UK government is outlining how the UK will become an independent global trading nation post-Brexit. For that UK businesses will need new arrangements for trading with the EU and the rest of the world.
All sides want to see the UK trading successfully with the whole world post Brexit. Terms for trade between the EU and UK are still in flux and it is likely that business will only see real clarity about both a short term partnership/transition agreement and a longer term trade agreement emerging as the negotiations develop through 2018.
Whatever the outcome of exit negotiations between the UK and the EU, the UK will also need to reassess the basis upon which it trades with the rest of the world (non-EU). This has not been the subject of much focus by the press, which is no doubt due to the immediacy of Brexit (with its two year timeframe) and the fact that the EU is the UK’s single largest trading partner (43.6% of total UK exports, 46.9% of goods exports, 39.4% of services exports ONS, 2016). However, this may also be due to the assumption made in certain quarters (both in the press and elsewhere) that non-EU trade is a secondary concern as, in any event, the UK can trade post-Brexit under the World Trade Organisation’s existing arrangements.
However, firm assumptions cannot be made at this stage that the UK will be able to trade on the basis of its (independent) membership of the WTO without problems. Many of the UK’s existing trade arrangements are dependent upon its membership of the EU and there is no precedent or mechanism to address where the UK stands once its EU membership ceases. Consequently, (non-EU) world trade remains an area the government will need to address prior to Brexit.
The Department for International Trade has been developing plans for how this will be managed and released a Trade Bill on 7 November 2017. This article sets out some aspects of the landscape in which future UK trade will need to operate.
World Trade and the World Trade Organisation (WTO)
The WTO was formed in 1995 to take on the role of governing world trade as enshrined in the 1948 General Agreement on Tariffs and Trade (GATT), of which the UK has been a member since formation. It propagates international agreements or treaties among members on matters such as procurement, intellectual property and the international supply of services (and significant steps forward on these were taken following the ‘Uruguay Round' of trade talks). However, its role is most developed in connection with the worldwide trade in goods.
UK policy is to be a leading international trading country and to support the WTO and develop its agreements as far as possible. The Trade Bill published in November 2017 includes powers to ensure that UK remains in the WTO’s General Procurement Agreement in its own name (rather than, as currently, through EU membership) and UK government has indicated that it would like to see current negotiations on widening trade in services to proceed more quickly.
Each WTO member (of which there are 162) agrees with the other members a schedule of tariffs (border taxes (usually) charged on imports) which they will not exceed for goods supplied by other members. Such ‘Most Favoured Nation’ (MFN) tariffs must apply to all other countries equally (subject to special agreements as outlined below). Members can unilaterally decide to apply lower tariffs than those in their schedules but they must apply such lower tariffs to all members. A member cannot unilaterally raises the tariffs in its schedules without agreement from the other WTO members.
UK does not have its own schedules. It uses the schedules negotiated by the EU, which apply to all imports to EU member states from other WTO members. The UK government has stated its intention to adopt the existing EU schedules at Brexit and seek to negotiate changes with the other WTO members at a later date if necessary.
It is not, however, immediately clear that the UK can adopt the EU schedules as its own in this way without the agreement of the other members of the WTO. Those schedules are favourable to the EU against the rest of the world (largely due to the EU’s size and negotiating strength). A smaller economy such as the UK might not be able to negotiate a tariff schedule on such favourable terms. It remains to be seen whether any WTO members will object to the UK’s intention simply to adopt the EU schedules. But it is not implausible to believe that some WTO members may see the UK’s isolation from the EU as an opportunity to get a better deal..
There have already been early indications that transferring the schedules across may not be as straightforward as anticipated. On 11 October 2017 the EU and UK put a joint proposal to the WTO to apportion current EU import quotas between the UK and the rest of the EU post Brexit. As the EU’s import quotas apply to all member states collectively, they ignore variances in demand between each member state. Therefore, a simple quantitative allocation of the existing quotas could, in practice, reduce the amount which overseas businesses importers can import to the combined ‘new’ EU and the UK.
As a result, the unilateral proposal from EU/UK was immediately met by objections from 7 other members including US, Canada and New Zealand. This may indicate that those countries will also resist similar unilateral proposals for UK to adopt EU schedules.
If so, the foundation on which the UK will trade with the (non-EU) world becomes shaky. Challenges could be raised in the WTO tribunal and the UK could find itself defending substantial claims for compensation from around the world. In an extreme situation, if the UK is thought to be trading without agreed schedules, UK goods might be stopped at WTO members' borders or met with higher, non-MFN tariffs. It is, nonetheless, anticipated that this point will be resolved (one way or another) prior to Brexit.
Free Trade Agreements
A more immediate (and predictable) impact for non-EU trade post Brexit will be the loss of existing free trade agreements entered into by the EU.
In principle, WTO rules require members to offer the same MFN tariffs to all other members. However, they do also allow members to enter into deeper free trade agreements on a bilateral or multi-party basis. Such agreements must cover substantially all the trade between the relevant members: it is not possible to set up a free trade agreement between two members giving a preferential rate for one category of goods.
While the UK is a member of the EU, it is not able to negotiate or enter into its own free trade agreements. It does however benefit from the EU’s agreements, of which there are over 36 preferential trade agreements covering 60 countries, including Switzerland, S. Korea and Canada. By contrast trade outside of such agreements within the WTO (i.e. on the MFN basis) extends to 24 countries, including US, China, Brazil, Australia and New Zealand.
