Brexit and UK Trade

Map of Europe

Four months after the Brexit vote in June last year, the House of Commons appointed the International Trade Committee (ITC) to examine the expenditure, administration and policy of the Department for Internal Trade and its associated public bodies. Dr Lorand Bartels, Fellow in Law, sits on the ITC as Special Adviser and is Senior Counsel at Linklaters, advising on trade law, particularly in the context of Brexit. Here, he discusses the impact of Brexit on UK trade.

Brexit was largely about immigration and sovereignty, but it will also have profound effects on the UK’s trade relationships. This poses some difficult challenges for a country that has traditionally been a supporter of free trade.

In the first instance, Brexit will result in the termination of a set of crucial free trade agreements. These are agreements that eliminate customs duties on almost all imports of goods and, to a lesser extent, reduce regulatory barriers on trade in services. The most significant of these agreements is with the EU, which is a market for around 45% of UK exports. But Brexit will also mean the end of the UK’s benefits under the EU’s free trade agreements with 50 other countries. These outcomes can be avoided by the extension of the existing arrangements, or the conclusion of new arrangements. But that requires the agreement of all others involved, including the EU.

This does not portend doom and gloom in all respects. Many UK exports are exported duty free regardless of any free trade agreements. But others are subject to high duties – like ceramics, cars, alcohol and agriculture – and these will be less competitive in third country markets, and may be priced out of these markets altogether. In the short term, these products will saturate the UK market, which is good for UK consumers, who will benefit for lower prices, but bad for UK producers, many of which are likely to go out of business. With services, the situation is even worse. Exports of financial and professional services to the EU will take a significant hit, as EU regulatory barriers are raised.

In addition, many modern free trade agreements (such as the EU itself) abolish border controls on whether traded products meet domestic safety standards, leaving this to points of production and sale, as with domestic products. This does not apply to all products. It is enough for Apple to certify that iPhones meet domestic standards. But small batch or riskier products are subject to these controls, which is costly and time-consuming.

The UK is also likely to raise barriers on imports of products and services from the EU that are currently imported without restrictions. This is not necessary, because the UK can unilaterally allow imports of products and services into the UK without restrictions. But if the UK unilaterally liberalises imports, it makes it more difficult to conclude free trade agreements with other countries to benefit its exporters. This is because it has nothing new to offer them. The logic of trade agreements is reciprocity, which is undercut by unilateral liberalisation.

All of this means that it is of vital importance to work to ensure the continuation of free trade between the UK and the EU, as well as between the UK and third countries. The Government is currently working on ways to do this, most obviously with the EU, but also with others. But there are two problems. First, in particular with the EU, nontrade issues have a way of complicating the picture. It is not just the ‘bar tab’ or the status of EU citizens in the UK that threaten to upset trade negotiations, but also issues like the status of Gibraltar. The second is to do with trade. If there is no UK-EU FTA, third countries that export raw materials or components to the UK for processing and export to the EU27 will see their UK market dry up. That changes the reciprocity calculation for them, and they may wish to renegotiate rather than simply roll over existing FTAs.

All of this means that the UK is under significant pressure. It would be difficult to sort out these issues at any time. To do it before 2019 is a Herculean task.

By Dr Lorand Bartels
Director of Studies in Law and University Reader in International Law

This article was originally published in the autumn 2017 issue of Front Court