Scotland's role in the development of future UK trade arrangements

Chapter Two - International Trade Agreements – Current Arrangements

46. This chapter describes the current arrangements for developing and agreeing trade policy and international trade agreements. In particular it focusses on the clear, if inadequate in practice, arrangements within the UK for doing so, including the currently very limited role for the UK Parliament, devolved administrations and civic society.

World Trade Organization

47. The World Trade Organization ( WTO), established on 1 January 1995, replaced the General Agreement on Tariffs and Trade ( GATT). The WTO is a global organisation dealing with trade negotiations, rules and disputes between countries. There are currently 164 WTO members, covering around 95% of world trade. A further 22 countries are currently seeking accession. The UK has been a member of the WTO in its own right since 1995 and will continue to be a member if it leaves the EU. However, as a member of the EU, the UK currently participates in the WTO as part of the EU, rather than as an independent member. Leaving the EU and participating in the WTO in its own right will require a number of practical and legal issues to be resolved, including establishing UK specific tariff rate quotas and securing accession to the Agreement on Government Procurement as an independent member.

48. One of the key principles governing the WTO is that of 'trade without discrimination'. Trade must be conducted on a 'most favoured nation' basis, where all WTO members enjoy equal treatment in terms of market access, tariffs, etc. Exceptions to this general rule are permitted, including allowing the establishment of free trade agreements in goods and, in more limited circumstances, in services, between countries. Article XXIV(8)(b) of the General Agreement on Tariffs and Trade ( GATT) ^[28] defines a free-trade area as " a group of two or more customs territories in which the duties and other restrictive regulations of commerce…are eliminated on substantially all the trade between the constituent territories in products originating in such territories".

Role of the European Union

49. International trade is largely an EU competence, and the European Commission (the executive arm of the European Union) is therefore currently responsible for preparing, negotiating and proposing international trade agreements on behalf of the 28 EU Member States. The Council of the European Union is responsible for approving negotiation mandates for the Commission's trade discussions. The Commission must keep the European Parliament regularly informed of the progress of those discussions. The European Parliament must approve all international agreements.

50. There are broadly three types of EU international trade agreements:

• Customs Unions
• Association Agreements, Stabilisation Agreements, (Deep and Comprehensive) Free Trade Agreements and Economic Partnership Agreements
• Partnership and Cooperation Agreements

51. As an EU Member, the UK currently benefits from around 40 separate Free Trade Agreements with 'third countries' (that is, countries outwith the EU), in addition to frictionless trade with fellow EU Member States. The EU has most recently signed an Economic Partnership Agreement with Japan (pending ratification) and is at an advanced stage of finalising trade deals with Singapore, Vietnam and Mexico. It is also negotiating with a number of other countries, including the Mercosur countries, (Argentina, Brazil, Paraguay and Uruguay), Australia and New Zealand. The EU Agreement with Canada has been provisionally in force since 21 September, pending ratification by Member States. In 2016, Scotland exported around £3.7 billion worth of goods and services to countries with which the EU has trade agreements, accounting for 12.4% of Scotland's international exports.

52. EU Member States operate as a single trading bloc. As such, Member States, including the UK, cannot negotiate free trade agreements independently, benefitting instead from operating as a large market which attracts trade and investment. Like other Member States, the UK plays its part in the policy development, agreement of negotiation mandates, ratification and implementation of those deals. The limitations and drawbacks to the current arrangements within the UK for doing so are considered below.

Evolving Nature of Free Trade Agreements

53. The UK has not negotiated its own trade deals for over 40 years. Much has changed since then, not least the nature of free trade agreements. Earlier trade deals had a more limited focus on issues such as tariffs, quotas and cooperation. While the scope of trade deals can vary considerably, modern trade deals have in general evolved – sometimes controversially - to extend into a wide range of social provision and domestic policy issues, such as labour and environmental protection, product safety regulations, environment and food safety, human rights, intellectual property and procurement (many areas of which are the responsibility of the Scottish Government and Parliament and the other devolved administrations). Devolution has allowed the Scottish Government to demonstrate its ambition in pursuing ambitious social and environmental goals. For example, the Scottish Government adopts a unique climate justice approach to tackling the effects of climate change that recognises that it is the poor and vulnerable at home and overseas who are the first to be affected by climate change, and will suffer the most, having done little or nothing to cause the problem. A strong role in developing future UK trading arrangements will allow Scotland to continue to act as a world leader, in its capacity as a good global citizen.

54. Modern trade deals also generally contain governing principles around fairness, for example, which have an impact on both reserved and devolved issues. As a result of this extension in scope, the effects of modern trade deals are felt widely through different policy areas and parts of the UK.

