The UK is currently party to over a thousand international agreements with third countries as a member of the EU. These cover trade, regulatory and policy co-operation in a range of areas, including fisheries, agriculture, the nuclear sector and transport (including aviation agreements). How many of these are pertinent to the UK is as yet unclear. There is little information available on what the Government’s intentions are regarding continuity of arrangements covered by the EU’s non-trade agreements.128 But leaving the EU without a deal would mean a radical change in UK trade relationships with the EU and the rest of the world.129
6.1 Trading under WTO rules
Trading under the WTO rules is the ‘default’ option, which would mean that the tariffs on trade in goods apply to trade between the UK and the EU and between the UK and the rest of the world (see also section 5.1). The UK is a founding member of the WTO in its own right, but as an EU Member State it is in practice represented in the WTO by the European Commission. After Brexit the UK will no longer be represented by the EU and will be a fully independent member of the WTO. The UK will need to update the terms of its WTO membership, for example by establishing its own ‘schedule’ of trade commitments at the WTO.130 This process is not expected to be straightforward.131
The WTO represents a rules-based trading system, based on multiple multilateral agreements between Member States. Its General Agreement on Trade and Tariffs (GATT) governs how tariffs are applied and addresses non-tariff barriers (quotas, rules of origin and various other legal or bureaucratic trade restrictions). The leading principle of non-discrimination requires WTO members not to treat any member less advantageously than any other: grant one country preferential treatment, and the same must be done for everyone else. There are exceptions for free trade areas and customs unions like the EU, preference schemes for developing countries, and anti-dumping duties (which are not determined on a non-discrimination basis). Beyond these, the tariff and treatment that applies to the ‘most-favoured nation’ (MFN) must similarly apply to all.
Based on the application of the MFN principle of the WTO, the EU would have to apply the same tariff to imports from the UK as to imports from any other nation that has no preferential trade agreement with the EU in the event of no-deal. The same would apply to all other countries importing goods from the UK.
128 For further information on the EU’s trade and other agreements, see House of Commons Briefing Paper 8370, UK adoption of EU external agreements after Brexit, 24 July 2018, and House of Commons International Trade Select Committee report on Continuing Application of EU trade agreements after Brexit, 28 February 2018.
129 The UK in a Changing Europe, Cost of No Deal, 20 July 2017
130 The UK will almost certainly have to establish its independent position at the WTO, irrespective of whether there is a deal with the EU.
131 P. Ungphakorn, Nothing simple about UK regaining WTO status post-Brexit, International Centre for Trade and Sustainable Development, 27 June 2016
If the UK would choose to apply zero tariffs to the EU unilaterally in order to keep barriers to imports from the EU low as before, it would have to apply the same zero tariff to imports from all other WTO members, with consequences to domestic industries like agriculture. Moreover, the EU would not be able to reciprocate, unless it was happy to give imports from all other WTO members tariff free access to its market.
Without a deal the UK’s trade in services with the rest of the world would be governed by the WTO General Agreement on Trade in Services (GATS). The MFN principle applies to trade in services in the same way it applies to trade in goods, albeit with more options for exceptional treatment. Members can tailor their commitments under GATS in line with their national policy and schedule their commitments to a handful of sectors or choose to provide market access in a wide range of services.
It should be noted that there are not many countries who trade under the WTO rules and only those. Most have bilateral or regional FTAs and facilitation agreements which cover other aspects than tariffs and focus on minimising the burden of regulatory barriers such as customs procedures. As these agreements have impact on trade flows and volumes, WTO tariffs are only a part of the picture.
According to the BBC report Reality Check, the EU (and the UK) trades with 24 countries and territories under WTO rules alone with respect to tariffs on goods. These include the US, China, Russia, Brazil, Argentina, Australia, New Zealand and Saudi Arabia. However, the Institute for Government notes that this trade is facilitated by various bilateral agreements: on customs co-operation, data exchange, product standards and more.132
Leaving the EU, and the customs union in particular, would allow the UK to pursue its own trade interests and forge its own free trade agreements. What will trade look like after a no-deal Brexit? The next sections look at the UK in relation to the EU and the rest of the world.
6.2 Would WTO rules allow for continuation of current UK-EU trade arrangements?
Article XXIV of the GATT sets out rules for bilateral and plurilateral (between several countries) trade agreements. It allows countries to form a customs union (CU) or of a free trade area (FTA) by allowing exceptions to the Most Favoured Nation rule. Article XXIV (5) allows countries to adopt an interim agreement necessary for the formation of a customs union or a free-trade area. This is a recognition of the fact that a CU or an FTA cannot be concluded rapidly and might need gradual implementation. 133
An interim agreement can apply for a “reasonable length of time”, allowing countries to build up to full implementation. WTO members have agreed a so called ‘Understanding’ to Article XXIV, which clarifies that the “reasonable length of time” referred to in paragraph 5(c) of Article XXIV
132 BBC News, Reality Check: Does the UK trade with ‘the rest of world’ on WTO rules?, 6 November 2017; Institute for Government, Do other countries trade with the EU on ‘WTO-only’ terms?, 22 June 2017
133 See P. Van den Bossche, W. Zdouc, The Law and Policy of the World Trade Organization, 4th edition, Cambridge University Press, 2017, chapter 3.3, p687.
should be read as 10 years, a time limit that could be exceeded only in exceptional cases.
Some advocates of leaving the EU without a deal have referred to this GATT provision and claimed that it would allow the UK to continue its tariff free trade with the EU for a certain number of years. However, trade and WTO law experts say that this is a misinterpretation of GATT Article XXIV.5, as it does not offer any automatic continuation of the status quo to the UK should it leave the EU without a deal and would not give room for unilateral action on the part of the UK as it refers to “an interim agreement” which by definition involves at least two parties (the UK and the EU) agreeing. Furthermore, the provision is designed for forming a CU or an FTA, not leaving one.
Former WTO official, Peter Ungphakorn, explains on the UK Trade Forum blog that for the UK to present an interim agreement to the WTO, it would have to overcome those three hurdles. They are:
The UK would have to reach agreement with the EU. The UK could not do this unilaterally. So this isn’t exactly “no deal”.
That agreement would have to include a plan and timetable for achieving the final agreement. And it would have to have a sufficient amount of detail, including what the final agreement would look like, because …
… the WTO membership could demand changes, if they weren’t convinced that the plan could be achieved within about 10 years. The UK and EU would have to accept those changes or scrap the agreement. (This doesn’t apply to free trade agreements that are not interim.)
Theoretically, an interim agreement could be used if the UK had started to negotiate a trade deal with the EU, for example, a Canada style FTA. Both parties might agree to register an interim agreement with the WTO under Article XXIV which would then apply pending the negotiations. But such an interim agreement needs to have a “plan and schedule” towards an end-state (GATT Article XXIV.5(c)) and has to be agreed by the UK and the EU. The UK and EU could alternatively avoid this route altogether and quickly conclude an interim basic FTA that eliminates tariffs and then notify it to the WTO as a fully-fledged agreement to remain in force until a replacement is agreed.134
6.3 UK trade with the EU
As an EU Member State, the UK is part of the EU Single Market and customs union. The EU, taken as a whole, is the UK’s largest trading partner. In 2017 UK exports to the EU were £274 billion (44% of all UK exports). UK imports from the EU were £341 billion (53% of all UK imports).135 Services accounted for 40% of the UK’s exports to the EU in 2017.
All the trade within the Single Market takes place (up to the point of exit) without paying tariffs or facing quota restrictions on goods. The Single
134 See also Commons Library Insight, No-deal Brexit and WTO: Article 24 explained, 4 February 2019
135 Commons Library Briefing Paper 7851, Statistics on UK-EU trade, 31 July 2018
Market also aims to eliminate non-tariff barriers such as differing technical specifications and labelling requirements.
With regard to trade in services, the Single Market provides the freedom to establish and run a company in any Member State. This is facilitated by mutual recognition of professional qualifications, freedom of movement of people and capital, and harmonisation of various rules.
No deal in March 2019 means the UK will be a third country to the EU for the purposes of trade. From exit day onwards, its relations with the EU will be governed by general public international law and both the UK and EU will start trading on the basis of WTO rules. The EU will be obliged to treat the UK no more favourably than any other country that has no preferential trade agreement with the block.136
Under the WTO the UK would no longer be obliged to follow the rules applied by the EU. There would be no requirement to implement EU legislation, although UK businesses would still have to comply with EU rules in order to export to the Single Market.
