Some conceptual clarifications concerning EFTA and the EEA

Dr. Michael Sánchez Rydelski
and Cath Howdle*

*Respectively Member and Deputy Director of the Legal Service of the
EFTA Surveillance Authority. Nothing in the present article binds or
necessarily reflects the views of the EFTA Surveillance Authority.

1. Introduction

This contribution does not intend to offer a solution to the Brexit
conundrum: that is a matter for governments and negotiation teams. The
following comments are merely intended to serve as a guide to some of the more
important aspects of the European Free Trade Association (“EFTA”) and the European
Economic Area (“EEA”).

In the present contribution, we aim to explain briefly what EFTA or EFTA-EEA
membership may offer the United Kingdom (“UK”), to clarify the relationship
between EFTA and the EEA, to articulate how each option might be exercised, and
to debunk a few misconceptions that have been doing the rounds.

2. The approaching vacuum

Once the transitional period ends, the UK’s definitive exit from the
European Union (“EU”) will create a vacuum, in terms of preferential trade and
market access arrangements with the UK’s current trading partners. It is
commonly understood that at the point of its final departure, the UK will lose
its preferential market access to the EU’s Single Market, unless an arrangement
can be agreed. However, what is less commonly articulated is the consideration
that the UK will simultaneously find itself empty-handed concerning trade with
its non-EU partners, as it will also lose its participation in a number of free
trade arrangements the EU has concluded with third countries, such as Canada,
Singapore and South Korea.

How the UK will fill this vacuum is still unknown. However, it is
already clear that concluding a new free trade agreement with the EU, while
negotiating free trade agreements with non-EU partners, will be a time-consuming
and resource-intensive exercise. No serious predictions can be made as to how
long it will take to finalise – let alone ratify – these arrangements, but it
is obvious that this will not be a quick fix.

In addition, the processes of negotiating a new relationship with the
EU and a whole host of new arrangements with non-EU partners will be
intertwined. Non-EU partners might be reluctant to finalise trade arrangements
with the UK until the position between the UK and the EU has been sorted out. This
process will be likely to have a negative impact on the UK’s economic

3. Existing models

Given this dilemma, the legitimate question needs to be raised whether existing
models could be used to overcome this uncertainty in the short to mid-term

Two ideas for the UK have been raised over the course of the last few

to re-join EFTA as a means of
maintaining at least free trade with non-EU partners, while ceasing to be a
party to the EEA Agreement (“the EFTA option”); or

to re-join EFTA while remaining a
party to the EEA Agreement (“the EFTA-EEA option”).

4. The EFTA option

4.1. What would the EFTA
option look like?

EFTA is an intergovernmental trade organisation comprising four Member
States, namely Iceland, Liechtenstein, Norway and Switzerland. The UK was a
founding member of EFTA in 1960,[i] before leaving in 1973
to join the then European Community. EFTA functions on the legal basis of the
EFTA Convention, which promotes free trade between its existing four EFTA
States (intra-EFTA trade).[ii] EFTA is also a
platform for an extensive network of free trade arrangements between the EFTA
States and third countries.

There are some important factors to consider with regard to the EFTA

First, EFTA membership is not
based upon joining a customs union or single market
. Foreign trade policy
remains at national level. The EFTA Convention established a free trade area, not
a customs union.

Second, the UK’s EFTA membership could be envisaged without
participation in the EU’s Single Market. EFTA is a classical international
trade organisation and membership of EFTA does not mean having to remain a
party to the EEA Agreement.

Third, unlike the EU, EFTA does
not envisage political integration
. There is no element of “ever closer political
union” in the EFTA Convention, the focus is on economic integration. Nor is
there a direct mechanism for incorporating EU rules into the EFTA Convention.

Fourth, EFTA does not establish
any supranational institutions
: there is no specific EFTA compliance
mechanism or court. Chapter 17 of the EFTA Convention, entitled “Consultations
and Dispute Settlement”, provides for a dispute settlement mechanism to deal
with any matters of controversy arising from the Convention. This enforcement
mechanism follows a classical arbitration approach, distinguishable both from
the judicial procedures available under EU/EEA law and from the more judicial
dispute settlement procedure under WTO rules.

