This is the fifth issue of WilmerHale’s 8-in-8 Recent Trends in European Law and Policy Alert Series. Our attorneys will share insights on current and emerging issues affecting companies doing business in Europe and across the Atlantic. Attorneys from across various practice groups at the firm will offer their take on issues ranging from Brexit to Big Data to EU energy market regulation. WilmerHale has offices in key European capitals, including Brussels, Berlin, Frankfurt and London, as well as lawyers qualified in a range of European countries. With one of the leading European law and policy practices in the world, we follow and work on a broad range of EU legal and policy issues, including data protection and privacy, competition, trade, technology, intellectual property, financial services, and a range of other EU and transatlantic regulatory and policy challenges that our clients face. Read all issues in this series and our other recent publications.

I. Introduction

This update considers some of the key trade issues facing the United Kingdom (‘UK’) and the European Union (‘EU’) in light of the UK’s decision to leave the EU (‘Brexit’). Most public and media attention on this topic to date has focused on the impact of Brexit as it pertains to trade relations between the UK and the EU; much less analysis has been undertaken with respect to the impact on the UK’s membership in the World Trade Organization (‘WTO’) or its trade relations with third countries – including key UK trading partners such as the United States (‘U.S.’). This update will discuss each of these topics in turn.

II. EU-UK Trade Negotiations for an FTA

The UK stated, at an early stage, that – following or as part of Brexit – it would like a bespoke comprehensive and ambitious Free Trade Agreement (‘FTA’) with the EU, covering both goods and services.1 At the same time, it has also indicated that it does not want to be in the European Economic Area2 (‘EEA’) – the extensive FTA that currently exists between the EU and certain other European countries such as Norway – or a customs union with the EU.3 The EU position similarly appears to be that the consequence of the UK’s various negotiating limits (‘so-called redlines’) is that the UK would not be in any ‘special’ trading relationship, including a customs union.4 Instead, it would have to negotiate an FTA – that may or may not be comprehensive, ambitious, and/or bespoke. Numerous existing FTA-type models have been discussed as possible precedents. The only mutually acceptable solution may be a framework similar to the FTAs that the EU has entered into with the Republic of Korea and Canada (‘CETA’), but with a number of UK-EU specific provisions and/or chapters. For example, in each of these FTAs, the EU excluded coverage of sectors -- financial services being a notable example – which are likely to be crucial for an EU-UK FTA. Indeed, the UK for its part has already made it clear that it would like this and other sectors to be covered. In the words of its chief Brexit negotiator, David Davis, it wants a ‘CETA plus, plus, plus’.5

For a number of industries, the UK has also expressed its desire that an EU-UK FTA be on similar terms as the current EU-UK relationship to guarantee no disruption in trade. For example, the UK wishes to continue current trade patterns for its car industry (with no duties on parts or finished cars); an outcome that it argues would be in both sides’ interests. The UK is also particularly concerned about broadcasting and financial services,6 arguing, amongst other things, that its trade deficit in goods should be counterbalanced by its surplus in such services.7

A more detailed discussion of the ongoing negotiations between the EU and the UK and their status can be found here (see, in particular slides 2-24).

The UK has announced that it will publish a new ‘White Paper’ on the future EU-UK relationship shortly. The EU’s position is that the ‘principles’ of that relationship should be agreed by October 2018 (together with other outstanding items in the Withdrawal Agreement) to allow for European Parliament review and finalization by March 2019.8

III. The UK’s Membership in the WTO

The WTO, formally established in 1995, provides a global multilateral system for trading goods and services between WTO Members. Key principles include the ‘most favoured nation’ principle (WTO Members must offer the most favourable tariff and non-tariff treatment they would offer one particular trading partner to every other WTO Member) and ‘national treatment’ (i.e. non-discrimination between domestic and imported goods). WTO rules cover everything from customs duties and charges, to non-tariff regulatory and domestic taxation issues, subsidization, and intellectual property rights. In addition to general obligations of membership, all WTO Members undertake specific commitments in their goods and services schedules, which specify maximum tariff levels for goods and establish varying levels of commitments in specified services sectors.

