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Brexit, swiss "model", pros and cons in comparative perspective
SCHWOK, René, NAJY, Cenni Michelangelo
Abstract
Contents 1- A summary of the main argument. 2- Two comparative tables of different (integration) regimes for third States. 3- A list of 12 common misconceptions on the Swiss-EU agreement. 1- Summary Main argument : Swiss-EU bilateral agreements are the worst form of EU agreement with (close) third countries, except for all the others.- This assertion is based on the assumption that the UK wants to maintain maximum access to the EU Single market, while preserving maximum formal sovereignty and independence. It is useful to adopt a comparative perspective to explain why the Swiss-EU bilaterals compare well with other regimes (see also table 1 and 2 below): 1) The European Economic Area (EEA, also known as the " Norway model ") represents the best option for the UK to preserve its trade with the EU. Indeed, the EEA offers full access to the Single Market for EFTA states (Norway, Iceland and Liechtenstein). However, EEA membership would come with significant loss of sovereignty for the UK. EFTA countries are not part of EU institutions and have no decision- making rights. EFTA experts are only consulted in [...]
SCHWOK, René, NAJY, Cenni Michelangelo. Brexit, swiss "model", pros and cons in comparative perspective. In: Exiting the EU committee, house of commons. London : Exiting the EU Committee, House of Commons, 2018. p. 10p.
Available at:
http://archive-ouverte.unige.ch/unige:110095
Disclaimer: layout of this document may differ from the published version.
House of Commons, exiting the EU committee, February 2018
Brexit, Swiss “Model”, Pros and Cons in Comparative Perspective Evidence by Prof. René Schwok (and Cenni Najy)1
Director, Global Studies Institute, University of Geneva
Contents
1- A summary of the main argument.
2- Two comparative tables of different (integration) regimes for third States.
3- A list of 12 common misconceptions on the Swiss-EU agreement.
1- Summary
Main argument : Swiss-EU bilateral agreements are the worst form of EU
agreement with (close) third countries, except for all the others.
- This assertion is based on the assumption that the UK wants to maintain maximum access to the EU Single market, while preserving maximum formal sovereignty and independence.
It is useful to adopt a comparative perspective to explain why the Swiss-EU bilaterals compare well with other regimes (see also table 1 and 2 below):
1) The European Economic Area (EEA, also known as the “Norway model”) represents the best option for the UK to preserve its trade with the EU. Indeed, the EEA offers full access to the Single Market for EFTA states (Norway, Iceland and Liechtenstein). However, EEA membership would come with significant loss of sovereignty for the UK. EFTA countries are not part of EU institutions and have no decision-making rights. EFTA experts are only consulted in early EU legislation phases. The EEA institutional framework is cumbersome and possesses supranational dimensions (EFTA surveillance authority and EFTA court - which closely follow the ECJ’s case law). Besides, EEA membership comes with important financial obligations. EFTA countries are obliged to pay substantial amounts for the reduction of socio-economic disparities in the EU. Last but not least, EEA-EFTA States would have to accept UK’s application to join the EEA/EFTA pillar unanimously. It appears that the Norwegian government has strong reservations on the matter.
2) The association agreements that the EU concluded with Ukraine (the “DCFTA”
being the trade part of the agreement) have also been cited as a potential blueprint for the UK. The text of the DCFTA offers gradual access to the Single market (see table 1). However, several parts of the agreements remain to be translated into acts yet. Indeed, Ukraine’s access to the different segments of the Single market depends on its alignment (or “approximation”) to EU relevant acquis. The EU imposed tough procedures to check on Ukraine’s compliance (the EU Commission does surveillance missions in Ukraine). The opening of new sections of the Single market depends on Ukraine and EU decisions. Thus, the EU has a veto right on the matter and does use it. If Ukraine does not comply with its approximation obligations, the EU makes sure that no Single market access is granted (see table 2). Thus, de facto, Ukraine is subject to a carrot and stick mechanism that EU often uses with less affluent Eastern European countries which are part of the European Neighbourhood Policy (ENP). It is doubtful that such an agreement would fit with the UK’s interests.
