors. It provides further certainty and confidence that there will be no disruption to existing trading relationships underpinned by EU trade agreements as we move into the Implementation Period.

However, the Government is not making assumptions and we continue to plan for a range of possible scenarios to maintain existing trading relationships. We will engage with partners to ensure that there is no disruption to trade as we leave the EU, working towards bilateral agreements that will ensure continuity beyond the Implementation Period.

A formal response to each of the conclusions and recommendations made in the Committee’s report is enclosed. The Committee’s work on trade policy plays an important part in providing proper scrutiny and debate, and I welcome continued engagement going forward.

2 May 2018

Appendix 2: Government Response

In its report, the Committee made 24 recommendations and conclusions in total. The Government’s response to each recommendation can be found below. The numbering of recommendations referred to here are those used in pages 31-35 the Committee’s report. Recommendations made by the Committee are indicated in bold italicised text.

EU trade-related agreements

Recommendation 1

“The Government is right to seek to ensure the continuation after Brexit of the effects of the EU’s trade and other trade-related agreements, at least in the short term. If this continuation does not occur, there is likely to be an economic price to pay.”(Paragraph 21)

The Government welcomes the Committee’s support for its work, and recognition of the importance of continuity for businesses and consumers.

Recommendation 2

“Regarding those agreements which promote development goals, notwithstanding the criticisms that have been made of them as they presently stand, the valuable preferential access to UK markets which they provide for developing countries must not be allowed to lapse at the point of Brexit. The Government should bring forward proposals for a mechanism whereby rolled-over Economic Partnership Agreements will be subject to review in respect of issues such as Most Favoured Nation clauses, rules of origin, requirements for economic liberalisation, and sanitary and phytosanitary measures, with a view to potential renegotiation in due course.” (Paragraph 22)

Our immediate priority is to ensure continuity and avoid disruption for businesses and consumers. This continuity is particularly important for developing countries exporting to the UK and for British businesses which rely on imports from these countries.

EPAs (Economic Partnership Agreements) are bilateral agreements, negotiated and agreed by both sides. As treaties, they are long-term, sending a strong continuity message to business. EPA partner countries have clearly said they want to replicate the effects of the EU EPAs after the UK leaves the EU. 1Our intention to transition EU EPAs respects their wishes and continues our mature, reciprocal trade relationships.

As per the joint statement by the Secretary of State for International Trade and the Secretary of State for International Development on 16 April 2018, transitioning EPAs is not the limit of the Government’s ambition and we will look to see how we can improve upon these trade arrangements.

Recommendation 3

“[With this in mind,] there is an urgent need for clarity over the number, type, scope, extent and importance of the EU’s trade-related agreements. The Government must reassure us that it has firm grasp of precisely which agreements will cease to have effect in respect of the UK at the point of Brexit if no action is taken, and what the consequences of that would be.” (Paragraph 23)

The Government has a clearly defined programme, working across several departments, to ensure the UK’s existing international agreements continue to apply as we leave the EU.

We wrote to the Committee last November and December on this issue for its prior inquiry on the work of the Department.2 As stated in the Secretary of State’s letter dated 19 December 2017, the Department of Exiting the European Union (DExEU) is leading work across Government to identify all international agreements that are affected by EU exit and take action to ensure continuity.

With regards to trade agreements, the EU Treaties Office Database includes a list of trade agreements that the EU has with third countries. As the Government noted in previous correspondence and in the evidence given by the Minister for Trade Policy to the Committee, it is potentially misleading to focus on a definitive figure for these agreements. For example, as indicated in our letter dated 19 December 2017, there are instances where multiple agreements may be referred to in some contexts as a single agreement, such as the EU’s 1972 trade agreement with Switzerland, which has been supplemented by more recent agreements. Additionally, the EU is a party to a number of agreements which have only been partially or provisionally applied, or are signed but have not yet entered into force.

