What is the Future of UK Trade if the Referendum Results in an Exit from the EU?

The formulation of the title makes it clear that we are talking of economics – the world of trade and commerce – rather than geopolitics – foreign and security policy. This also makes sense since it is in the economic/trade area that the European Union (EU) has most ‘personality’ to act on behalf of the group; in foreign policy the individual members are almost entirely still in charge. You don’t have to leave the EU to assert your sovereignty in that field.

A few preliminary words for those less acquainted with the EU’s practices and how trade policy is made.

• The first point is that the establishment of the original Customs Union was a core objective of the European Community (EC), flowing directly from the Treaty of Rome.
• Trade in goods among the Six was to be duty free; and that was achieved in 1968, ahead of the timetable set.[1]
• As a result the common commercial policy was one of the first to function as a common EC policy[2] and it played a vital part in building the international profile of the Community (EC).
• Common policies required collective discipline: policy was set in the Council of Ministers but it was executed exclusively by the Commission. Trade policy decisions were taken by Qualified Majority Voting rather than unanimity; and this made for more flexibility than applied in other areas such as foreign policy or industrial policy. [3]
• As a result trade policy has been, together with Development cooperation (relations with the Overseas Territories – African colonies) a central pillar in the evolution of the Community.

What are the current trade agreements that affect the UK and what benefits do they provide?

• First, at the multilateral level, the UK is a member of GATT (the General Agreement on Tariffs and Trade) and of WTO (the World Trade Organisation) which replaced it in 1995. This guarantees equal treatment on trade in goods and services with other members but provides no special access.
• Second, the EU has negotiated free trade agreements with many third countries which provide preferential access for EU members to their markets. [4]
• UK exporters would lose these benefits if and when Britain leaves the EU ……
• Within the EU, trade in goods and services between members is duty-free (no import duties) and there should in principle be no trade barriers in the internal market. This follows from the Rome Treaty – the customs union – and the Lisbon Treaty which has confirmed and updated the trade provisions to include investment matters. [5] More on the Single Market below.
• However, where the products or services are subject to domestic regulation at national level, member states are entitled to make free and open access conditional on such requirements as they consider necessary. [6]

Commentary

This summary description of the trade agreements in force requires some further comment:

• As indicated, the WTO provides no preferential access in the way that the EU trade agreements do, but there will be an issue that the UK will face on leaving the EU. To remain a WTO member and comply with WTO rules, it will have to create a new UK customs tariff (applied to imports of goods). Similarly, the UK would have to introduce its own services commitments to replace those offered by the EU.[7]
• There will inevitably be some pressures from domestic producers in some cases to have an increase in their protection from imports. Such an increase however would involve the UK in new negotiations, and in paying compensation to trading partners in the WTO. There is nothing automatic in this process; it would simply be required in order to keep the same WTO benefits as before.
• If the UK were to decide on a tariff identical in all respects to the CET (the Common External Tariff of the EU), and exactly the same services commitments, it could avoid the need for new negotiation in the post-EU membership period. This however would seem counter-intuitive – first to leave the club and then to copy its customs arrangements. In trade terms there is no benefit in this process, but a certain cost.
• It is equally necessary to define its future trading relationship with the rest of the EU. Would it be possible to maintain the current duty free arrangements between the UK and its former EU partners? The UK could opt to maintain the same tariff rates as the EU, but would the EU reciprocate and offer the same duty free entry to the UK?
• The standard answer to this is NO : once outside the EU the UK would face the CET like other non-members. It would, however, be the first occasion when a EU member would be leaving the Union; would an unprecedented situation lead to an unexpected outcome?
• Under the terms of the Treaty of Lisbon (Treaty on the European Union) negotiations would be required between both parties to determine “the arrangements for its withdrawal”. The exact scope of this discussion – apart from fixing the date of exit – is not further defined.[8]
• The loss of tariff preferences in third markets will hit UK exporters hard, and would raise the cost of tropical products especially (such as bananas, cocoa beans and coffee). The UK would have to decide whether to negotiate a similar trade deal with each country to replace the EU agreements. This will depend on the export intensity to each market no doubt; but one should NOT assume that this would be an easy process, just because free access had existed before – there is no such thing as a free transfer from an EU agreement to a UK one.

