Partnership / Comprehensive Trade Agreement
Perhaps the most likely medium to long term outcome of Brexit is that there will be a Deep and Comprehensive Free Trade Agreement between the United Kingdom and the European Union. The agreement is likely to go further than previous agreements entered by the European Union to provide for regulatory alignment in a wide range of areas, close customs cooperation, and facilitation, and zero or close to zero tariffs on almost all non-agricultural products.
The EU Canada Trade Agreement eliminated customs duties on 98.7% of all EU tariff lines on entry into force with progressive reductions to zero for most other products. The Agreement eliminated 90% of agricultural tariff lines with further liberalisation over 10 years. The remaining 10% are sensitive products on which there some zero rate quotas which are to increase.
However, such a relationship would be in no way comparable to EU or EEA membership or to a customs or regulatory union with EU. Event, with all of the likely facilitation will still require customs declarations, regulatory checks and considerable trade friction. The numerous basic harmonised laws enforceable throughout the EU will no longer apply and the effect is likely to be highly disruptive in some sectors and cases.
Comprehensive Agreement Unlikely in 2020
It seems unlikely that a single deep wide-ranging agreement could be entered between the EU and UK and ratified by the EU Parliament and required regional assemblies by the end of 2020. It may be that there are a series of agreements commencing with a narrow barebones agreement for trade in goods followed by more ambitious wide-ranging agreements for other sectors. Such agreements are both complex and potentially controversial. There is significant scope for various interest groups to lobby for less favourable treatment for UK competitors.
Anything but a basic trade agreement is likely to include elements that are within the competence of member states. This would, therefore, require the ratification of member states Parliament and regional assemblies in accordance with the particular constitutional requirements. This would extend the likely process significantly. It is possible that particular state parliaments stall ratification with a view to seeking concessions.
A basic free-trade agreement would be likely to involve the abolition of tariffs and quotas on most non-agricultural goods together with a reduction in tariffs and quotas on agricultural goods. This agreement will usually build on WTO agreements in the area of technical barriers to trade, sanitary and phytosanitary matters, barriers to trade,’ investment, rule of origin, safeguards and customs administration.
A more ambitious agreement would seek to liberalise areas such as services and investment.
Customs issues
Perhaps the biggest challenge posed by Brexit is the imposition of customs duties and customs processes on all movements of goods from Ireland to the United Kingdom and from the United Kingdom to Ireland.
In the event of a hard Brexit, the default position is that “third country” tariffs would apply to imports into the United Kingdom. Although it was expected that the UK would apply the same third-party tariffs as the EU now applies, the UK has published a temporary tariff for a no-deal scenario, that has zero-rated many goods.
Customs processes are perhaps the single biggest obstacle to post-Brexit trade both in a hard Brexit and also in a longer-term soft Brexit. The most likely scenario for the longer-term soft Brexit is a trade agreement. This will still require customs processes even though there may not be customs duties.
EU has Rejected Special Customs Arrangements as Unrealsitic
Some UK White papers publications of the Theresa May government proposed various models for special facilitative customs arrangements. These were proposed for trade generally as well as more particularly in the context of the Northern Ireland border. The 2017 White Paper stated ‘that the UK is leaving the EU and that it will seek a new customs arrangement with the EU, which enables them to make the most of the opportunities from trade which ensure that trade between the UK and the EU to continue to be as frictionless as possible/
In the future partnership paper of August 2017, it envisaged either a highly streamlined customs arrangement or a new customs partnership aligning the UK and EU approaches at the border in a way that removes the need for a UK EU customs border without the UK part of the EU customs union.
However, the EU time and time again made clear that it was not willing to facilitate new untested customs procedures of the type proposed. If the proposals were rejected as either magical thinking or unduly cumbersome. The opinion of trade experts is that they were best untested and somewhat half baked.
The WTO agreement requires that a free-trade agreement must eliminate internal barriers to substantially all the trade between the parties in products originating in such territories. Therefore, sector by sector agreements are not possible.
The comprehensive economic and trade agreement between the EU and Canada entered in 2016 has been proposed by many in the Conservative party as a model for the future relationship. It abolishes tariffs in more than 99% of cases. However, this is in no way equivalent to a customs union and single market participation frictionless trade as now applies within the EU.
Customs Barriers Inevitable
Any arrangement short of a customs union with the EU will involve new barriers to trade. There will be import and export customs procedures. Regulatory checks will arise. In the area of agri-food, the default position is that a high percentage must be checked.
Basic principles require there to be controls on and verification of origin in every case. Otherwise, goods might enter one territory circumventing the tariff duties or the other trade policy measures of the importing state.
Customs facilitation may involve the use of technology. The balance of opinion in the context of the backstop indicated that the kind of technology that might lead to free moving borders was very far off, at least 8 to 10 years, largely had not yet been developed so was not a realistic possibility in any foreseeable future.
It seems difficult to see how UK can maintain full access to the single market with free movement of goods and services without accepting the common EU regulations and standards and submitting to effective enforcement mechanisms equivalent to the direct application of single law. The UK would be obliged to unilaterally accept EU standards without any say in the making together checks to assess conformity in conjunction with customs barriers.
It is the UK’s intention to enter one or a series of agreements with the EU including a free-trade agreement in relation to goods. Studies have shown that over the longer term of 5 to 10 years this could involve as much as 35% loss in trade in goods and a 61% loss of trade in services with the EU (EBell will new trade deal soften the blow of hard Brexit National Institute of economic and social research 27 January 2017). Most studies show that geography is critical to trade relations. It is said that trade between countries halves as the distance between them doubles.