3) The EU – Canada free trade agreement (CETA) comes with a light institutional structure. Canada is not part of any integrated institutions and does not have to align itself with EU legislation and/or face European Commission’s inquiries.
Under CETA, Canada does not make any payment to the EU budget either.
However, as compared to the DCFTA, the EEA (and the Swiss bilaterals), CETA does not allow enough access to the EU Single market. Under a CETA- type relation, the UK’s economic operators would not be granted market- access treatment in several areas. They would therefore face several discriminations on the Single market. Such a situation would be particularly difficult to handle with for several sectors of the UK economy (such as services - see table 1).
Like the above-mentioned “models”, the Swiss-EU bilaterals are, far from perfect from a UK perspective. They would come with at least five “limitations”:
- First, Switzerland's sovereignty is also affected by its relationship with the EU.
Switzerland often aligns with the evolution of the new EU legislations. This is true, even when Switzerland is not obliged to do so under the bilaterals’
requirements.
- Second, the bilaterals allow for less access to the Single market than is enjoyed by Norway in the EEA. This is particularly true for areas such as financial services or technical barriers to trade (Cassis de Dijon principle).
- Third, the Swiss bilaterals include free movement of persons (that the UK no longer wants). The EU has also imposed a so-called guillotine clause that prevents Switzerland from rejecting free movement of people (if the Swiss did so, they would automatically lose six other Single market-access agreements).
- Fourth, the EU demands the transformation of the current bilaterals’ regime and wants to impose a new institutional framework that will cause Switzerland to relinquish to more sovereignty.
- Fifth, Switzerland makes limited net payments to reduce EU socio-economic disparities at the level of around 130 million euros per year.
Table 1. Market Access: Comparison of several regimes for third states
EEA/EFTA (Norway)
Swiss B.A.
(in force)
Swiss B.A.
(future)*
EU-Ukraine (DCFTA)
EU-Canada (CETA) 4 freedoms/Internal market
Free movement of goods [tariff barriers]
- Industrial goods Yes Yes Yes Yes
- Unprocessed agric. products - Processed agric. products - Fisheries
No Limited Limited
No Limited (CH still applies duties)
Yes
Yes Yes***
Yes***
Yes**
Yes Yes [non-tariff barriers]
Conformity assessment Yes Yes Yes Yes
Mutual recognition (Cassis de Dijon principle)
Yes No
(CH unilat. application)
No No
Trade facilitation (simplification of border controls and formalities)
Yes Yes Yes Yes
Anti-fraud cooperation (customs) Yes Yes Yes Yes
Identical rules on preferential origin (Pan-Euro-Med Convention)
Yes Yes Yes No
Free Movement of persons - Mutual recognition of diplomas - Social security coordination - Posted workers
- Citizens’ right directive
Yes Yes Yes Yes Yes
Yes Yes Yes Yes (special rules)
No
Unchanged
No
No No No
No No
No****
No No
No Free movement of services
Postal services
EU no-roaming area
- EU financial passport
Yes
Yes
No
No
No
Yes***
No
Limited
No
EU no-roaming area Yes No In negotiation No
EU financial passport Yes No No No
Equivalences (if no financial pass.):
- MiFID II (trading obligation shares) - K
Limited***** l No
No - Solvency II (insurance)
- EMIR
- -
Yes Yes
No No
Limited
- EMIR (central counterparties) - Yes No Yes
Air transport Yes Yes No limited
Public procurements Yes Yes Yes*** Yes
Free movement of capital (removal of capital controls)
Yes in force before the
B.A. progressive
removal in force before the CETA
EU Capital Markets Union Yes No No No
Customs Union
EU common external tariff No No No No
Controls on rules of origins Maintained Maintained Maintained Maintained
Freedom to negotiate trade agreements with non-EU countries
Maintained (alone or via EFTA)
Maintained (alone or via EFTA)
Maintained Maintained
EU Value added tax
EU VAT area (removal of border
controls on indirect taxation) No No No No
Energy policy
EU market-coupling (electricity) Yes No
(negotiations frozen)
No No
EU emission trading system Yes Participation in 2019 No No
Competition policy
Cartel, abuse of dominant position and mergers (alignment on EU rules)
Yes Yes
(coop. agreement + CH ≈ aligns on acquis)
Yes No
State aid
(alignment on EU rules)
Yes No Yes
(proposed by EU)
Yes No
*An institutional agreement is in negotiation between CH and EU since 2014 (the following elements are based on the CH-EU agreed guidelines for negotiation). ** Except some
“sensitive” products (eggs, poultry etc.). ***The Openings of new segments of the Single Market depend on Ukraine’s approximation to EU acquis and requires the agreement of both parties. Here, Ukraine is usually the requesting party (the EU is therefore in a strong position). **** However, CETA provides a framework for Canada and the EU to recognize each other qualifications in some regulated professions. ***** A third country is granted an equivalence only if its legislation is close enough to the one of the EU. Here, the equivalence was granted to CH for one year only (due to the lack of progress in the institutional agreement). Thus, political considerations can also play a role.
