One of the important questions for many companies importing into the UK is whether the UK will continue to be a party to the EU’s free trade agreements (“FTAs“) following Brexit.
The EU has concluded FTAs of varying scope with countries around the world, including South Korea, Israel and Mexico, and is in the process of negotiating and implementing many others (e.g. the Comprehensive Economic and Trade Agreement with Canada (“CETA“), which was signed in October 2016 and is currently awaiting ratification by the European and Canadian Parliaments before it enters into provisional application; CETA will enter into full application following ratification by the national parliaments of the EU’s Member States, a process that may take a number of years).
Additionally, the EU unilaterally grants tariff reductions or duty-free entry to many goods originating in a total of 76 developing countries and territories under the Generalised Scheme of Preferences (“GSP“).
Many companies have optimised their supply chains by taking advantage of the EU’s preferential trading arrangements, for example by conducting manufacturing operations in South Korea before importing the finished products into the EU at zero duty; or sourcing materials or components from countries that have a preferential arrangement with the EU.
The UK’s proposed departure from the EU Single Market and Customs Union, announced by Prime Minister Theresa May in a speech on 17 January 2017 (see our blog post here), makes the future applicability of the EU’s FTAs to the UK unclear. Once Brexit becomes effective (anticipated to be 29 March 2019, the second anniversary of the UK’s serving of the Article 50 notice to leave the EU), many of the preferential arrangements may cease to apply without further action, causing significant disruption to supply chains that rely upon the EU’s network of preferential arrangements.
We consider below what is likely to happen in this case post Brexit to imports to the UK from jurisdictions that currently benefit from EU FTAs.
Could the EU’s existing FTAs apply automatically to the UK?
There has been some speculation that the EU’s existing FTAs could be “grandfathered” to apply automatically between the UK and third countries after Brexit.
Article 34 of the 1978 Vienna Convention on Succession of States in Respect of Treaties provides that, where a part of a state secedes from another, then any treaties that apply to the predecessor state will automatically apply to the seceding state. It has been thought that this could also apply in respect of departure from a supranational entity such as the EU.
In our view, the Vienna Convention is unlikely to apply to EU FTAs. Article 34 does not apply to cases where the application of the treaty in respect of the successor state “would be incompatible with the object and purpose of the treaty or would radically change the conditions for its operation.” Given that the EU’s FTAs are intended to grant access to the EU market (and were entered into based upon the nature of the EU market as a whole), their continued application to the UK after Brexit is likely to run counter to the purpose of the FTAs, and to be a significant change to their operation.
This is corroborated by a 2012 statement from the European Commission, in which it expressed its view that “if a Member State were to leave the European Union it would no longer benefit from preferential arrangements included in EU trade agreements“, as that Member State “would not be subject to the Union’s common commercial policy“, and the third country with which the FTA was concluded “offers concessions to the EU on a reciprocal basis, expecting market access to the Union as a whole“, and not to individual Member States. The full statement can be found here.
In the absence of automatic grandfathering under the Vienna Convention, in our view the EU’s existing FTAs will cease to apply to the UK on Brexit. These FTAs fall into two categories:
- FTAs entered into by the EU alone, on behalf of the Member States (“non-mixed agreements”) – The UK is not a separate signatory to these agreements, and so they will automatically cease to apply if it is no longer an EU Member State. The EU’s non-mixed FTAs include the 1997 Euro-Mediterranean Interim Association Agreement between the EU and the Palestinian Authority.
- FTAs entered into by both the EU and all EU Member States (“mixed agreements”) – Many EU FTAs take this form (most notably CETA, although many others, including the EU FTAs with South Korea and Mexico, are also mixed). In our view, even though the UK is a party to these agreements in its own right, they will cease to apply on Brexit. This is because:
- the signatories are identified as the EU and its Member States, and not individual Member States by name. Once the UK leaves the EU, it will cease to be a Member State and so references to “Member States” will not include the UK; and
- these agreements contain territorial clauses stating that the agreement will apply in the territory of the EU. After Brexit, this will no longer extend to the UK.
