International Trade Update

The UK has voted to leave the European Union (EU). This will likely have significant implications for many companies doing business with the EU or the UK.

The first step will be for the UK to formally notify the EU of its intention to leave, which will then trigger a two-year period for negotiating the terms of the exit. If a deal is not reached by then, the UK’s EU membership will lapse automatically. The exit could mean that the UK will also no longer be party to some or all of the EU’s 36 Free Trade Agreements (FTAs) and will need to renegotiate the terms of its membership in the World Trade Organization (WTO).

Businesses will need to assess what changes will impact them, any potential opportunities and threats, and strategies for the way forward. We summarize some trade implications below.

Trade in Goods Between the UK and the EU

The EU could introduce import tariffs on goods coming from the UK after the transition period. To obtain lower tariffs than would otherwise apply to goods from the UK as a WTO Member, the UK may seek to agree to a free trade agreement or a customs union with the EU. However, the efficacy and impact of such an agreement would depend on the preferential tariffs, rules of origin and restrictions on non-tariff barriers agreed between the parties. Both sides should learn the lessons from the EU’s experience of having a customs union with Turkey.

Further, the UK may cease to apply the EU’s regulations on product standards after the transition period. However, to continue exporting goods to the EU, UK manufacturers will need to continue to meet EU standards. Non-EU countries sometimes adopt regulations similar to the EU’s to facilitate access to the EU market. This is the case, for example, in chemicals regulation, where several non-EU countries have adopted legislation similar to the EU’s REACH.

Trade in Services Between the UK and the EU

After the UK’s exit, EU service suppliers will no longer have seamless access to the UK market as the single market will no longer apply. Conversely, UK service suppliers will no longer have seamless access to the EU single market. This mutual exclusion entails threats and opportunities that companies will need to explore.

The financial services industry will need to pay attention to how the UK will be treated in the EU’s financial regulations. Service providers based in non-EU countries may be treated significantly differently from those based in EU Member States. We have previously highlighted the importance of “equivalence decisions” for non-EU countries under the Solvency II Directive on insurance1. In addition, UK industry will need to monitor negotiations on how non-EU service providers are treated in the EU’s proposed legislation on capital markets and securitization.

Trade Between the UK and Non-EU Countries

After exiting the EU, the UK will need to renegotiate the terms of its WTO membership, as well as all FTAs concluded between the EU and non-EU countries. This might lead to a domino effect that triggers the renegotiations of FTAs between non-EU countries and the rest of the EU as well, as non-EU countries may wish to renegotiate certain concessions they had provided to the EU in the assumption that the UK was part of the deal.

There are multiple potential scenarios: the UK may seek to join the European Economic Area (EEA) or the European Free Trade Association (EFTA), and thereby adopt the FTAs of those groups (probably after some negotiations); or it may negotiate its own FTAs on a country-by-country basis. For ongoing FTA negotiations, such as with the U.S. in the Trans-Atlantic Trade and Investment Partnership (TTIP) or with numerous countries in the Trade in Services Agreement (TiSA), the UK may seek to become a party in its own right. Parties will be examining their negotiating mandates and their interests before allowing any participation by the UK in its own right.

These examples demonstrate the volatile nature of the upcoming negotiations, for which companies should be prepared with alternative scenarios, since each scenario may entail significant business impact.

Sanctions and Export Controls

The UK will no longer be bound to apply the EU’s sanctions measures, including the financial sanctions on Russia. It may develop its own sanctions list, or it may elect to continue to apply the EU’s list.

The UK will also need to decide how it will regulate dual-use goods and apply licensing processes. Companies must be vigilant and prepare for any changes to the current regime.

Anti-Dumping and Anti-Subsidy Tariffs

The UK will need to determine what will happen to the anti-dumping and anti-subsidy tariffs it currently applies on imports. Some UK industries, like the steel sector, have benefited from the EU’s measures on competing imports from other countries. Since these measures will cease to bind the UK, it remains to be seen whether the UK will develop its own trade defense rules and impose its own measures.

With the UK’s withdrawal, the EU may impose anti-dumping or anti-subsidy tariffs against certain UK industries. UK manufacturers should assess their exposure to this risk and consider taking action to mitigate it.

Conclusion

In a nutshell, UK-based companies, and companies that do business with the UK anywhere in the world, need to plan for the post-Brexit era. While nothing will change overnight, companies must be prepared for the comprehensive changes that will emerge because of the UK’s withdrawal from the EU.