The Trade Possibilities
Worldwide, international trade is based on treaties between states or blocs of states. The treaties define the extent to which the countries concerned have access to each other’s market and the terms on which their citizens and businesses trade with each other.
The EU has a common commercial trade policy. Trade is an exclusive competence of the EU so that individual member states do not have their own trade policy. Trade policy in this sense refers to the conditions under which trade takes place between countries. This includes in particular, tariffs, rules of origin regulatory controls trade defence instruments and mechanisms and trade promotion.
It includes in particular
- the WTO schedule of tariffs on goods
- most import and export controls
- free trade agreements with third countries
- multilateral and regional preferential trade agreements
- trade preference agreements with developing countries
More recent trade agreements have covered a wide range of issues and for this reason have been entered both by the EU itself and by the member states in relation to issues that are within the competence of the member states, rather than the EU.
Intended Relationship More Distant- May to Johnson
After the effective date of Brexit, it is the UK’s intent that it will no longer be subject to the EU commercial/ policy and will adopt its own independent trade policy. Therefore, the UK will not be part of the EU customs union which sets the terms of EU trade policy in goods. The UK is intent not to be part of the EU regulatory area or single market in the same way as the EEA countries such as Norway and Switzerland.
The history of the Withdrawal Agreement and the trading declaration have been set out in other sections. In broad terms, the previous Conservative government under Mrs. May commenced by setting out red lines ruling out membership of the single market and membership of the customs union and not being subject to the jurisdiction of the European Court of Justice. However due to having later to rely on the DUP and the terms of Northern Ireland backstop the Withdrawal Agreement provided for a backstop in which Northern Ireland was effectively part of the European Union customs union and single market and Great Britain was in a customs union with the EU and later voluntarily undertook to maintain regulatory alignment with the EU.
The declaration on the future relationship the UK statements since and all statements made by the Boris Johnson government make it clear that the UK wishes to have a free-trade agreement as part of a wider and deeper agreement covering trade in goods and services and many other matters. Membership of the customs union or a customs union would necessitate the UK would not have its own independent trade policy. Membership of the single market close association would entail acceptance of the four freedoms including free movement of people such as applies in the European economic area (Norway and Iceland)
Balance of Rights and Obligations – No Cherrypicking
The UK wishes to maintain the existing deeply integrated trade and economic relationship with the EU despite not being in a customs union with the EU remain part of the EU single market.
The EU has made clear from the outset of the Brexit negotiations that the UK cannot have the benefits of EU membership while not being a member. It cannot “have its cake and eat’ it. It is a basic principle of the EU’s approach that a non-member cannot have a better deal than a member. Any other principle would lead to the breakup of the European Union.
The EU has expressed the UK’s alternatives in terms of the balance of benefits and obligations it wishes to have under the future relationship agreement. The EU has set out the existing types of trade relationship each of which provide for a particular balance between the benefits and obligations under a future trade agreement. In broad terms, these obligations run from a very close relationship with almost full access in the case of single market possibly plus customs union effectively the European Economic Area type relationship with a customs union to a free-trade agreement such as that recent one with Canada.
The EU has emphasised that the UK cannot choose participation in the single market on a sector by sector basis. Equally the four freedoms of the single market. free movement of goods, services, workers and capital are said to be indivisible.
The reports and white papers published by the UK government since giving notice of withdrawal have tended to set out aspirations to have the benefit of free and frictionless trade with elements of the single market but without membership of the customs union or the single market. Mrs. May’s Lancaster House Speech read ‘That Agreement may take in elements of current Single Market arrangements in certain areas – on the export of cars and lorries for example, or the freedom to provide financial services across national borders – as it makes no sense to start again from scratch when Britain and the remaining Member States have adhered to the same rules for so many years.
The EU has made it clear that this necessarily means that the UK will not have a relationship equivalent to a customs or single market membership and that is relationship will, therefore, be similar to that of existing free-trade partners such as Canada. It is also emphasised that a sector by sector agreement approach will not be taken. From its perspective, there can be no cherry-picking of the parts it likes.
The EU guidelines have stated that any free-trade agreement should be balanced ambitious and wide-ranging. It cannot, however, amount to participation in the single market or parts thereof as this will undermine its integrity and proper functioning. It must ensure a level playing field notably in terms of competition and state aid and encompass safeguards against unfair competitive advantages, certain tax social environmental and regulatory measures, and practices.
