Understanding world trade - preparing for post-Brexit opportunities

Whilst the outcomes of Brexit are still unknown, there are a number of ways in which you can prepare your business for the UK exiting the EU and mitigate the potential impacts.

29 January 2019

What will happen on Brexit day?

On 29 March 23:00hrs if the UK has not revoked Article 50, agreed a version of the EU exit deal or agreed an extension to the Article 50 deadline then the UK will no longer be party of the European Union or any of the agreements/customs unions which the EU has in place or is in the process of negotiating. This article provides an overview of how trade will continue in that circumstance (No Deal).

Trading options

For these purposes, trade is the exchange of goods and/or services across borders. UK exports are approximately 40% services (the UK economy overall is arguably ~80% services). Approximately 44% of UK exports go to the remaining EU members. In a no deal outcome, the UK would have to find new ways to trade with the EU and the rest of the world.

A country can trade in a number of different ways. WTO members trade according to a set of agreed terms. These do not provide full access to each others' markets (particularly for services) and allow countries to impose certain tariffs (customs charges, largely on goods) and non-tariff barriers.

Where greater access to markets can be agreed between countries deeper integration agreements are possible. These include single markets, customs unions and free trade agreements/areas.

A single market (largely) aligns tariffs and regulation to enable free movement of goods and in some cases free provision of services (linked in the EU's case to free movement of people). Border checks are rare or not required and may be focussed principally on security issues. The EU is a single market.

Customs unions, are agreements in which the parties agree to charge the same tariffs externally to the rest of the world and consequently do not need to charge internal tariffs when goods circulate inside them. They do not generally involve regulatory alignment and consequently require border checks. Customs unions generally provide only limited additional access for services. The EU is in a customs union with Turkey.

Free trade agreements can be negotiated bilaterally or plurilaterally and enable the parties to trade with each other using agreed tariffs and in some cases align or mutually recognise standards. They generally provide only limited additional access for services. The EU has numerous free trade agreements including with S Korea and Canada. Some free trade agreements/areas involve multiple countries (e.g. Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)).

At present, the EU has 4 customs unions in place, 28 economic and trade agreements in place, 47 provisionally applied agreements and 44 agreements under negotiation with third countries (countries which are not members of the EU).

It may be possible for the UK to become a party to the trade agreements which are already in place and which are under negotiation between the EU and third countries however this is dependent on the nature of the way in which the UK leaves the EU and goodwill of the EU towards the UK.

Outside the EU, the UK has no free trade agreements and is not a member of any single market or customs union.  It is however currently the 5th biggest economy in the world and has expressed an intention to seek to replicate free trade agreements which the EU currently has or accede to new ones (e.g. join CPTPP or negotiate bilateral free trade agreements with Australia, New Zealand and/or USA). 

In her address to Parliament on 21 January 2019, the Prime Minister stated that the UK has been in talks to initiate trade negotiations soon after Brexit day with third countries (countries which are not members of the EU) and to become a party to the plurilateral Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trading bloc.

These agreements may take some time to develop (negotiation of such agreements commonly takes up to 10 years). There is some debate about whether the UK and such third parties could adopt interim measures (as if free trade agreements were in place) while negotiations take place. This may ultimately depend upon the willingness, goodwill and interests of the potential counterparties and may be unlikely. Such agreements are also unlikely to deal substantively with services. Outside of such agreements there remains some uncertainty about how the UK will trade within the WTO.

Effects of UK membership of the World Trade Organisation (WTO)

The UK has been an independent member of the WTO since its foundation. However, since the UK has been a member of the EU, the EU has negotiated and agreed a single consolidated goods schedule (containing a list of commitments of tariffs and quotas) on behalf of all 28 member states (including the UK). In readiness for leaving the EU, the UK put forward its own 'new' schedule (predominantly identical to the EU consolidated schedule aside from quota amounts) which, in order to be used, is required to be agreed ('certified') by WTO members unanimously. For reasons linked to the UK's quota calculations, this schedule was rejected by the other members.