55. Modern trade deals take a long time to negotiate. The recently concluded Comprehensive Economic and Trade Agreement (' CETA') ^[29] , between the EU and Canada, represents a likely model for any potential future trade deal between the EU and the UK. That agreement, which took seven years to agree and is still only provisionally in force, pending ratification by Member States, represents the most comprehensive and ambitious EU trade agreement so far, in both content and scope, covering a wide range of non-tariff issues, as well as services, in addition to those more traditionally associated with trade agreements.

56. While the UK Government has suggested that a trade deal between the EU and the UK could be concluded much more quickly than the CETA, expert opinion differs. In his evidence to the House of Commons Select Committee for Exiting the European Union on 27 February 2018 ^[30] , Pascal Lamy - the former Director General of the World Trade Organization and former European Commissioner for Trade – estimated that such a deal could take five to six years to conclude, and that third countries may be unwilling to begin their own negotiations with the UK until the detail of its agreement with the EU is known. Even the quickest comprehensive trade agreement ever concluded - between the EU and Vietnam - took just under three years to negotiate and is still pending ratification. Dr Gracia Maŕin Durán, University College London, made similar observations in evidence to the Scottish Parliament's Culture, Tourism, Europe and External Relations Committee on 15 March 2018 ^[31] .

Role of UK and Devolved Administrations in International Trade Policy and International Trade Agreements

Constitutional Arrangements

57. Responsibility for foreign affairs, including international relations and the regulation of international trade, is reserved to the UK Parliament and Government under Schedule 5 of the Scotland Act 1998. The Secretary of State for Foreign and Commonwealth Affairs is responsible for the foreign policy of the UK, and has overall responsibility for concluding treaties and other international agreements on behalf of the United Kingdom.

58. But there are important exceptions to this general reservation of foreign affairs, reflecting the wider impact of international actions and decisions. In particular, the Scottish Parliament and Scottish Ministers are responsible for observing and implementing international, ECHR and EU obligations relating to devolved matters.

59. The Scotland Act also enables the Scottish Government to assist the UK Government in relation to international relations (including the regulation of international trade), so far as relating to devolved matters. This means that the Scottish Government could assist the UK Government in the formulation, negotiation and implementation of policy relating to regulation of international trade issues regarding devolved matters. It could also allow the Scottish Government to participate in relevant international negotiations.

60. Modern 'mixed' international trade agreements ( i.e. those which cover issues which fall within the competence of both the EU and its Member States, for example those dealing with trade and also investment protection matters) must be ratified by the European Parliament and by each Member State legislature before they are fully in place. Agreements which relate to areas of exclusive EU competence require only to be ratified by the European Parliament. Arrangements for ratification of mixed agreements vary widely between Member States, depending on the nature of the agreement and the Member State's particular constitutional arrangements, with some requiring referendums. For example, in Belgium, each layer of government – federal, regional and community – can be involved in ratifying international trade agreements as part of their wider involvement and responsibilities.

Parliamentary Oversight

61. The current arrangements within the UK for the ratification of international agreements are set out in the Constitutional Reform and Governance Act 2010 (" CRAGA") ^[32] , and are much more limited. Under that Act, subject to certain exceptions, new agreements are laid before the UK Parliament and ratified if neither House objects within 21 days. The UK Parliament (in particular, the House of Commons) can delay consent by objecting to an agreement, in which case the Government is required to lay before Parliament a statement setting out its reasons for considering that the agreement should nevertheless be ratified, and the 21 day period starts again.

62. The ratification provisions set out in CRAGA contain numerous exclusions and limitations. Parliament does not have to debate or vote on ratification and has no power to amend a treaty or be involved in treaty negotiation. In addition, there is no legal requirement to consult the devolved governments and legislatures, stakeholders or the public.

63. It is very rare for treaties to be debated in the Parliamentary time allocated to Government business, and opportunities for debates under other Parliamentary mechanisms are limited. While the arrangements for Parliamentary scrutiny vary according to the type of agreement, there is no general formal requirement to allow Parliament to scrutinise treaty negotiations, although Westminster committees have on occasion considered high profile negotiations, albeit in no great depth, and with no formal locus. In addition to ratifying a treaty, the Government must also arrange to explicitly incorporate treaty provisions, where necessary, into domestic law in order for it to become part of domestic law. The UK Government's practice is to try to ensure that the necessary legislation is in place before ratification. Any such legislation must follow the usual parliamentary procedures for passing legislation, which will involve the UK Parliament - or the Scottish Parliament in devolved areas - in terms of how a treaty obligation is implemented.

