Following the UK’s vote to leave the EU, there is much uncertainty as to what a post-Brexit UK will look like, with different sides of the debate continuing to proffer different models for the UK to follow. The precise implications of the referendum result for international trade are not yet known and will very much depend on the terms of any UK-EU trade agreement. This briefing outlines the repercussions of Brexit for international trade, which are likely to flow from each of the four relationship models (Norway, Switzerland, Turkey and South Korea) and, of course, the World Trade Organisation (“WTO”) fall-back model.

If the UK manages to secure a free trade deal with the EU which guarantees access to the Single Market, the impact on cross-border trade is likely to be negligible, as free movement of goods and services will continue. Alternatively, the UK may try to enter into a Customs Union with the EU in order to secure duty-free access for UK goods (and potentially services) into the EU. In the absence of any UK-EU trade deal, the trading relationship may fall back on the WTO rules – i.e. there would be no free movement of goods or services and the UK would be subject to tariffs and other barriers, within the bounds of the Most Favoured Nation and National Treatment principles applying under the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS). This means that the UK would face treatment and tariffs that are no less favourable than those relating to the other WTO Members.

In relation to export controls and sanctions, even if the UK is no longer be bound by the relevant EU Commission Regulations and Council Decisions implementing such restrictions, it is likely that it will put in place equivalent measures (not least because some of the rules are based on UN Security Council Resolutions and obligations imposed by the UK’s participation in e.g. the Wassenaar Arrangement and the Nuclear Suppliers Group, with which the UK will continue to comply). However, the export of so called dual-use goods (i.e. those identified as having both a civil and military application) from the UK to the EU, which was broadly unrestricted, may become subject to export licensing requirements following Brexit. In addition, the UK will no longer be bound by the anti-dumping measures imposed by the EU on third countries (such as China) and, as such, the UK will have to consider whether it wants to apply equivalent measures to protect the interests of UK industry.

Trading with the EU

As a member of the EU, the UK has access to the Single Market and can import and export goods and services to and from the rest of the EU free of tariffs or quotas (provided they meet EU regulatory requirements). Members of the EU Customs Union have a common trade policy, external tariffs and rules of origin (i.e. the criteria used to determine the origin of a product which is one of the elements needed to determine the applicable rate of duty). For countries outside the EU Customs Union (and which do not have a specially negotiated trade deal with the EU), the EU imposes a Common Customs Tariff.

The Brexit vote means that the UK must negotiate a new trade agreement with the EU. It is important to note that there is a significant difference between a Free Trade Agreement (“FTA”) and a Single Market or a Customs Union. Free Trade Agreements have lower trading tariffs, but do not usually eliminate them entirely like a Single Market and a Customs Union does. The EU is a Customs Union (an area of common external tariffs and an internal tariff-free trade) and a Single Market (a free trade area, with free movement of goods, services, people and capital). The EU’s relationship with Turkey is also a Customs Union but not a Single Market. The North American Free Trade Agreement (“NAFTA”) and the European Free Trade Agreement (“EFTA”) are Free Trade Agreements (although EFTA countries have managed to negotiate access to the EU Single Market via the EEA (in the case of Iceland, Liechtenstein and Norway) or a series of bilateral agreements (in the case of Switzerland); the EEA does not, however, extend the EU Customs Union to the EEA countries).

Trade deals are very hard to negotiate; they tend to take many years to agree. For example, the EU-Canada Comprehensive Economic and Trade Agreement has been finalised after seven years of negotiations but is still not ratified. The UK is more reliant on exports to the EU than the rest of the EU is reliant on exports to the UK, which puts it at a negotiating disadvantage. To conclude a full trade deal between the UK and the EU in two years would be a remarkable achievement. In addition, there is an argument (raised by the EU Trade Commissioner Cecilia Malmstrom) that, on giving notice under Article 50 of the Lisbon Treaty, the UK will not be able to start negotiating its free trade agreement with the EU immediately as it will continue to be an EU Member State until Brexit. This is because the EU has the exclusive competence to conclude trade agreements, and unilateral negotiations by the UK (an EU Member State) with the EU (or with any third countries) would amount to a breach of EU law. However, as any free trade agreement (whether with the EU or with a third country) would only come into force after Brexit, the argument that EU law may be breached by a mere act of negotiation seems weak. Nevertheless, there is nothing to stop the EU from refusing to start negotiations with the UK before Brexit.

It is generally accepted that there are four possible models for Brexit, with the additional possibility of falling back on the WTO model if all else fails. Eversheds has set out a detailed examination of the models which you can find in our brochure “Making Sense of Brexit”.