Trade in goods
The EU customs union sets the Common Customs Tariff (CCT): all members of the customs union apply the same set of tariffs on goods imported from outside the EU. UK exports to the EU would face the EU’s CCT and imports into the UK from the EU would face whatever tariffs the UK decided to impose. All exports from outside the EU are subject to the Rules of Origin (RoO) checks, even if they come from a country which has a trade agreement with the EU. This ensures that a correct tariff is applied and goods do not enter the EU customs union illegally via a low tariff country. As exporters from a third country, UK companies will immediately face such checks on all goods exported to the EU.
Trading under WTO rules means that the maximum tariff that can be applied to goods coming from the UK is the MFN rate. The EU’s MFN tariffs have generally fallen over time. In 2015 the EU’s average tariff was 2.6% for non-agricultural products.137 This is an average figure; tariffs on some individual products are higher. The EU tariff on cars, for example, is 10%. While the EU tariffs are low on average, they are still substantial for some sectors, particularly agriculture. The average EU tariff on sugar and confectionery, beverages and tobacco, is around 20%.138 This could be potentially economically disruptive, as it would increase the cost of the UK products in the EU. However, the MFN principle would prevent the EU from levying discriminatory or punitive tariffs on goods from the UK, or vice versa.
As a third country the UK could face various non-tariff barriers to trade, including administrative and bureaucratic delays at customs, technical barriers to trade, import licensing, standards and rules of origin.
136 Joe Owen, Alex Stojanovic, Jill Rutter, Trade after Brexit, Institute for Government, December 2017, p46
137 World Trade Organization, WTO Tariff Profiles 2017, p 82. Trade-weighted average
A Commission Brexit ‘preparedness notice’ for a no-deal scenario indicates, for example, that imports from the UK entering its territory may be subject to customs controls. Businesses will have to submit customs declarations and may be required to provide guarantees to cover potential customs debts.139
Manufacturers or importers established in the UK will no longer be considered as EU economic operators. A former EU distributor will become an exporter and will have to comply with a new set of conformity assessments.140
UK industrial products are currently subject to the standards and requirements of EU product legislation on general product safety, public health, environmental safety or energy efficiency requirements, for example. However, a no-deal Brexit may introduce new bureaucratic requirements to prove compliance.
The import of certain goods from the UK and the export of such goods to the UK will become subject to import/export licensing. The EU imposes such restrictions on goods going to and coming from third countries to protect health and safety and the environment. This affects goods such as waste, hazardous chemicals, genetically-modified organisms, live animals, products of animal origin, and some plants and plant products, such as wood packaging. The existing licences issued by the UK authorities will cease to be valid.141
The licensing requirements will also apply to controlled goods, such as firearms and dual-use items that can be used for both civil and military purposes.142
The Government’s ‘technical notice’ Trading with the EU if there’s no Brexit deal and VAT for businesses if there’s no Brexit deal clarify that the obligations for businesses that trade with the EU would be broadly the same as those that apply to companies currently trading with countries outside the EU. Businesses would have to register as UK economic operators, submit customs declarations on imports and exports, and might have to pay tariffs or fulfil other administrative requirements.143 Importers of goods from the EU would have to correctly classify these goods in order to apply the right UK import tariff.144
139 European Commission, Notice to Stakeholders, Withdrawal of the United Kingdom and EU Rules in the Field of Customs and Direct Taxation, 30 January 2018
140 European Commission, Notice to Stakeholders, Withdrawal of the United Kingdom and EU Rules in the Field of Industrial products, 22 January 2018
141 European Commission, Notice to Stakeholders, Withdrawal of the UK and EU Rules in the Field of Import/Export Licences for Certain Goods, 25 January 2018
142 Such items range from raw materials like chemicals to components and complete systems like lasers, as well as software and technology. Government Guidance, Exporting controlled goods if there’s no Brexit deal, 23 August 2018.
143 Government Guidance, Trading with the EU if there’s no Brexit deal and VAT for businesses if there’s no Brexit deal, 23 August 2018
144 Government Guidance, Classifying your goods in the UK Trade Tariff if there’s no Brexit deal, 23 August 2018
Rules of origin
The EU has preferential trade arrangements with a range of other countries. UK inputs (materials or processing operations) currently count as ‘EU content’ for the purpose of determining if imports benefit from preferential tariffs the EU has agreed with those countries. As of the withdrawal date, in the absence of any other arrangement, goods originating in the UK that are incorporated in EU goods exported to third countries will no longer qualify as ‘EU content’. EU exporters will no longer be able to cumulate the UK share in the product and may thus miss out on the benefits of preferential tariffs.145
Trade in services
Without an agreement, the UK’s trade in services with the EU will be governed by the WTO General Agreement on Trade in Services (GATS).
Within the EU Single Market, economic operators are free to establish and run a business in any Member State and can also provide services from their ‘home’ Member State in any other Member State. Professional qualifications acquired in one Member State are recognised across the Single Market. Freedom of movement of people and capital, harmonised rules on VAT, intellectual property rights and data protection all reduce the barriers to providing services across the EU. Many Single Market for Services measures are facilitated by the so-called Services Directive. This Directive aims to remove the legal and administrative barriers to cross-border service provision. It does this using various mechanisms, including:
- abolishing “discriminatory requirements” placed on people establishing businesses in other countries, including residency requirements or nationality requirements;
- removing other “burdensome requirements”, such as complex authorisation schemes, economic needs tests, or business size and health checks;
- requiring Member States to establish a Single Point of Contact so businesses can access all relevant information easily.146
The Directive also removes a range of barriers to consumers accessing services in other EU countries or accessing services provided by non-UK EU companies in the UK.147 Under a no-deal scenario, these provisions would cease to apply to UK operators in EU Member States.
There is a view among researchers that the WTO has made less progress in service liberalisation than the EU’s single market for services has to offer. GATS constitutes a broad framework for the liberalisation of trade in services rather than setting compulsory rules.148 According to researchers
145 European Commission, Notice to Stakeholders, Withdrawal of the United Kingdom and EU Rules in the Field of Customs and External Trade, Preferential Origin of Goods, 4 June 2018
146 European Commission, Services Directive: quick guide
147 European Commission, Services Directive in practice
148 Prof. Dr. Friedemann Kainer, The consequences of Brexit on Services and establishment: Different Scenarios for Exit and Future Cooperation. Analysis for the European Parliament Internal Market and Consumer Protection Committee, June 2017
at the London School of Economics (LSE), “since the WTO has made far less progress than the EU in liberalising trade in services, [no deal] would mean reduced access to EU markets for UK service producers”.
149 Emerging work at the OECD suggests that, on average, EU barriers to services sector trade with third countries are four times greater than those which apply inside the Single Market.150
The Confederation of British Industry (CBI) has noted that if no deal is agreed, the WTO rules would not guarantee the same level of access to the EU market for services industries as there is now. The single market for services provides for “positive integration” measures (e.g. mutual standards), which GATS is lacking. This concerns harmonisation of rules or the mutual recognition of rules by default. A CBI report said:
The barriers services businesses could potentially face include nationality requirements for service providers, requirements for businesses to have a minimum number of locally-resident staff for different roles, restrictions on the number of establishments and foreign ownership, and authorisation requirements that are subject to economic needs assessments.
Companies in some of our most successful exporting sectors would be unable to export specific types of services to the EU at all. Those industries include airlines, broadcasters, and a range of financial, professional and business service providers.151
According to a study by UK in a Changing Europe, in a no-deal scenario
UK service exporters would also suffer from the loss of passporting rights for financial services, as well as access for other service providers (legal and accountancy services, etc).152
Case study: professional and business services sector
Profile of the sector
The professional and business services sector includes industries that provide specialist, knowledge-intensive services to businesses. It includes legal services, accountancy, advertising, architectural services, engineering and management consultancy. It is a large sector and one in which the UK has a high international reputation.
The professional and business services sector: 153
- includes 645,000 businesses, 24% of all businesses in the UK in 2017;154
149 S. Dhingra and T. Sampson, Brexit and the UK economy, LSE Centre for EconomicPerformance, May 2017, p4
150 ‘A goods-only Brexit deal puts UK services sector jobs at risk’, Financial Times, 5 July 2018, UK Trade Policy Observatory Analytical Studies of Brexit Conference Brochure, 3 July 2018
151 CBI 5 Steps To Protect Services Post-Brexit, 8 March 2018, p14, 18
152 The UK in a Changing Europe, Cost of No Deal, 20 July 2017
153 The Industry is defined as the following Standard Industrial Classification codes: 69, 70, 71, 72, 73, 74, 77, 78, 82.
154 ONS, ‘Business activity, size and location’, 2017, via Nomis Database
- employed 4.1 million people, 14% of employment in Great Britain in 2016.