64. There has been considerable criticism of what currently amounts to very limited Parliamentary and civic oversight of new agreements, particularly when compared to the considerably more extensive arrangements in some EU Member States and elsewhere, and particularly given that, once in force, international trade deals cannot easily be renegotiated or withdrawn from. A recent example has been the considerable criticism of the very minimal Parliamentary scrutiny of CETA. This approach to scrutiny, which has been adopted more or less without adjustment in the Trade Bill currently proceeding through the UK Parliament, is already inadequate, and will clearly not be sufficient to respond to new circumstances, if the UK leaves the EU and Customs Union and begins negotiating its own trade deals. While the UK Government July 2018 White Paper The Future Relationship Between the United Kingdom and the European Union ^[33] acknowledges that the UK Parliament will need to have a role in overseeing and scrutinising future legislative proposals, this role needs to be extended and applied to the devolved administrations and legislatures.

65. Despite representations from the Scottish Government to the UK Government during the development of the CRAGA, there is currently no formal role for the Scottish Parliament in the ratification of international agreements, aside from its role in scrutinising any devolved legislation arising from implementing such agreements. Clearly, however, the Scottish Government and other devolved administrations have a legitimate and substantial interest in International and European policy, legislation and procedures both in devolved and non-devolved matters, especially given their responsibility for observing and implementing international agreements. The Scottish Ministers are directly accountable through the domestic courts and under the Scotland Act 1998 settlement in relation to their implementation and application of European and International law, including in dealing with any infraction proceedings or the payment of fines.

Involvement of the Devolved Administrations: Agreements between the Administrations

66. At present, beyond the relevant provisions of Schedule 5 to the Scotland Act, the role of the devolved administrations in work with the UK Government on European Union policy and International Relations is not protected in law, but is set out in the Memorandum of Understanding and Supplementary Agreements between the UK Government, the Scottish Ministers, the Welsh Ministers and the Northern Ireland Executive Committee (" MoU") ^[34] . The MoU, last revised and agreed in October 2013, sets out the guiding principles underpinning intergovernmental relations on these issues. Those arrangements, described below, have proved inadequate in ensuring that Scotland's interests are fully represented at EU and International level. They will require substantial re-evaluation and revision to meet the challenges posed by the UK potentially leaving the EU Single Market and Customs Union and pursuing both a new relationship with the EU as well as trading relationships outwith it. That leaving the EU potentially requires a re-evaluation of intra- UK arrangements was recognised at the meeting of the Joint Ministerial Committee Plenary on 14 March 2018 ^[35] , when it was agreed that " officials should review and report to Ministers on the existing intergovernmental structures, including the Memorandum of Understanding, to ensure they are fit for purpose in light of the UK's exit from the EU."

67. In practice, under current arrangements, there is limited scrutiny of trade agreements within the UK (and the development of trade policy on which the agreements are based). The UK Government has acknowledged that leaving the EU and developing an independent trade policy for the UK will require new procedures to be put in place. The Secretary of State for International Trade outlined his proposals for the future role of Parliament, the devolved administrations and others in this area in a statement to the House of Commons on 16 July 2018. These proposals are considered in the context of this paper in Chapter 4.

Concordat on Co-ordination of European Union Policy Issues

68. The Concordat on Co-ordination of European Union Policy Issues, set out in Annexes B1 and B4 to the MoU, states that " the UK Government wishes to involve the Scottish Ministers as directly and fully as possible in decision making on EU matters which touch on devolved areas (including non-devolved matters which impact on devolved areas and non-devolved matters which will have a distinctive impact of importance in Scotland)". It provides that co-ordination mechanisms should seek to achieve three key objectives:

• They should provide for full and continuing involvement of Scottish Ministers and their officials in the processes of policy formulation, negotiation and implementation, for issues which touch on devolved matters;
• They should ensure that the UK can negotiate effectively, in pursuit of a single UK policy line, but with the flexibility that fast moving negotiations require; and
• They should ensure EU obligations are implemented with consistency of effect and where appropriate of timing.