At this stage, there is no clear vision of what the UK would want its relationship with the EU to look like. For businesses in the UK who import from, or export to, the EU or are part of an EU corporate group, this uncertainty means that planning is very difficult, if not impossible. Businesses would be advised to look at the various potential models and consider the likely implications of Brexit relevant to their circumstances and industry.

Trading with the Rest of the World

The EU has the exclusive competence over the Common Commercial Policy (i.e. international trade), which means that the EU has the power to negotiate and enter into Free Trade Agreements with third countries on behalf of all its Member States (to the extent that the subject matter of such FTAs falls within the EU’s exclusive competence). This exclusive competence flows from the existence of the EU Customs Union, which means that EU Member States are not allowed to set their own tariffs: the tariffs for all third countries are set by the EU and once a product or service enters the EU Customs Union it can move freely within it.

Through its membership of the EU, the UK is a party to the EU’s 53 FTAs. Following Brexit, the UK will lose the benefit of these FTAs and will be forced to strike new trade deals not only with the EU but also with those third countries. There is a risk that the UK would not be able to conclude as favourable terms as those that the EU currently has with third parties given the UK’s smaller market and significantly reduced bargaining power compared to the EU.

In the table below we set out an overview of the models which the EU uses to trade with third countries, which could form the basis of the UK’s future relationship with the EU.

Trading with the EU

TRADE UNDER THE POTENTIAL BREXIT MODELS

Norway (EFTA and EEA)

Continued access to the Single Market (excluding certain areas, such as the Common Agriculture and Fisheries Policy) and trading in goods and services on a free movement, no-tariff basis (subject to compliance with regulatory requirements and the EEA’s rules of origin).

Switzerland (EFTA)

Bilateral treaties with the EU allowing free movement of goods and services without tariffs within the Single Market on a sector-by-sector basis (subject to compliance with regulatory requirements). The EU is not in favour of this piecemeal approach, therefore it is unlikely that this model will be adopted.

Turkey (Customs Union)

Free movement of goods within the Customs Union without tariffs (subject to compliance with regulatory requirements). No free movement of services, which is crucial for the UK, in particular in relation to provision of financial services (as this amounts to 8% of UK output1).

South Korea

Comprehensive FTA with the EU (took 4 years to negotiate) allowing trading in goods and services on a no-tariff (or very low tariffs) basis (subject to compliance with regulatory requirements).

WTO

No free movement of goods or services. Trade subject to tariffs and non-tariff barriers, as stipulated in the WTO rules, governed by Most Favoured Nation and National Treatment principles.

Trading with the Rest of the World

TRADE UNDER THE POTENTIAL BREXIT MODELS

Norway (EFTA and EEA)

Not bound by the EU’s FTAs as not part of the EU Customs Union. Free to negotiate its own FTAs with third countries.

To be part of the EEA, the UK would need to re-join EFTA (because the EEA membership is open only to EFTA and EU countries). As part of EFTA, the UK would also have free trade relations with EFTA members and access to EFTA’s 27 FTAs (covering 38 countries).

Switzerland (EFTA)

Not bound by the EU’s FTAs as not part of the EU Customs Union. Free to negotiate its own FTAs with third countries.

Free trade relations with EFTA members. Access to EFTA’s 27 FTAs (covering 38 countries) – see Eversheds briefing discussing the UK’s potential membership of EFTA available here.

Turkey (Customs Union)

Obliged to follow the EU’s overall trade policy as a member of the EU Customs Union. Not involved in negotiations of EU’s FTAs with third countries, yet bound by them.

South Korea

Not bound by the EU’s FTAs as not part of the EU Customs Union. Free to negotiate its own FTAs with third countries.

WTO

Free to negotiate its own FTAs with other countries.

WTO Fall-Back Model

If a UK-EU trade deal is not agreed before Brexit, the UK and the EU may need to trade under the terms of the WTO. Both the UK and the EU are members of the WTO, along with 160 other countries around the world.

WTO consists of various agreements, the most important of which are the GATT and the GATS. Under the GATT (which covers international trade in goods) and the GATS (which covers international trade in services), as part of the latest Uruguay Round of negotiations WTO Members submitted commitments on specific categories of goods and services, which had to be accepted by all other WTO Members. These include commitments to reduce and fix customs duty rates on imports of goods or service (so-called tariff schedules).

Obligations under the GATT and the GATS can be split into two categories: (i) general obligations which apply automatically to all Members and sectors; and (ii) specific commitments concerning designated sectors set out in individual country schedules, the scope of which may vary between Members.

