Oral evidence - Post-Brexit UK-EU relations

Dr Meredith Crowley, Dr Sylvia de Mars and Joe Owen.

Q1 The Chairman: Good afternoon. We are looking forward to the third of the troika appearing in due course. It is a very great pleasure to welcome Dr de Mars and Joe Owen to open the first session of our inquiry into post-Brexit UK-EU relations. It is only fair to comment that we have not actually left yet and that there are issues from the withdrawal agreement that are under negotiation and to which we may occasionally need to divert. But I think we know basically where we are looking forward after the political conclusions in March. We are drawing on your academic expertise and looking at the social partners and one or two MEP practitioners in this quite short inquiry.

I think you will be broadly familiar with the ground rules. This is an on-the-record session that will be webcast. We will send you a transcript later, and we look forward to Meredith joining you when she can make it; she is held up in traffic at the moment.

Perhaps it would be sensible for you severally to introduce yourselves and say what your particular angle or interests are. Would you like to start, Dr de Mars?

Dr Sylvia de Mars: Sure. I am a lecturer in law at Newcastle University and I have become a bit of an EU omnivore in that anything happening in EU law that is of current interest I seem drawn to and do things with. At the moment, that understandably means Brexit. In particular, I have focused on what is happening in Northern Ireland with the Northern Ireland border, but I know my general EU law field as well.

The Chairman: You will have noticed that the Committee has taken rather a lively interest in that topic, too.

Joe Owen: I am a senior researcher at the Institute for Government, and over the past year or so I have published papers on immigration, customs and trade after Brexit as well as what is happening inside Whitehall.

Q2 The Chairman: Thank you very much for that. Some of us enjoyed reading a paper that your colleague may have produced recently on the next stage of the negotiations, which is quite interesting. In fact, I commend it to other members of the Committee who have not seen it yet. We can give you the reference.

We are looking forward to further illumination on what is certainly not a simplistic debate; rather, the complexities are coming out. You are very welcome to help us to pick our way through it.

I will kick off with asking your view on general points following the Prime Minister’s Mansion House speech, which was not that long ago—the beginning of March. First, and generically, to what extent do you both think that it sets out a coherent and achievable vision for the future UK-EU relationship?

Joe Owen: There is obviously a difference between coherence and achievability. On coherence, we saw the Prime Minister step through what we can imagine to be the different chapters or headings in a UK proposal on the future relationship in relation to goods, services, data and migration. Those were all name-checked in the speech, so in that respect we got the most complete picture of the total UK ask that we have had to date. It was definitely fair to say that it was rather high level in places. Areas of it were supplemented by previous future-partnership papers that the UK Government had set out, so you could understand a little more detail, but, yes, there were still some gaps.

On achievability, when it comes to parts of the agreement, particularly the ask on goods and services and what the Prime Minister called a comprehensive system of mutual recognition, it will be down to the negotiations and the EU’s position. To date, it has shown little interest in that kind of position.

The reality is that when the UK starts to set out what the proposals look like in detail, if it can talk to some of those concerns and say that it recognises the EU’s concerns about integrity of the single market and, for that reason, this is the institutional underpinning et cetera, it will be easier to have a clearer view on achievability.

As I say, I think we have a coherent picture in that it set out the high level across the different headings of the trade agreement, but in order for it to be achievable, detail is required before we can really say whether it is something that the EU would negotiate on.

The Chairman: There was some suggestion about the time when we last convened that the UK Government have not been particularly proactive in developing their policy, even through the withdrawal agreement process. Do you feel a sense that that may be the case, that hands are being played very close to the chest and that it may not always be quite in our interests to be as reticent as we have been? In other words, do you think that the running is being made by the Commission—or the other side, if you like—in these negotiations?

Joe Owen: One thing that we at the Institute for Government argued in December, after we got sufficient progress, was that there was the period before the March Council, when we knew that the EU would be setting its guidelines of three months, and that the UK should do everything that it could to influence the EU to ensure that what it wants is on the table when those guidelines are set.

We saw from the first phase of negotiations, when the EU set its guidelines, that what was agreed at the end of the process was not a million miles away and that the EU found it very difficult to move on those guidelines or include things in the negotiations that were not already set out in the guidelines.

Our view is that that period of three months was really important to start influencing people on what the UK wanted. The reality is that we did not really get much of a sense. The Mansion House speech came right towards the back end of that. We had the series of speeches, but if the UK had set out its position earlier and used that three months to really lobby, there might have been a different set of guidelines. It is very difficult to say.

The Chairman: Thank you. Dr de Mars, what is your general take on the Mansion House speech and what it presages?

Dr Sylvia de Mars: It is interesting to focus on “coherent” and “achievable”.

My first thought about the Mansion House speech was that for the first time it acknowledged some of the more unpleasant realities of Brexit outright in saying, “We can’t get everything we want. It’s a negotiation and there will be less than there was when we were a full member state. That’s understandable”. All this was good in the sense that it was conciliatory with the very consistent EU position that there should be no cherry picking and that the single market is not divisible, and so on. In very general terms, the Prime Minister finally started speaking the same language as the EU has been speaking since the referendum.

Beyond that, some of the accusations levelled at the EU in the speech were very interesting in the sense that what the EU is setting out is something akin to a Norway level of obligations for Canada-style benefits at the moment. When I say the EU here, I mean the European Council in particular. We will come to the European Parliament later, as it has a very different idea from the European Council on what needs to happen next.

The Heads of State very much said, “You’re so close to us, and we need you basically to keep following all our rules so you don’t undercut us, and in exchange for that we might let UK workers still come to the European Union to do some business there”. That in many ways is as unrealistic a starting point as saying that we would like all the benefits but none of the things that we do not like from the EU in kind.

Mansion House was a first step in realising that both parties are trying to act as if there was a standard ask and a standard offer, but, in reality, compromises will be needed on both sides.

Q3 The Chairman: Thank you. We will unpack some of those issues later.

Can I ask you another high-level question collectively, which has three parts to it? The first question is the extent to which you perceive that the UK Government’s position has evolved since the EU referendum and the early statements of red lines, and so on.

Secondly, what are the main obstacles to delivering the Prime Minister’s vision for the future relationship, as that was set out or has it may have developed? Can we overcome them satisfactorily, and, if so, how?

Thirdly, what further clarity do the Government need to provide?

Joe Owen: On the question of how the UK’s position has evolved, we have had four speeches now: Lancaster House, Florence, Munich on security, and recently Mansion House. Sylvia’s point about language and the progression of it is really interesting. Throughout those speeches we have seen the UK making more effort, talking to the EU and member state interests and speaking in their language by talking about precedence, which shows an evolution in recognising the importance of selling this thing to the EU as much as to a domestic audience.

On the point about content, the broad parameters are still as those set out largely in Lancaster House: leaving the single market and the customs union. The four so-called red lines are still there—on the ECJ, migration, trade policy and financial contributions—but I think they have become less stark as the position has evolved. We recognised in the Mansion House speech that some binding regulatory commitments on a level playing field would be required that could constrain trade policy. We recognised the importance of ECJ influence. Indeed, that was one of the Prime Minister’s hard truths: that that would need to remain. We talked about an openness to negotiate on migration and paying in for agencies or frameworks. We saw that each of those four red lines are no longer as stark as they were perceived to be in January last year.

On the main obstacles, I would pick out two, one being negotiability and whether the EU will buy what the UK is selling. I am sure we will get into some of the details of the challenges with that. The other big challenge that I would bring out is the timing and whether there is enough time to achieve what the Prime Minister would like to achieve in the Mansion House speech.