69. Common Annex B4 of the Concordat states that, in order to contribute effectively to the UK's decisions on EU matters, the devolved administrations need to have information on relevant EU business, including proposals for Treaty change. It further states that the UK Government will provide all such full and comprehensive information, as early as possible. Specifically, on participation in the formulation of UK policy, it states that:

" …..Ministers and officials of the devolved administrations should be fully involved in discussions within the UK government about the formulation of the UK's policy position on all issues which touch on matters which fall within the responsibility of the devolved administrations……..consultation with devolved administrations includes the upstream opportunities to influence EU proposals in the period before they emerge as well as the period after formal proposals are made and includes the period before approval is sought for a UK line from the European Affairs Committee"

70. The Concordat anticipates that most issues will be able to be resolved bilaterally or, if not, through the Joint Ministerial Committee on Europe ( JMC(E), which meets ahead of meetings of the European Council. JMC(E) provides a forum for the devolved administrations to scrutinise and contribute to the UK's proposed priorities for the upcoming Council, and has been an overarching forum for discussing ongoing European business. In addition, meetings provide an opportunity to consider priority issues of on-going EU business, with an agenda agreed jointly between devolved administrations and the UK Government in advance of meetings. There are some examples of where this working practice has enabled the Scottish Government's position to be understood and reflected in the UK Government's policy position. One of the key examples where there is regular engagement, both structural and informal, is in relation to agricultural issues, with devolved administrations having substantial input into the position taken at the regular Ministerial Agriculture Councils, and official-led Special Committee Agriculture meetings (which feed into the Council meetings).

71. However, there are also examples of where the UK Government has not anticipated the need to share information – for example, where an issue of devolved competence has not been recognised or understood – in order to support meaningful discussions in sufficient time to allow thorough consideration of the implications of a policy position on the devolved legislatures. Furthermore, in cases where there may be fundamental differences between the positions of the UK Government and any of the devolved administrations, the UK Government position tends to prevail.

72. Following the result of the EU referendum, a further Joint Ministerial Committee was established in October 2016. The terms of reference of the JMC on EU Negotiations ( JMC( EN)) ^[36] provide that the JMC( EN) should be used to discuss each government's requirements for the future relationship with the EU; seek to agree a UK approach to, and objectives for, Article 50 negotiations; provide oversight of negotiations with the EU; and discuss issues stemming from the negotiation process which may impact upon or have consequences for the UK Government, the Scottish Government, the Welsh Government or the Northern Ireland Executive. An additional sub-committee of the JMC ( EN) - Ministerial Forum ( EN) - was subsequently established to discuss negotiation of the UK's future partnership with the EU, in recognition of the likely volume and speed of negotiations. The Ministerial Forum met for the first time in Edinburgh on 24 May 2018.

73. The terms of reference and initial work plan of the JMC ( EN) set out that the committee should meet on a monthly cycle. As of August 2018, there have been only eleven meetings since the first in November 2016. Furthermore, those meetings have not always followed the pace of the negotiations, or taken place ahead of key events, as the terms of reference envisaged.

74. The joint annex to the Concordat also makes provision for Ministers of the devolved administrations to have a role in meetings of the EU Council of Ministers (meetings of lead portfolio Ministers from each Member State) at which substantive discussion is expected of matters likely to have a significant impact on their devolved responsibilities. The presentation of arguments by Ministers from devolved administrations at such meetings follows an agreed UK negotiating line, established in advance. However, attendance at meetings does not always allow for an active role. On Agrifish issues, for example, the Scottish Government has not been able to secure an active role speaking on behalf of the UK since 2008, despite numerous requests to do so. In other, less high profile, areas such as culture and sport, the Scottish Government has been given a more prominent speaking role.

Concordat on International Relations

75. The Concordat on International Relations, set out in annexes D1 and D4 to the MoU, provides similar undertakings around the exchange of information, formulation of policy, implementation of obligations and representation of interests. In particular, it undertakes that the Foreign and Commonwealth Office or, as appropriate another lead UK Department will:

" consult the devolved administrations about the formulation of the UK's position for international negotiations, to the extent that the negotiations touch on devolved matters (including non-devolved matters which impact upon devolved areas). The devolved administrations will be sent copies of papers, including relevant interdepartmental correspondence, and be invited to meetings on subjects in which they have a devolved policy interest. Where necessary, the FCO will facilitate contacts and ensure that timely consultation takes place…..and will undertake the negotiations of all binding international agreements and multilateral international arrangements….following the consultation arrangements referred to above".

76. It also allows for agreements between the devolved administrations and foreign national or sub-national governments or organisations, to facilitate co-operation on devolved matters, within certain constraints ( i.e. provided such agreements don't purport to bind the UK in international law, affect the conduct of international relations or prejudice UK interests). It envisages that, where international negotiations bear directly on devolved matters, Ministers or officials from the devolved administrations can form part of the UK negotiating team, and speak for the UK in international meetings.

77. In terms of trade and inward investment promotion, the Concordat notes that the devolved administrations and the UK Government have concurrent powers to promote international trade and inward investment.

