After Brexit the UK will be able to determine its own trade policy, which is currently the responsibility of the EU. International trade will therefore be a key theme in the new Parliament. This article examines the UK’s future trade relationship with the EU, but trade relations with non-EU countries will be important too.
Trade policy as a member of the EU
As a member of the EU, UK trade policy is determined by the European Commission and Council. The EU Single Market means there is free trade between EU members. There are no quotas or tariffs on UK-EU trade. There is also a harmonised regulatory regime. This aims to facilitate trade by reducing non-tariff barriers, such as different technical or labelling requirements. These non-tariff barriers can be at least as important as tariffs as a barrier to trade.
The Single Market is based on the “four freedoms”: free movement of goods, services, people and capital. The EU also governs trade arrangements with non-EU countries. The EU is a customs union: all EU Member States impose the same set of tariffs on imports from outside the EU.
UK-EU trade post-Brexit
The EU is the UK’s largest trading partner, accounting for 44% of UK exports of goods and services in 2016 and 53% of imports.
The previous Government’s policy was not to seek membership of the Single Market and to leave the main elements of the EU customs union. This amounted to rejecting membership of the European Economic Area (EEA – EU States, Iceland, Liechtenstein and Norway). Continued Single Market membership was rejected because it would mean accepting the four freedoms and a continuing role for the Court of Justice of the EU. The UK would still have access to the Single Market (i.e. be able to export to it), but the terms of this access would depend on negotiations with the EU.
Free and frictionless trade
In place of Single Market and customs union membership, the May Government said it was seeking the “freest and most frictionless trade possible in goods and services between the UK and EU” and an “ambitious and comprehensive free trade agreement”.
This raises a number of questions. For example, will the Brexit trade negotiations have to wait until the divorce settlement has been agreed, or will they be negotiated in parallel?
How would a trade agreement deal with non-tariff barriers and trade in services?
Is it feasible to negotiate an “ambitious and comprehensive” free trade agreement within two years, especially if this is to cover services as well as goods? 40% of the UK’s exports to the EU are services. The UK has a surplus with the EU in services trade.
Trade agreements often take several years to negotiate, although the particular circumstances of the Brexit negotiations, where the parties are already closely integrated, may speed things up.
What if there is no trade agreement?
If no trade agreement is reached, trade between the UK and the EU will revert to World Trade Organization (WTO) rules. While many countries trade with the EU on this basis at the moment, it would mark a significant change from EU membership. Trading under WTO rules is likely to be disruptive to trade, as it would involve both tariff and non-tariff barriers.
UK exports to the EU would be subject to the EU’s tariffs. Imports from the EU would face UK tariffs set at a level determined by the UK Government. WTO rules require a country to impose the same set of tariffs on all trading partners (with exceptions for free trade agreements and schemes to help developing countries). This means the UK and EU would not be able to set punitive tariffs on each other’s imports.
EU tariffs are, on average, relatively low. In many sectors the effect of the tariff on exports may be offset to some extent by the fall in sterling. However, tariffs are high on some products, especially agricultural ones, and the EU tariff on cars is 10%.
A transitional agreement?
Many have argued that a transitional agreement will be needed if no trade agreement is in force by the time the UK leaves the EU, in order to avoid the WTO ‘cliff edge’ scenario. This too raises issues. How long might such an agreement last? What rights and obligations would it impose on the UK and how would it be enforced?
This article is part of Key Issues 2017 – a series of briefings on the topics that will take centre stage in UK and international politics in the new Parliament.