- generated economic output (in terms of Gross Value Added) of £198 billion, 11% of the UK’s economic output in 2017.156
The professional and business services industry provides essential services to all parts of the economy. Employees are typically highly skilled professionals. Businesses in this sector range from very large firms operating throughout the world and providing a range of services (such as the ‘Big Four’ accountancy firms or the ‘magic circle’ law firms), to small and medium sized enterprises that support a specific kind of business in one region of the UK.157
Service industries in the EU
Professional and business services businesses are subject to the EU’s Single Market for Services, which is not as far reaching as the Single Market for Goods. The core principles of the Single Market for Services are:158
- the freedom to establish and run a company in any Member State;
- the freedom to provide services across Member State borders;
- mutual recognition of professional qualifications (qualified service professionals are recognised as such throughout the EU without having to re-qualify).
The Single Market for Services also allows freedom of movement of people and capital, and harmonises rules in VAT, intellectual property and data protection, all of which reduce the barriers to providing professional and businesses services in other EU Member States.159
Section 6.2 above provides further information on the Single Market for Services.
Impact of no deal: regulatory frameworks
In the event of a no-deal Brexit, UK professional and business services companies operating only in the UK are unlikely to see any major direct impact. These services are largely regulated on a domestic basis, so EU-wide rules have only a limited impact.160
In areas where the regulatory framework is harmonised by EU Directives, a no-deal Brexit is also unlikely to have any immediate impact. For example, statutory audit is specified under the Audit Directive [2006/43/EC] and UK regulations will remain unchanged in many respects for some time after
155 ONS, ‘Business register and employment survey’, 2017, via NOMIS database
156 ONS, Quarterly National Accounts Q1 2018, Low Level Aggregates Table, June 2018
157 Department for Exiting the EU Select Committee, HM Government Sectoral Brexit Impact Assessments; Professional and business services, December 2017, p3
158 European Commission, Single Market for Services, webpage accessed 30 July 2018
159 European Commission, Slides on Internal EU27 preparatory discussions on the framework for the future relationship: Services, 6 February 2018
160 Exiting the EU Committee, HM Government Sectoral Brexit Impact Assessments; Professional and business services, December 2017, p9
withdrawal, whether or not a deal is reached. Any divergence would probably happen over several years.
However, a no deal scenario could have an immediate impact on UK companies operating or seeking to operate in the EU, and on EU companies operating or seeking to operate in the UK. Without a deal, these businesses would be viewed as third-country businesses, which means that EU Directives would not automatically apply to them. What rules do apply would depend on the company law in each Member State, so it is possible that some Member States would allow UK businesses to provide services as now, but this is not guaranteed.162
The government guidance on Accounting and audit if there’s no Brexit deal clarifies the effects of no deal for audit, accounting and corporate reporting.
Mutual recognition of qualifications
Another important area for the professional and business services sector in which ‘no deal’ could have a major impact is the mutual recognition of professional qualifications in the EU and the UK. It is possible that UK professionals working in the EU would no longer be recognised as having valid professional qualifications; this would depend on the Member States’ existing rules on the recognition of qualifications awarded by third countries.163
The European Commission has said that with no deal the UK’s third country status would mean:164
[t]he recognition of professional qualifications of United Kingdom nationals in an EU-27 Member State will be governed by the national policies and rules of that Member State, irrespective of whether the qualifications of the United Kingdom national were obtained in the United Kingdom, in another third country or in an EU-27 Member State.
The Commission also notes that this would apply to non-UK EU citizens in the UK (whose status would depend on the sector-by-sector rules in the UK regarding third country qualifications), and those EU citizens holding professional qualifications awarded in the UK but working in other EU countries.165
See section 9.1 below for more information on free movement and recognition of qualifications.
161 Ibid, p11
162 European Company Law Experts, The consequences of Brexit for companies and company law, Section 5: Third Country firms: the post-Brexit regime, May 2017
163 Government guidance Providing services including those of a qualified professional if there’s no Brexit deal, 12 October 2018
164 European Commission, Notice to stakeholders – Withdrawal of the United Kingdom and EU rules in the field of regulated professions and the recognition of professional qualifications, June 2018, p3
165 Ibid, p4
UK dominance in Europe
The UK’s financial services sector is the largest in Europe and is deeply connected with it. An estimated 10% of its revenues come directly from the EU, making it the third most-reliant sector on the EU market on that measure, after oil and gas at around 40% and manufacturing at around 20%.166
All the main European banks and insurance companies operate in London, as UK companies do in Europe, under a system of ‘passports’. Any company authorised in any EU Member State can operate in any other EU Member State under its passport. It is the sudden loss of this passport without other arrangements in place that is the biggest potential problem arising out of ‘no deal’.
A PwC study concluded that the loss of mutual market access in financial services would be detrimental to both sides, although it would hurt the UK more. It estimated that no access would make the UK economy 1.3% smaller by 2030, and 0.3% smaller for the EU27.167 The impact of no deal on financial services alone was estimated by the Government at around -9% of economic activity in the long run.168
The Government’s no-deal notices and guidance for financial services are collated here. Key information from these notices and other sources is summarised below.
What happens if there is no deal?
HM Treasury’s Approach to financial services legislation under the European Union (Withdrawal) Act (published 9 August 2018) explained what would happen if there is no deal (paras 1.17 – 1.20). As a third country, UK-based financial services would lose their automatic access to the EU. The Government said:
In the unlikely scenario that the UK leaves the EU without a deal, the UK would be outside the EU’s framework for financial services. The UK’s position in relation to the EU would be determined by the default Member State and EU rules that apply to third countries at the relevant time. The European Commission has confirmed that this would be the case.
In light of this, our approach in this scenario cannot and does not rely on any new, specific arrangements being in place between the UK and the EU. As a general principle, the UK would also need to default to treating EU Member States largely as it does other third countries, although there are instances where we would need to diverge from this approach, including to provide for a smooth transition to the new circumstances. The principles that would lead to deviations from this approach are set out below.
In some areas, correcting deficiencies to reflect this environment would be relatively straightforward. The UK’s world-leading financial sector is overseen by HM Treasury and underpinned by a strong legislative framework with world-class regulators (the Bank of England/Prudential Regulation Authority and Financial Conduct Authority). This means that the
166 See Library briefing, Importance of trade with the EU for UK industries, August 2017
167 PwC, Impact of loss of mutual market access in financial services across the EU27 and UK, February 2018, p4
168 HM Government, EU Exit: Long-term economic analysis, November 2018, p58
responsibilities of EU bodies could be re-assigned efficiently and effectively, providing firms, funds and their customers with confidence after exit. In this scenario, EU financial services firms operating in the UK would broadly become subject to the same supervisory regime that the UK already applies to other third countries – a regime that is shaped by the highly global, cross-border nature of financial services and the UK’s robust regulatory framework as set out in legislation, including in the Financial Services and Markets Act 2000 (FSMA), the Banking Act 2009 and the Bank of England Act 1998. This existing UK financial services legislative framework provides powers for extensive cooperation with global regulatory bodies. When the UK is no longer an EU Member State, and so the EU obligation of reciprocal cooperation no longer applies, this existing framework could be relied upon to ensure this important cooperation continues in this scenario.
The European Union (Withdrawal) Act 2018 transfers EU law, including that relating to Financial Services, to the UK statute book on exit day.
In the event of no deal, the Government will create temporary permissions and recognition regimes (explained below) to allow EU firms to continue their activities in the UK for a time-limited period. Firms wishing to continue doing business in the UK in the longer term will be able to use this period to obtain full authorisation (or recognition) from UK regulators without disruption to their business.169
In the event of no deal, regulatory functions carried out at an EU level will be transferred to UK bodies responsible for regulating financial services. The Government said:
In leaving the EU without a deal, many functions currently carried out at an EU level would cease to apply to the UK and would need to be provided for in the UK’s regulatory regime. HM Treasury’s onshoring work involves allocating these EU functions to the appropriate UK bodies. In this scenario, HM Treasury proposes to follow the model outlined in FSMA and allocate functions to UK regulators in a way which is consistent with the responsibilities already conferred on them by Parliament, thus providing certainty and continuity for firms.
Further information about how HM Treasury proposes to allocate responsibilities between HM Treasury and the financial services regulators in this scenario can be found in the draft Financial Regulators’ Powers (Technical Standards) (Amendment etc.) (EU Exit) Regulations 2018 and accompanying explanatory note, published in April 2018.