Upon Brexit, the UK will lose access to the EU's existing trade agreements. In principle, assuming that the UK is able to trade on a MFN basis under the WTO, it would then revert to trading with those countries according to the general tariff arrangements in its schedules. This will introduce additional costs and checks with such (non-EU) countries after Brexit.
Where existing free trade agreements with the EU are in place, UK policy is to seek to replicate them as soon as possible on a bilateral basis (with future amendments to make them more specific to the UK being left to a later date). A Trade Bill put forward in November 2017, includes powers to make whatever domestic legislation is necessary to reproduce such existing agreements for the UK. The accompanying explanatory memorandum indicates that this may be possible before Brexit to allow current trading relationships to continue unaffected.
However, such ‘transitional adoption’ may not be possible in all cases. Counterparties to EU trade agreements may not be prepared to offer the same deals to the UK alone as they were prepared to offer the EU (which, as the world’s largest trading block, wielded substantial negotiating power). In addition, aspects of the agreements (which are exceedingly complex and voluminous) may not make sense outside of an EU context. An example is the country of origin requirements in the free trade agreement with S Korea, where provisions for 'country of origin' of parts being within the EU will no longer make sense once the UK is outside the EU.
Where current EU free trade agreements do not exist, UK government has indicated an intention to enter new trade agreements with other worldwide trading partners (and, separately, the EU). Such agreements are known for how long they take to negotiate. It is likely to be an extended period after negotiations can begin (i.e. after Brexit) before any such agreement with any third party would be entered. Many UK commentators have cited the possibility of a US/UK free trade agreement being entered more quickly than the current TTIP EU/US trade agreement can be finalised. Current policy from the US, however, indicates a general cooling towards international trade deals, including existing ones which the US has with e.g. Japan and S Korea. It cannot be guaranteed that the UK would be the top of any list for a future trade deal in the short term.
While there have been some voices calling for the UK to join an existing free trade area (e.g. NAFTA or EFTA), it does not currently appear to be UK policy to investigate such options. It is probable that joining EFTA would bring the UK back into the European Economic Area and that it would therefore once again become subject to EU law (but without the power to influence the creation of that law).
Not all changes to existing trade will be based upon customs charges (tariffs). Where it exports goods into other jurisdictions the UK will need to comply with other local laws e.g. in relation to access, safety, quotas, origin of goods, labelling etc. This will, in principle, be most acute in the EU where the UK’s existing membership allows it free access to all markets. However, as the UK and EU are currently aligned on legal and regulatory requirements most commentators think it should be possible to arrange mutual recognition of approvals and regulation for goods relatively easily. The UK and EU have already begun discussing arrangements for such mutual recognition as part of the exit negotiations.
Other non-tariff barriers, however, will exist. The UK may need to seek a quota for exports of certain goods into the EU (e.g. agricultural produce). On one level, the current absence of an agreement between the UK and EU for access to airspace and airline slots could be seen as an extreme form of barrier in the event no agreement can be reached before Brexit.
Similarly, where the EU currently has arrangements for mutual recognition and access with the rest of the world, these will not necessarily automatically devolve on the UK. Again, the UK’s absence of bilateral agreements for air-traffic are a stark example. Rules of origin are also likely to be important. These govern where products are said to have originated and must be presented at customs in connection with any import. Where supply chains are complex and goods (e.g. chemicals or complex manufactured goods such as cars) contain numerous components, UK exporters may find they need to revise their evidence of origin and pay different tariffs.
It is currently unclear what reciprocal arrangements the UK will be able to enter with (non-EU) worldwide trading partners before losing access to the current arrangements (e.g. mutual recognitions of standards) to which it has access through membership of the EU. It is also unclear whether a transition period with the EU, whereby existing EU trade arrangements continued, would allow the UK to trade with other (non-EU) countries on the basis of the current EU arrangements during that transition period. To do so would appear to require agreement from the other (non-EU) country.
Anecdotal feedback indicates that some businesses are currently considering moving headquarters, the origin of approvals/certifications under which they operate and/or staff and capital to ensure that barriers are minimised.
Options for business
Whatever the outcome of exit negotiations and transition (partnership) arrangements between UK/EU, at Brexit (March 2019), the UK will need to have a basis to trade with the rest of the world (non-EU) as well as the EU. It does not appear likely that any preferential free trade agreements will be ready at that stage. The UK will therefore need to engage with all WTO members to ensure that it has a working solution at Brexit for ongoing trade at that point.
Exporters (and importers) from non-EU countries will therefore also be affected by Brexit. On Brexit day new tariff and non-tariff barriers will almost certainly arise with countries where existing EU arrangements provide preferential access.
Business should take steps now to ensure it understands what additional administration (such as alternative certification or authorisations, country of origin information and new tariff rates) will be involved, what delays this may involve in shipping or receiving goods and whether existing contracts (or new contracts) should be amended to take account of such changes. Where international supply becomes more difficult, business may need to identify alternative supply chains or markets.
The trade landscape both with the EU and with the rest of the world is likely to continue changing for an extended period after Brexit. New deals may be entered which can be more focussed on UK (rather than EU) interests and ultimately the UK may seek new export markets. Business should consider whether it has a preferred outcome and whether lobbying relevant government departments would assist those departments to correctly identify their future needs.