Brexit: An analysis of the effect on EU and international trade

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The UK's decision to leave the European Union in a so-called Brexit referendum is likely to have significant implications for UK companies doing business with the EU. Many UK, EU and wider international companies have started the process of reassessing their Brexit contingency plans with regards to the potential increase in the costs associated with UK-EU trade. 

In particular, key considerations include issues such as the location of headquarters, supply chain management, a potential increase in tariff and non-tariff barriers,  an increase in customs formalities and the reintroduction of customs controls and other red tape associated with trade between third countries outside the EU. 

However, the potential trade and investment impact of the vote will not be limited to those UK companies doing business in the EU. The impact will also be felt by wider businesses that operate in the UK and the EU. In addition, the UK's decision to leave the EU will necessitate a renegotiation of the UK's wider commercial relationships with existing EU Free Trade Agreement (FTA) partners, if UK-based companies are going to retain their preferential access to markets such as Canada and South Korea covered under these FTA arrangements.

UK Trade with remaining EU Member States

  • At present the UK benefits from full enjoyment of the EU's internal market. It enjoys full freedom of movement of goods, services, people and capital. This includes the absence of duties and quotas for the UK and other EU Member States doing business and trading throughout the European Union. The principle of free movement also facilitates access for UK workers and services. In addition, simplified customs procedures reduce the administrative burden for UK companies trading with the EU to an absolute minimum.
  • The terms of the future UK-EU trading relationship will need to be negotiated in parallel to the UK exit agreement. That is the current expectation. To avoid a vacuum, the transition from the definitive exit of the UK to a new relationship with the EU should be seamless. The question will be whether this can be realistically achieved within the prescribed timeframe.
  • Trading between the UK and the EU is only one of the many domains that need to be re-assessed and negotiated. Other topics include: migration (status of UK citizens in the EU and EU citizens in the UK), fisheries, crime prevention and police co-operation, scientific co-operation, recognition of diploma's, visa-free travel.
  • Clearly, the UK's decision to leave the EU opens the door to a potential increase in tariffs being imposed on UK exports to the EU and EU imports into the UK. This together with an increased administrative burden is likely to increase the administrative burden and financial cost of trade between the UK and EU.
  • As part of the exit negotiations between the UK and the remaining EU Member States, an agreement will need to be reached on a broad range of issues including preferential tariff rates, non-tariff barriers such as health, safety and environment standards and rules of origin requirements.

A potential UK-EU customs Union

  • Entering into a customs union with the EU would facilitate duty-free access for UK manufactured goods into the EU. However, the UK would no longer have any influence over EU health, safety and environmental standards with respect to UK exports to the EU.
  • A UK-EU customs union would continue to provide access into the UK market for those third countries who have entered into FTAs with the EU. However, the UK would no longer be able to benefit from reciprocal access into third country markets for its goods and services.
  • A UK-EU customs union is unlikely to address restrictions on trade in services. The basis for trade in services between the UK and EU would be the commitments that each has taken under the WTO General Agreement on Trade in Services (GATS). However, since its inception, negotiations  under the WTO/GATS has made limited progress with regards to opening up trade in services.
  • Various exiting models have been discussed as potential post-Brexit options for the UK-EU trading relationship. In summary, these include:

The Norway Model: Norway is a member of the European Economic Area (EEA), the "Single Market". As such, it enjoys full access to the EU with regards to free movement of goods, labour and capital. In return, Norway is obliged to make a financial contribution to the EU and accept reciprocal access for EU goods, labour and capital. Furthermore, Norway is obliged to implement the majority of EU laws without any influence over the development of such laws and regulations. However, Norway is not involved in the EU legislative decision-making and has to accept free movement of labour.

The Switzerland Model: Switzerland is a member of the European Free Trade Association (EFTA). As such, it enjoys access to the Single Market for most of its commercial activity, including with regards to free movement of labour. This access is agreed via more than 100 bilateral agreements between Switzerland and the EU. However,  Switzerland does not have full access to the Single Market - in particular for the banking sector and wider services sectors. Switzerland is not involved in EU legislative decision-making.

The Turkey Model. Turkey has candidate-status for EU Membership and, in anticipation of its EU Membership and negotiated benefits, enjoys duty-free and quota-free access to the EU for industrial goods. In addition, as part of its commitments under Turkey's customs union with the EU, Turkey has agreed to provide access to goods from third countries on the same basis as the EU's external tariffs. Nonetheless, Turkey does not benefit from reciprocal access to third countries under EU FTAs. Nor does Turkey retain any influence over the tariffs on goods imported from non-EU countries.

Existing and Future EU Free Trade Agreements (FTAs)

  • The UK is likely to lose the benefit of existing FTAs concluded between the EU and the EU's trading partners, for example recent agreements concluded with South Korea and Canada. In addition, the UK would lose influence over and would not benefit from any future FTAs, including those currently under negotiation between the EU and the United States and India.
  • As such, UK companies should consider where their goods and components are sourced from and where their key priority markets are, in order to assess the potential impact with regards increased import and export costs.
  • The decision to leave the EU opens the door to the UK being able to negotiate its own bilateral and regional trade and investment agreements with its trading partners. This will require sufficient negotiating resources to be devoted to wide ranging and complex trade discussions and the willingness of the UK's trading partners to negotiate such deals.
  • The UK will not be able to conclude bilateral trade agreements with individual Member States. The UK will be required to negotiate with the EU, represented by the European Commission in trade matters. 
  • Absent new FTAs being in place with the UK's trading partners, the basis for the UK's trading relationships will be existing WTO commitments. This is likely to have a minimal impact on the costs for third countries exporting to the UK - where UK tariffs have not been reduced to zero, they remain relatively low. However, should the basis for the UK's access to third countries revert to WTO levels, this may increase the cost and competitiveness of UK exports.   

Wider issues

  • Sanctions and Export Controls. At present, a significant amount of UK administered economic sanctions, export controls and wider trade restrictions - including those with respect to Russia and Iran, are implemented under EU Regulations. Whilst the UK would no longer be bound by such regulations, it is unlikely that the UK position would divert radically from the EU's. 
  • Nonetheless, questions remain as to whether exports of so-called "dual-use" goods from the UK to the EU would require licensing and whether the UK will increasingly look towards the U.S. model with regards to the future development, administration and enforcement of its policy objectives on these issues.    
  • Trade Defence and Safeguard measures: The UK will need to consider whether to continue to‎ apply anti-dumping and anti-subsidy measures imposed by the EU. These measures will no longer automatically apply to the imports of targeted products, e.g. steel, into the UK. The UK Government will have to consider whether equivalent measures should be applied in order to protect and safeguard the interests of UK industry.

The UK's decision to leave the EU opens a new chapter for its bilateral, regional and multilateral trading relationships. As the UK Government seeks to define its negotiating strategy for any exit negotiation and its wider discussions with the UK's trading partners, UK companies should begin to consider how their core objectives and key priorities, for example key sectors and priority markets, are brought to the top of the agenda. 

The window to influence these commercially important negotiations is narrow. Those companies who are able to clearly and quickly identify and articulate their offensive and defensive priorities on issues such as key markets and priority sectors will be best placed to influence the UK's exit terms and define a future UK trade policy towards their business interests.