Additionally, HM Treasury has confirmed that in this scenario it intends to transfer supervisory powers to the FCA to regulate credit ratings agencies and trade repositories currently supervised at the European level by the European Securities and Markets Authority (ESMA), and it intends to give functions and powers in relation to non-UK central counterparties and non-UK central securities depositories, also currently exercised by ESMA, to the Bank of England.170
169 Bank of England, Bank of England’s approach to financial services legislation under the European Union (Withdrawal) Act, 27 June 2018
170 HM Treasury’s Approach to financial services legislation under the European Union (Withdrawal) Act, 9 August 2018, paras 1.24 – 1.26
Regulation 2 of the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 tells us which UK regulator EU functions are assigned to:
the “appropriate regulator” in relation to—
(i) the EU Regulations specified in Part 1 of the Schedule, is the FCA;
(ii) the EU Regulations specified in Part 2 of the Schedule, is the PRA;
(iii) the EU Regulations specified in Part 3 of the Schedule, is the Bank of England;
(iv) the EU Regulations specified in Part 4 of the Schedule, is both the FCA and the PRA;
(v) the EU Regulations specified in Part 5 of the Schedule, is both the FCA and the Bank of England;
(vi) the EU Regulation specified in Part 6 of the Schedule, is the Payment Systems Regulator;
(vii) EU-derived provisions, means whichever of the FCA, the PRA or the Bank of England made the provisions
The SI’s Schedule lists the precise EU powers and responsibilities that are transferred to these UK regulators.
HM Treasury’s full programme of secondary legislation under the EU (Withdrawal) Act 2018 to ensure that the UK continues to have a functioning financial services regulatory regime in all exit scenarios can be found here.
EEA firms in the UK – a new Temporary Permissions Regime (TPR)
In December 2017, the Government announced its intention to introduce a Temporary Permissions Regime (TPR) which would allow EEA firms to continue operating in the UK for a time-limited period after the UK has left the EU without a deal.
This temporary regime would be bolstered by the main regulators (the Financial Conduct Authority and Bank of England) being given the power to implement changes to their rulebooks to permit it to become effective in support of whatever legislation is passed.
The TPR will allow EEA firms currently passporting into the UK to continue operating in the UK for up to three years after exit. During that time, these firms can apply for full authorisation from UK regulators.
The government has published in draft the legislation that will deliver the TPR. The Financial Conduct Authority (FCA) has published its approach to implementing the TPR and the Prudential Regulation Authority (PRA) has set out its expectations for the TPR. The FCA and PRA are the key regulators in the sector.
Financial stability risks related to derivatives
The derivatives market has been identified by the Governor of the Bank of England as the ‘big issue’ for the UK and EU to solve post Brexit day.171 Derivatives are financial contracts used to manage risk (they are also used to speculate). For example, an interest rate swap is a derivative that allows a firm to fix the interest rate it pays on a variable loan.
Speaking to the Treasury Committee in July 2018 the Governor outlined the problem, saying that so-called ‘life-cycle events’ in derivative contracts such as rolling open positions or exercising options could no longer be executed:
The crucial point here is that on the day of leaving, the contract can still be serviced; however, life-cycle events will start to accumulate and, arguably, they will accumulate quite rapidly in the event of a cliff-edge Brexit because one would reasonably expect the volatility in markets to go up. How big is that potential risk? We have done the due diligence on that. For a mid-size firm there are about 1,000 life-cycle events a month. For a large derivative counterparty, there are up to 250,000 a week. If you think about it in the world of derivatives hedging underlying positions, with the inability to conduct these life-cycle events and an environment where there is volatility, the risk—the inability to dynamically hedge—increases with time, and you see a financial stability risk developing fairly quickly, in our opinion. We shared that opinion publicly through the FSR and directly with our counterparts in the EU.172
He drew attention to how this problem affects cross-border clearing houses. A central counterparty (CCP) clearing house is a financial institution that facilitates the settling (i.e. clearance) of financial contracts such as derivatives. The clearing house stands between two clearing firms (also known as member firms or participants). Its purpose is to reduce the risk and consequences of participants defaulting on their obligations. Thus, CCPs make these transactions cheaper and safer for traders.
The Governor was warning that the consequences of ‘no deal’ for outstanding derivatives contracts cleared via UK CCPs would be financially destabilising, more so for the EU but also for the UK. There is an analysis of all these risks in the Bank of England’s Financial Stability Report (June 2018):
EEA clearing members and their clients currently rely heavily on CCPs based in the UK. The ECB estimates that UK CCPs clear approximately 90% of euro-denominated interest rate swaps used by euro-area customers. (p12)
The Governor explained that the EU had not come up with an equivalent temporary recognition regime for UK CCPs:
… as it stands at present, the large, UK-based clearing houses would no longer be authorised clearing houses by the EU following the Brexit date. Therefore, the actions of European counterparties that had cleared in those clearing houses would be ultra vires; they would not be authorised to use those clearing houses. Those clearing houses would know that in advance and so the European
171 For a more thorough examination of the derivatives market post Brexit see ISDA; Contractual Continuity in OTC Derivatives Challenges with Transfers, July 2018.
172 Treasury Committee, oral evidence: Bank of England Financial Stability Reports, HC 681
counterparties would have to close out those positions in advance. The question is how rapidly that could be done. The orders of magnitude are much higher—it is a notional £60 trillion-plus of exposure—than they are in the uncleared space. That process, which the Bank of England oversees as the regulator of these clearing houses, would have to begin prior to the Brexit date. I want to make two final points. First, the UK Government have signalled their intention and developed statutory instruments, which they will lay before Parliament as soon as is practical. Given the timing of the summer recess, that is likely to be in the fall, but it will be done in a timely way. Those statutory instruments will solve the UK side of this issue—both authorisation of EU CCPs and authorisation of the EU counterparties. The European Union has not yet indicated a solution to this.
Since that speech, the EU announced they would do the same as the UK – give temporary authorisations to UK CCPs in the event of no deal. The EC said in November 2018 that they will continue to recognise for some time this systemically important area of UK financial services, central clearing. The European Securities and Markets Authority (ESMA) explained here (23 November 2018):
The European Securities and Markets Authority (ESMA) is publishing this Public Statement to address the risks of a no-deal Brexit scenario in the area of central clearing. The ESMA Board of Supervisors supports the continued access to UK CCPs to limit the risk of disruption in central clearing and to avoid negatively impacting EU financial market stability.
They further published this statement (19 December 2018) clarifying their plans for recognising UK CPPs in the event of no deal. Whether arrangements for financial services would be more than bare minimum to safeguard financial stability would be a matter for negotiations.
The combination of the ‘no passport’ issue and the derivatives issue is particularly troublesome for the insurance industry. The Association of British Insurers (ABI) indicated that coordination between the UK and EU to avoid a ‘cliff edge’ would be ‘imperative’. A briefing from the ABI set out the problem:
- When the UK leaves the Single Market, UK-based providers will no longer be able to rely on ‘passports’ and the right of establishment to service existing cross-border financial contracts throughout the European Economic Area (EEA). There will also be an identical impact on EEA providers who will be unable to service existing financial contracts with UK-based parties. This issue is often referred to as the contract continuity problem.
- This will, for example, impact general insurance, long-term life insurance, pension schemes, medium and long-dated derivatives contracts, revolving credit facilities, and may also affect general customer terms of business, prime brokerage and custody arrangements.
- The extent of this issue is significant and will affect both UK and EEA consumers. According to the Bank of England, approximately six million UK insurance policyholders, 30 million EEA insurance policyholders, and around £26trn of outstanding uncleared derivatives contracts could potentially be affected. The issue will also affect contracts relating to segregated mandate business under the
Markets in Financial Instruments Directive (MiFID) II. In particular, failure to find a solution to derivatives contracts could potentially lead to significant financial stability risks. 4. Honouring existing obligations to customers is a key priority for the industry in the UK and the EU, and it is continuing to do all it can to address the issue. However, while service providers are preparing to take steps to mitigate the impact of the loss of passporting rights, it is highly unlikely that this will be adequate to fully address the contract continuity issue by March 2019.
- As a result, it is imperative that action by service providers is coupled with action from policymakers and regulators in the UK and EU to mitigate this ‘cliff edge risk’. The International Monetary Fund (IMF) flagged in its Article IV statement that a resolution would be “most efficiently achieved through coordinated EU and UK legislation”.
- It is critical that the UK and EU implement the transitional period that was agreed at a political level at the European Council meeting in March 2018. Furthermore, it is also important for UK and EU regulators to issue commitments about the future treatment of these contracts to act as a regulatory ‘back stop’ in the event that the transitional period fails to materialise.
- Any UK/EU solution should also be underpinned by ongoing supervisory cooperation between UK and EU regulators. The new European Central Bank (ECB) and the Bank of England (BoE) technical working group on risk management, announced on 27 April 2018, would be an ideal forum to discuss solutions to this issue.