Any new EFTA membership would entail the acceding State applying to
also become a party to the Free Trade Agreements (“FTAs”) EFTA has negotiated
with third countries. EFTA has currently a network of 27 concluded FTAs,
covering 38 countries, which cover substantially similar areas as those of the
EFTA Convention.[iii] Among these 27 FTAs
are trading partners such as Canada, Chile, Colombia, Hong Kong, South Korea,
Mexico, Morocco, Peru, Philippines, Singapore, the Southern African Customs Union,
Tunisia, Turkey and the Ukraine.
The term “FTAs” needs to be qualified, as EFTA as such is not a party
to these agreements. The Contracting Parties to an FTA are the EFTA States on
the one side and the partner country on the other, since foreign trade policy
remains within the competence of the EFTA States.[iv] The UK would
consequently be free to negotiate its own bilateral FTAs. Still, negotiating
future market access in a group with four other economically successful
countries enhances the scaling effect and will provide more weight in
Finally, EFTA also deals with the relationship between some EFTA
States, namely Iceland, Liechtenstein and Norway, and the EU by way of the EEA
Agreement, through which these EFTA States participate in the EU’s Single
Market.[v] Consequently, EFTA
membership would also leave the door open to consider later possible EEA

4.2. How could the UK take the
EFTA option?

The procedure for re-joining EFTA is not highly formalistic. EFTA
membership is open. Article 56(1) of the EFTA Convention provides for the
possibility for other States to accede to it. The EFTA Convention does not
contain any specific conditions for accession. The terms of accession would be
determined in the negotiations with the applying State. Upon completion of
these negotiations, the EFTA Council[vi] would take a decision
approving the accession, setting out the terms and conditions thereof. The EFTA
Convention would enter into force in relation to an acceding State on the date
stipulated in an EFTA Council decision.[vii]

5. The EFTA-EEA option

5.1. What would the EFTA-EEA
option look like?

The EEA Agreement was signed in 1992 and came into force in 1994. This
is an agreement between the European Union and its Member States, on the one
hand, and three EFTA States, namely Iceland, Liechtenstein and Norway (“EFTA-EEA
States”), on the other. The UK is a signatory to the EEA Agreement as a member
of the EU. Switzerland, the fourth EFTA State, is not a Contracting Party to
the EEA Agreement. The relationship between Switzerland and the EU is based
upon a series of bilateral agreements.

There are three important factors to consider regarding the EFTA-EEA

First, the EEA Agreement does not
establish a customs union but it does set up a single market
. The EEA
Agreement aims to ensure a balanced playing field between the EU Member States
and the EFTA-EEA States through provisions on free movement of goods and
capital, freedom of establishment and freedom to provide services. It also sets
out State aid and competition law parallel to the EU’s rules. If the UK were to
become an EFTA-EEA State, it would not be prevented from making a customs
arrangement with the EU.

Second, the EEA single market is
more limited than the EU Single Market
. It is limited in terms of the
material scope of what it covers – for example, it does not cover fisheries and
agriculture, or VAT. There is no “EEA citizenship” – this is not a part of EU
law which is reflected in the EEA. Similarly, there is no Charter of Fundamental
Rights, and no requirement for a State which is party to the EEA Agreement to
also be a member of the European Convention on Human Rights (although all 31 States
are parties to the ECHR, and the EFTA Court has made reference to human rights).
Nor does the EEA Agreement cover any of the justice and home affairs parts of
the EU Single Market (so no European Arrest Warrant, for example). However, EFTA-EEA
States have the possibility to “opt in” by agreement to initiatives in the area
of freedom, justice and security, or can conclude treaties with the EU based on
these arrangements, which are separate from the EEA. While every EFTA State
participates in the EU’s Schengen system, this is also legally separate from
the EEA.

Third, the EEA ensures access to the EU Single Market based on regulatory alignment and is self-policing.

The EFTA-EEA States can access the single market if they adhere to the
rules set out in the EEA Agreement, and if their regulations are aligned with
those in the EU. The chosen mechanism for doing so is to incorporate EU
regulations and directives into the annexes to the EEA Agreement, and then to
make those regulations and directives part of national law in the EFTA-EEA

This is a model of regulatory
which is not a million miles away from the current proposal for a
UK/EU transitional agreement.[viii] The EFTA-EEA model
has two advantages over this proposal. First, the EFTA-EEA States can
participate in the preparatory stages of the EU legislative process (a voice
which would be louder if the UK were part of the EFTA-EEA bloc). Second, the
process of incorporation of a piece of EU legislation into the EEA Agreement’s
annexes comes with the opportunity to negotiate adaptation texts. Furthermore,
the EFTA-EEA States can also notify “constitutional requirements” (notably a
vote in the national parliament) before accepting a piece of EU secondary
legislation into the annexes to the EEA Agreement. This, however, can create
delays in ensuring full regulatory alignment – as we have seen in the financial
services sector.

In ensuring compliance with the EEA Agreement, the EFTA-EEA States have
established two independent bodies; the EFTA Surveillance Authority (“ESA”) and
the EFTA Court. ESA monitors the EFTA-EEA States’ implementation and
application of the EEA Agreement and all regulations and directives in the
annexes. If the EFTA-EEA State has not met its obligations, it can be brought before
the EFTA Court. The EFTA Court also delivers judgments in cases brought against
ESA decisions, and delivers judgments interpreting EEA law (known as advisory
opinions) in cases which are referred from national courts.

