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

Chapter Three - Future UK Trading Arrangements

86. This chapter describes recent developments in the UK's withdrawal from the EU, focussing on the UK Government's approach to the inclusion of the devolved administrations in future trading arrangements.

EU Position

87. On 7 March 2018, the EU27 published draft guidelines for the negotiations on the future EU-UK relationship, having agreed in December 2017 that sufficient progress had been made in Phase 1 discussions to enable the EU and UK to move on to Phase 2 of the Brexit negotiations. This phase, which followed the release of the European Commission's draft Withdrawal Agreement on 28 February ^[40] , is focussing on the framework of a trade deal and other future relationship issues.

88. The European Commission and UK Government's subsequent partially agreed joint legal text of the Withdrawal Agreement, was published on 19 March 2018. That text states that there will be a transition period for the UK leaving the EU, which will end on 31 December 2020. During that period, the UK will be bound by the obligations stemming from international agreements concluded by the EU, including free trade agreements, but will not participate in any bodies set up by those agreements, unless invited to do so. The UK will be able to negotiate, sign and ratify new trade agreements during the transition period, provided that these do not enter into force or apply during the transition period (unless authorised by the EU). The UK will continue to participate in the Customs Union and Single Market, but will generally not be permitted to participate in any decision making.

89. The UK Government's White Paper The future relationship between the United Kingdom and the European Union ^[41] was published on 12 July 2018 and sets out what the UK Government would like to see in terms of future economic and security partnerships as the UK leaves the EU. While there will continue to be debate, discussion and negotiation around the detail of the future relationship the UK Government is seeking with the EU and what it will achieve, the UK Government's intention to leave the Single Market and Customs Union is clear. In the Prime Minister's Foreword, she confirms that leaving the European Union will involve " leaving the Single Market and the Customs Union, ending free movement and the jurisdiction of the European Court of Justice in this country". The White Paper is said to underpin the vision set out by the Prime Minister at Lancaster House, in Florence, at the Mansion House and in Munich and in doing so address questions raised by the EU in the intervening months. The White Paper says that the UK Government is determined to build a new relationship that works for both the UK and the EU and that the relationship needs to be:

" broader in scope than any other that exists between the EU and a third country" to " reflect the UK's and the EU's deep history, close ties and unique starting point".

"In designing the new trading relationship, the UK and the EU should therefore focus on ensuring continued frictionless access at the border to each other's markets for goods. To deliver this goal the Government is proposing the establishment of a free trade area for goods".

"The free trade area … and 'just in time' processes that have developed across the UK and the EU over the last 40 years" and would "see the UK and the EU meet their shared commitments to Northern Ireland and Ireland through the overall future relationship".

"The phased introduction of a new Facilitated Customs Arrangement…. would remove the need for customs checks and controls between the UK and the EU as if they were a combined customs territory, which would enable the UK to control its own tariffs for trade with the rest of the world".

"The UK's proposal for its future economic partnership with the EU would provide a strong foundation for the UK to establish a broad and ambitious independent trade policy with the rest of the world". Among other things, the UK would "boost trade relationships with old friends and new allies" as it seeks to grow trade contacts with markets outside of the EU .

90. While neither the European Commission nor the EU 27 have commented in any detail on the UK Government's proposals, in its draft negotiating guidelines for the future EU-UK relationship ^[42] - which were approved on 23 March 2018 - the European Council specifically countered some of the previous suggestions made by the Prime Minister and which have been incorporated into the July 2018 proposals. While calling for ' as close as possible a partnership with the UK in the future', the guidelines stated that the European Council would not agree to any 'cherry picking' through participation on a sector by sector approach, as that would undermine the integrity and proper functioning of the Single Market:

"Being outside the Customs Union and the Single Market will inevitably lead to frictions. Divergence in external tariffs and internal rules as well as absence of common institutions and a shared legal system, necessitates checks and controls to uphold the integrity of the EU Single Market as well as of the UK market. This unfortunately will have negative economic consequences."

91. More recently, Michel Barnier, following a meeting with the Secretary of State for Exiting the EU, Dominic Raab, was quoted on 26 July 2018 as saying:

"The EU cannot and will not delegate the application of its customs policy and rules, VAT and excise duty collection to a non-member who would not be subject to the EU's governance structures"

" Any customs arrangements or customs union – and I have always said that the EU is open to a customs union – must respect this principle and in any case a customs union which would help to reduce friction at the border would come with our common commercial policy for goods."

