Brexit: trading uncertainties for third countries
What Brexit means for trade relations between third countries, the UK and the EU
The simple answer to how the United Kingdom of Great Britain and Northern Ireland’s proposed withdrawal from the European Union (EU) will affect trade is increasing uncertainty. As we know, markets do not like uncertainty, nor do policymakers. All European Union (EU) trade partners are on the alert. However, specific consideration is needed for developing countries. Brexit could significantly impact their economic development through its impact on their trade relations.
Until 29 March 2019, the United Kingdom of Great Britain and Northern Ireland continues to be an EU member and thus current EU trade and regulatory regimes apply. However, economic operators and traders have started adjusting their activities in anticipation of Brexit, so trade and investment flows have already been partly affected.
The United Kingdom and EU negotiators have concluded a transition withdrawal agreement covering the period from 30 March 2019 until the end of 2020, according to which the UK will remain in the custom union with the EU, but not the EU Single Market, except for Northern Ireland (the backstop plan). The transition period can be extended to a maximum of two years, i.e. until the end of 2022. This means trade relations between third parties and the UK should continue to be determined by the EU’s various trade regimes: its bilateral free trade agreements (FTAs), unilateral trade preferences (GSP, GSP+ and EBA) and most favoured nation (MFN) tariffs at the World Trade Organization (WTO).
However, some trade partners might object to this arrangement, arguing that EU FTAs and WTO obligations apply only to EU member states, which the UK would no longer be as of 30 March 2019. The UK would not be able to adopt alternative trade regimes with these third countries as long as it remains in the EU customs union, which is the case during the transition period. The point is that third countries do not have to accept the transition agreement between the UK and EU as a fait accompli, at least with respect to trade.
Should the UK Parliament fail to ratify such an agreement, it will generate huge uncertainty: there will probably be a hard - no-deal - Brexit; or the UK could still opt to abandon Brexit and remain in the EU. In terms of trade, a no-deal Brexit means the UK will be out of the EU customs union and out of the single market, will have no trade agreement in place with the EU 27 and will have to establish its own trade regimes with third countries.
Beyond the transition period, third countries’ trade relations with the UK will depend on the trade regime it adopts. That, in turn, depends on the UK’s trade and regulatory relations with the EU.
If the UK stays in a customs union with the EU, it must continue applying the EU common trade policy and trade regime, on which it will have no say. Other countries will not have the possibility to negotiate special trade deals with the UK and will have to consider the implications of any new EU trade negotiations or arrangements on their trade with the UK.
The UK leaving the EU single market impacts third countries’ trade relations with both the UK and EU. This is because trade flows are not only affected by trade barriers such as tariffs and quotas, but also by a whole set of regulatory issues and standards embodied in the EU single market. New compliance requirements may seriously disrupt trade, increasing time and costs in terms of administrative burden and logistics. Integrated supply chains within the current EU may be broken up if trade via the UK becomes more complicated, which may lead suppliers and traders to use different channels to reach the UK or post-Brexit EU markets. To avoid regulatory barriers, the UK may thus opt to stay in the EU single market.
The UK could remain in the EU single market but keep its trade-policy autonomy by leaving the EU customs union. This would be along the lines of the so-called ‘Norway model’ with the European Economic Area. It could also opt to stay in both a customs union with the EU and the EU single market, in which case it must continue to apply both the EU trade and regulatory regimes (to the dismay of Brexiteers).
The UK could stay outside both the EU customs union and single market, opting instead to negotiate an FTA with the EU. This has been referred to as the ‘Canada model’ as Canada’s is arguably the most advanced EU FTA to date.
Finally, if no trade deal is struck, the UK would have no special trade relationship with the EU.
The UK, trying to have the best of both worlds, has tabled proposals for a tailor-made, à la carte UK trade and regulatory convergence with the post-Brexit EU. One idea is a customs partnership whereby the UK would formally stay outside the EU customs union but would mirror EU trade policies and collect tariffs on behalf of the EU. Another is the maximum facilitation plan to facilitate, through technologies still to be developed, border cooperation and regulatory alignment with the EU. These would not cover services, however. As for the EU, its main concern remains to preserve the integrity of the EU customs union and single market.
EU trade regimes will overall not be affected by Brexit as EU trade obligations and arrangements will remain in place, including its FTAs, though some WTO issues, such as tariff-rate-quotas in agriculture could be renegotiated.
However, trading with the EU without the UK will mean trading with a smaller market. This might render the EU market less attractive, affecting the balance of power and weight of tariff concessions and liberalization commitments made in the context of an FTA with the EU. Though this is unlikely to be significant for most EU partners, it might open the door to review and renegotiation of trade arrangements with the EU.
More significant will be the need or opportunity for third countries to negotiate new UK trade arrangements should it leave the EU customs union. First, it will have to set new unilateral trade policies including commitments at the WTO, which require the approval of all WTO members. Third countries may use this opportunity to encourage the UK to have a more open trade policy than the EU 28. These unilateral policies will also include UK preferential trade regimes.
To speed up the transition, the UK is proposing ‘grandfathering’ (i.e., copying provisions of) current EU FTAs into new UK FTAs with only minor technical adjustments. These could then be opened up later for re-negotiation.
Several African, Caribbean, and Pacific (ACP) countries trade with the EU under economic partnership agreements (EPAs). Should the UK leave the EU customs union these will no longer apply to the UK, nor will any other EU FTA. For countries unhappy with their EPAs excluding the UK may be a positive, lessening the impact of the agreement. It may also provide a justification for renegotiating the agreements. The EPAs include a most favoured nation (MFN) provision, suggesting any preferential treatment the EU would grant the UK post-Brexit - and which would be more favourable than those under the EPA - should be extended to the EPA countries. For ACP countries particularly reliant on trade with the UK, such as South Africa and Kenya, concluding an additional FTA with the UK may become an imperative.
Trade negotiations between the UK and ACP countries, especially African countries, will face numerous challenges though. First, the UK is unlikely to prioritize negotiations with African countries while it seeks trade arrangements with more commercially important trading partners. Second, negotiations with individual countries may be seen as weakening regional integration processes in Africa. Negotiating with blocs of African countries will likely run into the same difficulties as the EPA negotiations as many of those agreements are applied by only a subset of the members of the respective African regional blocs.