Readers who are familiar with the EU system of monitoring and oversight
will not find the EEA system wholly unfamiliar. There are, however, three
important differences. First, there is no possibility for ESA to obtain penal
damages against an EFTA-EEA State which continues to infringe EEA law after an
EFTA Court judgment against it. Instead the matter is resolved by recourse to
the Joint Committee of the EEA (comprising representatives from the EFTA-EEA
States and from the EU). Second, advisory opinions are non-binding and leave
the referring court free to follow a different course of action in reaching a
judgment (subject to the rules on loyal cooperation, and the potential for
follow-up action from ESA if the judgment leads to an infringement of EEA law).
Third, the EFTA Court cannot annul legislation.

It is worth noting that the compliance system established by the EEA is
rather unique in terms of its set-up as an international law compliance system,
in two respects.

First, unlike the classical model of dispute resolution for
international agreements (involving a tripartite tribunal of one person
appointed by each side and a neutral arbiter) the EEA model is self-policing. The EFTA-EEA States each nominate a
College member to lead ESA (which is an independent organisation charged with
ensuring compliance) and each nominate a judge to sit on the EFTA Court. The appointments
are made by the EFTA-EEA States jointly: there is no EU involvement. Nor is
there an EU appointee or representative in ESA or on the EFTA Court bench.

The absence of an EU judge is compensated for by the principle of
homogeneity; which provides that there should be a level playing field across
the two parts of the EEA (in the EU and in the EFTA –EEA States). However, this
does not mean that the EFTA Court always follows the CJEU: the CJEU has also
followed the EFTA Court. There is also extensive judicial dialogue between the
two courts. Moreover, representatives from the EFTA-EEA States and ESA are entitled
to be heard in cases before the CJEU (and vice versa). This system would
benefit the UK in that it would not lose its voice when EU rules are
interpreted by the CJEU (with an obvious knock-on impact in situations of
regulatory alignment).

Certain commentators have suggested that the CJEU is able to overrule
the EFTA Court in the event of disagreement. However, this is not the case: if
there is a serious and sustained divergence in the case-law (which there never
has been, despite some differences in interpretation), the Joint Committee may
be convened to deal with this issue (which it never has been) and if it fails
to reach an agreement on an interpretation of EEA law, it may choose to refer a
matter to the CJEU for interpretation. This does not amount to an ability for
the CJEU to overrule the EFTA Court.

The second respect in which the EEA compliance system differs from the
classical international model is that it is not simply state-to-state dispute
resolution. The system of preliminary references established in the EU (which
permits citizens to exercise their rights more effectively) is mirrored in the
advisory opinions process at the EFTA Court: an ordinary person or business can
bring a case before a national court, and if a question of interpretation of
EEA law arises then it can be answered by the EFTA Court (instead of the same
citizen or business having to try to bring their country to justice before an
international tribunal for an incorrect interpretation, or to rely on a
state-to-state action).

Similarly, ESA’s compliance activities are triggered by complaints and
ESA has extensive contact with citizens, businesses and NGOs, in order to
ensure that people who derive rights from EEA law can take advantage of those
rights. Likewise, interested parties can bring cases before the EFTA Court in
the event that they consider an ESA decision to be ill-founded. This is a
system which does not simply leave dispute resolution in the hands of a state versus
state court, but brings citizens into the picture in the exercise of rights
granted under law.

5.2. How could the UK take the
EFTA-EEA option?

The UK is already a party to the EEA Agreement, as one of the EU Member
States, and so would take the EEA option by becoming an EFTA-EEA State.

It would be impossible for the UK to remain as a “floating” state: the
EEA Agreement’s articles refer repeatedly to the EU Member States on one hand
and the EFTA-EEA States on the other. However, if the UK became an EFTA-EEA
State, then only the preamble and Article 126 EEA (plus some of the protocols
and annexes) would need significant amendment. Such amendments would require
the agreement of the other 30 EEA States.

6. Conclusion

It is with some surprise that the authors note that political debate in
the UK has not yet reached a firm conclusion as to what the EU-UK arrangements
should be at the end of the transitional period. It is hoped that the present
note at least helps to clarify two of the possible options.

Brussels, 13 June 2018

Barnard and Peers: chapter 27

Photo credit:

[i] The negotiations on the
establishment of EFTA were concluded with the signing of the EFTA Convention in
Stockholm on 4 January 1960.
[ii] The EFTA Convention
establishing EFTA is available at:
[iii] An overview of all concluded
FTAs is available at:
[iv] EFTA States are in principle
free to conclude unilaterally FTAs with third countries.
[v] Whereas the trading
relationship between Switzerland and the EU is based on series of bilateral
[vi] The EFTA Council is the
highest governing body of EFTA with responsibility for all matters concerning
the relations between the EFTA States and between EFTA and third countries
(Article 43 of the EFTA Convention).
[vii] Article 56(1), third
sentence, of the EFTA Convention.

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