The future of UK trade policy

Brexit means Brexit, we are told. A rather unhelpful tautology. For trade policy, however, Brexit means first the UK leaving the EU customs union. Before becoming a newly independent customs territory, to avoid leaving a legal vacuum, the UK will need to decide what its new trade regime will look like after it has left the EU customs union.

The debate on this issue has focussed largely on a number of options, often referred to as the Norway option, Swiss option, Turkish option, Canada option, and WTO option. The strengths and weaknesses of these options are then compared.  While all of these options are theoretically possible, this approach unnecessarily complicates the problem. There is a much simpler, more straightforward, and useful way of describing the trade policy questions facing the UK.

Before the end of the ART 50 negotiations, when the UK leaves the EU customs union, the UK must decide if it wants to apply non-preferential MFN tariffs or wants preferential tariffs for UK-EU trade.  There is no default, off-the-shelf WTO tariff schedule that will come into play if the UK does nothing.  Importantly, if the UK chooses to adopt MFN tariffs, regardless of the rates, the EU would have no choice but to impose its CCT on UK trade. 

The UK might decide to choose MFN tariffs because it wants to reset UK trade policy in a new direction.  If the UK chooses to apply MFN tariffs, there are three possibilities. 

1. The UK could set higher tariffs than are currently applied by the EU CCT.  This would signal a more protectionist trade policy, and would likely give rise to complaints from other WTO members, as well as from the EU. 
2. Alternately, the UK could adopt lower MFN tariffs than under the EU CCT, and signal that the UK is “open for business”.  This would be welcomed by both the EU, and the other WTO members who would then enjoy improved access to the UK market, but it would also mean increased competition for domestic producers and possibly lower producer prices.  This would be especially the case with highly protected agricultural products.
3. Finally, to minimise overall market disruption, the UK could adopt the EU CCT tariff rates on an MFN basis.  In a speech to the WTO on 27 September, Dr Liam Fox, UK Minister for International Trade indicted that this was the option the UK planned to adopt.  For agrifood products generally, and especially for those subject to tariff peaks, this would mean very significant costs and supply chain disruption.

The other choice open to the UK is to agree with the EU to preferential tariffs on bilateral trade.  This is possible in only two ways. Either the UK re-joins the EU customs union, or it agrees to preferential tariffs within the context of an FTA.  Fortunately, it is entirely possible to negotiate such an FTA during the Art 50 process.

There are three key determinants of how difficult and time-consuming an FTA is to negotiate:

1. How much political will there is to see a quick conclusion. Unless there is strong political will on both sides to see a successful conclusion to the negotiations, the inevitable trade-offs and concessions that will be needed will not be made.
2.  The degree of alignment of the sectoral negotiating objectives. If both parties agree on the sectoral priorities, agreement will be easier to reach than if difficult inter-sectoral trade-offs need to be made.
3. The degree of alignment and commonality of the commercial and regulatory interests and structures of the parties.  This is a measure of the extent of structural and institutional adjustment that will be caused by the implementation of the FTA.

In the case of UK-EU trade, the second and third of these determinants suggest that agreeing an FTA could be relatively quick and easy.  The high degree of economic institutional, and legal integration that has developed between the UK and EU over the past 43 years will make the negotiation of a bilateral FTA far easier than it would otherwise be.  It should be a relatively easy task to draft new legal modalities to retain the key elements of the current trading relationship. Only the amount of political will and capital that are brought to bear, stands between success and failure.

An FTA is simply a compendium of legal provisions governing the commercial relations between the contracting parties.  To be consistent with the WTO, it should cover substantially all trade in products, but can exclude some sectors and/or products, as agreed during the negotiations. Because the Art 50 negotiations must revise the current commercial legal framework governing UK-EU trade, the negotiation of an FTA would not have to be in addition to the Art 50 negotiations, but could be a part of them. 

The Art 50 negotiations are not simply about extracting the UK from the EU, but about replacing current UK-EU legal relations with new ones. In order to have any trade relationship at all, the UK cannot simply severe ties with the EU, it needs to replace the current legal framework with a new one within which trade can take place. As Art 50 says: “the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union” (emphasis added). In other words, at the conclusion of the Art 50 negotiations, all the elements could be in place to establish a new bilateral FTA between the UK and the EU.

Looked at in this way, the most sensible option for the UK is to focus on the trade provisions that need to be in place at the end of the Art 50 negotiations, and to implement them within the context of a comprehensive bilateral FTA with the EU.  If this proved too difficult, GATT Art XXIV(5) provides for an interim agreement that could “grandfather” existing trade measures pending agreement on an FTA.To choose the reciprocal application of the EU CCT to EU-UK trade would entail massive and entirely avoidable costs being imposed on the UK and EU economies.  This approach has a further important benefit.

An important objective of the Brexit process is to ensure the UK can effectively control the free movement of labour.  An FTA can do this by containing specific provisions to regulate the movement of labour.  Many FTAs contain provisions affecting access to labour, and the recently concluded – but not yet ratified – Canada-EU FTA (CETA) may provide a useful model.

As well as providing for the liberalisation of over 90% of agricultural trade, including significant reductions in many tariff peaks, the CETA also provides for temporary access to labour, including agricultural and forestry labour, subject to normal immigration controls.  This could go a long way to meeting the needs of UK businesses, including agricultural and horticultural businesses, for temporary and seasonal labour, while affirming the key UK objective of taking greater control over immigration.  It seems reasonable to assume that the EU would have no objections to similar provisions being included in a UK-EU FTA.  

To focus on the range of options theoretically open to the UK for a post-Brexit trade policy is a distraction from the fundamental choice that must be made between preferential and non-preferential trade between the UK and the EU.  If the UK fails to secure a preferential trade relationship with the EU during the Art 50 negotiations, or an interim agreement under GATT Art XXIV(5), it will have to adopt a schedule of non-preferential MFN tariffs, and the EU will have no choice other than to apply its CCT to UK trade. The commercial costs of such a failure would be both avoidable and large, especially for the sensitive agricultural products that would be subject to the EU tariff peaks.

DG Wilkinson

September 2016