CETA, the Canadian-EU trade agreement that is regularly held up as the best free trade agreement that the EU has done, took five years to negotiate and seven years until provisional application. We are saying that we want to go further than that. We recognise that there is a unique starting point, as both the EU and the UK refer to, but there is a challenge if you want to go beyond precedent in pulling together what is technically possible.

We are looking to get a framework agreement by the end of this year, around October, and there will be detailed negotiations during the transition, which is 21 months. If you say that you need to spend six, eight or 12 months on ratification and getting it through the European Parliament, you only really have nine to 12 months to do the detailed negotiations. But you also have to factor in the fact that a new Commission will need to be established on the EU side, and there will be European Parliament elections. There are a number of reasons why the additional 21 months is very important, but it is still a challenge timing-wise.

On the penultimate point about whether those obstacles can be overcome, this is clearly an opening salvo in the negotiations, and I do not think that the UK would expect it to be boiler-plate copied into the trade agreement. It is a sort of opening ask, but some big questions remain as to whether the EU is willing to flex on its red lines; they have held very strong up to now.

Is the UK willing to dial down ambition in some areas in order to satisfy time lines? Quite an important question is how able the UK is to make concessions internally that will speed up the process. As you mentioned, it has taken us a while to get to the position of having a broad opening ask of the EU. It took a lot of corralling, at least if you believe the press, to come to a position that satisfied the Cabinet. We do not know whether there is enough leeway in there for negotiators to make concessions without having to go back up and there being further deliberations on the UK side that will impact on timing.

How the obstacles can be overcome links to the point that I made earlier and to the next question about detail. The UK needs to set out its position in detail and, in the areas where it was quite vague and innovative, put forward a UK proposal that details why it is in the EU’s interest and recognises some of its concerns.

Particular areas that require clarity are goods and services. The UK has said that it wants a comprehensive system of mutual recognition for goods. How would it be governed? What would the institutional underpinning be? The UK talks about having substantially similar regulations but also binding commitments. What is the substantive difference between the two? What is the balance between areas? What would fall into binding commitments and what would fall into “substantially similar”? How would they relate to evolving EU rules? There are lots of questions that the EU will want answers to.

The other point that stands out is digital. The UK has said that it wants to go beyond the data adequacy decision. What does that look like? What is the UK’s proposal for increasing stability? All these things will be important in satisfying the EU that the UK has thought through its ask in Mansion House.

The Chairman: Thank you. That is a very comprehensive answer.

Dr Sylvia de Mars: If I can go with a slightly trite metaphor at this point in time, the size of the cake that we wish to have and eat has shrunk significantly since the referendum result, and we are now at the point where we are willing to trade it for something else—perhaps give a scone and get a cake back in some way. So in that sense there has been a clear evolution in give or take.

In particular, I will follow up what Joe said about the blurring of the red lines or their becoming less stark. It was almost inconceivable in 2016 that you would hear a statement about an inflexible migration regime with the European Union in the future. Indeed, even during the negotiation of the trade agreement, citizens’ rights proved to be a particularly difficult point, which makes the Mansion House speech stand out as the start of a new movement, in the sense of the idea that we will have an easy-going migration system in place for European nationals. That is not something that I would necessarily have predicted from the Government’s position over the last two years.

Beyond that, the Court of Justice is one of the most significant areas in which the UK has made concessions. That undoes a significant obstacle to giving the kind of relationship that the UK is asking for a good, concrete form that would fit within the EU legal architecture, in that the explicit acknowledgement that anything about EU law will ultimately have to be interpreted by the Court of Justice is a point on which the European Union will never budge.

The EU has sunk a wide variety of international agreements in the last couple of years, because the negotiations had not considered that areas of EU law would need to be interpreted, and that was not going to fall to the Court of Justice. In all those instances, in agreements such as ACTA, the Court of Justice has come along and said, “You can’t do this. We are the ultimate and only authority to interpret EU law. It cannot be interpreted by an arrangement that the EU has with a third country”.

So even though the Prime Minister was somewhat guarded in how she said it in the Mansion House speech, I think there was a clear acknowledgement of the fact that in any areas where we have identical regulations, however the Court of Justice interprets those will need to be considered in the UK. In practice, it will come to mean the same thing over the course of the negotiations. There will be no room for manoeuvre on that.

So on the question of obstacles, you end up with the question: okay, how much of the taking back control are we willing to sacrifice in order to get the access that we want from the European Union? The more we sign up to joining European agencies and the more we wish to be a part of different kinds of arrangements, regimes, trade security and what have you, the more we will be told by the European Union that that is fine but we will have to accept that it is the EU rules that govern this area from that point onwards.

I have not seen the EU budge on mutual recognition in the way the UK is presenting it. I do not have political insight; I am not the Oracle of Delphi and I do not know specifically what will happen in these negotiations. But from my experience of watching and studying the EU for the last decade, I think it is very unlikely that it will move on that, simply because the entire single-market project is rooted in centralised recognition but with exceptions that are subject to a single supervisory and enforcement mechanism.

It is not enough to say, “We have the same rules, and when we diverge, that is fine; we’ll just go our own way”. There are the institutions, with the Court of Justice sitting on top, the mutual enforcement, the way to directly hold someone accountable for stepping aside from those rules. I do not see how a mutual recognition regime could compensate for that, because even the member states do not benefit from the type of limitless mutual recognition that the UK is asking for.

An infamous case called Cassis de Dijon basically said that unless you have specific reasons for not recognising products from a different member state, they must be able to be sold and introduced to another member state. The key there is that there is still a wide variety of exceptions, and the Court of Justice is the authority that decides whether those exceptions are acceptable. I do not think that it would be acceptable to the Court of Justice or even to the rest of the EU for a joint committee between the UK and the EU to decide whether an exception was acceptable. We end up with conflicting interpretations of what is acceptable for EU law in that case.

That is my primary obstacle. It links to a second one, which is that the legal cultures in the UK and the EU are by and large so different that it is very, very difficult to get across just how much specificity and legalese these agreements will have to get before they are to the satisfaction of the EU. We have seen that throughout the negotiations; a lot of what the UK is doing is thinking and setting out general goals and ambitions, and things like that, whereas the Commission is typing out very long legal documents that it then sends around and says, “How about this?” It is a different language.

I come from a civil law background and I recognise what the EU is doing in the way it is treating this. I have also lived in the UK for a decade now, and I recognise that it does not click; it just does not make sense. That is one of the biggest obstacles, and timing plays a part in that. We will eventually learn to speak the same language; you would hope that after 40 years we were already mostly there. Even on the point about the amicable divorce, we will get to the same language, but I am not sure it will be as quickly as it needs to be, simply because it has not moved very fast so far.

On the question of further clarity, I would like lots, please. Again, with my civil law hat on, I would like a proposal of some kind. That is the level of further clarity that the Government will need to give the EU for these negotiations seriously to go somewhere fast and for there to be not just a lot of trade in all these areas but concrete rules and how they fit with the single market and exceptions to it.

Baroness Falkner of Margravine: It was not clear to me when you talked about the EU’s insistence on the CJEU—I think you mentioned it in the context of mutual recognition—whether you were referring primarily to goods or also to services.

Dr Sylvia de Mars: I was referring to everything, unfortunately. The Court of Justice wants to fence in anything that is EU law.

Baroness Falkner of Margravine: Is that reconciled with paragraph 38 of the Parliament’s guidelines and with paragraph 15 of the Council’s guidelines of 23 March?

The Council says, “The governance of our future relationship with the UK will have to address management and supervision, dispute settlement and enforcement, including sanctions and cross-retaliation mechanisms”. Then it goes through the depth versus the breadth. The Parliament goes further and calls for “the establishment of a coherent and solid governance system as an overarching framework for the four pillars, covering the joint continuous supervision/management of the agreement, dispute settlement and enforcement mechanisms”.