Table 2. Institutional and financial dimensions: Comparison of several regimes for third States EEA/EFTA
(Norway)
Swiss B.A.
(in force)*
Swiss B.A.
(future?)
EU-Ukraine (DCFTA)
EU-Canada (CETA) Institutional participation
EU institutions (decision-making) No No No No -
EU institutions (decision shaping
and comitology) Yes
(SM issues) No Yes
(relevant issues) No -
EU agencies 31 11
Unchanged
Limited cooper. in few agencies** - Major EU Programmes (research,
education and culture) All Research only*** All -
Common integrated
(supranational) institutions Yes (EEA/EFTA pillar)
No No -
EU acquis (Single market - SM) Legal obligation to adopt of all SM
laws at the concl. of the agreement Yes Only B.A.
relevant laws
Only B.A.
relevant laws No -
Legal obligation to adopt later SM relevant laws
Yes No Yes Yes
(approximation) -
Procedure to incorporate later SM
relevant laws Dynamic
Procedure (within EEA/EFTA
institutions)
Static procedure often autonomous
incorporation
Dynamic
procedure Static
procedure (but for services, pub. procurement)
-
Adoption of all later SM laws (current situation in the legal order of third states)
Complete (but EU wants a faster adoption)
Most B.A.
relevant laws
All B.A. relevant, opt-out for free movement issues (proposed by CH)
All DCFTA relevant laws (approximation)
-
Institutionalized right of reservation (adoption of later SM relevant laws)
Yes EEA/EFTA right of
reservation
No No? No -
Surveillance et jurisdiction Supervision by a surveillance authority (ensuring EU relevant acquis is applied)
Yes No No (EC might have a
“right of enquiry”)
No (EC checks
approximation)
-
Obligation to conform with ECJ's jurisprudence (interpretation of the relevant acquis)
Yes (EFTA court follows ECJ)
No
Yes
No (but for services,
pub. procurement)
-
Dispute settlements
Nature of dispute settlement (on interpretation and application of the agreements)
Hybrid (multilateral neg. in EEA JC, ECJ ruling when on EU law)
Diplomatic (bilateral neg. in
the mixed committees)
Hybrid?
(arbitration panel, ECJ ruling when
on EU law)
Hybrid (arbitration panel,
ECJ ruling when on EU law)
WTO standards (arbitration panel, ISDS) Rebalancing measures Appropriate
measures, up to partial suspension of EEA agreement
Appropriate measures, Guillotine****
attached to B.A. I
Similar system as for EEA?
(proposed by EU)
Appropriate measures, WTO standards
Appropriate measures,
WTO standards Review of the rebalancing
measures by an arbitration panel Yes No Yes?