The GATT consists of binding commitments on tariffs for goods in general and a combination of commitments on tariffs and quotas for some agricultural goods. The GATS covers four modes of supplying services: (i) cross-border trade (e.g. banking services transmitted cross-border via telecommunication systems); (ii) consumption abroad (where a consumer – e.g. a tourist – goes into another country to obtain a service); (iii) commercial presence (where a supplier establishes a local presence in another country to provide services); and (iv) presence of natural persons (e.g. where foreign accountants move to another country to provide services). The GATS includes schedules of market access commitments negotiated in relation to specific sectors and in relation to each of the four modes of supply (for example market access limitations which may be imposed on the number of suppliers, operations or employees in a specific sector, the legal form of the supplier or the participation of foreign capital).

The GATT and the GATS are underpinned by the principles of MFN and National Treatment:

  • The MFN principle means that Members treating one trading partner more favourably must extend that favourable treatment to other Members in relation to like goods/services and suppliers. In practice, this amounts to a prohibition on preferential treatment among groups of Members in individual sectors or reciprocity provisions entered into between smaller groups of trading partners. Derogations are possible, for example in the case of regional free trade agreements which need to be notified to WTO Members. Essentially, the WTO is focused on transparency and certainty of trading conditions with the overall aim of trade liberalisation. MFN is a general principle under the GATT, applicable to all WTO Members. It also applies to all services under the GATS, however, some special temporary exemptions have been allowed and the GATS includes a schedule of MFN exemptions in relation to specific sectors where individual countries stated they are not willing to apply the MFN principle.
  • National Treatment means that Members do not operate discriminatory measures benefiting domestic goods/services or suppliers and treat imported and local goods/services equally (at least once the foreign goods/services have entered the market). National Treatment is a general commitment in relation to trade in goods under the GATT, however, it is negotiable as a specific commitment in relation to trade in services under the GATS.

Trading under the WTO rules as a fall-back option after Brexit would mean that the EU would be obliged to impose its Common External Tariff on UK imports and the UK would be free to impose import tariffs on goods entering the UK (from the EU and elsewhere). The UK would face the same tariffs that the EU imposes on other countries, without any discrimination against the UK. The EU’s Common External Tariff varies from 0% on cotton, 11.5% on clothing, 25.6% on sugar and confectionery, to 45% on certain dairy products. Goods would also be subject to non-tariff barriers and UK exporters would face additional costs of clearing customs and the administrative costs of complying with the EU’s rules of origin.

If this is the only model available following Brexit, then a renegotiation of the terms of the UK’s WTO Membership may be needed. The EU has been representing the UK and the other EU Member States at the WTO level (along with other EU Member States). As a result, the UK’s goods schedules, for example, are included in those of the EU under the GATT. Following Brexit, the UK would cease to be a member of the EU Customs Union and it would need to submit its own tariff schedules. Renegotiating the UK’s own tariff commitments may itself be a difficult and lengthy process (unless the other WTO Members – in particular the EU – do not object to a quick replacement of the UK’s schedules with the existing EU tariffs), thus contributing to the state of uncertainty and making business planning difficult. Disentangling the UK’s market access commitments under the GATS from the EU’s schedules may be even more burdensome.

Businesses should note that goods exported to the EU would still need to comply with EU standards. Immediately following Brexit this would not be problematic, because UK regulations are currently the same as EU regulations. However, as EU regulations develop, there may be regulatory divergence if the UK decides not to replicate them.

WTO model: financial services

The GATS covers trade in services, including financial services, and it contains specific provisions applicable to financial services.

  • The GATS schedules include specific market access commitments and limitations for each WTO members in relation to financial services. Each WTO member also sets out in its schedule whether or not it offers National Treatment in relation to financial services. These commitments and limitations are listed separately in each WTO Member’s schedule, against each of the four modes of supply.
  • The financial services annex to the GATS gives WTO members a very wide discretion to take prudential measures for the protection of the integrity and stability of the financial system. Services provided by central banks are excluded from the GATS.

Additionally, some WTO members (including the EU) have made commitments in accordance with the Understanding on Commitments in Financial Services, which is not formally part of the GATS but is a non-mandatory mechanism of making special commitments on financial services.

Financial services are a crucial part of UK’s exports. The EU’s schedule of market access commitments in relation to financial services contains limitations on market access in relation to certain sub-sectors of financial services and certain modes of supply. By way of example, promotional activity of insurance services on behalf of a company not established in the EU is prohibited, and only firms having their registered office in the EU can act as depositories of the assets of investment funds. As such, if no UK-EU trade deal is negotiated and the trade in financial services falls back on the WTO model, the access of the UK’s financial services to the EU Single Market is likely to be restricted.