"Any customs arrangement will have to be workable and must protect EU and national revenue without imposing additional costs on businesses and customs authorities. This is the framework in which we will work with the UK in the coming months."

92. The guidelines confirmed that the EU is ready to work towards an ambitious and wide-ranging free trade agreement to be finalised and concluded once the UK is no longer a Member State. The UK Government's July White Paper makes it clear that it is seeking to agree a free trade area in goods. The EU guidelines specify that there is scope for trade in goods to cover all sectors, seeking to maintain zero tariffs and no quantitative restrictions, but with appropriate accompanying rules of origin. On services, the EU envisage only limited market access, given that the UK will no longer share a common regulatory and legal framework with the rest of the EU.

93. A treaty on the future relationship cannot be formally negotiated by the EU until the UK becomes a third country on 29 March 2019. However, preliminary meetings on the structure of the future partnership discussions began in late April, with the UK Government and European Commission jointly publishing on 4 May 2018 a list of topics for discussion on the future framework at forthcoming meetings ^[43] . Discussions between the UK and the EU are continuing, and the aim is to negotiate the full legal text on withdrawal and transition and reach political agreement on the EU and UK's future relationship in time for the European Council meeting in October 2018.

UK Government approach to inclusion of devolved administrations in future trading arrangements

94. The UK Department for International Trade's White paper Preparing for our future UK trade policy ^[44] , published on 9 October 2017, which committed to consulting the devolved administrations on the conduct of future trade policy, explored the UK Government's emerging approach to establishing an independent international trade policy, guided by three strategic objectives, all of which were reiterated in the Prime Minister's speech on 2 March 2018:

• ensuring UK-EU trade is as frictionless as possible;
• avoiding a hard border between Ireland and Northern Ireland;
• establishing an independent trade policy.

95. The consultation ended on 6 November 2017 and the UK Government published its response to comments made during the consultation on 5 January 2018 ^[45] . The response noted that the UK Government's proposed approach was that future trade arrangements should be transparent and inclusive, and acknowledged that a number of stakeholders highlighted their support for " a remit for the devolved administrations in future trade agreements, and raised the importance of ensuring the input of the devolved administrations in trade negotiations and developing governance arrangements to support this effectively." ^[46]

96. The UK Government's response to the consultation acknowledged this appetite for the inclusion of the devolved administrations in future trade deals stating that it is:

"fully committed to the devolution settlements and recognises the devolved administrations' direct interests in our future trade arrangements. That is why we will continue to work closely with them to deliver an approach that works for the whole of the UK, reflecting the needs and individual circumstances of England, Scotland, Wales and Northern Ireland and drawing on their essential knowledge and expertise."

97. Its response goes on to say that the devolved administrations should "… continue to take the opportunity to engage with and contribute to the development of trade policy."

98. The Prime Minister's three strategic objectives mentioned above remain relevant following the publication of the UK Government's July 2018 White Paper, which contained some further high level references to working with the devolved administrations, but no detail as to how this would work in practice. The Secretary of State for International Trade's statement to the House of Commons on 16 July gave an undertaking to " work closely with the Devolved Administrations on an ongoing basis to deliver an approach that works for the whole of the UK". This Scottish Government discussion paper is intended to play an important part of the process for developing enhanced and effective arrangements to allow the Government (and other devolved administrations) to shape the development of future trade policy and trade arrangements. Given the commitments made by the UK Government, the Scottish Government hopes and expects to have full and timely involvement in the development of future trade policy and future trade negotiations with the EU and third countries, if the UK and Scotland leave the EU and Customs Union.

99. However, aspiration alone will not put these commitments into practice and provide the step change needed to ensure the UK can meet the scale of the challenge facing it. Discussions on future arrangements must begin now.

Approach to Devolution

UK European Union (Withdrawal) Act, UK Withdrawal from the European Union (Legal Continuity) (Scotland) Bill

100. The UK leaving the European Union will mean increased devolved competencies in areas for which the Scottish Parliament is wholly or partly responsible, such as agriculture, fisheries, environmental policy and justice. The European Union (Withdrawal) Act 2018 ^[47] aims to provide legal continuity during Brexit by preserving EU law existing at the point that the UK leaves the EU, and allowing it to be amended to continue to work in a UK context. However, in doing so, it adopts a centralising approach to devolution issues which is unacceptable, by conferring power on Westminster to restrict the Scottish Parliament's legislative competence, and allowing UK Ministers to make changes in devolved policy areas without the consent of either the Scottish Government or Scottish Parliament. The result of the Act is to leave to the UK Government and Parliament ultimate decisions on UK-wide frameworks in areas affected by EU law that are otherwise devolved. The Scottish Parliament therefore voted on 15 May 2018 by a majority of 93 votes to 30 to refuse legislative consent to the Bill, the first time in the history of the Scottish Parliament such an action has taken place. Notwithstanding this vote, the legislation was passed by the Westminster Parliament.