The Government’s approach to rolling over EU trade agreements

Recommendation 4 and 5

“DIT is to be commended for identifying this issue quickly and designating it as the Department’s second-highest priority. DIT also deserves praise for making contact so quickly, and at ministerial level, with over 70 third-country parties to EU trade agreements.” (Paragraph 32)

and

“[However,] there is a disturbing lack of precision and clarity about the legal mechanism whereby the Government envisages EU trade agreements with some 70 countries being rolled over. DIT must show, Number 10 and the Cabinet Office must support, and DExEU must allow, that DIT has a legally watertight and practically viable strategy for achieving “transitional adoption” at the point when it will need to take effect, so that UK trade with around 70 countries does not face a “cliff edge”, even if no withdrawal or transition arrangements with the EU should have been agreed or ratified.” (Paragraph 33)

Please see the cover letter which outlines significant developments since the report’s publication relevant to this issue.

As agreed at March European Council, the EU has stated in the draft Withdrawal Agreement that the UK is to be treated as a Member State for the purposes of international agreements during the Implementation Period.

It is a process of transition, rather than a new agreement. The EU’s notification is expected to cover the UK and all Member States’ agreement to this approach.

In parallel to this, we continue to work bilaterally with partner countries to ensure continuity of effect for our international agreements beyond the Implementation Period. Discussions have been positive so far. This will enable us to work for continuity in a range of scenarios.

Recommendation 6

“The Government must treat the roll-over of EU trade agreements as an urgent priority. UK businesses, consumers andinvestors, as well as developing countries benefitting from EU trade agreements, all need certainty about future trade arrangements. DIT should publish a detailed timetable for de facto this work, and this should be explicitly backed by Number 10 and the Cabinet Office.” (Paragraph 34)

Continuity of EU trade agreements is one of the Department’s top priorities. The Government shares the Committee’s desire to provide as much certainty as possible about future trading arrangements as the UK leaves the EU, and we engage extensively with stakeholders to keep them updated on our approach.

As set out in the letter accompanying this response, the Government has recently made substantial progress towards ensuring continuity for EU trade agreements as we leave the EU.

The Committee can be assured that the Department continues to work across Government to ensure the programme is taking the necessary steps, including considering ratification timetables and requirements in partner countries, to ensure continuity of trading relationships.

Recommendation 7 and 24

“The Government should produce a ‘risk register’, identifying clearly the agreements to be rolled over, with an assessment of how important each agreement is to UK trade. If resources allow within the time given, this should be compiled in consultation with Parliament, businesses and civil society. If resources do not allow for this, the Government should reassure us that this register exists internally.” (Paragraph 35)

and

In respect of these agreements, just as with trade agreements, a comprehensive “risk register” is urgently needed.” (Paragraph 99)

As noted earlier in the response to recommendation 3, the Government has a clearly defined programme of work to ensure continuity for EU trade agreements, including rigorous project management to monitor progress.

The Government is fully aware of the importance of these agreements to businesses and civil society. The package of EU trade agreements being transitioned contains a wide variety of different provisions and benefits. For example, the emphasis of Association Agreements is on political cooperation as well as trade. Similarly, Economic Partnership Agreements are development-focused trade deals with Africa, Caribbean and Pacific countries.

Stakeholders have shared the importance that specific agreements have to their businesses, and we continue to engage extensively to update them on our approach. We are continuing this programme of engagement.

Recommendation 8

“The Government would risk appearing naïve if it assumed that assent-in-principle to roll over an agreement constitutes a guarantee that roll-over is actually certain to occur at the point of Brexit. It must be realistic about the steps that are necessary to get new agreements in place—and have contingency plans for the eventuality that the third countries concerned change their minds. This must include the pursuit of bilateral arrangements with each party with whom the UK currently has arrangements by virtue of its membership of the EU.” (Paragraph 36)

The Government is not making assumptions, but basing its judgement on the evidence of continuous engagement with partner countries. It remains the case that all partner countries are committed to ensuring there is no disruption to our trading relationship. We have a mature relationship with our partner countries, and in discussions cover a range of scenarios to ensure continuity.