It seemed to me on reading the guidelines that there has been movement on the part of the EU, which said that it welcomed the establishment of the joint committee, whereas you seemed to say, unless I misunderstood you, that there was still a wide space between the two positions.

Dr Sylvia de Mars: This is where the EU law gets incredibly finicky and complex. The Court of Justice does not demand that it is the overarching authority over every international agreement that the EU signs.

Baroness Falkner of Margravine: Exactly.

Dr Sylvia de Mars: However, if we have an agreement between the UK and the EU that requires the incorporation of rules that are identical to the relevant EU rules on that issue, it would not accept an arbitration panel interpreting how those rules work. So you have overlapping jurisdictions. That is the problem that will be created.

Baroness Falkner of Margravine: Quite. I think Mrs May in her Mansion House speech said that the interpretation of EU law would remain with the CJEU.

Dr Sylvia de Mars: She did say that, but I think it is a matter of the detail and the extent to which this is elaborated on. I also think that this is where we end up with a problem if we say that we have rules that achieve equivalent outcomes but they look quite different. That is an unprecedented thing within the EU architecture; it does not have those kinds of agreements with other third countries. So then the question is: how does the Court of Justice interpret rules that look different but that achieve the equivalence?

Baroness Falkner of Margravine: Forgive me for labouring the point, but it does with the US on financial services. It accepts some level of equivalence based on equivalent outcomes.

Dr Sylvia de Mars: But, again, it is very per sector, and I think we will agree that the US is not as integrated with the EU as the UK will be at the time of departure. It is about ambition and how many of the rules that form the substantive body of what we end up agreeing with the EU have a concrete partner, equivalence or a similar outcome to what is in EU law. I think the EU will look for more specificity on the part of the UK: the extent to which it acknowledges that that will be a consequence—if that makes sense.

Q4 Lord Jay of Ewelme: If I may get back on to slightly higher ground for a moment, we have talked about the Prime Minister's Mansion House speech. Since then, we have also had, in chronological order, the European Parliament’s resolution of March 2018, and the European Council guidelines, which just take note of the European Parliament’s resolution.

Do you think that those three things are in any way compatible, and which of them is the most realistic and perhaps achievable as an outline for a settlement between the UK and the EU? That question is also for Dr Crowley.

The Chairman: Can we welcome Dr Crowley? We are glad to see you.

Dr Meredith Crowley: Thank you, and apologies for arriving late.

The Chairman: We understand that these things happen. I make the point now that we will need to be quite tight on our timing, because I know that you have constraints. I do not want the witnesses to omit anything, but perhaps they can avoid referring back to matters that they have already covered. We will need to proceed at a slightly faster tempo to squeeze the full juice out of the lemon on this one.

Joe Owen: On the point about comparing the UK’s proposal with those of the European Council and European Parliament, I agree with Sylvia that you can accuse the UK of going for Norway-style access with Canada-style obligations, with mutual recognition underpinning it. It is not quite that stark, but the UK is erring towards that side, and in many respects the EU is erring towards Norway-style obligations but with Canada-style access—a very strong level playing field that looks not too dissimilar to single market-style obligations in relation to a level playing field but with relatively little on access. At the top level, that is how you could categorise them.

There are a number of key areas where they are not compatible, such as goods. The UK is asking for mutual recognition in its proposal, whereas the EU has said that it would go for something like regulatory co-operation, which it has in, say, CETA.

On services, again, the UK talks about mutual recognition and the EU says “under host state rules”, so again it is more like CETA, or TTIP as it was.

Fisheries is clearly an area that they are not necessarily compatible on. The EU wants continued access to the UK’s waters on the same terms, but that is one of the only ones on which it is willing to concede higher access.

Some of the binding commitments on the level playing field, as I said, will probably be more expansive in the EU’s proposal, with less access unlocked as a result of that.

It is very difficult to say what is most realistic. Both sides have consistently said that a trade deal is about a balance between rights and obligations. It does not seem that either side has come up with the proposal on that balance that would necessarily be acceptable to the others at this point. That comes back to the point that I made earlier about what happens next in the negotiations and what moves on which side, but at the moment that balance is not quite acceptable in either of the proposals.

Lord Jay of Ewelme: Perhaps Dr Mars and Dr Crowley could also talk about that, not just about the economic side of it but about whether either of those two or the European Parliament are in any way realistic when they are talking about internal security, foreign security co-operation and so on.

Dr Sylvia de Mars: I have a slightly different take from Joe on how the positions stand, which does not mean that any of us is correct. We are all doing the best we can, obviously, with starting points.

I think that the European Parliament has gone further than the European Council and the UK have in trying to set this up in a framework that would work in line with existing EU law. To my mind, it has taken one step further and said, “Why don’t we just accept that there should be an association agreement, because we don’t just want an economic partnership—we want a partnership in security, and we want to keep Erasmus, to keep doing things with other types of research, and to keep transport running”. Some of those things would be in a standard trade agreement, but many of them go beyond that.

In looking at the UK’s asks versus the EU’s offers, I am still seeing more than one agreement; I do not see it as a single trade agreement, as such. To my mind, if we are talking about as close a partnership as possible that recognises where the Court of Justice is and wants co-operation in research, culture, education and transport and will have trading goods at no tariffs and with some customs co-operation as well as freedom of establishment of provision of services abroad, which is the stuff that we all agree on at this point, we are looking at an association agreement. The Parliament has done a bit more work than the Council or the UK in thinking how it looks concretely.

Lord Jay of Ewelme: Do you think that everybody else has done the work but only the Parliament feels free to say it?

Dr Sylvia de Mars: I could not possibly say. I am going to be very diplomatic now before I make enemies in Brussels.

Lord Jay of Ewelme: There is nothing wrong with being diplomatic.

Dr Sylvia de Mars: The bottom line is that, yes, in a way they are looking to do different things; the European Parliament is looking to protect the interests of European nationals, and at the moment UK nationals are still European nationals, whereas the EU 27 are very much saying that they must all stick together and present a united front and that there are no exceptions—that they must keep the single market, and so on. I think that the European Parliament, being like the “nah, nah, nah, we’ve got a veto” party in all this, has freedom to say a bit more without having to negotiate with quite so many people before it comes out with a perspective. It sets ambition and a goal of some kind for the other parties to now see if they can respond to, if that makes sense.

Dr Meredith Crowley: The way I read the different proposals is that both documents are essentially based on principles that are long standing and part of the EU’s general vision of how they would like to structure trade agreements. The Prime Minister’s speech laid out what I thought was a pragmatic and somewhat creative approach to how you can do two things.

The first objective is to keep stability for both UK and EU businesses engaged in a very intense trade relationship and at the same time keep borders open. My expertise is in trade agreements, and the trade agreement that we are trying to negotiate comes under the general umbrella of the WTO, which recognises customs unions and free trade agreements. The UK is trying to propose something different, creating a free trade agreement with features of the customs union that look a little like what we would call in economics a duty drawback scheme. Essentially, they are trying to come up with a practical solution to how you keep borders open when you establish a free trade agreement.

Typically, in a free trade agreement, different members have different tariff rates, so in order to exchange goods between the different members you need to check at the border so that you know whether the good coming into your country from your free trading agreement partner is actually manufactured in that trading partner. In the case of the US and Canada, for example, if Canada has a lower tariff on a particular good than the US and imports that good from Germany, the US does not want it then imported into the US at that same free trade rate.