WTO anti-dumping measures

As a WTO Member, both the EU and the UK are bound by the Agreement on Implementation of Article VI of the GATT (the “WTO Anti-dumping Agreement”). This agreement provides that anti-dumping duty measures can be applied only under special circumstances and pursuant to investigations initiated and conducted in accordance with the provisions of the WTO Anti-dumping Agreement. EU Regulation 1225/2009 implements the WTO Anti-Dumping Agreement into EU law. The EU has imposed various anti-dumping measures pursuant to the WTO Anti-dumping Agreement, such as the (infamous) anti-dumping measures against China.

Following Brexit, as the UK will not be bound by the anti-dumping measures imposed by the EU on third countries, it will have to consider whether it wants to apply equivalent measures to protect the interests of UK industry. If so, such measures would need to comply with the WTO Anti-dumping Agreement which, in relation to China, may require a new investigation to be initiated.

WTO anti-subsidy rules

Unless a UK-EU trade deal is negotiated before Brexit, the EU State aid rules will likely cease to apply to the UK. However, the WTO regime also includes its own anti-subsidy rules. Therefore, as we discussed in our briefing on Brexit and State aid and public procurement (available here), even if the EU State aid rules were not to apply to the UK post-Brexit, restrictions on the ability of the State to subsidise UK companies will continue in some form.

The WTO anti-subsidy rules are somewhat similar to2 – but much narrower3 – the EU State aid rules. The WTO Agreement on Subsidies and Countervailing Measures allows a WTO member to challenge a subsidy granted by another WTO member using the WTO dispute settlement body to seek the withdrawal of the subsidy. Alternatively, a WTO member can launch its own investigation and impose a countervailing duty on imports of the subsidised product, if it establishes that such subsidised imports are hurting domestic industry.

As these rules are less stringent than the EU State aid rules, the UK should be able to provide higher levels of State funding to the UK industry under the WTO model.

WTO public procurement rules

Brexit is likely to mean that the UK is no longer obliged to comply with the EU public procurement rules, especially if no UK-EU trade deal is negotiated. However, as we mentioned in our briefing on Brexit and State aid and public procurement (available here), it seems likely that the UK will continue to comply with the public procurement rules under the WTO Agreement on Government Procurement (“GPA”).

The GPA is a non-obligatory multilateral agreement between certain members of the WTO which regulates the basis on which the parties give access to each other’s suppliers to their public procurement markets. The GPA currently has 18 signatories (comprising 46 WTO members). To the extent that the UK remained a signatory to the GPA, it would continue to have access to the government procurement markets of not only the EU Member States, but also the U.S., Japan, Canada and China. However, it would of course be bound by the GPA rules, which require open, fair and transparent conditions of competition in public procurement procedures.

The UK’s access to the EU procurement markets, however, would be more restricted under the GPA than it is currently, as the scope of the GPA is narrower than under EU law. The GPA signatories choose which sectors to include in their GPA commitments, and the agreement applies only to the goods and services negotiated by the parties and listed in the GPA coverage schedules.

Export Control and Sanctions

The UK export controls and sanctions regime is largely based on international obligations, such as the UN Security Council Resolutions and obligations imposed by the UK’s participation in international groups such as the Wassenaar Arrangement, the Nuclear Suppliers Group, the Zangger Committee and the Australia Group. These obligations are implemented in the EU through EU Regulations and Decisions which are legally binding within the UK.

Post-Brexit, it is likely that the UK will put in place equivalent measures to those previously imposed by the EU in order to comply with its obligations at an international level. As such, it is unlikely that exporters will see drastic changes to the export controls and sanctions regime.

In relation to the export of dual-use items, no licence is required by the UK exporter (subject to certain exceptions) if the item being exported is listed on Annex I to the EU Dual-Use Regulation and is being exported within the EU. Dual-use items listed in Annex IV (i.e. those determined to be particularly sensitive) are subject to licensing requirements for export within the EU. We consider it likely that, as the UK will no longer be bound by the EU Dual-Use Regulation following Brexit, UK exporters will need to obtain licences for export of all dual-use items within the EU.

There is also a small number of dual-use items which are controlled at a national level in the UK, as listed in Schedule 3 of the Export Control Order 2008). This list is unlikely to change following Brexit, as it is part of UK legislation in any event.