23 June 2017
L. Alan Winters CB, Professor of Economics and Director of UKTPO and Ilona Serwicka, Research Fellow at UKTPO
One year ago the British people voted to leave the EU. Out of 33.5 million votes cast, 51.9 per cent were for ‘leave’, albeit in the absence of any statement about what ‘leaving’ might mean. The government is still vague about what the UK’s post-Brexit trade policy should be – even after triggering the formal leave process – but the general election has pressured Theresa May to soften her Brexit stance. Even though Brexit negotiations are now formally under way, the options suddenly again seem wide open for debate.
In terms of options the UK is back at square one, but following a year’s analysis, it is now clearer what these options amount to. Over the year, the UK Trade Policy Observatory (UKTPO) has discussed many of the options and this note draws on some of that analysis to try to light the path forward.
Trade with the EU accounted for 44 per cent of total UK exports and 53 per cent of total UK imports in 2015. All of this was carried out with zero tariffs and with very low non-tariff barriers courtesy of the Single Market. The EU is large, rich, close and similar to the UK; it will inevitably remain a hugely important trading partner.
In 2015 services accounted for 43 per cent of the UK’s total exports and 24 per cent of the UK’s total imports. The UK runs a sizeable trade surplus in services – equivalent to some 5 per cent of the national income.
The UK has a hung Parliament and suddenly it has become acceptable again to talk about membership of the European Single Market and/or the Customs Union and the nature of a possible Free Trade Agreement. No-one has actively advocated ‘no deal’ – but even that cannot be ruled out because the complexity and contentiousness of Brexit may prevent reaching an agreement in time. What do these options entail?
The European Single Market is a ‘regulatory union’ that covers both goods and services. Because members of the European Single Market apply equivalent regulations (and this is enforced by a strong common legal system culminating at the European Court of Justice, ECJ), goods and services that satisfy one member satisfy the rest; there is no need to check at the border that imported goods conform with required standards, and purchasers of services can be confident of redress should anything go wrong with their transactions. Based on the Single Market, EU members have progressed further towards integrating their services markets than any other multi-country group.
The EU’s stated view is that membership of the European Single Market – restricted to EU Member States, plus Iceland, Liechtenstein, Norway and Switzerland – is not compatible with a dilution of the freedom of movement of labour.
The UK could try to negotiate a new Customs Union (CU) with the EU, which would apply to trade in goods but not in services. Such a Customs Union would commit the UK to zero tariffs on trade with other EU Member States and a common external tariff with non-EU countries, including having the same set of free trade agreements as the EU has with non-EU countries. This would mean that the UK could not have an independent trade policy for goods.
To maintain the freedom to negotiate its own goods trade deals with third countries, the UK could opt for negotiating a new Free Trade Agreement (FTA) with the EU, which would keep UK-EU tariffs at zero. Because the FTA members can set different tariffs on goods originating from third countries, an FTA would also require the efficient control and application of Rules of Origin (ROOs) on the UK-EU border in order to distinguish between goods originating within the FTA (which pay zero tariffs) from those originating in third countries, which pay a tariff.
In both the CU and FTA cases, the UK would be free to negotiate agreements with third countries on trade in services.
This is the ‘hard Brexit’ scenario, whereby UK-EU trade is subject to the Most Favoured Nation (MFN) terms that they have agreed with WTO members – sometimes referred to as ‘WTO rules’. There would be high tariffs on trade in certain goods (e.g. cars), high regulatory barriers to trade in many goods including incurring the costs of testing and certification that UK goods meet EU standards (and vice versa), and high regulatory barriers to services trade, such as requiring banks to hold reserves within both the UK and the EU and limiting the right of lawyers to practice in other countries.
If the rejection of the free movement of labour, freedom from the jurisdiction of the ECJ and freedom to negotiate new trade deals with third countries are political ‘red lines’ for the UK, the most attractive feasible Brexit outcome would be a new (deep and comprehensive) Free Trade Agreement (FTA) with the EU-27 with a variety of special sectoral arrangements. But a deep UK-EU FTA cannot be achieved in 21 months – and even a weaker agreement would still take more than 21 months to negotiate. The UK will thus need a transitional agreement with the EU-27. This has to be simple model that can be adopted without much negotiation (it is necessary precisely because there is no time for negotiation), and something close to the status quo will minimise a disruption.