- The early announcement of grandfathering arrangements, either for a time-limited period or potentially until maturity, would allow for contract continuity which will deliver the best results for UK and EEA customers, as well as European competitiveness more broadly.173
Temporary Recognition Regime (TRR)
As explained above, the UK will establish a temporary recognition regime (TRR) for EU-based central counterparties (CCPs). This regime will allow these CCPs to continue to provide clearing services to UK firms for a period of up to three years while those CCPs apply for recognition in the UK. The Bank of England has published further details on the approach to recognising non-UK CCPs.
Becoming a third country could mean no mutual rights of access to public procurement markets in the UK and the EU – although many contracts may in practice still be open. In such a scenario the EU rules on public procurement would no longer apply and EU Member States’ authorities would have to apply the same rules to a potential UK supplier as to any
173 TheCityUK/ABI briefing, June 2018
other business based in a third country with which the EU did not have an agreement on procurement.
This ‘cliff-edge’ and possible exclusion of UK bidders from procurement procedures in the EU can be largely avoided by joining the General Procurement Agreement of the WTO (GPA). The UK is currently a party to the GPA by virtue of its EU membership, but the Government has submitted an application to re-join as an independent party.175 This would ensure continued UK access to the EU27 procurement market for most tenders above certain thresholds. The GPA would not give the UK the same full access to EU procurement markets that it currently enjoys, however.176
Commenting on the differences in scope between the EU Procurement directives and the GPA, Professor Sue Arrowsmith of the University of Nottingham states that some of them are of limited importance for the UK:
The scope of procurement covered for the EU/UK under the GPA is narrower than the scope of covered procurement under the EU procurement directives in relation to a few utility sectors, coverage of private utilities, the defence sector, some services, (possibly) concessions, and certain private contracts subsidised by government. The GPA also does not include below-threshold procurement. However, some of these differences are of limited importance in the UK context. Further, the procurement that does fall into the gaps between the directives and GPA, at least above the directives’ thresholds, could easily be added to the GPA UK if desired.177
For further information on the UK and the GPA, see the Commons Library briefing Brexit: Public Procurement. See also National Audit Office, Report by the Comptroller and Auditor General, Department for Business, Energy & Industrial Strategy, Competition and Markets Authority, Exiting the EU: Consumer protection, competition and state aid, HC 1384 Session 2017–2019, 6 July 2018.
BEIS has contingency plans if the UK loses access to EU-wide market surveillance and enforcement systems, but it will have a considerable task to implement them in the event of a no-deal scenario.
- To support its market surveillance capability, the UK currently relies on an EU-wide rapid alert system to identify unsafe products. BEIS sought a ministerial direction in March 2018 to spend £2.4 million on a replacement system. This was behind schedule but, following the direction, BEIS reports being on track to deliver a minimum capability by March 2019 in a no-deal scenario (paragraphs 2.19 to 2.21).
174 European Commission, Notice to Stakeholders: Withdrawal of the United Kingdom and EU Rules in the Field of Public Procurement, 18 January 2018
175 International Centre for Trade and Development, EU, UK Debate Next Steps as Key October Summit Approaches, 26 July 2018
176 Institute for Government Explainers, Public procurement
177 Prof Sue Arrowsmith, Consequences of Brexit in the area of public procurement, a study for the European Parliament Committee on Internal Market and Consumer Protection, April 2017
- National Trading Standards has identified product safety checks on imported goods as an issue that may be affected by EU Exit if provision is not made for the free movement of goods in a future UK–EU economic relationship. The borders in Kent could be some of the most affected by Brexit because the vast majority of goods imported through there are from the EU and not currently subject to product safety checks. Kent Trading Standards has estimated the impact on its workforce of different scenarios, including no deal, and has escalated this to their funding providers. There is no requirement in law that product safety checks must be carried out at the border and, to date, no changes have been made to the infrastructure at Dover to expand capacity for product safety checks (paragraph 2.24).
- Trading Standards services and the CMA are planning to work bilaterally with EU Member States on enforcement, as they currently do with non-EU countries, if there is no deal. Appropriate protocols already exist, but outside EU structures the authorities expect cross-border enforcement to take longer and be more expensive, and the UK authorities cannot mandate another country to cooperate (paragraphs 2.22 to 2.23).
6.4 Pursuing an independent trade policy
New UK legislation
The Government has introduced the Trade Bill178 and the Taxation (Cross-border Trade) Bill, the latter becoming an Act of Parliament in September 2018.179 Both aim to prevent disruption in trading arrangements and allow the UK to continue its existing trade policy as far as possible immediately after Brexit. The Trade Bill has provisions for the transitioning of EU trade agreements. The customs legislation under The Taxation (Cross-border Trade) Act 2018 will mostly follow the EU’s Union Customs Code. Neither the Trade Bill nor the Taxation (Cross-border Trade) Act 2018 are intended to deal with future trade agreements with the EU or other countries.
In a no-deal scenario there would be significant time constraints in an otherwise ongoing process in which the UK is developing the principles of its trade policy.
Trading with third countries
The UK is a member of the World Trade Organization (WTO) in its own right. However, as noted above, on leaving the EU it will need to update the terms of its WTO membership.180
178 The Trade Bill passed its third reading in the House of Commons in July 2018 and is currently being considered by the House of Lords (committee stage).
179 The Taxation (Cross-border Trade) Act received Royal Assent on 13 September 2018.
180 Department for International Trade, Trade White Paper: Preparing for our future UK trade policy – Government Response, January 2018
In order to re-establish its autonomy from the EU in the WTO, the UK must take several procedural steps. In particular, it must agree ‘schedules’ for goods and services. These country-specific commitments refer to maximum tariff levels and tariff rate quotas (TRQs – quantitative restrictions on imports) on goods and levels of agricultural subsidies.181
The Department for International Trade has stated that the Government plans to replicate as far as possible its current commitments after Brexit.182 The Commission and the UK have mutually agreed to apportion the UK’s TRQs based on recent years’ trade flows.183 On 24 July 2018, the UK notified its draft schedule for goods commitments to the WTO. Several major agricultural exporters, including the US, Argentina, Australia, Brazil, Canada and Thailand, have questioned the proposed Tariff Rate Quota apportionment between the EU and the UK, and some have expressed formal reservations about the proposal.184 Liam Fox notified Parliament on 25 October that the UK would open formal negotiations which would lead to the approval of schedules.185
For services schedules the UK must comply with the GATS obligations and specify its commitments for each particular service sector, detailing the levels of market access and treatment under national laws.186 Services schedules include unamendable lists of exemptions which allow the extension of more favourable treatment to particular trading partners in particular service sectors for a limited period of time.187 On 3 December 2018, the UK submitted its draft services schedule to the WTO. Its members have 45 days to review the proposal. If no objections are made by the end of this period, the UK’s services schedule will be considered certified.188
It is widely accepted that the UK can trade under WTO rules without certified goods and services schedules in place.189 The Government has said:
Should the goods and services schedules be uncertified as we leave the EU, we do not anticipate there to be any problems – it is not
181 WTO, ‘Members’ commitments’
182 Department for International Trade, Trade White Paper: Preparing for our future UK trade policy – Government Response, January 2018, Chapter 2.1
183 European Commission Proposal on the apportionment between the United Kingdom and the EU27 of tariff rate quotas included in the World Trade Organisation schedule of the Union, COM(2018)321 final, 22 May 2018
184 IEG Policy, UK to enter into negotiations with WTO partners on Goods Schedule after TRQ objections, 25 October 2019
185 HCWS1034, 25 October 2018
186 House of Lords European Union Committee, Brexit: the options for trade,13 December 2016, HL 72, chapter 6
187 WTO, Services: rules for growth and investment; Department for International Trade, Trade White Paper: Preparing for our future UK trade policy – Government Response, 5 January 2018, chapter 1.1
188 WTO, United Kingdom submits draft post-Brexit services commitments to WTO, 3 December 2018
189 The EU, for example, updated its schedules in 2016, twelve years after its enlargement from 15 to 25 member states, and again in 2017, to reflect its expansion to 28 member states; Comment: UK trade can survive on ‘uncertified’ schedules after Brexit, MLex, 2 August 2018
82 What if there’s no Brexit deal?
uncommon for WTO members to operate on uncertified schedules for periods of time.
Public Procurement and third countries
The UK is currently part of the WTO Agreement on Government Procurement (GPA) through its EU membership. Under the GPA, many large public sector procurement opportunities must be opened up to suppliers in countries which are parties to the Agreement.
