European Union: Brexit: The Way Forward For Trade

Last Updated: 25 July 2016
Article by John Whittaker

Most Read Contributor in UK, October 2017

As the country, and indeed the World, reacts to the UK's vote to leave the EU, it is important to take stock and contemplate our future as an international trading nation. Since the vote on 23 June, we have seen various positions adopted by our trading partners around the EU. From the hard line stance of the European Commission to the more pragmatic approach taken by German Chancellor Angela Merkel. In the absence of any clear plan, compounded by a political vacuum not to mention negotiating positions, it is impossible to predict what will follow. We look at how Brexit could impact trade over the coming years.

Our future with the EU

Whatever route is taken, there will be major implications for trade.

The EU is the most important trading partner of the United Kingdom and the United Kingdom is the most significant export market for some, but not all, of the EU nations. This is a good starting point. However, whilst we may have full "control" over future lawmaking, we must remember that if we want to trade with the EUwe have to be compatible with EU law and that will mean, inevitably, we lose some control.

Whilst the EU has stated that the UK cannot gain access to the single market without free movement, it must not be forgotten that following Brexit the UK will benefit (in theory) from new-found flexibility in our ability to negotiate trade agreements. The outcome of these, likely difficult, negotiations is paramount to the UK for its trade and services.

Our options with the EU

"The Free Trade Agreement Option" - the UK could look to establish one over-arching deal rather than a set of multiple bilateral agreements. In theory this is appealing, but EU officials have been keen to stress that negotiations would not be rapid or straightforward – there is no appetite in Brussels to make leaving an easy option and so encourage others to follow the UK out the door.

"The Swiss Option"  - the UK would seek to negotiate a set of bilateral options that would regulate access to the market on a sector by sector basis. Whilst this would represent the ultimate in control over our trading future, negotiating such agreements in the atmosphere of animosity which we now find ourselves in would be no easy task.

"The Norwegian Option" - the UK would have to re-adopt or confirm EU regulations and standards. We would become part of the European Economic Area, which currently numbers just Norway, Iceland and Lichtenstein.

Our future with the rest of the World

Further afield we have no recent history in negotiating trade agreements on a bilateral basis, though the EU has preferential agreements with many nations. Although the UK will be able to negotiate their own trade agreements, there are difficulties which lie ahead. If we use the EU as a base not only must we agree terms with them, but also have the administrative infrastructure to negotiate and implement agreements with other countries – a process which is likely to take many years. Even then, the UK may be constrained by what it agrees with one country in that it may prove an obstacle for an agreement with another.

As a member of the World Trade Organisation in its own right, the UK would still benefit from its most favoured nation (MFN) position in GATT and use this as the basis of new trade deals. But MFN would not give the UK carte blanche to enter into any bilateral agreements without fulfilling WTO criteria; bilateral agreements are prima facie treated as exceptions to the MFN principle. Consequently, MFN status is partly a burden as well as a benefit.

There may also be political constraints. For example, China is an attractive trade partner, but a crucial element of their status within the WTO is the right for other member nations to treat them as a non-market economy and so "ignore Chinese prices and costs in anti-dumping cases and instead calculate dumping margins using external benchmarks". This effectively allows the US and EU to place much higher duties on imports from China in anti-dumping cases than if China was treated as a market economy. The issue of China's status as a non-market economy remains a live issue both at EU and US level, as well as with other emerging markets such as India.

It is highly likely that as part of any trade negotiation, China would require the UK to grant it market economy status – a line in the sand whichmay displease the EU and US, if crossed. The UK may find it hard to satisfy China, the US and EU on this issue following Brexit.

Which route is best for the UK and best for traders?

Whilst it is too early to know how our relationship with the EU and the rest of the World will look in the coming years, there are a few certainties.

With the indication that we will not invoke Article 50 (triggering the two year countdown to Brexit) until David Cameron leaves his post, this volatility will be here for some time. It seems unlikely that Article 50 will be invoked without a plan and at the very least a clear expectation as to what is achievable. That too may take time and even when Article 50 is invoked, we can expect a protracted period of negotiation and uncertainty until an agreement with the EU is reached. Such negotiations will not be quick or straight forward – look at the WTO DOHA talks for example, which were abandoned after 14 years to be replaced by a series of separate, more manageable one on one discussions.

Brexit: The Way Forward For Trade

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