101. The Scottish Government has been very clear about the serious implications for the Sewel Convention (and the future of devolution) of the recent actions of the UK Government. In particular, we have made it clear that urgent discussions are required on how to protect the Convention before any further legislative consent motions on Westminster Bills related to EU withdrawal, including the Trade Bill, can be brought forward to the Scottish Parliament.

102. In the meantime, the Scottish Parliament passed the UK Withdrawal from the European Union (Legal Continuity)(Scotland) Bill ^[48] on 21 March 2018, a contingency to ensure devolved laws can continue to operate if no agreement on the way forward is reached. The Bill, which would ensure that EU laws currently in force will be retained after withdrawal, and able to operate effectively, has been challenged by the UK Government and a two day hearing in the Supreme Court took place on 24 and 25 July.

Common Frameworks

103. Through the Joint Ministerial Committee ( EU Negotiations), the Scottish Government and other devolved administrations have been developing with the UK Government an approach to agreeing common frameworks in those areas that are currently governed by EU law, but that are otherwise within areas of competence of the devolved administrations or legislatures. This might include common goals, minimum or maximum standards, harmonisation, limits on action, or mutual recognition, depending on the policy area and objectives being pursued. The UK Government published on 9 March 2018 a revised analysis, identifying 24 areas where it considered a new legislative framework may be required. That analysis was compiled without consulting the Scottish Government and does not reflect an agreed position. While the Scottish Government recognises that common frameworks to replace EU laws across the UK may be needed in some areas, the competence for matters which are otherwise devolved should revert to the Scottish Parliament, enabling the scope and content of any UK-wide frameworks to be agreed, not imposed.

Trade Bill

104. Originally described by the UK Government as legislation which would build a future UK trade policy after Brexit, the UK Trade Bill ^[49] , introduced into the House of Commons on 7 November 2017 - one day after the consultation on future trade policy ended - is much more limited in scope. It will operate alongside the EU (Withdrawal) Act to help ensure continuity in the UK's existing trade and investment relationships with third countries, by allowing steps to be taken to carry over, or 'grandfather' existing agreements between the EU and third countries when the UK leaves the EU.

105. The UK Government envisages that, in most cases, the implementation of any obligations within existing international trade agreements can be dealt with through the European Union (Withdrawal) Act. The Trade Bill deals with the circumstances where that will not be possible, and confers powers on the Scottish Parliament and Scottish Government to do so in devolved areas in those cases. The Bill also creates powers to enable the UK to be an independent member of the WTO Agreement on Government Procurement ( GPA) after it leaves the EU and establishes a Trade Remedies Authority, to deliver a new UK trade remedies framework.

106. The UK Government has indicated that the development of future trading arrangements will be dealt with through the European Union (Withdrawal) Act, or in separate legislation. It has made no commitments on the timing or content of such legislation and the Trade Bill is silent on the role of the devolved administrations in negotiating the future trade agreements which will be needed in the longer term, if the UK leaves the EU and Customs Union. Some tax-related ( i.e. customs) elements of the UK's trade policy are being legislated for in the Taxation (Cross-border Trade) Bill ^[50] , which was introduced into the House of Commons on 20 November 2017.

107. As the Trade Bill makes provision within the legislative competence of the Scottish Parliament and alters the executive competence of the Scottish Ministers, the UK Government is seeking the legislative consent of the Scottish Parliament. The Scottish Government submitted its legislative consent memorandum ^[51] to the Scottish Parliament in December 2017. That memorandum made it clear that, notwithstanding its views on withdrawal from the EU, and the manner of that withdrawal, it accepted that proper, responsible preparations should be made for withdrawal, including maintaining important continuity in trading arrangements in the event of the UK leaving the EU. The Scottish Government therefore accepted the main purpose of the Trade Bill, and welcomed the recognition of the role of and conferral of powers on the Scottish Parliament and Scottish Ministers contained within it. However, the memorandum made it clear that the Scottish Government could not accept the constraints on competence contained within the Bill, analogous to those within what became the European Union (Withdrawal) Act, and therefore could not recommend the Parliament consents to the Bill in its current form.