The Government formally requested to re-join the GPA under terms similar to the EU’s. On 27 November 2019, signatories to the GPA agreed in principle to the UK’s offer but an official decision is expected in February 2019.191 Re-joining the GPA would ensure that the UK maintains a similar level of access to the government procurement markets of (non-EU) third countries as before Brexit. The GPA does not, however, cover the enhanced terms of access which the EU has negotiated for operators of its Member States under its free trade agreements with third countries like Canada and Japan.192 This would become a matter for the UK’s future bilateral trade treaties with these countries.
‘Rollover’ of existing EU trade agreements
As part of an orderly withdrawal, the Government would like the transitional adoption or ‘rollover’ of all the EU’s trade agreements and other preferential trade arrangements with third countries. The Government published a Technical Note in February 2018 on continued application of EU international trade and other agreements during the envisaged transition/implementation phase by agreement of all the parties concerned. This would enable trade arrangements with third countries that the UK is currently party to as an EU Member State to be replicated in UK-third-country agreements when the UK leaves. This would not preclude a fuller revision of these agreements in the longer term to create a more bespoke trading arrangement.
The EU agrees to rollover in principle
At the March 2018 European Council, the EU agreed to notify other parties to international agreements that the UK is to be treated as a Member State during the transition period for the purposes of these agreements. However, this remains a request and it is possible that the third countries concerned may not agree.
On 11 January 2019 the Council of EU adopted a decision on the signing of the WA which provides for the signing of the WA once the procedures required for its conclusion (i.e. ratification by the House of Commons and by the European Parliament and Council of EU) are completed. It referred to the envisaged transition period and stated that the Commission should therefore notify the other parties to the EU’s international agreements that the UK “is to be treated as a Member State for the purposes of those agreements during the transition period”.
190 For the Government’s position see Department for International Trade, Trade White Paper: Preparing for our future UK trade policy – Government Response, January 2018
191 WTO, Parties to government procurement pact approve UK’s terms of participation post-Brexit, 27 November 2018
192 The EU-Japan Economic Partnership Agreement will enter into force on 1 February 2019.
The Government’s bilateral engagement
The Government said in January 2018 that it had engaged with 70 countries covered by over 40 EU international trade agreements and had received a positive reaction to its objective of ensuring continuity in these trading relationships.
An International Trade Committee (ITC) report on Continuing Application of EU trade agreements after Brexit published in February 2018 warned of trade with 70 nations “falling off a cliff edge” if the Government did not act quickly to roll over the EU’s trade deals. It said there was an urgent need for clarity “over the number, type, scope, extent and importance of the EU’s trade-related agreements” and warned that substantive amendments to the rolled-over agreements were almost certain to be required. The Government told the ITC in May that it was working bilaterally with partner countries to “to ensure continuity of effect for our international agreements beyond the Implementation Period”.193 Commons Briefing Paper 8370, The UK adoption of the EU’s external agreements after Brexit, 24 July 2018, provides a more in-depth account of the issues.194
Liam Fox told the ITC on 11 July 2018 that agreements in principle had been reached with third countries about continuing trading arrangements, but that many countries were waiting to see if there would be a transition period first, with a view to using the extra time to negotiate a more bespoke agreement (rather than simply rolling over the existing arrangements). It was the Government’s intention to have those agreements in place before Brexit.195 But Trade minister George Hollingbery told the ITC on 4 September that it is “not an absolute given” that all the EU trade agreements would be “transitioned” before exit day.196
The Government published a technical notice covering arrangements in the event of no deal on 12 October 2018, “Existing free trade agreements if there’s no Brexit deal”. It refers to “around 40 free trade agreements with over 70 countries” that the UK participates in as a member of the EU, accounting for around 12% of the UK’s total trade, according to 2017 ONS data. It states that the Government is “currently working with partner countries to prepare for a range of possible scenarios to maintain existing trading relationships”. It states that during any implementation (i.e. transition) period “arrangements would be put in place with partner countries so that the UK is treated as an EU member state for the purposes of international agreements, including trade agreements”. However, in the event of a ‘no deal’, there will be no implementation period, and in this scenario “the government will seek to bring into force bilateral UK-third country agreements from exit day, or as soon as possible thereafter”. It states that new agreements will replicate existing EU agreements and the
193 International Trade Committee, Continuing application of EU trade agreements after Brexit: Government Response, 15 May 2018, p 4
194 Commons Briefing Paper 8370, The UK adoption of the EU’s external agreements after Brexit, 24 July 2018
195 International Trade Committee, The work of the Department for International Trade, 11 July 2018, Q 332-337
196 MLex, Trade agreement rollovers after Brexit ‘not a given,’ minister says, 4 September 2018
same preferential effects with third countries as far as possible, whilst making the technical changes needed to ensure the agreements operate in a bilateral context. Reaching agreements with partner countries “will depend on our ongoing discussions with them”.
The notice states that should the necessary arrangements not be in place by exit day to maintain particular preferences, then in a no deal scenario trade would take place on a ‘Most Favoured Nation’ (MFN) basis otherwise known as ‘World Trade Organization (WTO) Terms’, until such a new arrangement has been implemented. It explains that the principle of MFN treatment under WTO rules means that the same rate of duty, on the same good, must be charged to all WTO members equally subject to certain exceptions (such as if a free trade agreement is in place), and that for services WTO members are required to grant treatment that is no less favourable to that granted to services and service suppliers of any other WTO member. The notice also refers to the process of regularising the terms of UK membership at the WTO membership, including establishment of independent UK schedules, currently contained within the EU schedules (see section 6.3 of this paper).
In addition to seeking continuity for existing free trade agreements, the notice refers to powers in the Taxation (Cross-border Trade) Act 2018 which enable the UK to put in place a UK unilateral trade preference scheme for developing countries as the UK leaves the EU. It states that in the first instance, it is intended that this will provide the same level of access as provided by the current EU trade preference scheme. This will maintain tariff free access for Least Developed Countries and continue to offer tariff reductions to around 25 other developing countries.
In terms of the implications for users of current EU free trade agreements, the notice warns that while the Government’s intention is that the effects of new bilateral agreements will be identical to, or substantially the same as, the EU agreements they replace, “there may be practical changes to how they make use of preferences under these new agreements.” For example, UK and EU content will be considered distinct, and each new agreement will individually specify what origin designations may be used to qualify for preferences. The notice states that the Government “will aim to limit these changes as far as possible, but the final form of new agreements and any resulting changes will depend on ongoing discussions with our trading partners”. In this regard, it refers to a requirement in the Trade Bill that the government will publish a report before these new free trade agreements are ratified on any significant changes to the new trade-related provisions.
The notice states that traders will pay the applied MFN tariff where no arrangements have been agreed to ensure continuity of existing trade preferences with third countries, and that the Government “will determine and publish a new UK MFN tariff schedule before we leave the EU”. The notice provides a link to the UK Government’s Tariff Look Up tool where information on current tariff rates are available.197
By December 2018, The UK’s trade consultations with several South African states, as well as with Switzerland, had materialised in preliminary agreements to continue existing trade relationships as far as possible after Brexit. Both proposals are explained in the boxes below.
Box 2: Proposed UK-SADC agreement
On 28 August 2018, coinciding with a visit to South Africa, the Prime Minister announced that a new UK-Southern African Economic Partnership would be ready as soon as the current EU-Southern African Development economic partnership (covering the same six countries: Botswana, Lesotho, Namibia, South Africa, Eswatini/Swaziland and Mozambique)198 ceases to apply to the UK.
UK Trade Minister George Hollingbery and Botswanan trade minister (representing the five Southern African Customs Union countries and Mozambique) issued a joint statement on 29 August, which referred to the importance of a UK-EU agreement on a post-Brexit transition period and continued cumulation between the UK, EU and all parties to the agreement in ensuring continuity to trade. It stated:
We take note of the progress achieved regarding the UK and EU’s agreement on a time-limited implementation period between the EU and UK following the UK’s departure from the EU, and in particular the intention for the UK to be treated, for the purposes of EU international agreements, as an EU Member State for the duration of the implementation period between the EU and UK. The SACU (Southern African Customs Union) and Mozambique Trade Ministers indicated that they look forward to receiving formal confirmation of the same via the proposed notification, and to continuing to receive regular updates on progress from the UK on the EU-UK negotiations under Article 50 of the Treaty of the European Union on the UK’s withdrawal from the EU. SACU and Mozambique emphasise the importance of continued cumulation between all the parties in promoting continuity and to avoid disruption in trade, and urge both the UK and the EU to recognise the importance of cumulation in the discussions on a post-Brexit EU-UK arrangement.