In parallel to arrangements for the Implementation Period, the Government continues the important work with partner countries to ensure continuity of effect of our international agreements beyond the Implementation Period, to avoid any disruption in trade from January 2021 onwards.

Post-Brexit “implementation” period

Recommendation 9 and 10

“We cautiously welcome the Government’s new policy to seek agreement of all parties to interpret relevant terms of EU free trade agreements, such as “European Union” or “EU Member State”, to include the UK during transition, while continuing to seek to roll over those agreements. While we welcome the Government’s willingness in this respect to be pragmatic, it is difficult not to see this as an admission that its policy of negotiating new agreements by March 2019 might not be achieved and may be failing. We seek urgent reassurance that the Government is allocating appropriate resources not only to this objective but to all its policy objectives, including the bilateral strand of negotiating these agreements, and that it is being realistic about how achievable those objectives are. The Government should write to this Committee setting out why it might not achieve and may be failing to achieve this policy objective in the time it originally set, and how it will change its future plans on these and other trade agreements to take account of the lessons learnt. If the EU’s agreement to the treating of the UK as a de facto EU territory for the purposes of the transition period is not agreed at the March 2018 EU Council meeting, the Government should publish a statement setting out its alternative approach for achieving continuity.” (Paragraph 42)

and

“In addition, it is still far from clear that it will be possible to secure continued application of EU trade agreements during the post-Brexit transition period. The Government must urgently clarify the nature and form of the trilateral (UK-EU-third country) agreements whereby it is intended that the UK will remain a de facto party to the EU’s trade agreements during a transition period. It must also evaluate and set out the potential risks and benefits attached to this approach.” (Paragraph 43)

The Government notes the Committee’s recommendation was made before the agreement at the March European Council. As noted earlier in the response to recommendations 4 and 5, the EU has stated in the draft Withdrawal Agreement that the UK is to be treated as a Member State for the purposes of international agreements during the Implementation Period.

Recommendation 11

“Meanwhile, the Government must still address the issues that we have raised in respect of its pursuit of “transitional adoption” and act on the assumption that this could still need to be in place at the point of Brexit in March 2019. Even if the new approach does prove successful, it will only buy the Government a limited amount of extra time in which to achieve roll-over and it would still need to redouble its efforts in that respect.” (Paragraph 44)

The Government is keenly aware of the limited time available. We and our trading partners are clear that this is a technical exercise to ensure continuity. We are also aware of ratification timeframes and requirements for each of our partner countries. Officials will continue to work with their counterparts within these countries to ensure relevant deadlines are met.

The terms of rolled-over trade agreements

Recommendation 12

“The Government should work with the EU to arrive at a consistent solution to the problem of dividing Tariff Rate Quotas in rolled-over agreements, just as it already has in respect of establishing separate UK schedules at the World Trade Organization. The Government should set out its approach to overcoming the objections made to its TRQ proposals at the WTO.” (Paragraph 53)

Regarding TRQs in existing EU FTAs, the Government is discussing future quota levels directly with our trading partners. We have had constructive initial exchanges on this issue. Consistent with the approach across FTA continuity discussions, the Government is seeking to protect existing trade flows and avoid any disruption for businesses, producers and consumers. The Government also engages closely with EU partners, including the European Commission, to keep them abreast of discussions.

Regarding TRQs in the WTO beyond 2020, the UK is continuing to pursue an approach at the WTO to ensure that our trading partners are no worse off as regards to their current market access entitlements, including agricultural tariff rate quotas. To minimise disruption, the Government is preparing the necessary schedules that replicate as far as possible our current obligations. We are working closely with domestic and international stakeholders.

