Brexit – The Trade Agenda Moves One Step Further

In a previous blog I described the UK trade agenda, the four principal areas where the UK will be losing trade access or trade rights and privileges as a result of Brexit.  I presume that the government will wish to replace them by new arrangements, but I stopped short of suggesting how best this could be done and what difficulties might lie along the way. The purpose of this blog is to fill that gap.

The four areas for action once the UK has left the EU are:

• to negotiate a new UK-EU trade relationship, preferably based on free trade;
• to seek new UK trade agreements with non-EU third countries;
• to make adjustment to the UK commitments as a continuing member of the WTO;   and
• in order to move forward on the first three,  to introduce a new UK customs tariff.

These points addressed in turn.

1. Leaving the EU implies in my view that you leave the Customs Union and are no longer in the Single Market.  Others may question this and think that it will only follow negotiations; but I believe it happens inevitably on the day after the exit.  I also believe that for several reasons it will not be possible to negotiate a new customs union relationship with the EU, and that in consequence the only avenue to maintain free trade will be to negotiate a free trade area on goods and services.[1] This would in fact be the “best solution” for the UK’s trade with the EU since it would aim at maintaining the same free trade conditions as existed before.[2]

An FTA confined to the simple ‘goods and services’ format is not in itself so difficult to secure.  On the minimum basis of WTO Article XXIV both sides would commit to duty-free trade in goods and  to respecting the provisions of GATS for services trade;  but unfortunately, for services, this means only agreed principles such as MFN and National treatment rather than access to the internal market free of barriers. To secure that you need to be in or to join the Single Market. As a consequence, if the UK wishes to continue the pre-existing pattern of UK trade in services exports to the EU, Single Market access is immediately an issue and the EU might make the basic FTA package conditional on reaching agreement on the Single Market. In any event, the linkage to the Single Market will inevitably be a major central issue in the negotiations. It is known that the UK aims to control its borders and introduce some form of check on free movement of workers from the EU.  It is also known that respect of the ‘four freedoms’ is a requirement for full access to the Single Market, and that this has been accepted, for example, by the non-EU members of the EEA.  The contradiction in the essential objectives of both sides is clear. One can expect departure from initial positions if both sides wish to seek compromise solutions;  but to bridge this particular gap will require major changes in the political stances of both sides, and that is at this stage hard to predict.  My conclusion therefore is that a new free trade arrangement between the EU and the UK will be very difficult to achieve.  Even at a technical level it is hard to imagine how one can arrange a close connection to the Single Market while staying outside it and also challenging the free movement of people from the EU.  Are there effective controls on immigrants (as opposed to purely formal checks) which the EU would be able to accept?  Are there ways to guarantee compliance with Single Market regulations (and funding elements) which the UK could accept? 

2. En passant, it should be mentioned that in order to negotiate with any other country, both the EU and non-EU states, the UK will have to introduce its own Customs Tariff.  This is not easily created by pulling down from the shelf the tariff that existed in 1970: there have been too many changes in the composition of goods (technology) and in their classification for that to work.  It might be possible to “cut and paste” the EU Common External Tariff duty rates and tariff commitments, and that would simplify the impact of UK exit on other countries; but it might not suit the UK’s purposes in all respects (classification issues and questions about protection and tariff policy) and will raised domestic political concerns.  I flag the issue: it is resource intensive work, and there are some technical difficulties; but it is manageable.[3]

3. The need to adjust the UK’s commitments at WTO is another urgent matter if the UK’s existing membership and WTO rights are to continue without interruption.  All members are required to offer a schedule of tariff and services commitments and the UK should aim to submit a draft within a month of its exit, drawing on the existing notification made by the EU on behalf of member states.  This might be largely based on the same commitments, an approach that would enable the UK to maintain control of the exercise with other WTO members and to avoid anxieties especially among developing countries with concerns about continuing preferential treatment of their exports to the UK.[4] A key point which will need to be addressed with the EU, and later in the draft submitted, is the unwinding of TRQs into separate shares for the EU and for the UK.  The trade volume calculations do not seem to be difficult in themselves, as long as both sides approach the problem in a generous spirit: aiming to provide at least the same total access — perhaps a little extra — as was available before.

4. Trade arrangements with the Rest of the World are less urgent since they can only be negotiated, under the EU common commercial policy rules, after the UK exit.  Negotiations can of course be prepared in advance by all manner of informal contacts between the parties.  My assumption is that the UK will seek free trade arrangements to replace those that they have left behind on leaving the EU, and the same or similar ambitious agreements with others such as India and China. No one can say how difficult this will be, since many factors are involved including historic ties and the degree of trade and investment integration that already exists.  It is clear however that the dynamics of negotiation with the UK (population 64 million) will be different from those that existed with the EU.28 (population 500 million) and that it may be necessary to accept a lower level of concessions from the partner while giving the same degree of free trade.

Conclusion:  there is a rocky road ahead.

[1] One reason is that in a customs union framework the UK loses part of its trade sovereignty – no freedom to fix its own import duties or to make individual agreements with third countries.   A second is that it is generally accepted that if you leave a club, you cannot expect to get the same treatment if you decide to rejoin it at a later date

[2] There is perhaps a prior question about the type of FTA agreement you are aiming for.  If the UK had in mind to seek an ambitious agreement, along the lines of recent deals with Canada and Korea, then that might take some time.  In the popular mind it is known that CETA took seven years to negotiate, and it would also mean that the UK would have to accept a number of EU regulations while securing less advantages for its services.  It might be that the UK will not want this kind of agreement, at least initially, and it might choose to secure duty-free trade in goods rapidly – to avoid damaging disruption to trade – and to seek to broaden the scope of the agreement at a later date.

[3] For example, the UK will have to decide if it needs TRQs – see paragraph 3.

[4] These concerns may be focused on preferential treatment under GSP and under the duty-free quota-free agreement for least developed countries.  The UK will remain committed to the latter in WTO, but will have to decide about its own general preferences system.