The closer the relationship, the greater the degree of level playing field alignment in basic regulatory rules such as those in those areas, that the EU would require. Mrs. May’s Lancaster House speech of January 2017 referred to the possibility of the UK becoming a low tax low regulations state at the edge of Europe, a so-called Singapore on the Thames, which might compete with and undermine it. The UK appears determined not to facilitate a relationship with the UK by which it might be enabled to take such a course.
No Deal Exit at End of 2020
The EU has issued negotiation guidelines and directions in relation to the future relationship agreement early in 2020. They are likely to circumscribe and define tightly the scope for concessions by the EU. Given experience in relation to negotiation of the Withdrawal Agreement and future trading declaration, they will most likely reiterate that the degree of access to the EU single market would be commensurate with the extent of its alignment and in particular commitment to a level playing field in terms of competition and state aid including broader matters of competitive advantage such as regulations in the area of workers’ rights tax social environmental and regulatory policies generally.
If no trading agreement is entered by 31 December 2020 and that date is not extended there is the very real risk that the UK will leave the EU without a trade agreement. In the circumstances, the Northern Ireland Protocol is intended to apply. In the absence of agreements otherwise the WTO default third party regime would apply to EU GB trade.
This would imply that the EU would apply its default third country schedules of tariffs and trade policy measures to imports from the UK, that apply in respect of countries with which there is no trade agreement such as China and the United States. Equally, since the United Kingdom is also subject to these rules, it is likely that the UK will also apply these rules in respect of trade and imports from the EU.
The UK has indicated that it would apply a temporary import tariff schedule in such an event, which it has published. It waives duties on 87% of tariff lines. The third country tariff rates differ considerably. The average is about 4%. Most are between 0% and 7.25%. In some sectors such as textiles automobiles, et cetera rates are between 10 and 15%. In agriculture and certain foods, the rates are much higher reaching 2030 and 40% or more.
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.
We use the expressions hard Brexit and soft Brexit to refer to two broad scenarios. In theory, there is a whole range of possibilities, but the expressions are useful as they describe the broad nature of the two main possibilities.
A hard Brexit refers to the UK leaving the EU without a deal, scheduled (as of early 2020) to take place on 31 December 2020. This would be a chaotic event that would overnight change the terms on which most EU – UK trade is conducted. Most of the changes would be immediately felt by businesses that import or export goods, due to overnight changes in regulation and in particular, the very onerous requirements for customs returns both to the UK and Irish revenue authorities on every movement of goods.
Most economic studies including those by the ESRI and governmental authorities both in the UK and Ireland, predict that this would cause many businesses to cease to be viable with many closures and liquidations or at a minimum, redundancies pay cuts and contraction in businesses. There would also be significant logistical chaos in the movement of goods.
Governments may take steps to counteract the economic shock by increasing public expenditure. However, the most likely scenario is that increased government expenditure would simply arise through so-called automatic stabilisers by financing greater unemployment benefits retraining and other emergency measures from a reduced tax base.
A hard Brexit would most likely involve
- numerous laws and basic trading rules changing overnight
- immediate customs duties, customs obligations, and regulatory controls
- immediate cessation of single market rights
- likely negative economic effects
- logistical chaos
- possible currency falls
(Relatively) Softer Exit
A soft Brexit refers to some kind of negotiated agreement by which the UK leaves the EU most likely at the end of the transitional at the end of 2020 perhaps extended to the end of 2021 or 2022.
In principle, there could be a very soft Brexit that would involve the UK being a member of the customs union and single market. If the UK was a member of the single market, then many of the matters mentioned would not apply, even after the implementation period. This would be a favourable outcome from the perspective of Irish businesses, but it would still not be as good as the UK remaining in the EU, as depending on the exact terms, anything whatsoever short of the current arrangement would be a significant change.
However, membership of a customs union with the EU and membership of the single market have been firmly ruled out by the United Kingdom. The future trading declaration between the EU and the UK does not contemplate membership of either. The more likely “soft” Brexit (at present) is a Canada style free-trade agreement which is now supported by the Conservative party. In this context, the expression “soft” is a misnomer. It would have many of the disadvantages of a “hard” Brexit.
It would be an important and significant benefit that there had not been a dramatic rupture in the basic terms of trade, as with a hard Brexit. It might be less of a dramatic shock than a hard Brexit. Nonetheless what is referred to as a “soft” Brexit is likely still to be a severe shock and change. The changes would still be likely to have a profound effect on the entire economy.