108. The Scottish and Welsh Governments published draft amendments to the Bill in January 2018, which could have made it acceptable in terms of devolution issues, by ensuring: that UK Ministers could not legislate in relation to devolved matters without the agreement of the Scottish Government; that the Scottish Ministers have the same implementation powers in relation to devolved matters as the UK Government has; and that Scotland's interests are adequately represented in the important work of the future Trade Remedies Authority. These amendments were tabled at Westminster and debated during the House of Commons committee stage of the Bill in February, but were not supported. Following further discussions between the UK Government and the devolved administrations, the Trade Bill was amended during its final stages in the House of Commons on 17 July to bring the relevant provisions in line with the EU (Withdrawal) Act 2018.

109. In addition to concerns about the way in which devolution issues are dealt with in the Bill, the Scottish Government is concerned about the approach taken to the scrutiny of trade agreements. In particular, the Bill appears to envisage a process whereby existing agreements between the EU and third countries are seamlessly 'grandfathered' following Brexit. The UK Government justifies the lack of robust scrutiny arrangements for such agreements on the basis that arrangements need to be put in place quickly, and that trade agreements dealt with under the Bill have already been scrutinised by the UK Parliament's EU Committees or ratified through the normal parliamentary scrutiny process.

110. However, a number of reports have suggested that third countries are likely to seek concessions either now or as part of a future FTA with the UK as a condition of agreeing to grandfather existing agreements. The possibility of such concessions being made and the resulting changes to the terms of the existing agreements highlights the need for proper scrutiny. As many of those who spoke during the Bill's second reading in the House of Commons on 9 January 2018, and the House of Commons' International Trade Committee's ^[52] report into Continuing application of EU trade agreements after Brexit date made clear, the UK Government is therefore proceeding on the basis of a very optimistic assumption that the process of grandfathering existing agreements will be straightforward or quick.

111. Dealing only with the implementation of obligations, rather than the negotiation of trade deals, the Bill makes no provision for circumstances where the terms of existing agreements change as a result of negotiations from third countries or to ensure workability. Under current proposals, the devolved administrations would not be involved in those negotiations, which would be conducted by the UK alone. Those negotiations could be prolonged and involve trade-offs to ensure acceptability to both sides. The risk to the Scottish seafood industry, for example, could be significant given the extensive third country salmon trade which exists under current arrangements. Changes to existing agreements could potentially be substantial, but the Bill contains no mechanism for Parliamentary scrutiny of such negotiations and adjustments, or for the involvement of the devolved administrations or others in agreeing them, allowing the UK Government to make potentially sweeping changes to existing agreements (some of which could be detrimental to Scottish interests) and forcing the devolved administrations to implement them.

112. The House of Commons International Trade Committee has already registered its concern about that, saying that

" Our evidence strongly suggests that substantive changes will be necessary when EU trade agreements are rolled over. The Government should set out provisions for both more extensive parliamentary scrutiny and enhanced involvement by the devolved administrations in situations where such changes do occur, particularly in the light of the fact that each of the four nations of the UK may differ in their priorities for trade deals…….The Government must show what it is doing to foster a cross-departmental approach to the issue of rolling over trade, and other trade-related, agreements and to involve fully the devolved administrations." ^[53]

113. While the Secretary of State for International Trade has undertaken to bring forward new proposals to ensure adequate scrutiny of new trade agreements, which he has said will involve consulting widely with a range of interest groups, those arrangements will not apply to agreements dealt with under the EU (Withdrawal) or Trade Bill. ^[54]

114. Wide ranging consultation with stakeholders and others about potential trade deals happens successfully elsewhere, and we will argue later in the paper that it should happen across the UK, giving the people of Scotland the opportunity to shape trade policy and individual trade agreements. Current arrangements are not fit for purpose against the scale of what needs to be achieved. If the UK Government is serious about ensuring there is adequate scrutiny of trade deals and proper consultation with the devolved administrations about those deals, it should begin now, by agreeing and putting in place proper measures in relation to any changes to existing agreements dealt with under the Trade Bill. Chapter 5 outlines the Scottish Government's proposals for the future.