Some new investment will be needed even if the UK negotiates a new CU (for example, to check compliance with standards and levy Value-Added Tax) or a new FTA (to efficiently control and apply the ROOs). And in any case, the UK will need to work in close cooperation with the EU to smooth the passage of goods to the maximum extent possible.
Different sectors depend on the CU and SM to different extents and so, depending on what follows, will be disrupted to different degrees by leaving them. Because different regions have different sectoral profiles and different degrees of dependence on EU links within sectors, any disruption to EU trade will have quite heterogeneous effects.
Negotiations to ‘regularise’ the UK’s position in the WTO and to establish a new trade relationship with the EU-27 are the most urgent issues. Until these are settled no other significant trading partner is likely to want to sign an FTA. The WTO relationship defines the UK’s ‘default’ trade policies that an FTA would seek to improve upon, and the EU relationship affects the probable value of getting access to the UK market.
The UK is a member of the WTO and does not need to reapply on leaving the EU, but it does need to separate a UK schedule of commitments from the EU schedule. While this is generally straightforward there are some gritty little details in agriculture that need to be settled. This is a job for diplomacy.
One further complication is that leaving the EU will cause the UK to lose its membership of the WTO’s Government Procurement Agreement (GPA). Negotiating accession is desirable both to keep UK procurement markets open to competition from abroad and to give UK firms access to other members’ markets. Designing its own procurement policy will also provide the opportunity to improve procurement policy in the UK.
In both these cases, Brexit will also disturb the EU’s relationships within the WTO. Hence finding solutions will be easier cooperatively, and a joint UK-EU diplomatic effort in the WTO could provide a useful balm for the negotiating rivalry that will define most of their interactions over the next two years.
The opinions expressed in this blog do not necessarily represent the opinions of the University of Sussex.
Charlotte Humma June 23rd, 2017
19 June 2017
Alasdair Smith is an Emeritus Professor of Economics at the University of Sussex, and is a member of the UK Trade Policy Observatory.
It’s now 12 months since the referendum decision, 3 months since the Article 50 notification, and only 21 months until the date on which the UK is due to exit the EU. Brexit negotiations start today, but most politicians have still not progressed beyond the stage of wishful thinking.
There are ambiguities about the objectives of both the large political parties but each seems to want some kind of free trade agreement (FTA) with the EU after Brexit, often described by a phrase like ‘tariff-free access to the single market’. Behind such inherently confused terminology lies an apparent wish to have a ‘deep’ FTA; that is to say, a UK-EU FTA which has no tariffs and sufficient regulatory convergence between the UK and the EU that many of the non-tariff advantages of the single market are retained.
Here’s the first hard truth: a deep UK-EU FTA cannot be negotiated in 21 months. Even much weaker agreements take longer, especially if the political and technical ground has not been prepared in advance, so it’s not ‘challenging’ or ‘ambitious’ or ‘difficult’: everyone who understands the reality of trade negotiations knows that it is completely impossible. (more…)
Charlotte Humma June 19th, 2017
Posted In: UK- EU
12 June 2017
Guest blog by Iyan I.H. Offor, Trade & Animal Welfare Project Officer at Eurogroup for Animals and David Bowles, Assistant Director, Public Affairs, RSPCA.
The Conservative Government has been quick to highlight the potential benefits and quick wins for animal welfare made possible by new UK trade competencies post-Brexit. However, experience with the reality of trade negotiations is making some animal welfare organisations more sceptical.