On this basis, we consider it highly unlikely that the EU’s existing FTAs will automatically continue to apply to the UK after Brexit.
In this case, the UK would be able to unilaterally offer any third country trade terms that match those in the EU FTAs, but this would be an entirely different proposition to simply grandfathering an existing EU FTA. In particular, this would require the third country to agree to continue trading on the terms of the existing FTA, and may involve negotiation of revised tariff quotas and potentially other amendments to take into account the fact that the UK is no longer a part of the EU market.
Comments made by Liam Fox, the Secretary of State for International Trade, to the House of Commons International Trade Committee on 1 February (footage available here) indicate that several third countries with which the EU currently has FTAs may be willing to adopt this approach, with an appropriate reduction in quotas in the revised agreement with the UK. Whether these countries would also accept a commensurate reduction in quotas in their existing agreements with the EU-27 is less clear.
It may also be possible for the UK to remain a party to the EU’s mixed agreements, although this would require the consent of the EU, each Member State and the third country in question. This may be an arduous process and is not guaranteed to succeed, as illustrated by the much-publicised delay to the signing of the CETA in October 2016 following objections from the Parliament of Wallonia in Belgium.
The European Council has indicated in its Brexit negotiating guidelines (available here) that it “expects the United Kingdom to honour its share of all international commitments contracted in the context of its EU membership” and will seek “a constructive dialogue with the United Kingdom on a possible common approach towards third country partners, international organisations and conventions”, indicating that the UK could remain a party to existing FTAs, although as noted above this would be challenging in practice.
Alternatively, the EU’s approach implies that the UK may be able to grandfather in existing FTAs with the permission of the EU and the third country. The continued arrangements could allow for diagonal cumulation of preferential origin between the UK, EU and third country FTA partners, which is a feature of many of the EU’s existing arrangements (notably, the Pan-Euro-Mediterranean network of FTAs spanning Europe, North Africa and the Middle East). This would allow raw materials originating in (for example) Canada to be exported to the UK for processing under a UK-Canada FTA, and then exported to the EU under an EU-UK FTA, which would reduce the tariff burden on supply chains spanning all three jurisdictions.
Will the EU GSP continue to apply to imports to the UK from beneficiary countries and territories?
Unlike FTAs, the GSP is a wholly unilateral scheme adopted by the EU within the WTO framework. Many WTO members have their own GSP, which need only to be notified to the other WTO members. The UK would be able to implement whatever GSP it deemed suitable after Brexit.
The Government’s plan for a “Great Repeal Bill” to incorporate all EU legislation into domestic law would ensure that Regulation (EU) No 978/2012, which establishes the EU’s GSP, remains applicable to the UK after Brexit. We anticipate that suitable amendments will need to be made to (for example) replace references to EU institutions with UK equivalents. It is also possible that the UK may wish to make further changes e.g. to the list of countries and territories benefitting from the GSP, the scope of tariff relief or tariff quotas, or the conditions for application of the GSP.
However, we anticipate that imports into the UK that benefit from the GSP immediately before Brexit will continue to do so after Brexit, at least in the short term.
What can businesses do to plan in the event that the EU’s preferential tariff regimes cease to apply after Brexit?
Although the future status of the EU’s FTAs remains somewhat unclear, there are steps that can be taken in order to plan ahead for the possibility of a change in the UK’s trading relationship with third countries. In particular, businesses should consider:
- Identifying goods benefitting from preferential arrangements. Consider whether you import any goods into the UK under an EU FTA, or are planning to do so. Following Brexit, it may be that these goods become subject to tariffs if no agreement is reached to maintain the terms of the FTA.
- Evaluating the financial impact of customs duties. If imported goods become subject to tariffs on entering the UK, this is likely to be a cost to your business and impact upon cashflow. Similarly, if your business currently purchases goods that have been imported under an FTA, it is possible that the cost of these goods may rise after Brexit if importers choose to pass the cost of duties on to their customers.
- Engaging with governments the continuation of existing preferential relationships. Consider lobbying the UK Government and/or the governments of any countries whose EU FTAs your business relies upon to maintain existing preferential trading arrangements with the UK after Brexit.