Summary
The International Trade Committee’s first inquiry has examined the different potential models for UK international trade after the UK leaves the EU. We have sought to understand the factual implications for the UK’s future trading relationships of the UK’s different options for trade after Brexit, and the issues that the Government will need to resolve in each case. In the report we consider the UK’s relationship with the World Trade Organization (WTO); the Free Trade Agreement (FTA) the Government plans to strike with the EU; the implications of the UK falling back on trading with the EU under WTO rules alone; and the UK’s future trading relationship with non-EU countries.
The UK’s membership of the WTO will form the basis of its future trading relationships. The UK’s status as a WTO member is beyond doubt but it needs to establish its own schedules of concessions and commitments separate from the EU’s. This involves first setting maximum tariff levels, which should be straightforward. Second, it involves setting upper limits for Tariff Rate Quotas and Aggregate Measurement of Support. Opinion is divided as to whether or not this will prove to be a difficult and lengthy process. Nothing should be left to chance.
The Department has quite correctly made an early start on establishing its position at the WTO. It should report to the Committee about this regularly, and at least every quarter.
As part of a Free Trade Agreement with the EU, the UK must seek a reciprocal tariff-free basis for trade. Non-tariff barriers are arguably of much greater importance than tariffs. The Government should seek to retain the mutual recognition of rules and standards, and conformity assessment, that the UK currently has with the EU. The Government appears confident that non-tariff barriers to trade in goods would not be increased in a UK-EU FTA. However, regulatory divergence is likely to occur over time after Brexit. In respect of the services sector, the UK at present benefits from right of establishment and mutual recognition of professional qualifications. The UK should seek to preserve these as far as possible in a UK-EU FTA. At present, financial service firms based in the UK can rely on “passporting” to do business in the rest of the EU. The Government should seek the nearest achievable approximation to this. This is a matter to which the Committee will return, including the examination of regulatory change.
Were the UK to conclude an FTA with the EU without a customs union, rules of origin would apply and a customs border would consequently exist between the UK and the EU. This would create trade friction at the border and some UK products might not actually meet the criteria for sale in the EU under rules of origin.
The Government wants the UK to have “a customs agreement with the EU” but not a customs union. It must be much clearer about the defining characteristics of this. The Government should clarify if there will be a significant sectoral aspect to the arrangement they are seeking and whether that would impact on future international trade policy. Whatever option applies, the Government must clarify arrangements for customs and border operations, and specify the expected number and intensity of customs checks. Planning for this is a matter of urgency now.
The Government must set out as clearly as possible the likely consequences of trading under WTO rules alone. It must also show what contingency planning it is undertaking for that eventuality. Trading under WTO rules alone would mean that UK exports to the EU inevitably faced EU tariffs. Most of the EU’s Most Favoured Nation (MFN) tariffs are low, with a few significant exceptions: the automotive industry, agriculture and textiles. WTO rules do not cover regulatory restrictions, geographic indicators or standards, so the UK cannot rely on them to prevent the occurrence of this type of trade barrier. The effect of trading under WTO rules on trade in services is complex to gauge, but trading in financial services under WTO rules alone would mean the loss of passporting rights, with no agreed substitute.
While there seems to be a broad consensus that the UK can, legally, undertake informal discussions with non-EU countries about future trade relationships, it is not clear how far the Government can go towards negotiating new agreements before leaving the EU. Given that striking new FTAs is a major strand of the Government’s Brexit strategy, it is untenable that it should proceed in this work without clarity on this point.
The Government will need to prioritise countries or regions for new FTAs. The Department’s priority is to “grandfather” those that the EU has with third countries, but uncertainty remains about whether the UK will have rights under these FTAs, and the Government must seek the earliest possible clarity on this matter. Clearly, there is a limit to how many FTAs can be negotiated at one time. Negotiating new FTAs is not something the UK has needed to do since joining the EU’s predecessor in 1973. The Department was unable to say how many the UK would be able to manage simultaneously. There will have to be priorities, and the Government must be clear about what those priorities are, what negotiating resources it is able and willing to procure, and how those resources will be deployed.
We recommend that the Government now evaluate the implications of the UK’s rejoining the European Free Trade Association (EFTA), which would offer an opportunity for a smoother transition as the UK exits the EU in 2019. We were impressed by the potential benefits of EFTA membership, given there is close alignment between the UK’s economy and those of EFTA members, albeit the UK would be considerably the largest member were it to join. The prospect of UK membership of EFTA from 2019 onwards could clearly be to Britain’s advantage and we, therefore, recommend that the Secretary of State publish a White Paper on EFTA membership before summer 2017, so that negotiations can commence before the end of the year.
6 March 2017