The Prime Minister has proposed a customs partnership as one of her options. As I understand it, how that would be managed is that the UK would collect European Union external tariffs at the border. After those tariffs are collected, if the goods that came into the UK then went on into the European Union, they would just transfer the tariff revenue in some way. If, however, there was some evidence that that good was consumed in the UK, there would be a rebate of that tariff duty back to whoever paid it, if the UK had established a lower tariff rate with a particular trading partner. In concept, that sounds different—no one has tried it before. It could solve two difficult problems: keeping the borders open between the UK and the European Union and, at the same time, allowing the UK to have freedom to negotiate further trading agreements.

The downside of this system is that it would impose very significant costs on smaller businesses within both the UK and Europe. If, for example, 4% import duty was collected on something that they imported but then, because of a special free trade agreement with, for example, Australia, they were entitled to a duty-free importation, the small UK business would then have to provide some documentation to get this duty rebate. That could be very costly for the small operation in the UK, which might just say that it was not worth the additional effort. This is a possibly workable solution, but it creates new bureaucratic and administrative costs.

In thinking about the proposal, there are three important questions. Is it logistically feasible? I do not know the answer to that question. Certainly, middle and low-income countries have managed similar systems whereby they collect duties at the border and later rebate them. It is feasible to do something like that in some cases, but not in the case of the Prime Minister’s particular proposal. We have not tried it before anywhere in the world that I am aware of.

The second question is how costly it is if it is feasible.

The third question is: is this system desirable? The question of whether it is desirable or not lies ultimately in whether it creates benefits for the firms in the UK. If the administrative costs exceed any benefits of having the flexibility to negotiate lower tariffs in the future with third-country partners, it might not be desirable.

An additional constraint that this proposal places on the UK as it looks forward and ahead to negotiating future trade agreements is that if I am in, say, Mexico and I am approached by the UK to negotiate a free trade agreement, if Mexico knows that my free trade access to the UK is only through the sort of complex bureaucratic system in which the UK would collect duties and then partially rebate them or possibly not rebate them, it might make the UK less desirable.

That is what the UK is proposing. The EU has not indicated whether it would like that. It is much more intransigent in some ways in saying, “Here’s how we negotiate trade agreements. Here’s what we want”. So there is a difficulty and a disconnect between the two.

A further complication has to do with regulation. I am sceptical that the European Union will be willing to accept mutual recognition. I see that as potentially very unworkable. That is the other big area of difference at the moment.

Baroness Kennedy of The Shaws: Welcome. It is nice to have you join us. That was very interesting analysis and quite new evidence for us.

When a group of us visited Brussels not very long ago, one of the European Union officials, unnamed, said that there are often problems with the language and the intellectual traditions—Dr de Mars referred to this—which mean that there is often a passing, because we are not talking the same language. We were given the alert that mutual recognition was one area where we might not be speaking the same language, and I would like you to explain to us what you think that meant.

Dr Meredith Crowley: I am not a lawyer, so I caveat my answer with that.

I think what was meant by mutual recognition was that if a product met the safety standards established in France, for example, and it was designated by the French authorities to be safe for human consumption, the British would respect that and say that the product was safe for the purposes of consumption in the UK, and similarly in the other direction: that if something was designated by the UK and its regulatory authorities as safe, it would be allowed for consumption in France.

Baroness Kennedy of The Shaws: As lawyers, we think of mutual recognition in other contexts, too.

Dr Sylvia de Mars: Yes. Coming at this from the perspective of the European Union, what it does internally with mutual recognition is very, very different from what it does in its external relations. I think that most of the mutual recognition that it engages in in trade relationships is about the mutual recognition of conformity assessment, whereby it will say, “We trust that when you, a Canadian laboratory, evaluate the safety of this children’s toy, it meets the EU standards, so, fine, it’s welcome to come over”.

Mutual recognition in the EU is a very different animal. It is significantly more to do with having identical regulation that is identically enforced than it is with understanding the differences in each other’s regulations. There is so much more harmonised legislation than there is acknowledgement of concrete differences now.

So to my mind the problem is not so much where we are in 2019 or 2020; it is how the EU knows that we are going to keep doing what we have been doing so far, because that overarching infrastructure has gone.

Baroness Kennedy of The Shaws: We will not have the institutional arrangements that keep all those standards in place. Thank you.

Lord Cromwell: One of the things that has bothered me all through this is, as you said, moving from the concept to the mechanism. The mechanisms seem to have been left for later, as so many new bodies will have to be created to do so much of this. The existing ones have taken decades to get in place. Will that concern you?

My second point is about the description of tariffs, refunds and so forth. One only has to look at the horror story of VAT fraud to realise the opportunities for fraud that this will create. Do you want to comment on that?

Joe Owen: On the customs point in particular and the shift from broad outcomes to a tangible proposal on how this will work at the border on day one, the customs partnership, option 2, is the only one of the two options that would avoid friction at the border; I think it is recognised that the streamlined option, even in the Government’s proposal, would result in some friction at the border.

In the UK Government’s proposal paper, there are maybe four or five paragraphs on the partnership, two of which, the first and the last, are caveats: “This is just an idea. We don’t know how it would work in practice”. There is a lot of “could” and “possibly” in the detail that it does set out. It seems more of a “Let’s look at finding something that gives us the benefit of a customs union that isn’t, but we don’t have a concrete proposal on that yet”.

Looking at the timelines for preparedness, the last major change from a customs perspective is the one that we are working through at the moment: implementing the Union Customs Code. The design of that was agreed in 2013, and Governments and businesses were given until 2020 to put the systems and processes in place. There were some big changes in that, but you could argue that reintroducing checks between the UK and the EU is a more significant change. The Union Customs Code was delivered across all member states, so you could shrink that because it is less broad in scope, but you still get to see some of the timeline challenges.

The other point to make—again, I will take customs as an example, but there are perhaps examples elsewhere—is the customs partnership proposal, which talked about what would happen for UK businesses. But whether the proposal—

Baroness Falkner of Margravine: Was that option 1?

Joe Owen: That was option 2—partnership.

Baroness Falkner of Margravine: That was still option 2.

Joe Owen: Yes. The partnership option talked about what would happen for UK businesses, but what is not clear is whether we would ask every country with an external EU border also to run our tariff regimes. If that were the case, if you have to get unanimous agreement for the future relationship, that is a potential problem; you are looking at quite a considerable change there. How we move, as you say, from proposals and outcomes to the mechanics of how this will work is a big challenge in a number of areas, and customs is one of them.

Baroness Kennedy of The Shaws: I have never heard anyone say that before. The possibility that there might be issues on the border between Germany and Turkey or somewhere—

Joe Owen: It is not clear. What I am saying is that if we are saying that we will run their tariff regime for them and there will be a way to draw back, are we also suggesting that EU countries would run the same for us? It is not clear from the proposal how you get around that.

Dr Meredith Crowley: As Dr de Mars mentioned, the real concern about the customs partnership is long-term regulatory divergence. Keeping the border open is fine if the UK and the EU still have similar enough regulation and they are both satisfied to exchange goods.

The bigger problem lies in the future if, say five years from now, the UK decides that it wants a different standard that is incompatible with the standard in the EU for the import of some good. At that point, that reopens the problem of whether you want to institute border checks. At some level, one of the UK’s long-term objectives might be to negotiate trade agreements that would allow the importation of food products and animal products that are produced in countries such as the US that are currently not imported into the EU.

That is a different regulatory standard for production. It is incompatible with the one in the EU, so ultimately if you offer to the Americans that you will import chlorinated chicken or some other product that is unpalatable to Europeans, you reopen this wound. So at some level with this customs partnership, the question is always: when do you need to put the border in place? In the long term, the question will be: will there be some effort at skirting that border if you have this divergence?

