In the first two weeks of March three Parliamentary Select Committees have published reports exploring the UK's future trading relationships outside the European Union.
The reports have coincided with indications that the Government is preparing public opinion for the possibility that the UK could exit the EU without any agreement on the contours of the future UK-EU trade and investment relationship.
There is still a long road to travel and the Government has yet to trigger the Article 50 withdrawal process. The aim of this article is to assist businesses with their understanding of the broad parameters of what the UK’s future trading position may look like after 2019.
Foreign Affairs Committee Report
In ‘Article 50 Negotiations: Implications of ‘No Deal’’ (HC1077) the House of Commons Foreign Affairs Committee (FAC) identifies six key issues that will flow from any breakdown in the Brexit negotiations:
- Ongoing disputes over the exit “bill”
- Uncertainty over the status of UK citizens in the EU and EU citizens in the UK
- Trading on Word Trade Organisation (“WTO”) terms
- Gaps in regulation
- Uncertainty over UK participation in the EU Common Foreign and Security Policy
- The sudden return of a customs border between Northern Ireland and the Republic of Ireland
Many of these, such as the exit “bill” are the inevitable consequence of failing to reach a ‘deal’ of any kind with the EU. Others, such as trading on WTO terms, may still occur whether or not the terms of the UK’s withdrawal are settled and an agreement reached on future UK-EU cooperation.
The FAC acknowledges that there are scenarios in which no deal might be better than a bad deal, for example agreeing to pay large sums to settle the UK’s membership liabilities without any agreement on the basis for preferential future trade arrangements. However, the key to protecting the UK economy, and the position of UK businesses interests, is to assess the impact of those scenarios and put in place a plan to manage them.
International Trade Committee Report
‘UK trade options beyond 2019’ (HC817) is the first report published by the newly constituted House of Commons International Trade Committee. It covers a lot of familiar ground, such as the legal and practical feasibility of concluding a UK-EU Free Trade Agreement by 2019 and the potential features of such an agreement. However, it also provides detail on the practical steps that the Government will seek to take.
It is expected that the UK will establish its position at the WTO in line with the existing commitments it has already made as a member of the EU, i.e. it will pursue further trade liberalisation in the context of ongoing WTO negotiations from the existing baseline of scheduled tariff levels, horizontal and sectoral services market access and national treatment commitments and other non-tariff measures.
The UK will also seek to maintain with third countries the preferential trading terms already agreed as a result of concluded agreements made between the EU and those third countries - a process known as ‘grandfathering’. In the end, this is likely to be a political rather than a legal issue.
The report also lays out a number of actions that would be available to the Government on a unilateral basis, regardless of the positions taken by the EU and other countries. These include further tariff reductions, the establishment of free trade zones and the complete removal of all tariffs to reduce the cost of imported manufactured and agricultural goods.
European Union Committee Report
In ‘Brexit: trade in goods’ (HL129) the House of Lords European Union Committee (“EUC”) focuses its analysis on the UK’s current trade in goods with reference to six sectors - pharmaceuticals and chemicals, capital goods and machinery, food and beverages, oil and petroleum, automotive, and aerospace and defence. This focus reflects Office of National Statistics' data that the bulk of the UK’s international trade (56%) continues to be in goods, even though services dominate the domestic economy. It is also reflective of the fact that it is much easier to quantify and analyse flows of goods rather than services.
The EUC’s key recommendation is that the Government needs to secure a transitional agreement which maintains the UK’s current trading terms (both with the EU and with third countries) after withdrawal until a new UK-EU partnership has been enacted. This would form part of a “phased implementation of Brexit” to allow companies time to adjust to any new trading, legal and regulatory frameworks.
The Government’s formal position as set out in the ‘UK’s exit from and new partnership with the EU’ White Paper is that it would enact legislation to mitigate the effects of failing to reach a deal on the future UK-EU trade and investment relationship in order to ensure that economic and other functions can continue.
There are indications that this position is hardening. The Chancellor of the Exchequer has previously floated the idea of changing the UK’s economic model to regain competitiveness, while in recent comments the Foreign Secretary has suggested that the prospect of no ‘deal’ is “perfectly okay”, and the Brexit Secretary that it “would not be as frightening as some people think”.
In the absence of any formal negotiating proposals, it remains difficult to predict whether a deal will be reached or what the future landscape of the UK's trade and investment relationships will look like. Nonetheless, an understanding of the options and emerging UK priorities will assist UK and wider business interests prepare for different possible scenarios which may affect trade, investment and supply chain management decisions and ensure that they are in a position to make the most of the challenges and opportunities that Brexit holds.