(proposed by CH) Yes Yes
Financial contributions
2013 annual financial contribution
per capita (in 2013 £)***** ≈115 £ ≈60 £
(?) Ukraine is a net recipient
No
Participation in the reduction of social and economic disparities within the EU
Yes Yes
(CH: on a
“voluntary basis”)
EU proposes an institutionalized contribution
No No
*Schengen/Dublin, Air Transport, Customs Facilitation and Security B.A.s are based on other institutional rules. ** For the Erasmus and Creative Europe programmes, the EU refused to renew its agreements with Switzerland after the 2014 referendum on immigration. *** 20 agencies + 19 programmes are opened to Ukraine’s participation (Ukraine could join them depending on its approximate and implement EU relevant laws). ****The activation of the guillotine clause is of an automatic nature. If one of the parties terminates one of the agreement of the B.A. I package, all the others are also terminated. ***** The numbers for Norway and Switzerland do not include participation to Schengen and do not take into account returns of funds. Also, they do not take into account. As an EU member, the UK topped 240 £ in 2013 (number obtained using a similar calculation method).
Table legend:
EC = European Commission
EEA JC = Joint Committee of the European Economic Area ECJ = European Court of Justice
Guillotine =. this clause states that if any of the B.A. I agreements were to be terminated, the other 6 would cease to have effect ISDS = investor-state dispute settlement
WTO = World Trade Organization
3 – Some frequent common misconceptions about the Swiss bilaterals
It appears that there are several misconceptions in the UK regarding Swiss-EU bilateral agreements.
In order to avoid sterile polemics, we do not mention the multiple sources of the following affirmations. But they are available on request.
Affirmation 1
The EU has denied Switzerland access to its financial services market. So going Swiss would not be an interesting path for the UK.
In fact, it is quite the opposite. It was Switzerland, in the early 2000s, that did not want to include financial services in the agreements (“bilateral II” package). Back then; the EU was not opposed to the idea.
It was mainly Swiss banking circles who feared that this would be the beginning of a process that, they believed, would result in the end of banking secrecy (which was still in force in Switzerland at this point).
Now banking secrecy has been abandoned by Switzerland and it is largely the same banking circles that now want to include financial services in the scope of the bilaterals. They are mainly interested in securing the EU financial passport.
Meanwhile, however, it is the EU that has become reluctant. The EU is currently using financial market access as a bargaining chip to force Switzerland to transform the institutional mechanism of the bilaterals. The EU has often reaffirmed this market- access conditionality since at least 2010.
Affirmation 2
Switzerland obtained a major concession from the EU regarding free movement. The Swiss now enforces preferential treatment in respect to their nationals seeking jobs (over non-Swiss nationals). This ends the myth that with free trade must come unlimited freedom of movement of persons.
This affirmation is largely wrong. Admittedly, the Swiss people, after a 2014 referendum launched by the Swiss People’s Party, introduced in the Swiss Constitution the obligation to establish a national preference and discriminatory migration quotas (Article 121a of the Swiss constitution).
Switzerland then tried to renegotiate the free movement of persons agreement with the EU. However, it failed to obtain any concessions from the EU. The EU rejected both the proposal to change the text of the agreement and the idea to amend the agreement with a political declaration allowing for some migration flexibility.
Meanwhile, the EU Commission warned Switzerland about the consequences of applying discrimination and quotas on their domestic job markets.
Faced with a dilemma: 1) applying the Constitution and facing EU retaliations with possibly an activation of the guillotine clause or 2) coming with a very mild implementation law and preserving relations with the EU, the Swiss federal Parliament opted for the second option.
Thus, the implementation law adopted by the Parliament does not propose any migration quotas or real national preference on the Swiss job market. This law is essentially window dressing.
The above-mentioned law merely stipulates that unemployed workers registered in Switzerland (in cantonal employment offices) should be informed “5 days in advance”
when there is a job on offer. Also, this law would only apply from 2020 and on the condition that the unemployment rate exceeds 5% in a particular sector of the economy (average in Switzerland is around 3%).
This law also states that the employer who advertises for a job will automatically receive the records of the unemployed workers in the region.
That being said, this employer will always remain free to hire a person residing in the EU, without having to justify his choice not to hire a Swiss or a local resident.