In a sense, the WTO provides a worldwide (‘multilateral’) FTA, with rules and commitments that do not go as far and are often not as specific or tailored as most bilateral FTAs, but that set a basic floor and minimum rules to which all WTO Member countries are bound. In some areas, WTO rules go further than many bilateral or regional FTAs, including, in particular, in the area of dispute settlement/enforceability. As such, WTO membership is both critical for the UK in its own right – as it will help determine the country’s trade relationship with all other WTO member countries – and has been described by some as a potential fall-back if EU-UK FTA negotiations fail.

The UK’s WTO membership: current status and required process

The UK was a founding member of the WTO and remains a full and independent WTO Member in its own right. It is also a signatory to the majority of WTO agreements. As such, it will not need to re-apply to the WTO on leaving the EU, as some early reports and analyses erroneously suggested. However, some of the UK’s more specific WTO commitments are currently a part of the joint EU goods and services schedules (just as the EU’s commitments specifically include the UK market).

The UK Government’s position on this issue is that, with respect to these more specific commitments, it must adopt its own standalone WTO schedules. The UK’s International Trade Secretary, Liam Fox, has stated that the UK Government intends to submit new WTO schedules that will ‘replicate [the] existing trade regime as far as possible’ to ensure that trade with WTO partners is not disrupted. The UK’s Department for International Trade (the ‘DIT’) has already initiated consultations with the WTO and its members to achieve this objective.

Because the WTO is a consensus-driven organization, it is possible that some WTO Members will take advantage of this process to raise objections to the UK’s new schedules. However, this risk should not be overstated, as any such objections would likely be limited to arguments that a proposed change has reduced the value of a given concession or commitment, or that it does not accurately reflect the UK’s WTO commitments. If the UK were unable to resolve such objections, the objecting Member(s) would have the option of challenging the UK’s actions under WTO dispute settlement rules, but the challenge would take several years to resolve, and it would not directly impact the UK’s ability to continue trading. In addition, the UK, the EU (which may need to update some of its own schedules as well), and other WTO Members will likely have a broad range of mutual incentives to come to a negotiated agreement instead. Overall disruption, in other words, is likely to be minimal.

The economic impact of trading under the WTO Rules

Most studies suggest that, as compared to a UK-EU ‘deal’ scenario, a ‘no-deal’ scenario – i.e. trading only under WTO rules – would likely have a significant negative economic impact on the UK. One of the key principles of the WTO, the most favoured nation principle, would require the EU to treat the UK ‘no less favourably’ than other WTO Members that are not members of the EU. In many sectors, this could result in higher tariffs and less favourable trade and regulatory treatment than the UK currently enjoys (the same would also be true the other way around).

The UK Government’s own impact assessment9, referred to as the ‘EU Exit Analysis’, concluded that the UK will be economically worse off under the ‘no-deal’ scenario. It predicts that the UK will see a reduction in economic growth by 7.7% over the next 15 years. The document also suggests that major sectors of the UK economy will be affected, including chemicals, manufacturing, automobiles and retail. Other reports have estimated that at least some portion of goods exported from the UK to the EU would face at least some tariffs (with over 16% of goods exported potentially facing tariffs of over 7%). The same would be true in the other direction.

IV. Post-Brexit Trade Relationships

One key point that the EU and the UK have already agreed upon is that the UK may sign and ratify FTAs with third countries before Brexit (extended by the Transitional/Implementation Period that the UK and EU agreed to earlier this year10). However, the agreements cannot enter into force until the UK has left the EU. Thus, another important point from a trade perspective is that the UK’s withdrawal from the EU will allow it to create its own independent trade policy and enter into trade agreements with non-EU countries. The DIT has stated explicitly that this is a key part of the UK’s post-Brexit trade strategy.11