Smith Commission Report on the devolution of further powers to the Scottish Parliament, 2014

78. International relations and the UK's relationship with the EU was considered as part of the Smith Commission's consideration of the devolution of further powers to the Scottish Parliament, which reported in November 2014 ^[37] . In evidence to the Commission ^[38] , the Scottish Government argued that the Scottish Parliament and the Government should play a greater role in decision making on issues within their responsibilities or which affect their interests, to enhance their ability to promote Scottish products and businesses internationally. The Smith Commission report concluded that:

" The parties recognise that foreign affairs will remain a reserved matter. They also recognise the need to reflect fully the views of the other devolved administrations when drawing up any revised governance arrangements in relation to Scottish Government representation of the UK to the EU. In that context, the parties agree that the implementation of the current Concordat on the Co-ordination of European Union Policy Issues should be improved. This should be achieved by:

(1) ensuring that Scottish Ministers are fully involved in agreeing the UK position in EU negotiations relating to devolved policy matters. For example, it may be appropriate as part of this process for a UK Government Minister to chair a meeting of devolved administration Ministers where another UK Government Minister represents the position of England (or England and Wales in certain policy areas) while devolved administration Ministers represent their respective interests.
(2) ensuring that Scottish Ministers are consulted and their views taken into account before final UK negotiating positions relating to devolved policy matters are agreed.
(3) presuming that a devolved administration Minister can speak on behalf of the UK at a meeting of the Council of Ministers according to an agreed UK negotiating line where the devolved administration Minister holds the predominant policy interest across the UK and where the relevant lead UK Government Minister is unable to attend all or part of a meeting.

Future Change

79. The Smith Commission Report in November 2014 came in the aftermath of the Scottish Independence Referendum, and must be viewed in that context. At the time there was no prospect that the UK would leave the EU - indeed much of the debate prior to the Referendum had centred on the benefits of Scotland and the rest of the UK remaining in the EU.

80. Leaving the EU will fundamentally change the nature of the UK as a state, and will have an inevitable impact on the UK's current constitutional arrangements. EU law is currently a major source of functions, rights and powers within the UK. With the dramatic change of circumstances brought about by the EU Referendum in 2016, comes the need to re-examine the future arrangements and establish new ways of working which ensure that Scotland is able to contribute effectively in the development of the UK positions on international agreements.

81. Currently, all international trade deals are negotiated through the EU. Within the UK the established arrangements in place for their development and eventual ratification are already inadequate in practice, as outlined earlier in this chapter. If the UK leaves the EU and Customs Union, the UK will be wholly responsible for negotiating and concluding trade deals, including with the EU itself. The direction of trade policy and future trade negotiations will have important implications for Scotland, and the other devolved administrations.

82. Losing the EU's negotiating power, scrutiny and expertise would take the UK into new, uncharted territory and will require a massive step change in the way the UK conducts its affairs in relation to international matters. The UK will need new processes to support that. The respective roles of the UK Government and Parliament and the devolved administrations and their legislatures in foreign policy development, and the making and ratification of international agreements, will have to change substantially, to reflect the magnitude and significance of change, and the loss of the EU as an additional scrutiny body. The UK Government has itself acknowledged the importance of giving the Scottish Government and Scottish Parliament a meaningful role in developing future trade policy, and how future trade agreements will be reached:

" Our approach to developing our future trade policy must be transparent and inclusive. Parliament, the devolved administrations, the devolved legislatures…..and the public from every part of the UK must have the opportunity to engage with and contribute to our trade policy." ^[39]

83. While this issue was raised in the context of the European Union (Withdrawal) Act and Trade Bill, the UK Government has done little or nothing to allay concerns that it will react to the scale of this challenge by centralising power and diminishing, rather than enhancing, the role of the UK Parliament and devolved administrations. A number of high level commitments have been made by the UK Government about the need for the future development of trade policies and agreements to be inclusive and to meet the requirements of all parts of the United Kingdom, but no detail has yet been proposed.

84. The Trade Bill currently before the UK Parliament deals with the transitioning of any EU-third country trade agreements that have been signed before the UK exits the EU. In particular, it seeks to ensure continuity in the UK's trading arrangements at the point of exit from the EU, by making provision to allow for the implementation in domestic law of any non-tariff elements of agreements reached between the EU and third countries before that date. It will do that using broad regulation-making powers, with limited opportunity for input or scrutiny, by the devolved administrations, or UK or Scottish Parliament, stakeholders or wider interests.

85. That approach must change, with roles and responsibilities re-aligned, to ensure that the interests and priorities of all in these islands are properly represented, protected and promoted if the UK leaves the EU and Customs Union.