For many products, this is not really a problem, because many multinational manufacturers produce a product to the highest standard in the world. Their objective is to produce a high-quality good. If it turns out that Canada has the highest standard, they produce to that standard so that they can ship it everywhere. This comes with a certain class of goods, but there are multiple exclusive regulatory frameworks. That is what ultimately may be a problem down the road.

Q5 The Earl of Kinnoull: Throughout the Brexit process, the EU and its 27 other EU member states have tried to speak with a single voice. We have talked a little about those things, but I wondered how successful you thought that had been. Given the two documents that appeared in March—the 14 March Parliament resolution and the 23 March Council guidelines—do you see tensions building between those institutions? I will start off with that and come in with a couple of other supplementaries afterwards.

Dr Sylvia de Mars: It is an interesting question in that when we expect the EU to behave as one entity we also expect all EU institutions to behave as one entity. But the EU is a strange little creature that has three separate legislatures that all have distinct functions, and I think you are seeing here a distinct role for the European Parliament coming out.

It has the possibility to ignore state interests and diplomatic concerns throughout the run of the negotiation and just ask, “What would we like and what would be the best for us as people? What would be the nicest and best possible solution?” Ultimately, though, if you read the detail of what the European Parliament has put forward next to the skinny outline that the European Council has set out, there are no fundamental differences between them. The European Parliament goes into more detail in some regards, mostly related to form, but it does not actually contradict anything that the European Council has said.

Baroness Falkner of Margravine: It throws in the association agreement.

Dr Sylvia de Mars: Yes, but I do not think that the European Council has specifically ruled that out. I think it has just said, “Hey, maybe this is what we are all thinking about”.

I would add very specifically in light of the trade stuff that we have been talking about that the association agreement sounds like an offer that the Parliament is making for its own sake, but in a way I think it plays to the UK’s interests significantly, because if it is an association agreement, giving the UK a special deal on services becomes a possibility—

Baroness Falkner of Margravine: Exactly.

Dr Sylvia de Mars: —whereas if it is just a free trade agreement, any deal that the UK gets would have to be extended to all the EU’s other trading partners, and it does not want to do that.

In a way, the European Parliament sets out the halfway house that all parties might wish to move towards in due course, if that makes sense. But I do not think that there is a fundamental disagreement between what the European Council has said and what the European Parliament has put forth.

The Earl of Kinnoull: I have a short supplementary. I suppose diplomatically Britain has concentrated quite hard in recent times on its bilateral work. We have had some elections recently in other countries and more elections are coming along. I wonder whether you saw any development of cracks in the 27 in terms of differing approaches and any tensions within the 27.

Dr Sylvia de Mars: I am not a political scientist, so this is less on the side of things that I would look at, but I would say that the way the EU 27 have gone about this negotiation is very much the way the Court of Justice goes about its judgments—one single voice and no dissents, with as general a compromise as is humanly possible. We know that all member states have distinct interests and that some of those interests lie more towards the free movement of people side and some are more on the industrial side. For the time being, they are very much sticking close together, as far as I can tell.

The Chairman: Is that view shared by your colleagues?

Joe Owen: Yes. We did a piece of work at the Institute for Government which we published in February called Negotiating Brexit: the Views of the EU27, where we tried to look at those different interests and spoke to representatives from as many of the 27 as we could to see how things might play out, asking exactly that question. It echoes what Sylvia said: that of course there are different interests, which there will be lobbying on and discussions behind the scenes. But once the EU sets its position, unity trumps anything else, so they will support the line.

What is perhaps more important to them is the context of a new budget, for example, that is being set, so countries that previously saw the UK as an important ally are now focusing on working out who their new allies are in these discussions. So on the question of the unity of the 27, at least from the work that we did there do not seem to be cracks, even though there are different interests.

The Chairman: Baroness Wilcox has the next question, and perhaps we will have the opportunity to hear from Dr Crowley on this question.

Q6 Baroness Wilcox: Dr Crowley, one of the arguments advanced for leaving the EU single market and customs union is that it will allow the UK to develop closer trading relationships with non-EU countries. How have recent developments, particularly in the United States, affected the economic arguments for and against UK membership of the single market and customs union? Nice and straightforward.

Dr Meredith Crowley: In recent years, UK exports to the US have comprised about 12% of UK total exports. The US in particular is an important trading partner. Over time, that share has crept up. In normal circumstances, if we had the same President we had five, 10 or 20 years ago, I would expect that in a situation like this the US would be willing to come forward and negotiate some sort of co-operative trade agreement with the UK.

The current environment for negotiating a productive trade agreement with the United States is very poor. The Trump Administration came in first, pulling the US out of one trade agreement, the Trans-Pacific Partnership Agreement, that was almost concluded. It withdrew from that agreement and the other members moved forward to establish deeper trading relations.

The US then began the negotiation of NAFTA, which is ongoing and contentious. What will be accomplished, if anything, is constantly changing. It looks as if what ultimately might be achieved is a change in the agreement that is more superficial than substantive, in that there seems to be a desire to achieve politically popular change but not substantive change. For example, the President might seek some sort of compromise or concession from Mexico that does not change any substantive value of US trade but appears quite politically popular. The US President right now is quite unreliable as a trade negotiation partner. At least for the next two years, before the next US presidential election, productive negotiations with the United States seem to me to be very unlikely.

On the other options going forward, if the US were governed by a different Administration, many options are available to the UK. It consider joining the North American Free Trade Agreement, which would achieve integration with the Canadian, US and Mexico markets simultaneously. The UK could also try to sign on to the trans-Pacific partnership, because that would bring in some high-income Commonwealth countries and valuable markets such as Japan, countries with which the UK would like to have a free trade agreement anyway.

I personally think that the approach of approaching individual countries to negotiate a bilateral trade agreement with an individual partner do not yield much in the way of concrete benefits for the most part. The nature of what the UK produces is sophisticated manufactured goods and components. If you want to be able to sell that to a regional trade group like the North American Free Trade Agreement, you would like a firm that purchases apart from the UK to be able easily to ship it on to another firm in a partner country after it has been transformed somewhat. To do that, you have to be very careful about individual trade agreements rules for what constitutes domestic content.

That is why my personal preference for the UK will be for it to join large regional trading groups—the Mercosur agreement in South America and the North American Free Trade Agreement, as well as the Trans-Pacific Partnership. That would give the UK access to multiple countries at the same time.

These types of agreements tend to have a lower level of integration in various aspects than the European Union, so the members of these agreements retain more sovereignty over various issues. However, these different agreements tend over time to have more and more constraints on what they require of their members. For example, the Trans-Pacific Partnership has extensive rules on state aid and state-owned enterprises that are much lighter on what is required than what we have in the European Union but deeper than what currently exists among the North American Free Trade Agreement countries.

These are all potential options. The bilateral route has a lot of negotiating capacity and time cost for very little material gain for future trade relations.

Dr Sylvia de Mars: That was possibly the gentlest explanation of rules of origin that I have heard in all my time doing this. It was very welcome.

My personal impression, again coming from the EU side, is that many countries and many regional areas will be very reluctant to engage in negotiations with the UK until it becomes clear just what kind of access the UK will have to the EU, as it is the nearest massive market. So the Trump Administration aside, we may not actually look at going far in these negotiations or even at being able to make obvious what we are offering until after 2020 when, say, the future partnership deal looks like a trade agreement.

The Chairman: May I ask a generic question? We have seen a number of things, including from leaks and sources from Whitehall, estimating the likely impact of a UK-US trade deal on British GDP, for example. There is also the question, which we touched on, about the likely implications for the change in British-European trade.