Recommendation 13 and 14

“Rules of origin provisions in treaties between the EU and third countries cannot simply be copied and pasted. In order to maintain the status quo, the Government will need to negotiate either a reduced threshold for domestic content or “diagonal accumulation” arrangements. In either case the consent of the third country will be necessary. It is difficult to imagine a scenario in which the third country would not seek concessions from the UK in return.” (Paragraph 66)

and

“The Government should consider seeking an agreement on “diagonal cumulation” in third- country agreements with the EU and the third country concerned in each case. While the trilateral method of negotiating may in many cases be aimed pragmatically at helping the EU and UK cumulate content for the purposes of rules of origin in agreements during a transitional period, it must not be undertaken at the expense of making bilateral agreements in case there ends up being a problem trilaterally. It makes sense for the UK to organise with the third countries to count EU inputs to UK exports to those countriesas cumulated, and we would hope that if pursued in the right spirit the third countries and the EU would be amenable to treating UK input content of EU exports to those countries as cumulated also, at least during the implementation period of the UK-EU agreement.” (Paragraph 67)

The Government is undertaking detailed discussions with our trading partners about how we can achieve continuity beyond the Implementation Period. We are keen to ensure that the rules of origin used in transitioned agreements enable businesses in the UK, EU and current EU FTA partner countries to continue to operate as much as possible through their established value and supply chains, including continuing to make use of UK and EU content in their exports.

Recommendation 15

“The Government should seek UK accession to the PEM Convention after Brexit, in order to facilitate diagonal cumulation. It should also investigate the option of seeking full cumulation arrangements with the EU / EEA (at least on a temporary basis). DIT must show that it is liaising closely with DExEU on this matter. The Government should publish as a matter of urgency those sectors where it expects rules of origin issues could most significantly harm UK exporters and prevent industriesbenefitting from tariff-free trade.” (Paragraph 68)

As the Prime Minister has set out, the UK is seeking a bold and ambitious free trade agreement with the EU that is greater in scope than any existing agreement. This is, of course, subject to negotiations. All areas and options, including our future relationship with the pan- Euro-Mediterranean (PEM) Convention, are being considered as part of this process.

DExEU has lead responsibility for negotiations on rules of origin with the EU, with significant policy and analysis support from DIT and other Government departments. DExEU and DIT continue to work closely with other Government departments to understand the needs of key sectors.

Recommendation 16

“It may be more difficult for the UK to keep the commitments that it has made in Phase 1 of the Brexit talks with regard to what will be the EU-UK border on the island of Ireland if it does not roll over third-party agreements as they currently apply to the UK. The Government should, therefore, take account of the implications of these Phase 1 Brexit commitments for the roll-over of third-party trade agreements. The UK’s continued participation in a customs union and the single market with the EU would be the approach least likely to risk a return to a hard border between Northern Ireland and the Republic of Ireland.” (Paragraph 72)

As stated by the Minister during his evidence session, the future trading arrangement for the Irish border is a matter for DExEU. DIT works closely across Government and particularly with DExEU to ensure all relevant issues and aspects of transitioning EU trade agreements are taken into consideration.

Recommendation 17

“The Government should consider the implications of the prospective UK-EU trade agreement for the rolling over of agreements with the EFTA states and Turkey, which currently entail close adherence to the EU’s regulatory and customs regime. It should also consider the degree to which the rolled-over agreements might also entail negotiations and commitments on the free movement of people in respect of the EFTA states.” (Paragraph 75)

DIT is leading work across Government to assess the trade agreements we have with EFTA states and Turkey that will need to be replaced or amended as a result of the UK’s exit from the EU.

As mentioned elsewhere, the UK and the EU have agreed the UK should be treated as a Member State for the purposes of these agreements for the duration of the time-limited Implementation Period, to ensure continuity in crucial elements of our trading and non- trading relationship with these countries.