Rule and Certification of Origin
Qualification for the reduced / zero customs duty in each of the EU and UK would require evidence of the UK and EU origin respectively of the particular goods. Goods that have been imported from a third country and which are moving freely in either the EU (or the UK) are not necessarily of EU (or the UK) origin for this purpose. Therefore, there would be a requirement for certification of origin.
Certification of origin may be by one of a number of means and may be based on one of a number of tests. A common test is that of substantial transformation or a certain maximum value derived from the country of immediate export.
Proof of origin may require an application to and a certificate from a governmental or trade body for confirmation that the relevant test has been met. There is likely to be simplifications in some or most cases, which allow or come close to allowing self-certification by the manufacturer, originator or importer, where the nature of goods is such as to make the issue low risk. The REX system allows certain qualified parties to self-certify.
Customs Procedures Remain
Regardless of whether there are close to zero or zero import/customs duties under a free-trade agreement, customs controls and procedures will still apply. Both import and export customs declarations will be required on each and every import and on each and every export. The free-trade agreement may allow some simplifications but is unlikely to avoid the necessity for declarations. Security notices on each import and export may also be required.
Customs procedures will constitute a significant challenge cost and friction in doing business, in particular for small to medium-sized businesses. Either the UK exporter through a permanent establishment or agent or their customer/supplier must also make the corresponding declaration in the EU jurisdiction. Businesses that deliver just in time will face particular challenges.
An electronic return with significant information about the transaction the code for the goods, proof of origin as well as information about the transport movement must be made. Most movements are likely to move freely but some degree of customs intervention by way of policing of origin and regulatory requirements is likely and is mandated on the EU side by existing EU law.
Agriculture and Food
In the area of agriculture and food, the default position requires very onerous veterinary or plant health checks at or near the border. The extent to which this will be simplified is not yet clear. There are likely to be some significant animal health plant health and food safety controls which may require verification at the border. Some intra-EU controls apply to the movement of plants and animals, but they are sufficiently coordinated to allow free movement at internal EU borders.
In the absence of a very high level of coordination, there is a distinct possibility of some interventions at or near borders. Customs control even by way of occasional policing or risk analysis-based intervention is likely to be disruptive and costly. The risk of such controls will depend on the extent of divergences in food safety standards and controls.
The future direction of agricultural and food safety policy in the UK post-Brexit is not yet clear. The export and import declaration will be required in advance of each movement by way of prior clearance from HMRC and the revenue authority in the EU country of import or export.
Single Market
Given the EU’s insistence that the four freedoms of movement under the EU Treaties, namely free movement of goods, free movement of people, free movement of services and free movement of capital are indivisible and given the UK’s opposition to being subject to the jurisdiction of the Court of Justice of European Union and EU law for the purpose of the rules of the single market, it appears likely that UK citizens and established business will not enjoy the freedoms to provide services, establish branches and subsidiaries and exercise professions with, in, or into other EU states.
Some degree of regulatory alignment may take place in respect of goods. However, even in this context in the absence of a single set of laws, self-executing courts, and legal system, there is likely to be some regulatory barriers to trade in goods even with a comprehensive free trade agreement. Increased regulatory divergence may take place over time.
Single market rules and the jurisdiction of the European courts, including in particular the obligation of all domestic courts in the EU to apply EU law, are fundamental to ensuring a level playing field and fair competition within the EU. Almost all trade agreements provide only for state to state enforcement mechanisms which are not directly open to businesses and may lead to sanctions by way of countermeasures at the state level, rather than by way of direct orders invalidating the infringing action.
Regulatory Alignment
Regulatory divergence could become a significant barrier to trade post-Brexit. While an EU UK free-trade agreement may seek maximum regulatory conformity the effectiveness of the arrangements will be limited if as appears likely, the UK will not submit to a set of single market rules which potentially override domestic law in order to remove barriers to trade.
A mechanism to ensure regulatory alignment sufficient to maintain full single market access would require governance structures and dispute resolution mechanisms largely similar to those under the EU arrangements or the EFTA arrangements. Even if the EU was prepared to agree to such mechanisms, it appears unlikely that the UK government would wish to submit to them.
In the absence of a uniform approach to regulation, there is potential for unfair competition. There is a developed body of EU competition law as well as a wide range of harmonised standards across employment, occupational safety, equality, consumer protection, corporate law environmental regulation, and many other areas.
Services
Under the EU Canada free-trade agreement, in common with other advanced and developed free-trade agreements, there is limited removal only, of restrictions on the provision of services. As under the WTO Agreement on Services, concessions are ad hoc and very incomplete.
There may be wide-ranging visa-free travel for social and leisure visits and subject to conditions for most business activity. However, there is unlikely to be anything close to the present rights to establish a presence without discrimination and to provide services into the EU.
There is unlikely to be automatic recognition of licensing and authorisation of businesses which are regulated at present under a single EU framework. There is unlikely to be automatic recognition of qualifications, freedom to exercise trades and professions cross-border.
Basic Protections Gone
UK nationals and domiciled businesses will not be able to raise Treaty protections and other EU rights to cut through technical and effective barriers to trade in EU states. Under EU law there exists both core Treaty rights as well as detailed EU legislation which can be invoked before any court or by way of complaint to the EU Commission to counter rules and practices of member states which limit or prevent the free exercise of any business or service in another EU state. These protections will no longer be available to the UK established businesses after Brexit.
There are several key sectors that are subject to single EU based regulation, where it seems unlikely that any free-trade agreement would allow full membership and participation. This includes in particular common markets in the areas of financial services, transport, broadcasting, communications, energy, and digital services.
In the circumstances, the only way in which a UK national or domiciled business can continue to have access to the EU single market will be by way of a corporate establishment in another EU state, such as Ireland.
