Opportunities and challenges for multinational companies operating within WTO and bilateral trade arrangements
The political events of 2016 may herald an impending shift away from the trend towards comprehensive trade liberalisation we have seen in recent decades, towards instead a potentially more complex, and arguably protectionist, approach to global trade in goods and services.
Globalised trade and immigration are increasingly perceived by certain political groups and sections of society as the root causes of the economic slowdown in developed nations and the widening wealth gap. Recent developments testify to the increasing prominence of this school of thought and its potentially significant impact on the global trade landscape in the coming years.
Since the result of the UK’s EU membership referendum in June 2016, no clear picture of the future relationship between the UK and EU has yet emerged. The EU has taken the stance of ‘no negotiation without notification’ and the UK government has chosen not to reveal its negotiation strategy.
As a result, it remains highly uncertain what the future post-Brexit relationships between the EU and the UK will look like, and what the precise impact of leaving the EU will be for citizens and businesses. Commentators have mooted a range of options, including:
- EFTA/EEA: like Norway, the UK could potentially retain access to the EU’s single market by remaining a member of the European Economic Area (EEA) (the UK is currently an EEA member by virtue of its EU membership). This approach would involve the UK acceding to the EEA in its own right. Under this model, the four freedoms (goods, people, services and capital) would continue to apply between the UK and the rest of the EU/EEA. Consequently there would be no tariffs, taxes or quotas on most goods or services traded to and from the UK. However, there could in principle be agreed exceptions to this rule (there is an existing exception for fisheries, for example). Furthermore, mutual recognition of goods and services would be preserved but the UK’s influence over regulatory standards is likely to be limited. Non-EU members of the EEA do not form part of the EU’s customs union and are therefore free to enter into their own trade agreements with non-EU countries. But there would be customs checks, including to determine the ‘nationality’ of the goods on the basis of the rules of origin, as only products originating from the EEA would benefit from free circulation;
- Customs union: like Turkey, the UK could enter into a customs union with the EU. In this scenario, the UK and EU would agree to apply the same tariffs to certain goods and services from outside the customs union (such as industrial goods in the case of Turkey). For all goods or services covered by the customs union, the UK would need to comply with EU single market regulations and it would automatically be subject to any (new) free trade agreements the EU concludes with third parties (and would not be free to negotiate its own terms with third countries in relation to those goods or services). The UK would, however, remain free to conclude trade agreements with third countries for goods not covered by the customs union. Services would not be included;
- Free trade agreement: alternatively, the UK could pursue a new, comprehensive economic trade agreement with the EU, similar to, but probably more inclusive than, the recently concluded EU–Canada agreement – a solution known as the ‘CETA plus’ model. This strategy would enable the UK to conclude its own free trade agreements with other countries and trading blocs. As with the EEA option, there would be customs and ‘rules of origin’ checks to determine whether the goods traded in the EU can benefit from the preferential terms of the free trade agreement, for example in the form of lower import tariffs. Free trade in services would depend on the terms of the agreement; and
- WTO: if none of the above alternative arrangements (or similar ones) is in place by the time the UK leaves the EU, the UK’s trade with the EU (and most likely the rest of the world, in the absence of new bilateral free trade agreements between the UK and third countries) would be governed by the rules of the World Trade Organization (WTO). The UK’s exports to the EU and other WTO members would be subject to the importing countries’ tariffs (applied on a ‘most favoured nation’ basis – that is, without discrimination). Imports into the UK would be subject to the UK’s tariff.
Each of these options could result in substantial changes to the trading relationships between the UK and the rest of the world and could require businesses to make significant adjustments to accommodate these changes. Unless the UK remains part of the EU’s customs union, trade in goods between the EU and UK will become subject to customs formalities and possibly import tariffs. The fundamental freedoms in services, people and capital are likely to cease to apply between the UK and the EU, unless the UK opts to remain a member of the EEA, which at this stage seems unlikely for political reasons (as free movement of people is a pre-requisite).
Business implications of Brexit
Many businesses in the UK are part of an integrated European supply chain. Many finished products are made up of a multiplicity of parts and components imported from other EU countries. One component can, as part of such a supply chain, travel across borders between EU countries several times before the final product is assembled and ultimately sold. The EU single market allows EU manufacturers to operate quickly and flexibly across all countries of the EU as goods can circulate freely once they are inside the EU’s customs union, without being subject to tariffs, duties or customs controls. Goods imported into an EU member state from another EU member state are not technically regarded as ‘imports’ for customs purposes. No customs duties or import VAT are payable and no formal customs declarations are required.
Services benefit from the EU’s single market principle on the ‘free movement of services’ and mutual recognition. For example, financial services can rely on regulation in one member state to ‘passport’ their services across the EU without additional authorisations. Similarly professional services firms may rely on a professional qualification gained in one member state to enable an employee to work in another member state with few (if any) additional requirements.