There might be some ways to ‘finesse’ these negotiated outcomes; but that would depend on how far the UK’s trading partners would wish to maintain friendly relations and the status quo in terms of trade access. In normal circumstances they act in a purely mercantilist and unemotional fashion, so it is not excluded that some partners would attempt to profit from the situation.

In WTO the requirement to define tariff and services commitments applies to “new countries” that seek to join – new accession cases – which would not apply to the UK. Once outside the EU, the UK would no longer have legally binding commitments to other WTO members, and its legal entitlement to benefits would have been lost. The WTO, like nature, abhors a vacuum …. Would an exception be found?

In the EU situation, after a notification of the UK desire to leave, one could expect a certain frostiness although not –in my view – downright hostility; but a new relationship on trade would have to be found, in trade as in all other areas. The question will arise whether free trade could be maintained with the EU (the UK’s largest export market), but also how and under what terms and conditions UK access to the EU Single Market could be kept open. This would presumably be part of the TEU Art. 50 negotiations.

There are no precedents here. Some observers believe that the definition of the future trading relation-ship would be a relatively easy matter, with continuing free trade as the basic rule; and that, once that falls in place, the other elements — the Single Market linkages — would automatically follow. [9]

I am inclined to the opposite view. Access to the Single Market is not open as of right to non-members and the application of relevant Regulations to the UK would have to be the subject of negotiation. This means that new conditions could be applied by the EU members to any UK participation in future, and this could create major problems for the UK financial service industry which is of major importance in the UK economy and exports. [10]

Some observers think that a solution could be found along the lines of the participation of Norway and Iceland — as members of the European Economic Area (EEA). It is, however, rather well established that while they apply all EU Single Market Regulations – immediately and in full -they have no say in their content during the legislative process and are given no opportunity to seek modifications. This would not be satisfactory for the UK; but the Commission has indicated that participation on these lines will only be available in future to countries that are committed to joining the EU in due course.

It is not possible to guess at this stage how this issue might be solved. The issue and its implications are not widely understood and it remains a hypothetical problem for the moment. However, it would have been created by the UK decision to depart from the EU, and the onus of finding a solution might rest on it rather than on the EU partners.

Conclusion

First, a disclaimer. I write on the basis of my own experience, I was a Commission official for 30 years from 1973, I arrived in Brussels in the first months after enlargement when the UK, Ireland and Denmark joined the Community, and my outlook is therefore continental. I see Europe from the centre outwards rather than from London; and my views and judgments are affected accordingly.

In summary I agree with the politician who said that leaving Europe would be ‘economic suicide’; and future trade arrangements with the EU and with global partners would be central to that, given the importance of exports in the country’s GDP and that 60% or more of our trade is with other EU members. The UK has benefitted considerably from its EU membership by being a portal for the EU and attracting foreign investment designed to serve the larger EU market (for example, the UK car industry); this position would evaporate outside the EU.

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[1]   A customs union has to be notified under the rules of GATT and defended in Geneva as in compliance.

[2]  The CAP which came later was more internal/production focused than external/international trade.

[3]  T Rome Article 111:3 and Art.113:4 establish that unanimity is not required for trade agreements.

[4]  The full list is available. There are 79 ACP states that were signatories of the Cotonou Convention.

[5]  see the Treaty on the Functioning of the European Union (TFEU), Article 206

[6]  This is permitted under GATS rules and in the TBT/SPS agreements, and a variety of EU Regulations relating to specific areas of business, professional and personal services follows the same approach.

[7]   At present the EU’s tariff and services commitments meet the WTO requirement for all its member states.

[8]   T Lisbon contains an Article that specifically permits a member to leave the Union. The relevant provision is TEU Article 50, which states: ”A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union.”

[9]   The only nearly similar case is the decision to keep trade free between the EC/9 and the rest of the EFTA group after the UK joined the EC in 1973. But would that be repeated?

[10] One idea that has been mentioned is that all financial service transactions within the EU would have to be carried out in Euro. This would create difficulties for the City of London. Reaction in the financial service world has been slow to develop, but I understand that the City is now discreetly lobbying Government Ministers to avoid a Single Market scenario on these lines