In his oral evidence to the ITC on 28 November Mr Hollingbery stated that he was “disappointed to say that we have not signed that deal.” A deal was “just a little bit away” and the focus of discussions were at that moment “nothing to do with trade”. There had been nine rounds of discussions and negotiations, with agreement on the vast majority of issues.
UK trade arrangements with EFTA and Turkey
The UK’s trade with EFTA countries and Turkey represents a significant 6.2% share of its external trade. Concluding agreements with these countries would require more substantial renegotiation, as their relationship with the EU is based on extensive acceptance of the EU’s regulatory and customs regimes. EFTA Members Iceland, Liechtenstein and Norway participate in the Single Market through the EEA Agreement and Switzerland participates in aspects of the Single Market through a series of bilateral agreements. Turkey is in a partial customs union with the EU.
In evidence in January 2018 to the ITC, Dr Holger Hestermeyer (Shell Reader in International Dispute Resolution at King’s College London) said the UK would need to negotiate new agreements with these countries which would “differ substantially from the current arrangements”.
197 Government Guidance, Existing free trade agreements if there’s no Brexit deal, 12 October 2018
198 The first five countries making up the Southern African Customs Union.
Of these countries, the Government has established a ‘trade policy dialogue’ with Norway and a Trade Working Group with Turkey.199
In January 2019, the Government sent a list of signed and nearly finalised international agreements to Parliamentary Committee chairs (see below). The list included a UK-Norway and Iceland trade agreement which the Government said it intended to finalise shortly. The Government said that the agreement would seek to preserve elements of the current trading relationship with Norway and Iceland “where possible”, and that as the UK would be leaving the Single Market, the aim would be “to ensure replacement arrangements on trade with the EEA EFTA States that do not impact upon their EEA obligations”.
In a letter to the Chair of the Commons International Trade Committee on 4 February 2019, Dr Fox said that achieving continuity for some agreements “will be challenging in a no deal scenario”, giving the example of Turkey which has a high degree of alignment with the EU.200
UK-Swiss trade agreement
On 14 December 2018, the Government announced that the UK and Swiss Governments (Swiss Federal Council) had approved the transition of UK-Swiss trade arrangements to apply when the transition period provided for in the Withdrawal Agreement with the EU comes to an end or on 29 March 2019 (may also apply to new exit date on 31 December 2020) if the UK leaves the EU without a deal. The Government said that this was the first existing agreement transition to have been agreed as part of its preparations to ensure trade continuity for when the UK leaves the EU.
It said the agreement would replicate the existing EU-Switzerland arrangements “as far as possible” and had now been initialled by both countries, and that once the agreement is signed, both the UK and Switzerland will seek parliamentary approval for the agreement.
A statement on the Swiss Federal Council website said that it had “approved the text of a trade agreement with the UK which could serve as a basis for future economic and trade relations” guaranteeing, “as far as possible, the continuation of the economic and commercial rights and obligations arising from the agreements between Switzerland and the EU”, and providing for exploratory discussions aimed at developing these bilateral relations in the future.
It said that if the transition period comes into effect between the UK and EU on 29 March 2019 (may also apply to new exit date on 31 December 2020), the text of the agreement between Switzerland and the UK would serve “as a basis for economic and trade relations between Switzerland and the UK after the transition period expires on 31 December 2020 (or at a later date agreed between the UK and the EU), until such time as new trade agreements can be concluded between the parties”.
However, it said that if the UK leaves the EU “in a disorderly manner” on 29 March without a transition period then the text of the agreement would
199 See International Trade Committee, Continuing application of EU trade agreements after Brexit, 7 March 2018, HC 520 (Annex 2)
200 See Letter from Dr Liam Fox, Secretary of State for International Trade, to the Chair of the International Trade Committee, 4 February 2019.
make it possible to replicate in substance the vast majority of trade agreements that currently regulate relations between Switzerland and the UK. It said the agreement could be signed and ready to be applied from the date the UK leaves the EU, provided the relevant parliamentary committees in Switzerland, which will be consulted early next year, approve the agreement.
Box 3: UK-Swiss trade agreement
On 14 December 2018, the UK government and the Swiss Federal Council agreed a text of a trade agreement, which will replicate the existing EU-Switzerland arrangements as far as possible and will come into effect after the end of the transition period. In a no-deal scenario, the text would make it possible to “replicate in substance” the majority of current agreements that regulate mutual trade.
According to Borderlex trade news service, the transition deal covers three agreements:
- the 1972 bilateral FTA which liberalises tariffs on goods trade;
- the 2002 Agreement on Agriculture for trade in processed foods and
- the 2002 Mutual Recognition Agreement of conformity assessment procedures in a variety of industrial sectors such as machinery, medical devices, electrical equipment, construction products, lifts and biocidal products.
Many areas including government procurement and SPS measures are not covered.201
The UK has a trade surplus with Switzerland exporting goods and services worth £19.04 billion in 2017. British exports to Switzerland have grown by 41.1% in the last 5 years. For Switzerland, the UK was its sixth-largest export market and its eighth-largest supplier in 2017.
Transitioning tariff rate quotas, rules of origin and cumulation
As highlighted in the ITC report, it will not be possible to simply replicate the terms of some of the EU’s trade agreements, as they include arrangements for tariff rate quotas (TRQs) and rules of origins requirements which would need amending to make them more specific to the UK. TRQs involve allowing imports of a fixed quantity of certain goods at a lower tariff rate, with a higher tariff applied to anything above this. A UK-specific free trade agreement may require a new TRQ calculation, although the UK’s exit would also create problems for the EU, as it would most likely want to recalculate its TRQs with third countries to take into account the UK no longer being part of the calculations. TRQs are also an issue in establishing separate UK and EU27 schedules at the WTO post-Brexit, with a number of third countries objecting to the proposals made by the UK and the EU. These proposals are discussed in section “WTO Schedules” above.
Trade agreements also involve rules of origin (RoO), whereby the origin of goods must be proven for them to qualify for preferential treatment in respect of customs duties. The application of origination status can be widened by means of provisions for ‘cumulation’, whereby components or inputs from outside a country can be treated as originating from there for the purpose of RoO.
The ITC report cited evidence from Mike Hawes of the Society of Motor Manufacturers and Traders, who explained that “most free trade
201 Borderlex, UK and Switzerland agree to roll over three key EU agreements, 14 December 2018.
agreements tend to have a minimum [domestic content] threshold of 55% to 60%” for automotive goods. Therefore, he said, merely copying and pasting the EU-South Korea free trade agreement, for example, would not benefit the UK “because we would not qualify for the preferential trading arrangements… unless you could agree cumulation with the European context, which is what we currently enjoy”.
The ITC report refers to the suggestion made by several witnesses and submissions to its inquiry that “diagonal” cumulation arrangements should be established allowing inputs from any of the three parties concerned (the UK, the EU and the third country in a trade agreement) to count as originating content.
One route to this would be for the UK separately to join the Regional Convention on Pan-Euro-Mediterranean Rules of Origin (the PEM Convention), to which it is currently party as a member of the EU. This allows for diagonal cumulation between all signatories, provided there are trade agreements in place between all the contracting parties concerned. However, as the UK Trade Policy Observatory pointed out in its evidence to the inquiry, “the EU can be quite difficult in in agreeing to diagonal cumulation” and typically only does so if all countries involved have free trade agreements among themselves”.
The Government has acknowledged in its no-deal guidance “Existing free trade agreements if there’s no Brexit deal” that changes in the application of the rules of origin are possible. Businesses are made aware, for example, that UK and EU content in products will be considered distinct and each new agreement will specify which origin designations will qualify for preferences. It states further:
We will aim to limit these changes as far as possible, but the final form of new agreements and any resulting changes will depend on ongoing discussions with our trading partners. The Trade Bill contains a reporting requirement stating that the government will publish a report before these new free trade agreements are ratified on any significant changes to the new trade-related provisions.202
Impact of ‘no deal’ on rollover
As of November 2017, EU bilateral and multilateral trade agreements covered 88 countries and accounted for 13% of UK trade.203 The UK will no longer be part of those arrangements in the case of no deal.
A transition period would give the Government time to work on bespoke agreements, but ‘no deal’ would mean no transition period. The threat of ‘no deal’ presents the Government with considerable time pressure and it is uncertain if countries would agree to a temporary bilateral rollover of the agreements, as they would be cautious of missing out on an opportunity to renegotiate preferred terms in case the no deal scenario becomes a reality. Asked on the Andrew Marr programme on 2 September 2018 whether the
202 Government Guidance, Existing free trade agreements if there’s no Brexit deal, 12 October 2018
203 This figure did not take into account newly signed agreements such as EU-Japan partnership. The Government’s Impact Assessment for the Trade Bill, November 2017.
new trade deals replicating the trading arrangements with third countries would be in place for Brexit day, Liam Fox said:
That remains our aim. Of course a lot of countries are waiting to see exactly what [the UK] relationship will be with the European Union. But not one of those countries have said to us that they don’t want to get a trade agreement with the UK.
