There’s clarity but no certainty over UK’s FTA and customs path post-EU withdrawal
The global market is finally beginning to get some clarity on the way forward following the United Kingdom’s looming withdrawal from the European Union, commonly referred to as “Brexit.”
But, unfortunately, this clarity does not add up to a great deal of certainty in terms of international trade policy. Against a backdrop of protectionism, which is generally a disruptor of the global supply chains evolving from trade policies, emerging markets, and changes in consumption, Brexit negotiators, by all appearances, want to preserve the economic status quo while obtaining a higher level of autonomy over immigration from the rest of the EU.
However, these two objectives may not be compatible.
Brexit as an initiative is deceptively complex. While it was prompted by a majority of Britons that took a couple hours out of their workday to show up at polls and answer a one-question referendum, what comes next involves many variables and stakeholders. The U.K. is party to four agreements that bind it to the rest of the EU: the EU’s single market, the European Economic Area, the EU’s customs union, and the World Trade Organization.
Brexit affects all of these ties, meaning they are all under scrutiny now as the U.K. pursues a smooth transition out of the union.
Which relationships will remain intact and which will be renegotiated or severed greatly affects businesses in Europe and, to a lesser but still meaningful extent, everywhere else as well. Being prepared for all plausible outcomes will allow companies to operate with some degree of direction, even though the environment will continue to be cloudy.
There are strong signals that U.K. voters favored Brexit because of a desire to have more autonomy over immigration and other issues more related to demographics than to trade. This would make negotiating access to the EU single market as a non-EU member, for example, a non-starter for the simple fact that the EU single market regulations control immigration regulations.
The U.K. cannot have autonomy over immigration policy while being party to the single market.
European Economic Area. Prime Minister Theresa May said in a January speech the U.K. intends on leaving the single market, but May has not explicitly stated what the country intends to do with respect to the EEA, customs union, or WTO, which has businesses and trade analysts wondering what might happen with those three ties.
For the EEA, Article 126 of the agreement states that it applies to the territories establishing the European Economic Community—now the EU—and to Iceland, Liechtenstein, and Norway. Article 127, however, states each contracting party “may” leave the EEA Agreement “provided it gives at least twelve months’ notice in writing.”
If the U.K. does not provide a withdrawal in writing, would it continue to be a member of the EEA? Conversely, if the U.K. ceases to be part of the EU, could it negotiate EEA membership with the EU countries it just divorced? And crucially, would the U.K. have complete autonomy over immigration if it were to become an EEA member post-Brexit?
The answer to the latter question would appear to be “no.”
If the U.K. were to remain a part of the EEA, it would continue to enjoy the trade of goods and services within the EEA, but it would have to accept the free movement of workers and abide by EU law, as stipulated in the EEA agreement.
This could explain May’s remarks that the U.K. does not intend to have a “half-in, half-out” approach to leaving the union.
EU Customs Union. In order to gain autonomy over immigration policy, the U.K. could exit the EU’s single market, but retain membership in the bloc’s customs union. However, this may sabotage potential bilateral or multilateral trade deals because the customs union also regulates trade agreements with third-party, non-EU countries.
Furthermore, this move would force the U.K. to abide by trade rules without having a say in what those rules are. Unless something changes and a new deal is struck, membership to the customs union and autonomy in negotiating outside trade deals would not appear to be compatible.
Turkey and Andorra, for example, have negotiated deals with the EU customs union to bring their economies into the fold. The Turkish model allows certain industries to enjoy benefits of the customs union, while also being able to negotiate third-party trade agreements.
While May said the U.K. will “not seek to adopt a model already enjoyed by other countries,” it is possible the U.K. could take a similar route and include certain industries into the EU customs union, or cut some other kind of deal. This seems unlikely, however, given that Article 50 of the guidelines for negotiation, published April 29, states that individual markets will not be carved out.
WTO Membership. Leaving the customs union altogether, while seemingly the most plausible option, creates an administrative headache. Brexit would add new administrative costs for border checks and certification of where goods come from. Additionally, the land border with Northern Ireland would have to be secured.
Considering this, it still seems likely that the U.K. will cease to be part of the customs union as well. Membership to the WTO seems to be the trade tie most likely to remain.
If the U.K. completely pulls out of the EU single market, customs union, and the EEA, trade relationships could still be governed by the WTO rules, but it’s not a given the U.K. continues its membership.
If the U.K. completely pulls out of the EU single market, customs union, and the EEA, trade relationships could still be governed by the WTO rules, but it’s not a given the U.K. continues its membership.
As a founding member of the WTO, the U.K. would probably not need to re-apply for membership post-Brexit. If it does, watch out: the WTO operates by consensus, not voting, meaning just one objection could hold up the talks. This is one reason why WTO negotiations take so long.
Assuming the U.K. keeps its WTO membership, it could enforce WTO tariff regulations on imported goods from the EU, or it could unilaterally remove tariff restrictions from the EU, keeping trade open without change. The former option could disrupt imports significantly, while the latter would be a sensible, albeit short-term, option to seek reciprocity from the EU until a trade agreement could be drafted, negotiated, and ratified.
There are two other options should the U.K. leave the single market and customs union altogether: joining the European Free Trade Association or negotiating a new customs area with the EU.
Brussels hardliners have been steadfast that they will not negotiate a trade agreement with the U.K. until a withdrawal agreement is complete. However, there has been a slight softening of the EU’s position in recent weeks.
As reported by Reuters news service, the EU on April 29 established seven guidelines for their chief negotiator, Michael Barnier, to follow in Brexit talks:
1. Phased approach: If sufficient progress is made toward an “orderly withdrawal” on March 29, 2019, talks on a long-term trade agreement between the EU and the U.K. could begin. The discussions depend on Britain’s contribution to the EU budget and treatment of EU expats residing in the U.K.
2. Transitional arrangements: The U.K. could continue enjoying the benefits of EU membership after March 2019, assuming it abides by EU rules and supervision by the European Court of Justice and other EU authorities.
3. Sticking together: The EU is united in its efforts to thwart the U.K.’s efforts to divide and conquer, since EU authorities believe that the EU has leverage in the negotiations.
4. No dumping: Any free trade agreement with the U.K. must be balanced, which means it will not result in the country receiving competitive advantages over EU members.
5. Rights and benefits: The EU will not negotiate an agreement that provides the U.K. with more favorable terms outside of the EU than its current membership.
6. Brexit bill: The U.K. must pay its share of potential losses from guarantees given by the EU.
7. Border trouble: The EU wants to ensure peace within Northern Ireland as the U.K. contemplates how to erect a new EU border between Northern Ireland and the Republic of Ireland. Similarly, the EU needs to address the status of British military bases in Cyprus and Spain, which are part of the EU.
Given the complexity of the negotiations, this means that for businesses engaged in international trade, monitoring how the above guidelines come into play and how Brexit talks unfold will be paramount.