Dr Crowley in particular, although the other witnesses should feel free to participate, do you have any comments on that, or is it too tentative and early to say at this stage?

Dr Meredith Crowley: On the point about different estimates put out by different groups, the report by the Treasury, which was a very middle-of-the-road type of standard economic analysis and standard econometrics, showed that there will be costs from leaving the EU. These are very standard costs. They will take a hit on GDP, and I think those are reasonable estimates.

The gains are from deeper integration with other markets that are further away, and the tariffs that these countries have against the UK are already relatively low, so the potential gains are small.

Ultimately it depends on the nature of the relationship and what is negotiated. I know there are some in the UK who very much look forward to trying to liberalise other countries’ markets for financial services, and that there is expertise here in producing financial services that they would like to be able to export.

A very real and serious concern is that, in many countries around the world, financial services are provided inefficiently, and the providers of those services get huge monopoly profits—it is a very profitable and lucrative business. So the question is: why would that country want to open up to importing financial services from the UK? It would probably benefit lots of businesses and citizens, but it will cut into the profits of the bankers. Bankers in many of these countries, especially small, low and middle-income countries, are also politically powerful, so it seems unlikely that you can make much progress there.

With a country like the US, you could probably make more progress with liberalising financial services, but the US also happens to be very good at providing financial services, so essentially you are going into a competitive market with your own perhaps new and innovative products and maybe better technology to deliver the service, but it is competitive.

Q7 Baroness Falkner of Margravine: I would like to turn to the future framework agreement.

Could you give us a quick overview of whether you expect extremely broad parameters to be defined but not very much detail, as the European institutions are saying, or, as we read in the media that Mr David Davis would like, rather a lot more detail? Which side do you think we will come out on at the end?

I have a couple of follow-up questions, particularly for Dr de Mars but you may all comment on them. If it is only a political agreement, which is what we are told it will be, how is it legally binding? We have an idea, but we would like to hear your views on how it becomes legally binding in terms of the European parliamentary agreement or winning a case in the CJEU if it is taken up to the CJEU.

First, how broad or how detailed will the agreement be?

The Chairman: I think it is an issue between the general political and the specific, and how you balance them, and how much of the specific you need to incorporate within the general, if I can put it that way.

Joe Owen: Yes. What is this document that will be bolted on to the withdrawal agreement that sets out the political declarations of the future framework? It seems, as you say if you look at the press, as though there are ongoing discussions on both sides about what this looks like, and I think each side has different, often competing, interests on its side. I will explain very quickly in a minute what I mean by that.

If you look at what we managed to do in the first phase, the negotiations began in the summer, and by December we had a 15 to 20-page joint report that had been agreed by both sides looking at three areas. The trade agreement for the future relationship is considerably broader than the three areas that we looked at in the withdrawal agreement. There is a lot more ground to cover, and we have not necessarily staffed up. At least on the UK side; it is not clear that the different departments that will need to be involved in thrashing out the details of the new trade agreement are necessarily lined up and ready and waiting for their Eurostar ticket.

On the point about different interests, there is the constraint of time. There is also a constraint in that it is easier to agree something that is broad and sets a direction within this time constraint, because the detail is much harder to get into, although there are probably constituencies on both sides, both in the UK and the EU, who will want to know exactly what they will get in the future relationship when they sign up to the withdrawal agreement.

I know that there are live conversations on the UK side, which we see in the press here, about pushing for detail, but a handful of conversations that we have had on the EU side suggest that there are also people on the EU side who are saying, “We need the detail”. The big challenge will be technically how possible it is for a limited number of people to thrash through a number of broad areas over a few months. If you are looking at the first phase, you are looking at the shorter end, based on what they were able to achieve over the time period.

The Chairman: I am reading into this that presumably you are trying to avoid dramatic consequences for air services, for example, where you perhaps need to be a little more specific than in certain other areas where you may want to set out an aspiration and return to it later. You can see a complexity in these areas.

Joe Owen: Exactly. We looked in the earlier round at where both sides agree and there is precedent that you can point to and say, “Actually, that’s quite detailed, but we both agree that that’s what we want”, and you can sort of lift it and shift it.

In other areas where the UK wants something that is unprecedented and the EU is not convinced by it yet, you could see a sort of “We’d look to go as far as possible and get a broad outline that set detail across the piece”. That would be very difficult, given the time constraints.

Dr Sylvia de Mars: I concur.

Dr Meredith Crowley: As an economist, the key thing for me will be what details exist about dispute resolution. You can leave big bits unfilled, or you can have some bits decided on principle, with nitty-gritty that maybe two sides will disagree on. What will really matter is what type of effective dispute resolution system has been set up and how you will fill in the gaps when we discover that something has not been covered. If that gets concluded well and there is a well-designed dispute resolution process, that gets you over the hump internally.

Baroness Falkner of Margravine: And the legal side?

Dr Sylvia de Mars: The political declaration is a funny one. The EU signs these every once in a while, and a lot of times they are very generic. You know: “We vow to save the penguin at all costs. It’s very important”. That is the kind of the thing that you get.

This will be a bit more of a mixed bag. I agree with what Joe and Meredith have said: that there are some sectors where we absolutely need rules or life will come crashing to a halt in 2020. So there are some things that I think all sides will want to commit to on a firm level. Transport is probably the most obvious one that I can think of that needs to keep going after the transition period ends.

With everything else, we are juggling too many balls in the air. Depending on how the talks about the future relationship go, the withdrawal agreement itself might start looking different. If we are going to stay in Erasmus, there is no point in severing that connection or figuring out how to settle expenses under the next annual framework for the agencies that we wish to remain a part of. Because of those complexities, there will be more focus on making sure that the withdrawal agreement is as airtight as it can be, leaving the political declaration as a statement of intent at the end of that.

The whole package needs to be approved by the European Parliament, which is basically a yea or nay vote. Again, it can be specific in the sense that it can indicate which part of it it is particularly unhappy with. It is very unlikely that if the EU 27 agree with what is in the political declaration the Parliament will veto the agreement on that basis, especially because the political declaration is just a declaration. After that, they will have to restart negotiations in a formal sense once the UK is a third country in order to build the association agreements or the free trade agreement or whatever we are going to call it. The European Parliament will have another veto on whatever is in that at any point in time. So I do not think that it will waste its capital on the political declaration on the framework so far.

Baroness Falkner of Margravine: So you do not think that the framework will be contentious?

Dr Sylvia de Mars: I think it will be different degrees of specific, but I do not think it will be the reason for the European Parliament to veto the whole deal, because if it does that there is no way for it to say no to the political declaration without also saying no to, for instance, the guarantees on citizens’ rights. I do not think it would throw that overboard for the sake of saying that it wants firmer political direction in the future, especially because in a very clear way it has control over those further negotiations for the onward relationship; it is debatable that the UK Parliament does.

The Chairman: That leads very well into Lord Cromwell’s question, which is the forward-looking one on what happens if it is not all resolved by October or is not resolved to an extent.

Q8 Lord Cromwell: I think you have all given the crystal ball quite a lot of work today, and you have illustrated how cloudy it becomes the further you look into the future.

I want to ask you two things. One is that obviously at the end of March a year from now we will be a third country. What is still going to be unresolved at that point? What I am more interested in is that, as Joe has illustrated, the transition period will in working time be very short, practically. As a Norwegian parliamentarian said to me recently, “At the end of March next year, you have to understand that you will be a third country. You will no longer be a member—you will be a lobbyist”.

Do you think the tone, the dynamic, of the negotiations through the transition period and of course beyond will be more in that vein than they are now, when we are still a member of the club?