Self-evidently, the Swiss People’s Party is unsatisfied about the way the parliament implemented (in fact did not implement) its initial proposal to limit immigration. This is the reason why this party (who was backed by around 30% of Swiss voters in the last general elections) has decided to launch a new referendum. This time the text is clearer. It proposes to renegotiate and – if no renegotiation is possible – to denounce the agreement on the free movement of people with the EU.
Affirmation 3
The absence of border controls between Switzerland and the EU can be a model for maintaining the absence of border controls between the two Irelands.
Certainly, one can imagine that innovative technical solutions – such as the ones currently used by Switzerland to allow for a relatively friction-less situation – could represent a model for the UK. These solutions are the following: centralized controls on a limited number of key border points, common border patrols involving Swiss and German customs staff, a customs intelligence strategy in close cooperation with police forces, a pre-qualification system for trusted traders, a system for easing low- risk trade, automatic control systems (through CCTV or other electronic means) etc.
It must not be forgotten, however, that the friction-less situation at the Swiss border mainly results from Switzerland's accession to the Schengen Area.
Today, there are, however, residual checks on goods at the border that are difficult to terminate. They result from the fact that there is no agreement between Switzerland and the EU on:
Removal of tariffs on agricultural products,
Adoption by Switzerland of the EU Common external tariff,
Adoption by Switzerland of the EU indirect taxation mechanism (VAT, excise duties).
Affirmation 4
A return of UK in EFTA would be a way to maintain access to the EU Single Market.
This affirmation is wrong. There is no substantial trade agreement between EFTA as such or all EFTA members and the EU. Swiss bilateralism is unrelated to EFTA membership. The Swiss bilateral agreements allowing for Single market access have been negotiated independently of EFTA.
Crucially, EFTA membership has to be distinguished from EEA. EFTA membership alone would not allow for Single market access. Under EFTA, the UK would only be able to maintain its trade with the other EFTA countries (which is now governed by the EEA agreement and the Swiss bilaterals).
Affirmation 5
To avoid disparities with the EU, the Swiss free trade agreements (FTAs) with third countries are completed after EU’s own FTAs are signed.
It used to be true but the situation has changed around 10 years ago. Switzerland concluded (through EFTA or alone) FTAs with countries that do not have any significant trade deal with the EU. This is the case for China, Japan, Hong-Kong, the Philippines etc. Sometimes, Switzerland was faster in concluding trade deals than the EU (it was the case for the FTAs with Canada, Ukraine, South Korea etc.).
Affirmation 6
The lack of an institutional framework between Switzerland and the EU results in perpetual dispute, often followed by threats of trade restrictions.
In fact, disputes are rare between Switzerland and the EU. In almost 20 years of bilateralism, there have been only a handful of disagreements between Berne and Brussels. Switzerland is keen to keep a “low profile” in its relations with the EU. Thus
it often complies very well with the requirements set by the bilateral agreements.
Also, in some cases, it appears that Switzerland applies (relevant) EU legislations better than most EU Member states themselves.
Affirmation 7
If any legal dispute occurs between the EU and Switzerland, the ECJ can intervene and settle the issue.
In the bilaterals’ institutional architecture, the ECJ has no competence to do so.
Thus, the ECJ cannot intervene in case of disputes regarding the interpretation or the application of the bilaterals. Currently, such disputes are settled in a diplomatic way in the so-called “mixed committees” of the bilateral agreements. The EU wants to change this situation and proposed an institutionalized procedure to settle disputes.
This procedure, would allow the ECJ to have a say. This new dispute settlement mechanism is now in negotiation between Switzerland and the EU.
It has to be noted that since the ratification of the bilateral agreements, the Swiss Federal Tribunal and Swiss national tribunals take into consideration ECJ jurisprudence (even is it is not obliged to do so). So in practice, there is a high level of homogeneity between Swiss laws and EU laws when it comes to issues such as public procurement, technical barriers to trade, free movement etc.
Affirmation 8
The EFTA / EEA Court of Justice could settle disputes between Switzerland and the EU or between the UK and the EU.
