Christopher Howarth is a senior researcher working in the House of Commons. Prior to this he worked for Open Europe, as a Conservative Foreign Affairs Adviser and senior researcher to a Shadow Europe Minister.
While the UK’s EU negotiations fill the headlines and Whitehall diaries its worth remembering that the majority of our trade is conducted not with the EU but with the rest of the world. It is vital to ensure this trade prospers post-Brexit. This will require analysis, engagement and negotiation. Analysis of what the UK’s interests and future economy require, engagement with potential non-EU bilateral trade partners and negotiation. The good news is the UK is half way there already.
Before launching into the world trading system it is worth reminding ourselves that the EU is very much an anomaly. The EU is a customs union with a common external tariff, the harmonisation of laws and standards and its “four freedoms”, goods (free), capital (mostly free), services (partially free) and people (free). On top of this there is a Court and political union.
The WTO – how most of the world works
The majority of the world’s (and the UK’s) trade is however overseen by the World Trade Organisation (WTO), of which the UK is a member. This is a purely a commercial organisation designed to facilitate trade via the creation of a level trading field. All WTO members agree to give each other their lowest tariffs (import taxes) – their Most Favoured Nation (MFN) terms. The only exceptions to this are WTO-sanctioned Customs Unions or bilateral agreements which can go further than WTO terms as well as some tariff quotas and preferences for developing states.
While the WTO has advanced trade liberalisation at a multilateral level, the stalling of the Doha round has led many WTO members to pursue trade liberalisation bilaterally and plurilaterally such as through the important Agreement on Government Procurement (GPA). This accounts for the recent proliferation of trade negotiations. However, WTO MFN trade remains the standard and is used by major trading states such as the USA, China and Australia to access the EU market as well as by the UK in trading with any states to which the EU has no agreement, which is most of them.
In addition to external tariffs the WTO has secured agreement on the services trade and will shortly go further with its new TISA or Trade in Services Agreement. In addition to these are important agreements on aviation and intellectual property which the UK will need to remain inside.
Should the UK use the EU tariff schedule reduce it or go higher
In order to trade on MFN terms the UK will have to set its own schedule of tariffs. Before doing so it should decide whether the current EU schedules are suited to the UK economy, whether we need to increase any particular tariff or decrease others. Given our economy has already adjusted to the EU tariff schedule it is unlikely UK industry will find the current rates problematic, but there should be serious analysis conducted of what tariffs would best serve the UK economy, including a consultation.
A further consideration will be whether to prioritise unilateral tariff reduction or bilateral deals. This is an important decision for if the UK decided to reduce its tariffs below the current EU level there will be little left to offer to reduce as an incentive in bilateral deals.
To make matters easier the WTO has two tariff levels – an agreed ‘bound’ (a range) within which they can set their – applied – limit. The EU bound rates are already above the applied rate, so by accepting the EU schedule we will still have some scope to increase tariffs to respond to industry concerns – you can always reduce an applied rate.
What do we need to negotiate to trade on WTO terms?
Once we have decided on a schedule it will need to be lodged at the WTO for other states to agree. There is no reason to expect any problems if the UK’s set rates are reasonable. Ideally we will want to see our schedule formally agreed by all states (certified) but if that is not immediately possible it will not prevent the UK commencing trade on an uncertified schedule (as confirmed to the House of Lords EU select Committee) – it’s worth noting that the EU itself trades on a schedule that has not been re-certified since the times of the EU15.
Agricultural support and tariff quotas
There remain in place some agreed quotas as well as agreed levels of agricultural support to ensure fair competition and a system of preferences given to developing states. On exit, it is possible that the UK and EU could agree to divide up the quotas and support mechanisms (and seek WTO approval) or the UK could institute and seek approval for its own measures based on what exists. If the UK is reasonable agreement is likely to be forthcoming (for more information see Professor Alan Matthews’ blog here). The UK may at this point wish to consult partners in developing Commonwealth states as to what form of UK preferences would be beneficial to their development – the EU’s existing Cotonou agreement will in any event expire in 2020.
Beyond tariffs the UK is a signatory to the WTO’s agreements on services (GATS) but other agreements have been entered into by the EU on behalf of the UK and will need novating. The UK will also wish to ensure that any new WTO agreements signed in the next two years – TISA foremost among them – are signed by the UK as well as the EU named as a party.
Conclusion: No substantive problems
Going beyond the WTO MFN system: Non EU trade agreements
Concurrently to setting out a WTO schedule we may wish to pursue our own bilateral trade agreements. The EU has a number of non-EU trade agreements that the UK as an EU member is a signatory and currently benefits such as with South Korea, South Africa, Mexico and the EU’s neighbours. If the parties to these EU agreements were willing it may be possible to novate these agreements into the UK’s name or potentially improve on them. The UK can also start discussions with states to which the EU has not yet concluded agreements although these will need to be informed by whatever schedule of tariffs are decided on.
Rules of Origin
While retaining reciprocal tariff-free access to the EU’s market (i.e the status quo) is likely to be achievable, the trick is to maintain a regime that allows components manufactured outside of the EU to be incorporated into UK manufactured goods destined for the EU with as little paperwork as possible. To ensure this there will need to be negotiation to ensure relaxed and easily administered rules of origin as well as agreeing complimentary cumulation agreements with other states. These, along with sensible customs rules, will ensure that integrated supply chains can be maintained across EU borders, while holding open the possibility of the UK allowing the import of cheaper components than competitors in the EU.
What order to negotiate in?
There are a number of trade and non-trade agreements the UK will have to negotiate, and a large amount of concurrent activity will be vital. However, there are a number of negotiations that may depend on each other.
- The formal Brexit Article 50 negotiation. This will need to be concluded or run its 2yr course.
- The EU/UK trade agreement. Ideally this should run concurrently with the above and should inform the level of tariffs the UK registers at the WTO.
- The UK/non-EU trade agreements. These will ideally be started before the UK leaves the EU, but substantial progress cannot be made until the UK has decided on its own schedule of tariffs. In addition the type of arrangement the UK has with the EU may have an impact. For instance offering a zero tariff rate on agricultural products to the EU would be more of a negotiating tool if we had not simultaneously offered a zero tariff rate to the French farmers competitors in Canada and Australia.
- Non-trade-related agreements with the EU. The UK’s formal relationship with the EU is likely to go beyond just trade to take in security, defence cooperation and other areas such as science, universities and the environment. Although agreement in these other areas is mutually beneficial in some such as defence and security the UK’s cooperation would be much sort after. It would therefore be beneficial to
The UK has a number of interlinked negotiations to perform in order to fully re-join the world trading system post Brexit. The good news is we are already half way there and as a major trading nation there is no reason to suppose that the transition will not be smooth. On paper the negotiations may look complex, because trade is complex but all the agreements are eminently achievable and negotiations of a similar type are done on a regular basis within the WTO with little public comment.