Dr Sylvia de Mars: Will this be more or less resolved by the end of 2020? I think it is unlikely, and I would follow up with what Meredith outlined. We need some things in hard law, whereas other things can be negotiated on an ongoing basis in more detail as we proceed, in one way or another. If anything fundamental, such as dispute resolution and further governance arrangements, or the very basics on what can cross a border and what cannot, is not resolved by 2020, we are down to the WTO rules. There is not a lot of debate on that front.

On the question of how the UK will be treated, it is a funny one. When I saw that question in the list of questions that we were given in preparation, I thought, “That’s a strange question. Why would we treat each other less civilly when we have already gotten through the hard parts of trying to figure out where we are going next? It had not occurred to me that the EU would be so fundamentally negatively outmuscling the UK at that point in time so as to try to punish it belatedly. I think that the withdrawal agreement has been seen by the EU 27 as regrettable but self-inflicted, and at that point they just want to make the best of what remains. They will want to keep trading with the UK and to keep people moving between the UK and the EU member states. They do not want to end up in a situation in which our Governments are barely speaking to each other anymore.

Lord Cromwell: I am not suggesting that there is enmity, but the reality is that if we are all in the same club in this room and somebody comes in to negotiate with us, that is a different dynamic from one member of the group trying to negotiate.

Dr Sylvia de Mars: No, absolutely, and I think we will experience that in a somewhat confrontational way purely in the sense that we have no wide variety of exceptions from the EU acquis on account of being in the club, so we will not get any exceptions from the EU acquis when we are no longer in it.

I say that with the caveat that with anything that affects Ireland directly the EU will be willing to be flexible on because it will have to be flexible on it. But, of course, it might be less willing to compromise or go for the outrageously innovative solution than it would have been had this been an internal debate rather than an external one. But that is normal trade relations.

Baroness Falkner of Margravine: On the same point, the thinking is that the beastliness is subjective. On this side of the channel we perhaps feel that its behaviour is more beastly. But the bottom line is that the United Kingdom Government do not want to sign and dot every line in advance of the future agreement because of money. They think that they have more leverage if they are capable of withholding money.

In that sense, could you comment on whether that is the point of the UK being a third country? The dynamic might be different, because if you are in a negotiation and you have money in your pocket, your leverage is higher than if you do not have any money in your pocket.

The Chairman: May I just gloss on that? I understand that David Davis, Secretary of State for Exiting the EU, has suggested that our negotiating position will be more difficult during the transition period with, I think, some of those considerations in mind.

Dr Sylvia de Mars: That is possibly fair. That is realpolitik, if you will. It is just the reality that you are in: the more powerful you are, the more you get to do in trade negotiations, and the UK would experience that with the US just as much as they would with the European Union. Pragmatically, if I think about this from the perspective of the UK, the more that we have potentially to bargain with—fisheries and offers on movement of citizens—the more likely we are to get concessions on services. That is just how negotiations work.

At the same time, if it does not touch upon the integrity of the single market, the EU is also much more willing than many other really big economic players to liberalise. It is one of the pushing forces for liberalising services worldwide. So I will sit on the fence on that one.

Joe Owen: Coming back to the point about the dynamic and the UK being a third country, it is a really interesting question as to whether there has been a considerable amount of thought about what being a third country means in Brussels relative to being a member state, and what your mechanisms for influence are.

The broader structural question is quite interesting: who runs the negotiation from the EU side? We know that the expectation is that Taskforce 50 gets wound up in 2019 once the withdrawal agreement is done. Does it get handed off to DG Trade? Is it run as a trade negotiation, or does it look more similar to an accession negotiation in how they set themselves up? Then, of course, there is the big question of who is in the new Commission and who is in the European Parliament. There are some big questions there.

There is then a softer question about the dynamic, which is interesting. The UK has had to do this already, but it will be even more stark when it is a third country; it will find that there is a different way of doing business in the EU—sitting around for these formal negotiations, where you cannot really talk in the margins. The UK did a lot of business before by having conversations in the margins and corralling opinion. That might change. How the UK changes its structure in Brussels to reflect that is a really interesting question, but I do not have the answer to it, unfortunately.

Dr Meredith Crowley: Any trade agreement needs ultimately to be beneficial to both parties, so the EU should have some view to what it is trying to get out of the UK and what it needs to give up in return. At that level, whether you are a lobbyist or a third country, ultimately there will be an exchange of market access of different types. If there are gains to be had from both parties, they should be treated fairly. The details of how it takes place might vary, but the ultimate result that we would expect should still be similar.

The Chairman: We have five minutes left, and I would just make the comment, really to invite you to assent to it, that the political mood music at about that point, when we are dealing with a future relationship, will, I take it, be very important, too. There is the sense that we are seen to be at least trying to reach a mutually acceptable conclusion.

If we may, we will pass on to Baroness Kennedy, who has a nuts and bolts question. I suggest that Meredith answers first, because I know that she has a tight schedule, and the others may reflect. Indeed, if I do not have a chance to thank you before you have to go, Dr Crowley, I thank you now.

Dr Meredith Crowley: Thank you.

Q9 Baroness Kennedy of The Shaws: Yes, this is a nuts and bolts question and is really about the institutional structures that will be needed to underpin the future UK-EU relationship. How do you see the Government’s framework for the future relationship working? What dispute resolution methods and mechanisms will be needed? You mentioned how important it will be to have them in place and I could not agree with you more as a lawyer. What intergovernmental and interparliamentary mechanisms will be needed between the UK and the EU or between the UK and individual member states—the bilateral stuff?

In among that, one concern that lawyers have in this country relates to enforcement. When you get a decision in a court, what are you going to do about enforcement? Again, it relies on mutuality. It is not enough for us just to introduce European Union law here; there has to be the business of “What about the other folk. What about over there?” We need help on the institutional structures.

Dr Meredith Crowley: I will draw parallels with the WTO dispute resolution system. It was established in 1995 to implement the GATT of 1994, which is the current agreement. It worked very effectively for a number of years. There is a panel of people who are drawn from a lower court. Then there is an appellate body if the two parties are unhappy with the resolution of the dispute.

That system is under a lot of stress, largely because the existing agreement is outdated and has needed to be updated for some time. That is putting more pressure on dispute resolution to address issues that should really be addressed through later negotiation. When I look at the trade in goods and potentially the trade in services, one concern I have is that the trade in goods is at some level straightforward. Regulation and behind-the-border barriers will be the contentious area that dispute resolution will have to cover. Some areas could go to WTO dispute resolution and come under that system. With others, there will need to be an external, jointly agreed system between the UK and the EU.

With enforcement, the difficulty for the UK is that the smaller country will always be at a disadvantage. If there is a system like the WTO, the idea is that if, for example, the EU did something that the UK did not like and did not think was consistent with the treaty, if ultimately the EU said that it did not care and that if the UK did not like the agreement it was just going to leave it in place, the UK’s only recourse would be to retaliate against that somehow with some other sort of restriction. It is very difficult as a small country to punish the big country when it infringes on an agreement. That is a fundamental problem. It might suggest that the UK would be better off resolving as many disputes as possible in a larger forum, such as the WTO, where it might have more equal weight relative to the EU.

A separate issue is that, with regard to something like financial services and goods, financial services products are innovated and changed much more rapidly than in other areas of the economy. You do not change a car as rapidly as you change all types of newly created financial products. These products can carry risk and harm the economy in a way that it is very difficult for regulators to assess.