A number of the options above would imply major changes to this situation. For example, UK firms could be limited in or even prohibited from providing cross-border services into some or all of the remaining EU member states and vice versa. As regards goods, the departure from the EU’s customs union would mean that burdensome customs declarations would need to be made, and customs formalities complied with. The relevant customs duties and import VAT would be charged on goods going into and out of the UK. In some sectors, such as food, clothing, chemicals and automobiles, import tariffs can be high – ranging from 5 to 15 per cent or more. If, post-Brexit, the UK were to enter into a free trade agreement with the EU, customs declarations would still be required to determine whether UK exports to the EU benefit from the preferential terms contained in the free trade agreement and vice versa. Absent a truly comprehensive free trade solution, services provisions might well also be limited and would be unlikely to replicate the free movement of services enjoyed in the single market.
Whatever the final framework of the new UK–EU relationship, UK-based manufacturing businesses will need to consider the impact on their operations carefully. At the very least, the increased customs clearance costs and potential EU and UK customs duties will become an additional factor, alongside tax rates, labour costs, exchange rates and regulatory burdens, that businesses with operations in the UK will have to take into account in their investment decisions.
An end to mutual recognition and an increase in the customs burdens that could apply between the UK and the EU post-Brexit will become important factors for businesses when determining whether to invest in, or migrate from, the UK.
Andrew Renshaw, Partner, Brussels
British businesses need to ensure their voices are heard by the UK government to optimise the outcome for their businesses in the upcoming UK–EU negotiations.
Martin McElwee, Partner, London
Bilateral or multilateral trade agreements?
In 2016, the Comprehensive Economic Trade Agreement (CETA) between the EU and Canada was almost scuppered when it was opposed by the Belgian regional governments of Wallonia and Brussels (mixed EU trade agreements require ratification by both the EU and national (and – in some member states – regional) parliaments), while the Netherlands also rejected the EU–Ukraine partnership deal. The length of time taken to negotiate these multilateral agreements – over seven years for CETA – the difficulties inherent in ratifying them and the increasing scepticism with which they are viewed by politicians and electorates alike have brought the recent trend towards comprehensive trade liberalisation agreements into question.
This apparent trend has been seemingly exacerbated by President-elect Trump’s calling into question the US’s future membership of the Trans-Pacific Partnership (TPP) (between the US and 11 other countries including Australia, Japan and Singapore), the Transatlantic Trade and Investment Partnership (TTIP) (which is being negotiated between the EU and the US), and the North American Free Trade Agreement (NAFTA) (the trilateral North American trade bloc between the US, Canada and Mexico in force since January 1994). Separately, President-elect Trump has threatened to impose big tariffs on imports from certain countries to force concessions to trade deals. Mr Trump has also signalled his intention to protect US employees’ jobs, stating that he would use ‘tariffs to discourage companies from laying off their workers in order to relocate in other countries and ship their products back to the US tax-free’. This strategy could result in trading partners retaliating by making it more difficult for the US to sell US goods and agricultural products around the world.
Despite these real and potential difficulties, efforts to maintain global trade links are likely to continue. For instance, 23 parties, including the EU, will continue to negotiate the Trade in Services Agreement (TiSA) that aims to liberalise the worldwide trade in services such as banking, healthcare and transport. And there are signs that nations will continue to strengthen trading ties. The UK government has strongly signalled that it would wish to deepen trading links with countries outside Europe in a post-Brexit world. In July 2016, the UK created a ministry (the Department for International Trade) specifically tasked with entering into trade agreements with countries such as the US, Australia and India. And China is currently attempting to persuade other Asian countries that the China-backed Regional Comprehensive Economic Partnership is a viable alternative to the uncertain Trans-Pacific Partnership.
2017 will be a significant year for global trade as the effects of the UK’s EU referendum and US election begin to be felt and new trade deals start to take shape.
Anthony Parry, Senior Consultant, London
Looking ahead in 2017
In 2017, the global trade landscape will be reshaped by the new approaches the US and UK take towards their trading partners, with anti-globalisation movements exercising an increased influence. In this shifting environment, businesses should ensure that they take all possible steps to mitigate the potential risks. These actions should include:
- carrying out a thorough risk assessment of their businesses to identify the high-risk areas and their exposure to any change in trading conditions;
- identifying their key ‘asks’ for any negotiations covering their sectors. For example, in the UK–EU negotiations ‘asks’ may include passporting in financial services and the recognition of equivalent regulation in consumer goods and pharmaceuticals, and in relation to professional qualifications;
- positioning themselves to maximise their influence on future trade negotiations by engaging with local governments, parliamentarians and trade bodies; and
- carefully assessing mitigation options if their key ‘asks’ are not met.