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Brexit Britain has swum against the tide of ever-increasing regional integration that defined Europe since World War Two and particularly since the end of the Cold War. The UK is not, however, alone in resisting integration. The four members of the European Free Trade Association (EFTA) – Iceland, Liechtenstein, Norway and Switzerland – have for various reasons chosen to remain outside the EU, while pursuing close economic relations with it.
The UK is much larger than any of the EFTA countries, but its relationship with the EU is not very different. The EFTA countries are in a similar position as the UK: the EU is their most important trading partner by some distance. The EU received 43 per cent by value of UK exports of goods in 2023, compared to 50 per cent of Swiss exports and 58 per cent of Norwegian non-petroleum exports.
Similarly, while relations with each of these countries are important for the EU, the relative importance in the other direction is much smaller: the UK absorbed 13 .1 per cent of EU exports of goods in 2023, Switzerland 7.4 per cent and Norway 2.4 per cent. The UK faces the same problem of managing an imbalanced, but mutually beneficial, economic relationship with the EU. As the UK found out during the Brexit negotiations, there is a trade-off between the degree of market access and trading and regulatory freedom. Greater access to the single market inevitably requires long-term commitments to ensure a level playing-field and regulatory alignment.
What lessons can the UK draw from EFTA’s experience? Although neither the current Conservative government nor Labour is arguing for as close a relationship with the EU as the EFTA countries, Labour is calling for better market access in exchange for greater regulatory alignment. For this to succeed, Labour must think of institutions as well as outcomes. EFTA’s experience offers lessons in this regard.
Norway, along with Iceland and Liechtenstein, has chosen deeper integration with the EU through the European Economic Area (EEA) agreement. EEA membership for most purposes makes Norway a full member of the single market, but also requires Norway to fully adopt EU regulations with few adaptations. The EEA also comes with a separate EFTA surveillance authority in lieu of the supervisory role the EU commission plays for EU member-states and a separate EFTA court in lieu of the European Court of Justice (ECJ). In practice, these serve as special-purpose mini-versions of EU institutions for EEA countries that follow ECJ jurisprudence.
Switzerland, having rejected EEA membership in a 1992 referendum, instead has a set of bilateral agreements that provide for free movement of people and regulatory alignment for goods as well as participation in some EU programmes. Instead of dynamic alignment with EU regulations, these agreements have to be updated manually as EU regulation changes. This has proved unsatisfactory for the EU, both due to insufficient dynamic alignment (in its view) and the lack of institutions to provide effective monitoring and dispute resolution. For their part, the Swiss have concerns about having to adopt EU state aid rules and about wage competition for cross-border services. Switzerland and the EU have tried to resolve these issues for many years and the EU is now refusing to update the older agreements until a satisfactory overall solution has been found. As a result, some alignment has started to lapse, notably on medical devices. That means increased trade costs for that sector, as Swiss exporters have to appoint local EU representatives to go through compliance procedures. Without updates to the agreement between the EU and Switzerland, this problem will gradually spread to other sectors as EU regulations continue to change. ..
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