Non-EU countries, according to recent figures, account for 57% of the UK’s exports. Some argue that number could grow substantially in a post-Brexit world. According to the EU Exit Analysis, new trade deals with these export markets could result in a total long-term increase of 0.2 to 0.7% of UK GDP. This could potentially mitigate the predicted reduction in economic growth that is expected in the ‘no deal’ scenario discussed above, as well as any potential negative effects of a post-Brexit EU-UK FTA that offers lesser or different levels of EU market access than the UK currently enjoys.12

Institutional framework: the UK’s Department of International Trade (DIT)

Immediately after the Brexit referendum, the UK created the DIT, as noted above, led by International Trade Secretary, Liam Fox. The DIT was established to play a role similar to that of the European Commission’s Directorate General for Trade (plus the trade-focused lawyers in the European Commission’s Legal Service), or some combination of the Office of the U.S. Trade Representative (‘USTR’) and key externally focused divisions of the Department of Commerce in the U.S.

The DIT was tasked, among other things, to commence trade negotiations with non-EU countries. The 40-some FTAs that the UK currently benefits from through its membership in the EU will likely not survive automatically post-Brexit and will require re-negotiation or some sort of UK-specific deal. The DIT is responsible for this, as well as for negotiating new trade deals with other major export partners.13 The DIT has also been active in developing a UK-specific trade remedies law, whereby the UK would administer its own anti-dumping and anti-subsidy or ‘countervailing duty’ laws.14

A US-UK Trade Deal?

As the UK’s largest trading partner, the U.S. is at the front of the queue for a potential bilateral agreement. The UK Government predicts that a comprehensive UK-U.S. trade agreement could result in 0.2% growth in UK GDP in the long-term.15 The two sides have already held initial discussions, including a first meeting of the U.S.-UK Trade and Investment Working Group in July 2017.16

It is too soon to say whether and when such negotiations could be successfully concluded. In the words of a former British ambassador to the US, the prospect of a ‘generous’ free trade deal with President Trump may be an ‘illusion’, and the attitude of the Trump Administration towards international trade and tariffs in recent months may foreshadow difficult negotiations. The Trump Administration’s efforts to renegotiate the North American Free Trade Agreement (‘NAFTA’) have not borne fruit and President Trump has threatened more than once to withdraw from that trade agreement. The U.S. Government also recently applied tariffs to U.S. steel and aluminium imports from a wide range of countries, including the UK and other members of the EU. Many have also voiced concerns about the pressure that a U.S. trade deal might put on the UK’s agriculture sector, as well as the risk that, in order to secure a deal, the UK Government will have to agree to lower regulatory standards and allow the imports of genetically-modified or hormone treated food products. This is currently a hotly debated issue in the UK, so it is far from clear how likely (or feasible) any such regulatory changes would be.

On the other hand, the UK may well see negotiations with the U.S. as a key tool not only to help further cement the strong economic, trade, and political relationship between the two countries that already exists, but also to create additional business opportunities, for example for the financial sector, as well as a range of other UK exports and global industries. Some even see the negotiations as a helpful opportunity to move further towards a more de-regulated economy, and closer to the model already in place in the U.S.

Trade Negotiations with ASEAN, the Commonwealth and other Non-EU Countries

In addition to negotiating with the U.S., the UK Government has also announced its intention to enter into agreements with other non-EU countries, including the Gulf Cooperation Council (‘GCC’), ASEAN, China, India, Australia and New Zealand. According to UK Government estimates, this could add a further long-term increase of 0.1% to 0.4% to UK GDP. Other fast-growing countries, such as Malaysia, Egypt and Bangladesh, may also be attractive export markets for the UK post-Brexit.

As of April 2018, the DIT has set up trade working groups with 21 countries, including the U.S. Each of these effectively suggests the early start of FTA negotiations (such negotiations typically start informally through such so-called ‘working groups’ before commencing in a more formal way). There has also been some discussion of the UK negotiating to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (‘CPTPP’), the successor agreement to the Trans-Pacific Partnership (‘TPP’) which the U.S. negotiated with a range of Asian-Pacific countries, including Japan, Australia, New Zealand and others, and from which President Trump withdrew shortly after taking office.