The UK has some of the highest standards in the world enacted under a legislative model. This is in contrast to the approach of the US and Canada, for example, which place reliance upon voluntary industry standards. Diverging welfare standards can result in increased imports of low-welfare products for two reasons. First, lower animal welfare standards are invariably linked to cheaper production which out-factors transport costs. Second, there are no effective mandatory product labelling mechanisms for animal welfare, except for shell eggs. Thus, although consumers express willingness to buy higher welfare products and to pay a premium for such products, they inadvertently purchase low welfare meat and dairy because the market does not operate transparently. This puts the livelihoods of British farmers who comply with animal welfare production requirements at risk. (more…)
Charlotte Humma June 12th, 2017
18 May 2017
Compiled by Fellows of UKTPO
Brexit will leave many areas of UK policy open to change. International trade policy is among the most important of these for UK prosperity and also among the most immediate because the status quo cannot simply be extended. This is the second in a series of blogs reporting what the major political parties say about trade policy in their 2017 manifestos, as they become available.
The UK Trade Policy Observatory (UKTPO) has set out a series of issues that it believes should be considered in any election manifesto that might form the basis of the UK’s future trade policy. The table below checks whether or not the Liberal Democrats’ Manifesto mentions these important elements explicitly or implicitly. Following that we offer a brief commentary on the treatment of trade policy in the manifesto.
The central plank of the Liberal Democrats’ manifesto is remaining in the single market and the customs union. This implies no change to current trade policies and hence little need to discuss them in the manifesto. Thus their coverage of trade policy is rather sparse. (more…)
Charlotte Humma May 18th, 2017
26 April 2017
On 22 February 2017, UKTPO, CBI and the TUC held an event in Newcastle that brought together employees and employers to discuss the important regional issues for post-Brexit trade. This guest blog by Sarah Glendinning, Regional Director for the North East, CBI; and Beth Farhat, Regional Secretary, Northern TUC draws on this discussion.
Now that Brexit negotiations are officially underway it’s important to consider what kind of deal workers and businesses want from negotiations, and what kind of deal will enable all parts of the country to develop and prosper after we leave the EU.
As representatives of working people and businesses from across the North East, we are seeking a Brexit deal that ensures stability and delivers decent jobs, fair pay and growth for the region. (more…)
Charlotte Humma April 26th, 2017
Posted In: UK- EU
19 April 2017
L. Alan Winters CB, Professor of Economics and Director of UKTPO.
Economists for Free Trade’s Patrick Minford recently suggested that the UK should
simply eliminate our tariffs on them [the EU], and by implication – under WTO rules – on everyone else. By doing so, we would achieve free trade for our consumers with one quick move [and increase consumer welfare by 4%] Minford (2017).
This, he explains in a fuller exposition, is achievable ‘via Unilateral Free Trade’ – see page 8 of Minford and Miller (2017), henceforth referred to as M&M.
But this claim is misleading or worse:
Charlotte Humma April 19th, 2017
Posted In: UK- EU
17 January 2017
Dr Peter Holmes (Reader in Economics and member of the UK Trade Policy Observatory at the University of Sussex), reacts to Prime Minister Theresa May’s speech on negotiating objectives for exiting the EU.
The speech essentially confirms what we knew already, that sticking to the government’s red lines on the European Court of Justice and free movement would make joining the European Economic Area impossible and so we must leave the single market. (more…)
Katherine Davies January 17th, 2017
Posted In: UK- EU
L. Alan Winters, Professor of Economics and Director of UKTPO.
The ideal trading partner is rich, large, similar and next door. For the UK this means the EU, and for the UK government, this means trade negotiations with our European neighbours must take priority.
Charlotte Humma November 7th, 2016
Posted In: UK- EU
Dr Emily Lydgate is a Lecturer in Law in the School of Law, Politics and Sociology at the University of Sussex, and is a member of UKTPO
According to government sources at the weekend, the UK probably won’t trigger Article 50 until late 2017. At this point, it is crucial the EU and UK begin negotiating their new trade agreement. Delaying until after Brexit and relying on WTO rules in the meantime would cost the UK billions – in the best case scenario.
The worst case would see trade conflicts erupting and negotiations with the rest of the world in indefinite limbo. (more…)
Charlotte Humma August 22nd, 2016
Posted In: UK- EU