Dominic Walsh is a policy analyst for Open Europe.
At present, the UK and the EU are on course for a No Deal Brexit. Yesterday morning, EU negotiators said there was no basis for any “meaningful discussions” about a potential deal. Meanwhile, in Westminster, it is far from clear that Parliament will be able to stop No Deal, which remains the legal default on October 31.
There has rightly been a lot of focus on what No Deal would mean for the UK’s trade with the EU. However, No Deal also has significant implications for the UK’s trade with the rest of the world – bringing both threats (some trade deals the UK enjoys through the EU will be lost and haven’t been replaced), and potential opportunities (the UK will be able to exercise an independent trade policy from day one).
The UK will set its own tariffs on all imports
In the immediate event of a No Deal exit, the UK’s ability to unilaterally set its own tariff regime on imports is likely to be a more significant plank of UK trade policy than trade deals. The Government’s current approach, which removes tariffs on 87 per cent of goods imports to the UK, has advantages and disadvantages, but correctly errs towards the interests of the UK consumer, while protecting some sensitive producers such as in the farming sector. At present, this regime is only due to last for a year – with uncertainty over what comes next.
The Government has several options for the long-term and, as ever with Brexit, there are trade-offs to confront. Continuing with a liberal approach to tariffs could have benefits for consumers and would increase competition in the UK economy.
However, there is an argument that unilateral liberalisation undermines the UK’s leverage with potential trade partners (who may think there is little point in doing a deal if they are already getting zero-tariff access for free). Raising tariffs, on the other hand, could restore some of this leverage, but at the cost of increasing trade barriers and imposing a regressive tax on consumers. The Government will need to decide swiftly after No Deal which approach is the best way forward.
Preserving EU trade deals
As an EU member, the UK benefits from around 40 trade deals the EU has negotiated with around 70 third countries. The importance of these deals to the UK economy varies considerably. While trade with these 70 countries makes up approximately 15 per cent of the UK’s total trade, two thirds of this is with just six countries – Canada, South Korea, Japan, Turkey, Switzerland, and Norway. Many of the other countries covered by EU agreements make up less than 0.05 per cent of UK trade. When it comes to rolling over trade deals, quality beats quantity.
Under Liam Fox, the Department of International Trade made better progress in “rolling over” existing EU agreements than some have given it credit, though significant gaps remain. Of the six major partners above, it has secured continuity agreements with Switzerland, Norway, and South Korea.
However, Japan has refused to roll over its existing deal with the EU, as it thinks it can get better terms through a bespoke bilateral deal. The UK’s current trading arrangements with Turkey rely on the latter’s customs union with the EU, and therefore cannot be preserved in a No Deal context. And negotiations with Canada have stalled because the UK’s low No Deal tariffs give competitor countries without a trade deal the same levels of access as Canada (known as “preference erosion”).
In addition, the “rollovers” that the UK has secured do not all provide full trade continuity. For example, the deals with Norway, Iceland and Switzerland provide for tariff-free trade in goods, but do not cover services or regulatory alignment in product standards.
The consequences of failing to preserve EU trade deals in a No Deal will affect exporters more than importers, thanks to the UK’s relatively liberal No Deal tariff regime. For example, businesses exporting cheese to Canada face eye-watering tariffs of 245 per cent, whereas Canadian pearls and precious stones (73 per cent of UK imports from Canada) would continue to enter the UK tariff-free.
New avenues for global trade
Whatever the outcome of Brexit, it makes sense for the UK to diversify its trade beyond the EU. Brexiteers are right to point out that the EU’s portion of the UK’s trade has already been gradually declining for the last 20 years; the question is how best to harness this. A No Deal outcome would be likely to accelerate this trend, and open up the UK to non-EU trade much more quickly.
However, a sharp change will not be an easy or painless transition for sectors highly integrated into EU supply chains. Geography still matters to many traders – particularly those involved in perishable or time-sensitive goods, such as fresh food.
Both Boris Johnson and Liz Truss are committed to pursuing new trade deals after Brexit. However, expectations of dozens of ‘quick wins’ in a No Deal scenario should be tempered. Some countries may adopt the “wait and see” strategy adopted by Canada and Japan – partly due to the ongoing lack of certainty over the UK’s future trading relationship with the EU, and partly because it is unclear that any deal negotiated by the UK would be ratified by this Parliament.
Just like the EU, potential trading partners have their own interests which will not always be aligned with those of the UK. The primary example is the US, which Truss has said she wants to deliver “as soon as possible.”
Yet there are a number of obstacles to a UK-US trade deal, which will take time to overcome – such as food standards (think chlorinated chicken), drug procurement, and digital services. There are also political obstacles to ratification on both sides. In the Commons, a deal with Trump’s US would be just as controversial as a deal with the EU, while the Democrat-controlled Congress cannot be relied upon either.
While trade deals have taken on an important political and symbolic value in the context of Brexit, their economic benefits are typically smaller and slower to materialise than many realise. As Fox found on the job, there are many ways to promote UK trade interests other than trade deals, such as exploiting soft power assets and prioritising services trade (where the UK is a world leader).
The trade debate in the UK is still beset by simplistic soundbites. While this might be expected after 40 years of outsourcing trade policy to Brussels, the UK needs to grapple with the realities of global trade quickly in order to make a success of Brexit.