Once the Implementation Period ends, the UK will no longer participate in the EU’s trade agreements with Turkey and the EFTA states. The UK will instead seek to put in place new arrangements to maintain our relationships with these countries, with a view to ensuring as far as possible continuity of trade between the UK, Turkey and EFTA states following the Implementation Period. The Government recognises the particular situation of these countries given their close adherence to the EU’s regulatory and/or customs regime, and similar free movement of people arrangements.

In relation to the EU, the Prime Minister has said that we want to agree an appropriate labour mobility framework that enables UK and EU businesses, and professionals, to travel and provide services. In relation to those resident in the UK before the specified date, we have been clear that we want to secure as similar a deal as possible to the EU deal for citizens of EFTA states. We have already commenced constructive talks with all four EFTA states to secure such a deal.

Recommendation 18

“Given the importance attributed by the Government in its overall trade policy to trade in- services liberalisation, it should consider the potential impact of Most Favoured Nation clauses on services in rolled-over agreements.” (Paragraph 78)

Most-Favoured Nation (MFN) clauses are an important cornerstone of trade in services commitments. Both the UK and EU have many such clauses, both under WTO commitments and in specific trade agreements with third countries. DIT has assessed the interaction of MFN clauses with the future UK trade policy agenda and is fully mindful of the importance of this issue in how it approaches the UK’s trade agreements.

Recommendation 19

“Investor-state dispute settlement or Investment Court System provisions in existing Free Trade Agreements have been controversial in the past. The Government should fully consider and explain the implications of rolling over these provisions in the agreements concerned. The appropriate time to do this may be when the Government lays a new agreement before the House under the provisions for treaty ratification in the Constitutional Reform and Governance Act 2010.” (Paragraph 81)

Investment protection provisions protect investors from discriminatory or unfair treatment by a state. We have over 90 bilateral investment agreements in place with other countries and there has never been a successful Investor-State Dispute Settlement claim brought against the UK, nor has the threat of potential claims affected the Government’s legislative programme.

The UK, as one of the most open economies in the world, welcomes investors and is committed to treating all investors fairly. We do not discriminate against foreign investors. We would expect other countries to treat British businesses operating in other countries as we treat their investors in the UK, and UK investors overseas benefit from investment protection.

As we develop an independent trade and investment policy we are considering a wide range of options in the design of future bilateral investment agreements, including dispute settlement mechanisms.

Recommendation 20

“The Government must show that it has taken into account the need for all aspects of rolled- over agreements to sit coherently within the UK’s overall trade-policy architecture in the longer term.” (Paragraph 82)

Our work on transitioning existing EU trade agreements and other preferential arrangements is part of the Government’s wider approach for preparing the UK’s future trade policy, as set out in the Trade White Paper, published 9 October 2017.3

The Government is developing an ambitious independent trade agenda that will include the ability to strike comprehensive trade deals with global partners. We are well aware that this work on securing continuity of existing trading relationships must remain consistent with the UK’s future independent trade policy.

The implementation of rolled-over agreements

Recommendation 21

“Our evidence strongly suggests that substantive changes will be necessary when EU trade agreements are rolled over. The Government should set out provisions for both more extensive parliamentary scrutiny and enhanced involvement by the devolved administrations in situations where such changes do occur, particularly in the light of the fact that each of the four nations of the UK may differ in their priorities for trade deals. We look forward to reading the proposals for a new ratification process for trade agreements to which the Minister of State for Trade Policy referred in his evidence and expect to be consulted formally on those proposals while they are in draft.” (Paragraph 92)

Following the Implementation Period, the Government’s intention is that businesses and consumers continue to benefit from the same terms as the existing EU trade deals. Whilst technical changes may be necessary to ensure agreements are functional when the UK leaves the EU, the primary goal is ensuring continuity of effect.

As indicated by the Minister in his evidence session, existing EU trade agreements have already been subjected to a scrutiny process at EU level. This is overseen in the UK by Parliament’s EU Select Committees. The trade agreements the UK has ratified have already been through the normal Parliamentary scrutiny process. Secondary legislation introduced by the powers in the Trade Bill will be subject to Parliamentary oversight, using well-established scrutiny procedures.

