United Kingdom

In a turn of events that could only have happened in 2017, a recent article in the Daily Telegraph prompted a round of heated debate on social media about MFN clauses in the EU’s existing free trade agreements. The clauses in question require that the parties extend Most Favoured Nation treatment to each other, which means they have to match any better terms they give to any other country. Also known as ratchet clauses, they feature in the EU’s FTAs with Canada (CETA) and South Korea.

For example, article 9.5(1) of CETA provides that:

“each Party shall accord to service suppliers of the other Party treatment no less favourable than that it accords, in like situations, to service suppliers and services of a third country”.

Article 7.8 of the EU/SK FTA provides:

“With respect to any measures covered by this Section affecting the cross border supply of services … each Party shall accord to services and service suppliers of the other party treatment no less favourable than it accords to like services and service suppliers of any third country in the context of an economic integration agreement signed after the entry into force of this Agreement.”

This, it has been suggested, means that to get anything better than the access given to Canadian and Korean service providers, will be near impossible, as the EU would not wish to have to extend those preferences without receiving anything in return from Canada and South Korea. The same applies in reverse to any better arrangements that the UK might seek with Canada and South Korea, and will apply to the UK’s future trade deals with other partners if the MFN terms are carried in to our FTAs with South Korea and Canada.

As well as potentially causing difficulties for the UK’s ambitions, this would mean that the EU has effectively reached its high water mark of services liberalisation, with no further bilateral or plurilateral progress to be made (although opening up unilaterally to businesses in all countries, irrespective of FTAs, can of course continue).

In fact, the scope of these MFN provisions is limited by the exclusions that accompany them. In particular, the MFN provisions do not apply to sector specific reservations set out in the Annexes to the agreements, or to recognition matters. For example in CETA, article 9.3(3) provides:

“[article 9.5(1)] does not apply to treatment accorded by a party under an existing or future measure providing for recognition, including through an arrangement or agreement with a third country that recognises the accreditation of testing and analysis services and service suppliers, the accreditation of repair and maintenance services and service suppliers as well as the certification of the qualifications of, or the results of, or work done by, those accredited services and service suppliers”.

And article 7.8(3)(a) of the SK/EU FTA excludes the application of MFN treatment from:

“measures providing for recognition of qualifications, licences or prudential measures in accordance with Article VII of GATS or its Annex on Financial Services”.[1]

In services trade, and financial services especially, these areas are the most difficult barriers faced by exporters (as outlined in our paper A New UK EU Relationship in Financial Services: A Bilateral Regulatory Partnership). This is the area where the UK and the EU could make most progress as against other FTA partners, starting from an unprecedented point of full regulatory alignment and recognition.

Notably the MFN provisions in services do not apply to government procurement or to access to employment markets by nationals of the other party– although in CETA MFN does apply to temporary entry and stay of natural persons for business purposes. This could in fact be a more material issue for the UK and the EU than market access, depending on how future movement of workers is to be treated.

The EU also has a general exemption in CETA from the application of MFN to investment and cross border services that could be explored if the UK and the EU wished to extend the market access and national treatment provisions beyond the available reservations in the Annexes and regulatory recognition matters. The exemption applies to agreements where the EU:

  • creates an internal market in services and investment (which presumably will not apply as it entails the free movement of persons);
  • grants a general right of establishment by abolishing all barriers to establishment (which may be a viable goal, and has precedent through the association agreement between the EU and Turkey, for example); or
  • requires the approximation of legislation in one or more economic sectors (which can mean alignment of one party’s laws with that of the other, or incorporation of common legislation, and may be the outcome for certain sectors).

In light of this the priorities for UK negotiators and businesses should be twofold.

  • Exploring the scope of the general exemptions: the inclusion of a right of establishment in the agreement between the UK and the EU and exploration of whether the kinds of future regulatory cooperation the UK will be seeking count as “approximation”. “Approximation” may not necessarily mean identical, but the issue forms part of a wider regulatory discussion which the UK will have to have with the EU, working from a position where regulatory systems will be fully harmonised on day one of Brexit.
  • Looking further ahead to the UK’s FTAs with Canada and South Korea and beyond, and as contingency if a right of establishment/approximation of laws is not agreed, assess the sectors and activities where the MFN provisions will bite. In CETA, this means sectors that include market access or national treatment (but not MFN) reservations, and temporary entry of natural persons in particular, and in the EU/SK FTA, sectors that are not included in the list of commitments or the list of MFN reservations.

[1] The CETA financial services chapter requires non-discrimination in recognition of prudential measures of third countries, but a party is only required to provide the opportunity to the other party to negotiate its access to the agreement or negotiate a comparable arrangement if the other party is able to demonstrate that it has equivalent regulation, oversight and implementation and information sharing procedures. In financial services regulation, achieving equivalence to EU regulation has been challenging for third countries, so while any arrangement for recognition of prudential measures in financial services would trigger this provision, historically the Commission has been able to manage the process and withhold recognition without violating the equivalent provision in the Financial Services Annex to the GATS.