If there is a financial services agreement, it is not simply dispute resolution that needs to be set up; you would need to have a much deeper system of regulatory co-operation whereby, as the products change and new products are created, the two parties to the agreement jointly determine how those new products should be regulated. Whereas with goods you can have an agreement and wait 10 years and redesign it as necessary, with financial products it seems that you have to have a much more intensive and constant review of the safety of the products being sold and the risks associated with them, and a joint regulation for prudential concerns between both parties—both the EU and the UK.

The Earl of Kinnoull: I want to get one very important thing on the record. What you have just been talking about, with which I totally agree, already exists. You have colleges of regulators with big financial centres, such as the US. So in fact you are saying that there is a tried and trusted mechanism in other situations.

Dr Meredith Crowley: I am not an expert on financial services regulation, but there are concerns. A lot of the cracks in the overall system came out in the last crisis of 2008. There has been progress since that point, but what, if anything, we learned in that crisis is how critical it is that we understand the products that are being created. There will be concern on both sides of the channel about new products coming in. The fundamental nature in which you regulate that and adjudicate disputes has to be much deeper, potentially relying on other external bodies. You can use the BIS and other systems to address that.

The Chairman: On which note, we respect your deadline. We are incredibly grateful for your evidence, and we will of course follow up with a transcript. I hope that if you want to make further observations or give us detail on some of the very interesting evidence that you have given, you will feel that you can do so. We are very much in the market for a discussion on these complex issues. You go with our blessing, Dr Crowley. Perhaps the other two witnesses can stand by just to give us their thoughts.

Dr Meredith Crowley: Thank you very much for having me. I apologise for my schedule today.

The Chairman: We understand.

Dr Sylvia de Mars: My first thought on looking at the institutional structures is that it was very unfortunate that in the withdrawal agreement one area not to do with Ireland that remains very contentious is the governance agreement. Again, I think we are all agreed on a joint committee of some kind, which is fairly standard in international relations involving trade and a variety of other things. After that, it becomes much more difficult to find a point of agreement.

The Mansion House speech, I believe, mentioned a system of arbitration. For the level of continued integration/co-operation/regulatory overlap, that simply would not work, not least because it is entirely unclear how arbitration and the Court of Justice of the European Union relate to each other. Say that we have an arbitral tribunal governing our future relationship and it decides that, yes, one of the two parties has been bad and has not done X or Y, because this is what X or Y means, is that then binding on the other EU member states? Does the Court or Justice get an opinion on it? These things are complicated. I think the EU would have serious questions about the co-operation working appropriately, if what we had was just arbitration.

At the same time, I am reminded of the EEA agreement, where, again, there were issues with the Court of Justice and the EFTA court. That was not a smooth process to set up. But they ultimately ended up agreeing that there could be a judicial tribunal independent from the Court of Justice that, generally speaking, made its own decisions, purely to do with EFTA, and might occasionally ask a question of the Court of Justice.

If we end up achieving deep-level services integration and deep-level goods integration, with co-operation on research, education, culture and transport, as well as an advanced movement of people regime—the movement of people is the fundamental difference between your standard trade agreement and what we are hoping to get here—something like that seems to me like a logical dispute resolution mechanism.

Then the compromise on both sides is that it is purely independent; it is nothing to do with UK courts or with the Court of Justice per se, with routes to communicate with both but no direct impact on either party.

Baroness Kennedy of The Shaws: What would you do about Brussels I and II, the European arrest warrant and all these different types of things? Brussels I and II are about civil litigation and enforcement—about maintenance when people get a divorce, live in different countries and have to pay for children and somebody refuses to do it. Where does that go?

The Chairman: Do you want to reflect on that and drop us a line? Would that be easier?

Dr Sylvia de Mars: I can do, but my initial reaction is that this is one thing that to my surprise all parties seem to have been thinking about already and the Prime Minister has said, “We’d like to continue what we are doing at the moment”. The European Council said very explicitly that those kinds of things need to continue to happen. I think we will get a more complex, multilayered system of inter-court dispute communication, if you want.

Joe Owen: On the broader institutional structures, as Sylvia has already referenced, it will depend on the depth and the dynamism of the deal if you go for something that is single market-like for access in the outcome that it delivers. In our report, we looked at trade after Brexit and said that you would require: a mechanism for automatically updating rules in line with EU laws where you have said that you would; an independent surveillance authority to make sure that the UK does what it says it would do—the EU has the Commission; a means of uniform interpretation of the agreement, which is core; and a robust dispute resolution mechanism.

We said that if that is the depth that you are going for, you have broadly two options. One is to dock to the EFTA institutions where they already exist. The other is to design your own institutions, which look broadly similar to the EFTA institutions. If you went for something that is more CETA-style in depth and access, you would need: a committee that was set up to monitor the agreement, particularly if you have equivalence agreements, to make sure that equivalence continues; a forum for regulatory co-operation, as was touched on previously; and probably an ad-hoc arbitrary mechanism, with a limited role for the ECJ.

On the point about broader dispute resolution, I believe that my colleague, Raphael Hogarth, submitted evidence to the Justice Sub-Committee, and he has written a very comprehensive paper setting out six different options for dispute resolution at a very high level. I am very happy to run through them now if you think there is time, or I can send through the evidence that Raphael submitted.

The Chairman: I think we have the paper. We can make sure it is circulated to colleagues who are not on that sub-committee.

Baroness Kennedy of The Shaws: We have it, because he testified very well in front of the sub-committee and we have a record of his evidence to us.

Joe Owen: I would only be trying to emulate Raphael.

The Chairman: I do not want to cut you off on any of this. Baroness Falkner has a point about EFTA.

Baroness Falkner of Margravine: Do the EFTA arrangements also comprise what the Government envisage, which is a ministerial level first, several layers of technical conversations where there is a dispute that escalate up to political-level conversations, and, finally, if there is an inability to resolve it in any other way, the seeking of judicial remedies? Does EFTA have any of those technical and political-level committees that would adjudicate?

Joe Owen: I would be lying if I said that I knew enough of the detail to reply with confidence.

Dr Sylvia de Mars: I think it does, much like the Swiss and the bilaterals.

Baroness Falkner of Margravine: Yes, the Swiss do.

Dr Sylvia de Mars: There are joint committees overseeing EFTA. The EU approach in these kinds of agreements is very much along the lines of, “If we can resolve something just by changing the rules or reinterpreting them together, that is easier than making someone decide between us”.

The Chairman: At this point, I think we have exhausted our main lines of questioning. I thank you both very much, and Dr Crowley vicariously in her absence as she has had to leave early.

Are we missing anything at the moment that you want to add? We all know, and I think today has demonstrated, the extreme complexity of these issues. Is there anything else that you would like to signpost to us before we close the session?

Dr Sylvia de Mars: I would flag up one thing. In the broad statements that have been set out so far on all sides, what seems to be somewhat fading from sight is the fact that some things that we started discussing in phase 1 of the negotiations were kicked forward.

The first thing that comes to my mind is what happens with UK nationals who live in the EU at the moment. Will they be allowed to continue moving elsewhere, or are they in effect stranded where they are right now? Again, it would be very helpful if all parties said something explicit about that rather than, “We’d like to make movement possible”, which is a bit generic for people who have built lives in respective countries.

Joe Owen: I have nothing to add to that.

The Chairman: Thank you for that. May I express the formal thanks of the Committee? We have had a very lively session in what is not an easy area of discussion or debate. You have opened up many of these thoughts to us and given us a lot to think about. As I indicated earlier in bidding farewell to your colleague, not only are we grateful but we are very anxious to maintain that relationship as and when things develop, which inevitably, given the pace of the negotiations, they will do.

We will be in touch with the transcript as soon as we can. Please feel that you can keep in touch with us on any particular insights that you may have then or thereafter. Thank you.