The UK will now need to negotiate quotas under the WTO General Agreement on Tariffs and Trade (the 'GATT') Article 28 with those WTO members who either have individual tariff quotas, are principal or substantial suppliers of that quota or who originally negotiated the quota. This negotiation process began on 21 December 2018.

In the meantime, the UK will seek to trade on the EU schedules. It is not expected that other countries will reject goods or services traded by the UK on these schedules, however these countries (or trade counterparties) may compile a claim against the UK for trading on uncertified schedules (or trading companies for unpaid taxes).

It is possible that some countries may apply a tax on goods imported from the UK. These countries could argue that the UK is breaching WTO rules by trading on uncertified schedules. In theory if a country is in breach of WTO rules then any other country trading with it may take retaliatory measures. For this reason some countries may take advantage of this opportunity and apply further taxes (or restrictions) on UK imports.

Any disputes regarding breaches of WTO rules will need to be made to the WTO Dispute Settlement System. Unfortunately, the system is currently paralysed by the US blockage of the appointment of WTO appeal judges. As a result, disputes may take years to be considered and dealt with if a decision is possible at all.

The WTO also manages agreements to which its members may sign up. The General Agreement on Trade in Services (the 'GATS') provides some additional market access for services, however, is limited in its scope and key services, such as aviation, are absent from the schedules.

On 27 November 2018 the WTO reported that GPA signatories had, in principle, approved the UK’s accession to the Agreement on Government Procurement (the 'GPA') which opens government procurement markets between members, estimated to be worth approximately $1.7 trillion. That accession will need to be finalised.

Trading with the EU

In the event of a No Deal outcome, there will be no basis for trade between UK/EU other than WTO rules (subject to the points above). Subject to other agreement, a UK/EU border will result in additional regulatory and administrative barriers and tariffs. Tariffs on food and agricultural products are substantial, however tariffs are lower in many other sectors. Such tariffs will need to be paid on imports/exports through HMRC and local tax authorities and is likely to be done, predominantly, away from the physical border (and in advance). UK exporters will need to ensure they are registered for such taxes if dealing with the EU.

More importantly, regulatory and other non-tariff barriers will arise. These will in principle require checks of goods crossing borders and may substantially restrict the provision of services into the EU.

As discussed above, an interim solution while a free trade agreement is negotiated may be possible, and both sides may agree to implement light touch interventions in goods crossing the border depending on the willingness and goodwill of both sides. Such solutions are likely to be time bound while more permanent arrangements are agreed. Free trade agreements are unlikely to deal substantially with access to EU markets for services.

Government trade volume targets

The government has set out plans to make Britain a "21st century exporting superpower", with the Department for International Trade stating in its new Export Strategy that it is seeking an increase of exports from 30% GDP to 35%. These trade plans were bolstered by the release of figures on 11 January showing that exports of goods and services had grown by £13.9 billion in the year to November 2018 (totalling exports worth £630 billion). The government has reported a 32 consecutive month export growth with exports up considerably between the UK and non-EU countries:

Country

Increase in exports in the 12 months to November 2018 (%)

USA

6.9

Australia

2.9

New Zealand

3.8

Nigeria

29.2

India

27.3

Thailand

18.5

Additionally, London has been named as the top tech investment destination in Europe, receiving £1.8 billion tech investment in 2018 which, according to Pitchbook and London & Partners, is more than Berlin and Paris combined.

To realise continued growth and capitalise on the UK's economic size and attractions, businesses are likely to have to work hard to open up new international markets and preserve existing ones (particularly in the EU).

Preparing your business to access new markets outside the EU

Whilst the outcomes of Brexit are still unknown, there are a number of ways in which you can self-audit and prepare your business for the UK exiting the EU and mitigate the potential impacts.

Key contact

Chris Seaton

Chris Seaton Senior Partner

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