Brexit: can the UK achieve its vision of being a great, global trading nation?

International Trade Alert

Por

Theresa May, the UK Prime Minister, made clear in a in a speech on January 17, that the UK's trade and investment relationships with the EU and the rest of the world would be front and centre of her Government's new vision.

In short, May wants the UK to be a "great, global trading nation that is respected around the world". No one doing business in the UK would disagree with the sentiment. The question is how the UK is going to achieve this vision from a position outside the EU and the single market.

The key objectives

There are two pillars to May's approach. First, free trade with European markets - a new, comprehensive, bold and ambitious free trade agreement (FTA). Secondly, new trade agreements with other countries - building relationships with old and new friends alike. These go to the core of three intertwined elements of EU membership - the single market, the customs union and the ability to negotiate bilateral and regional FTAs.

Free trade with European markets

The single market establishes tariff-free trade across EU Member States and also aims to remove non-tariff barriers to trade. Within the EU, the single market also carries with it a commitment to the EU's four freedoms - the movement of goods, services, capital and people.

May has now said very clearly that the UK cannot accept all four freedoms and will therefore leave the single market, and instead seek an FTA with the EU which still gives it the greatest possible access, on a fully reciprocal basis, to the single market.

With respect to the customs union, in line with DLA Piper's analysis, May has also acknowledged that membership of the customs union prevents the UK from negotiating its own trade deals.

Free trade agreements seek to reduce or eliminate tariffs, taxes, non-tariff barriers and quotas on goods and services across the signatory states. Such an agreement between the UK and the EU might, May suggested, incorporate elements of the current single market arrangements, for example in relation to the export of cars and lorries, and the provision of financial services across national borders. This latter will be of central interest to financial institutions, many of which are currently able to carry out their activities across the EU from a UK base without obtaining separate authorisations, by taking advantage of EU passporting rules. However, a key consideration of any sectoral approach or sector specific initiatives will be consistency with established WTO rules.

New trade agreements with other countries

The UK is currently a member of an EU-wide customs union. The effect of this is to impose a common tariff on imports from non-Member States, while ensuring that imports from fellow EU Member States are not subject to import tariffs.

The UK cannot negotiate trade deals with other countries whilst it is a full member of the customs union, so again it seems that the UK will leave the current customs union. May made it clear that she does still want a customs agreement with the EU, although she left open the means of achieving it.

May has indicated that the UK has already started preparatory discussions with a number of potential future FTA partners, including Australia, Brazil, China, the Gulf States, India, New Zealand and the US.

Six stumbling blocks

  1. Free trade agreements can take many years to negotiate. May's timeline for agreeing the UK's future relationship with the EU within the two year exit window that will follow the trigger of Article 50 looks ambitious.
  2. Negotiating new agreements with other countries around the world will also take time - and the UK is not permitted to begin formal negotiations until it has left the European Union. If the UK rushes the process, it might not get the best deal.
  3. Free trade agreements are rarely all-encompassing. Much will be up for negotiation, including, as May mentioned in her speech, the treatment of financial services. It is improbable that, in leaving the EU and entering into a free trade agreement, the UK will be able to obtain an equivalent or better deal than is currently the case.
  4. Successful trade is not just about tariff-free access. Non-tariff barriers , such as different regulatory requirements and standards in different countries, also make cross-border trade difficult. EU membership has to a great extent eliminated non-tariff barriers within the EU. Whether the same can be achieved through a free trade agreement remains to be seen.
  5. Achieving associate membership of the customs union, or even simply being a signatory to certain elements of it, is likely to be a complex process.
  6. It is unlikely that non-EU FTA partners will agree to enter in any substantive FTA discussions with the UK until the contours of the UK's future trading arrangements with the EU are agreed.

All that said, May's speech has generally been welcomed in establishing the starting point for negotiation. Whether the final outcome reflects this starting point remains to be seen.