Responding to Andrew Marr’s follow up question as to whether it would still be possible to get all these deals ready for the minute after the UK leaves the EU, Fox said: “It’s possible but it’s ultimately dependent on both parties agreeing”.
In his oral evidence to the ITC on 28 November 2018, Mr Hollingbery said that the Government was “still extremely optimistic” that we will transition most of these agreements in time if there was no deal with the EU in place for Brexit day although he could “not pretend” that “we have one on the books yet” and could “not guarantee that all of them will be absolutely on time”. He said there were “lots that are reasonably well progressed”, and some where “very substantial progress” had been made or which were “very close to final initialling or even signature in some cases”. There were also some “where we have not made very much progress for all sorts of reasons”.
He also referred to complexities in the discussions with third countries, given that some had been negotiating on the basis of there being a transition period, rather than needing a deal in place from March 2019 in the event of there being no UK-EU deal. But the focus had changed “some months ago . . . to emphasising to key partners in our discussions that no deal was a real possibility”. However, Mr Hollingbery said there were some countries for which “it is difficult to imagine how you could enter into an agreement to transition a deal if you did not have agreement with the EU”
Mr Hollingbery also referred to ratification issues in some countries (for example South Korea) that could prevent agreements coming into force in time, although the Government was working on the “ability to provisionally ratify in these agreements as we write them up, so that, if provisional application is possible in a partner country, that will be written into the agreement”.
On 18 January 2019, the Financial Times reported on a leaked Department of International Trade memo that said that most of the EU’s international trade deals would lapse without a transition period after 29 March, as rollover deals would not be ready in time. A government official was reported as saying: “Almost none of them are ready to go now and none will be ready to go by March.”
Speaking to the Marr programme on 20 January 2019, Dr Fox said he was confident that the UK could replicate the five most important trade deals with non-EU countries in time for 29 March 2019 (may also apply to new exit date on 31 December 2020). He said that there were 34 EU trade deals in operation and requiring replication. Adding mutual recognition deals with Australia and New Zealand mutual recognition would bring the figure up to 36. Overall Dr Fox said that these agreements “represent about 11.6% of our total trade” but “the bottom 21 of them represent about point eight of 1%”. Dr Fox said:
The top five of those represent about three quarters of that total and we’re confident that we will be able to get those agreements over the line.
Dr Fox said that a number of countries were “unwilling to put the preparations in for no deal”, while a couple of others were in the process of elections or had “no effective government” making it difficult to negotiate replacement deals.
In reply to an oral question on 24 January 2019, Mr Hollingbery told the House of Commons that he believed “we will have the majority of agreements rolled over, and it is absolutely our objective to have them all rolled over”.
The Institute for Government has suggested the Government prioritise agreements which should be in place before leaving the EU as part of its no-deal planning:
‘No deal’ planning has to assume that those arrangements will not be in place. That means the UK needs to prepare a priority list of countries and agreements, renegotiated and re-ratified by 29 March 2019 (may also apply to new exit date on 31 December 2020) – and it needs to warn business of the consequences if those agreements are not in place. The Government claims it is making good progress on third country agreements, but it needs to be much more transparent to give business confidence this is really happening.204
If the Government is successful in agreeing new rolled-over treaties with third countries to replace EU agreements, then it may be able to implement these irrespective of whether it reaches a deal with the EU on withdrawal and future relations. But a failure to agree on the future relationship is likely to complicate matters where third countries are awaiting confirmation of the UK’s future relationship with the EU before concluding new agreements with the UK.
Government update on international agreements signed
On 25 January 2019, Brexit Secretary Steve Barclay wrote to the Chair of the Exiting the EU Committee and other Committee chairs attaching a list of bilateral agreements the Government has so far signed with third countries to replace existing EU international agreements, and those that it expects to sign in the near future. In terms of trade-related agreements actually signed, these were:
- Agreement with Australia on trade in wine
- Agreement with New Zealand on trade in live animals and animal products
- Mutual recognition agreement on conformity assessment with New Zealand
- Mutual recognition agreement on conformity assessment with Australia
204 Institute for Government, How the Government plans to roll over third country agreements, 19 July 2018
Trade agreements that the UK expects to sign shortly were listed as follows:
- Economic Partnership Agreement with the Eastern and Southern African States205
- Free Trade Agreement with Denmark in respect of the Faroe Islands
- Association Agreement with Chile
- Economic Partnership with Cariforum States206
- Trade Agreement with Switzerland
- Trade and Partnership Agreement with Palestinian Liberation Organisation on behalf of the Palestinian Authority.
The document also listed agreements where the text is expected to be finalise shortly. These included mutual recognition agreements with the USA, agreements with the USA on trade in wine and distilled spirits/spirit drinks, an agreement with Mexico on distilled spirits/spirit drinks, and trade agreements with Israel, Canada, Norway and Iceland, the Pacific States207, and the South African Customs Union and Mozambique. The list does not include agreements with important UK trading partners such as Japan, South Korea and Singapore.
Signature of the agreement with Chile was announced by the Government on 30 January 2019. The signature of the agreement with the Eastern and Southern Africa States was announced on 31 January, and the one with the Faroe Islands the next day.
Rules of Origin
No deal could also make it difficult to apply diagonal cumulation arrangements in relation to rules of origin (RoO), creating difficulties for the UK in meeting the current RoO requirements in EU trade agreements with third countries if it attempted to replicate these in UK-specific trade agreements. Given the complex supply chains with components coming from across the EU in sectors such as the car industry, this could require the threshold for domestic content in RoO to be revised significantly downwards.
However, the Government has indicated that it will seek agreement with third countries for EU content to count as UK content in rolled over agreements with third countries. This approach has been agreed in the three agreements so far signed.
Possible continuity of aspects of Mixed Agreements
Around a quarter of the EU’s international agreements have been classified as mixed agreements because they cover competences shared by the EU and Member States. This means that they have been ratified separately by individual EU Member States as well as approved at EU level. It is possible that some aspects of these agreements could continue to apply in the event
205 Comoros, Madagascar, Mauritius, the Seychelles, Zambia and Zimbabwe
206 Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, Saint Lucia, St Vincent and the Grenadines, St Kitts and Nevis, Suriname and Trinidad and Tobago.
207 Papua New Guinea and Fiji.
of the UK leaving the EU without a deal, but there is some debate about this. While EU-exclusive competence agreements will cease to apply to the UK once it leaves the EU, some legal experts have suggested that aspects of mixed agreements could continue to apply. However, the EU has stated that all agreements will cease to apply.208
New trade deals
In addition to its work on existing EU trade agreements, the Government is exploring options for new free trade agreements (FTAs) after leaving the EU:
We have established working groups and high level dialogues with a range of key trade partners, including the United States, Australia, China, the Gulf Cooperation Council (GCC), India, Japan and New Zealand. 209
In July 2018 the Department for International Trade announced consultations on the UK’s first bilateral trade agreements with Australia, New Zealand and the USA, as well as potentially joining the Trans-Pacific Partnership.
But trade negotiations are time-consuming and complex, and while it is an EU Member State the UK cannot officially negotiate and sign future trade deals. Even the legality of holding preliminary consultations on future deals has been debated, although the Government has been conducting bilateral discussion, as outlined above.210 The draft withdrawal agreement allows the UK to negotiate and sign new trade agreements during the transition period, but not to implement then until after transition. But with no deal and no transition period, formal negotiations and/or the conclusion of new agreements could not happen until after March 2019, meaning new trade agreements with third countries would not be in place.
Australia’s Trade Minister Simon Birmingham told the Australian ABC TV network on 18 November 2018 that Australia had put measures in place to deal with any Brexit outcome. He said that negotiations were already underway on a new free-trade agreement between Australia and the EU and that Australia had established a trade working group with the UK. Australia has also been replicating text from some of its market access agreements with the EU, in readiness to deploy them for the UK. Mr Birmingham said: “We could bring those into effect with the UK quite quickly should there be an abrupt, perhaps no-deal Brexit . . . We are ready for pretty much any possibility that arises”.
208 See House of Commons Library Briefing Paper 8370, UK adoption of EU external agreements after Brexit, 24 July 2018, for further discussion of mixed agreements and their future application post-Brexit.
209 Department for International Trade, Trade White Paper: Preparing for our future UK trade policy – Government Response, January 2018, Chapter 2.1
210 The Trade Bill, Commons Library Briefing Paper, chapter 2.2