First, it is important to stress that the EFTA Court has no competence to do that. The EFTA court is only competent for the EEA/EFTA countries (thus Switzerland is outside of its jurisdiction). The Court decides on actions brought by the EFTA surveillance authority against EEA/EFTA states. The court is also competent to settle disputes between the EEA/EFTA countries. Finally, the Court can also give advisory opinions on the interpretation of the EEA Agreement.
However, the Court has no competence to settle disputes between an EEA/EFTA state and the EU. So, even if the UK joins the EEA/EFTA pillar, the EFTA Court will not settle disputes between the UK and the EU. The dispute settlement mechanism is different within the EEA (see table 2).
Second, there have been some discussions about “docking” Switzerland to the EFTA Court. The idea would be that the EFTA Court would gain a new competence in settling the disputes between the EU and Switzerland. Both the EU and Switzerland never (officially) considered the EFTA Court as being an appropriate institution to do that.
Affirmation 9
There is an agreement between Switzerland and the EU on the recognition of standards without prior harmonization (Cassis de Dijon principle).
In reality, there is no agreement between the EU and Switzerland on this issue. But the Swiss Confederation has decided to apply this principle on an autonomous basis and for a limited number of products imported from the EU. The EU does not, however, grant reciprocity on this important non-tariff barrier issue. This constitutes one of the main problems in Swiss-EU trade and a clear discrimination for Swiss exporters as compared to their European competitors.
Affirmation 10
All bilateral agreements between Switzerland and the EU are similar in their functioning.
In fact, they are often different. Swiss bilateralism resembles a patchwork. For example, most bilateral agreements do not provide for a dynamic adoption of the evolution of relevant EU law. But some provide for a dynamic adoption (Schengen, Dublin, Air transport etc.). In order to understand the very nature of Swiss bilateralism, it is necessary to analyse all agreements separately.
Affirmation 11
The negotiations between the EU and Switzerland have always been long. It highlights the difficulties that Switzerland faces with the EU. The UK can not afford to spend so many years negotiating.
This is a somewhat misleading generalization. Again, one has to study each agreement separately to get a clear picture. Some negotiations were relatively fast (Bilateral Agreements II package: 2001-2004). Others have been slower (Bilateral Agreements I 1993-1999). Currently, some negotiations are dragging on because Switzerland is procrastinating, as it does not want an institutional framework that would make it relinquish some formal sovereignty.
In addition, Brexit is complicating negotiations between the EU and Switzerland.
Indeed, the EU does not want to grant concessions to Switzerland that could be claimed by the UK later. Similarly, the Swiss Confederation hopes that the UK will get concessions from the EU that it could itself claim later.
Finally, it should be remembered that Switzerland's negotiating position is different from that of the UK. Switzerland is in a process of increasing integration (even if such processes take a lot of time), while the UK is engaged in a process of disintegration from the EU – and may lose a lot without an agreement. The Swiss and British initial positions and time constraints are therefore very different. This limits any comparison that could be drawn between the two cases.
Affirmation 12
The EU will never want to grant the UK a Swiss-type integration. Swiss bilateralism has faced its limits, as it is now facing a dead-end.
Officially, the EU never stated such a position. It is therefore difficult to assess what would be the reaction of the EU if the UK would seek a Swiss-type integration.
Arguably, many EU Commission officials and legal experts are very sceptical of the fact that the bilaterals could be a blueprint for other countries. They see bilateralism as a particular experience that cannot be reproduced. Meanwhile, however, some (pragmatic) top EU decision-makers – such as former German finance minister Wolfgang Schäuble in a January 2017 declaration – encouraged the UK to look at Switzerland to get some inspiration.
Similarly, Swiss-EU bilateralism has often been said to have reached its limits. It is true that Switzerland was unable to conclude any significant market-access agreement in the last 10 years. However, this is due to the ongoing institutional agreement negotiations. This institutional framework agreement is now close to being concluded. If the Swiss and the European manage to do so in the coming months of years, there is no reason to think that bilateralism will not continue and even reinforce itself. Indeed, there are strong economic incentives to do so and both the Europeans and the Swiss top decision-makers want to continue their cooperation.
