The UK's decision to leave the EU opens a new chapter for UK regional, bilateral and multilateral trading relationships. As the UK Government seeks to define its exit negotiating strategy, UK, EU and wider international companies should consider how their core objectives and key priorities are brought to the top of the agenda.
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 EU. 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. The question will be whether this can be realistically achieved within the prescribed timeframe. The UK may also be required to negotiate its own independent membership to the WTO before any agreement with the EU can be reached.
- 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 free trade agreements (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.
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.
- 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. 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.
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, eg 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 is likely to have significant implications for UK companies doing business with the EU. However, the potential trade and investment impact of the vote will also be felt by wider businesses that operate in the UK and 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.
Key considerations include:
- Do you have employees that are based or travel between different locations in the EU? The free movement of workers between the UK and EU was a key element of the terms of membership of the EU. Post Brexit, free movement will not be guaranteed and conditions may be imposed on the movement UK and EU nationals. See Brexit: Impact on Employment Law for more information.
- Do you currently do business in markets where preferential goods or services access is governed by a FTA between the EU and that third country? How can you prepare for and mitigate the impact of this access being removed or changed?
- Does your company have manufacturing operations in the UK and if so where do you purchase your inputs from? Inputs currently imported duty free from the EU or at zero or preferential rates under a FTA that the EU has with a third country will become subject to tariffs. What options do you have for sourcing inputs?
- Does your business receive any grants or subsidies from the EU? If you receive funding from the EU, this is likely to be withdrawn post Brexit.
- Has the company done enough to reassure investors that anticipated risks have been considered and are being managed?
- Based on the above, what are your business's priorities for the Brexit negotiations? Are there particular EU laws that should be retained or replaced?
For a more detailed analysis of the issues, please contact the authors or your usual DLA Piper contact.