On preparations for the UK’s future trade policy, the Government is committed to developing UK trade policy in a transparent and inclusive way which does not undermine our negotiating position, as set out in the Trade White Paper last year. We will ensure that Parliament, devolved administrations, devolved legislatures, businesses and civil society are engaged throughout. Since publication of the Trade White Paper, the Department has undertaken a comprehensive series of engagement activities to ensure a wide range of stakeholder views were gathered. On 5 January 2018, we published a response acknowledging stakeholder views on the White Paper and set out positive next steps for future engagement.

The Department is currently considering the most appropriate scrutiny procedure for future trade agreements with new partners. We want to make provision for a legislative framework that will enable future trade agreements with partner countries to move smoothly from signing, to implementation, and then to ratification, whilst respecting due process in Parliament.

We remain committed to working with Parliament and the devolved administrations on our approach to the implementation of trade agreements signed after EU exit, as well as the role they will play in influencing and contributing to the UK’s future trade policy.

A cross-Government approach

Recommendation 22 and 23

“The roll-over of EU trade agreements is closely entwined with UK-EU trade relations and negotiations, touching upon several of DExEU’s areas of responsibility. Relevant cross- departmental issues in this respect include:

• possible “trilateral” negotiations between the UK, EU and relevant third parties on both the splitting of TRQs in existing agreements and crafting rules of origin that allow for “diagonal cumulation”;
• the future UK-EU trade agreement and its provisions on regulation (including the freedom of movement of people) and customs, which have implications for the agreements with Turkey and the EFTA states
• future UK-EU trade-in-services negotiations, which may be affected by MFN clauses in rolled-over agreements
• ensuring the UK continues to benefit from EU agreements during the post Brexit transition / implementation period, which may require negotiations with the EU on the so-called “Guernsey model”
• the need as part of planning for any eventuality to seek bilateral exchange of letters with the EU’s FTA partners to extend the rights and obligations of the EU as under those agreements to the UK until they can be revisited;
• UK Government commitments during Phase 1 of the Brexit talks regarding the border on the island of Ireland; and
• the role, if any, of the jurisdiction of the CJEU in rolled over agreements.” (Paragraph 94)

and

“The Government must show what it is doing to foster a cross-departmental approach to the issue of rolling over trade, and other trade-related, agreements and to involve fully the devolved administrations. In particular, it must show how DIT and DExEU are working together in this regard and, in particular, clarify their respective roles as regards rolling over trade-related agreements other than trade agreements. In particular also, it must demonstrate how the trade negotiating expertise in DIT is actually and actively being used by the negotiating teams in Number 10, DExEU and the UK Permanent Representation to the EU.” (Paragraph 98)

The task of ensuring continuity of EU trade agreements is not consigned to one team or a single department. Rather, it is a cross-Government project with the Department’s over 500- strong Trade Policy Group (TPG) working closely with other Government departments.

This was made clear by the Minister for Trade Policy in his evidence to the Committee, “while our overall trade policy is clearly the responsibility of the Department for International Trade, some of those agreements that have a trade element but are not explicitly trading agreements fall under the auspices of other Departments. For example, the lead on Economic Partnership Agreements is taken jointly by DIT and DfID. Association agreements have a political element and are led on by the FCO. Our agreements with the EEA, Switzerland, Turkey and the European microstates, which are the Faroes, San Marino and Andorra, are the responsibility of DExEU. Finally, we are working closely across Government to ensure that we deliver the best outcome for the United Kingdom.”

DIT’s trade agreement continuity programme is part of the broader cross-Government International Agreements programme, led by DExEU. The Department continues to work closely with DExEU and other Government departments to ensure continuity of effect of existing trade agreements for all key stakeholders.