Roughly half of all UK trade is with non-EU countries[1]. It is argued that Brexit will accelerate the growth of this trade by enabling the UK to strike its own trade deals, particularly with the world’s largest and most dynamic economies. What are the main risks and opportunities created by new trade deals and what should UK businesses be doing now to position themselves strongly?

The UK cannot formally negotiate new trade agreements until it has ceased to be a member of the EU. And potential partners are unlikely to engage seriously with it until the shape of an UK-EU trade agreement is known, since this will have a significant impact on what the UK can offer to third countries.

Nonetheless, the UK government has made clear its view that it is not precluded from holding informal discussions with third countries now and has indicated that it has begun to put out feelers. Regardless of the timing of the discussions (whether now or after the UK ceases to be a member of the EU), four issues will be key for the UK: to what extent, if at all, it stays in the Customs Union; how it manages the EU’s existing Free Trade Agreements (FTAs); which countries and which sectors it prioritises in negotiating new trade agreements; and what tariffs it sets at the World Trade Organisation (WTO). Each creates substantial risks and opportunities for UK businesses.

The Customs Union

Members of the Customs Union (all EU Member States plus Turkey, Monaco, Andorra, San Marino, the Channel Islands and the Isle of Man) form a single trading area within which all goods circulate freely, without tariffs and with minimal customs procedures.

The corollary of this is that all members must impose a set of common tariffs on imports from outside the Customs Union. Since members of the Customs Union cannot impose tariffs that differ from those of the EU, remaining in it would severely constrain the scope of the UK to strike its own trade agreements.

The Government, most recently the Prime Minister in an interview on 8 January, has made clear that the UK “will be able to have trade deals around the world” which clearly points to the UK leaving the Customs Union. However, Liam Fox, Secretary of State for International Trade, has also said that the government is studying all the options and has not ruled out the possibility that the UK might remain within the Customs Union, at least in part.

Since the Customs Union does not cover all sectors (notably services and, for example in the case of Turkey, unprocessed agricultural products), the UK might potentially seek an arrangement that keeps some sectors effectively within the Customs Union while others are taken out and could therefore be included in new trade agreements. If it were to adopt this approach, and provided it could be squared with WTO rules, the UK government would need to consider where the balance of interests in each sector lies and whether to prioritise, for each sector, existing links with the EU or potential new deals with the rest of the world.

In making these judgements, the UK government would also need to factor in another aspect of the way the Customs Union works: when the EU signs an FTA with a third country, all other members must give that country access to its market on the same concessionary terms, even though the deal secured by the EU may not necessarily benefit them. But this obligation is not reciprocal: other members of the Customs Union need to negotiate their own separate agreements with the third country to secure their own market access. UK sectors that remained within the Customs Union would thus have to make market access concessions automatically whenever the EU concluded new agreements with third countries, but without a guarantee that they would secure reciprocal concessions in a separate UK agreement with the third countries concerned

EU Free Trade Agreements

The EU has trade agreements with some 60 countries including Canada, Korea, most non-EU European and Mediterranean countries, the Caribbean, and a number of states in Latin America (including Mexico), the Pacific and Africa (including South Africa).

Liam Fox has said that a first priority for the UK is to maintain these existing EU FTAs. There is some uncertainty over how this could be achieved. The UK government is understood to have already initiated discussions on this with a number of countries.

These agreements represent compromises between the different interests of the current 28 Member States and in some instances protect sectors of little relevance to the UK. For example, since the UK has a relatively small and efficient agricultural sector and has already lost many of the lower-end manufacturing jobs which free trade with poorer countries tends to threaten, it may be more open to free trade than others in the EU which prioritise the protection of their agriculture or heavy industry.

It would therefore make sense for the UK to seek to secure new terms tailored to its specific interests and prioritising its key sectors - particularly services, which are not included in about half of the agreements but are particularly important to the UK economy (some 80% of UK GDP). There is also likely to be a UK interest in negotiating on regulatory aspects related to services, which most existing agreements do not address substantively. For their part, the third countries may also want to renegotiate to improve the terms of the deals from their perspective: they originally conceded access to their markets in return for access to the EU market of 500 million but may not be willing to continue the same terms in return for access to the UK market of 65 million.

New Trade Agreements

If the UK were to leave the Customs Union or parts of it, the UK would also in principle have the option of striking new deals with other countries that have no FTA with the EU. Some, including in the UK government, have argued that after Brexit the UK might rapidly complete the trade negotiations with a wide range of countries and regional groups that the EU has begun but not concluded: the US, Malaysia, Thailand, Indonesia, Philippines, Japan, Burma, India, Mercosur (currently, Argentina, Brazil, Paraguay and Uruguay), the Gulf Co-operation Council, China (on investment) and Russia. The UK might also seek deals with other significant countries such as Australia, New Zealand, China (on trade), Hong Kong, Nigeria and Pakistan.

A number of these countries (e.g. Canada, China, India, Mexico, Singapore and South Korea) have already indicated that they would welcome talks, while the UK has agreed to start scoping discussions with Australia and New Zealand.

The UK will, again, need to prioritise. With very limited trade negotiating capacity and much of it focused on an agreement with the EU, the UK will need to choose which countries to work with first and what balance to strike between securing access to overseas markets and conceding access to its own. For example, India and Australia have already made clear that they want to secure access to Britain’s labour market, although this would risk undermining UK government objectives to reduce immigration. New deals could also lead to increased competition in certain sectors such as agriculture, particularly if imports came from countries with lower standards, for example of environmental protection. While UK consumers might benefit, domestic producers could come under pressure.

The World Trade Organisation

When it leaves the EU, the UK will have to establish its own WTO schedule of commitments - the tariffs it will levy on imported goods and services, covering some five thousand categories. The UK government has said that it will aim to replicate as far as possible the EU’s current schedules. But this faces a number of technical and political hurdles, not least the need for consensus with the 163 other WTO members.

In particular, there will be questions about how existing EU quotas (currently around 100) are split between the UK and the EU27. For example, New Zealand can currently export some 230,000 tonnes of sheep meat into the EU each year without any tariff: the UK, EU27 and New Zealand will need to agree how to divide this up.

Countries with less favourable access to the EU, such as Brazil, may press for a significant share of their exports to be included within any new UK quotas. And countries like Russia that joined the WTO more recently and had to accept relatively limited tariffs may oppose the UK getting a more favourable deal.

What This Means for Businesses and How Dechert Can Help

In each of these areas – whether the UK should keep certain sectors in or out of the Customs Union, which countries it should prioritise for new trade negotiations and what should be its priorities and red lines in those negotiations and in the WTO - the UK government faces a complex array of options. These will require trade-offs between different sectors and interests in the UK e.g. between goods and services, consumers and business, farmers and manufacturers, and exporters and importers.

Many businesses and industry associations have already grasped the need to identify where their interests lie in the negotiations on the future UK-EU27 relationship. While this remains the priority, it is also vital for those trading outside the EU to do the same. They should analyse their priorities for exports, imports, supply chains and investment, and communicate these very clearly to the UK government at the highest possible level now, while it is still in the process of considering where the balance of national interests lies and how best to pursue it. Businesses that get this right stand to mitigate any disruption caused by Brexit and to seize potentially significant opportunities.

Dechert has a team ideally placed to help. In addition to deep UK and EU legal expertise, our team has practical and policy experience - including of trade negotiations - developed at the European Commission, the Council and a range of UK bodies including the Prime Minister’s Office, the Cabinet Office, the Bank of England, HM Treasury, the Foreign Office, and the Attorney-General’s Office. Through this, we have an understanding of how the UK and EU institutions operate in practice and the main personalities involved.