The economic and financial costs and benefits of the UK’s EU membership Contents

6The long-term impact of leaving the EU: the economic relationship between the UK and the rest of the world

214.For supporters of Brexit, a key benefit of leaving the EU is the freedom the UK would thereby gain to negotiate its own free trade agreements with non-EU countries. As Vote Leave puts it, after Brexit “we will [ … ] be able to negotiate trade agreements with other countries. This will help our economy grow and create more jobs”.

Success of EU external trade policy and status of existing free trade agreements

215.The EU has 33 preferential trade agreements, covering 62 countries. Collectively, these markets account for 13 per cent of UK exports and imports. The completion of a deal currently under negotiation with the United States–known as the Transatlantic Trade and Investment Partnership (TTIP)–would lead to EU-negotiated trade agreements covering around 29 per cent of UK exports and 22 per cent of UK imports. 198

216.Witnesses had different views on the success of the EU’s external trade policy to date, and the extent to which the UK could have achieved better results on its own. It was recognised that recent trade deals with Canada and South Korea were among the most comprehensive ever to be negotiated. The EU has also reduced the tariffs it applies to countries with which it does not have a trade deal, from a trade-weighted average of 7.4 per cent in 1995 to 2.4 per cent in 2014, a level broadly in line with other major advanced economies (see Figure 3 below).

Figure 3: trade-weighted average most-favoured-nation (WTO) tariffs, selected economies, 1988–2014, per cent

Source: World Bank database

217.However, a number of witnesses noted that EU trade negotiations often proceeded at a glacial pace. Roger Bootle said that the EU was “very slow and cumbersome” in reaching trade agreements,199 adding that the different economic interests at stake in EU trade negotiations led to agreements that did not fully reflect the UK’s interests:

We have a much bigger financial services sector. We have a much smaller agricultural sector than is true of France, a much bigger business services sector than is true of most of those countries, and smaller manufacturing than Germany. It is by no means obvious that getting your negotiations for the interests that really affect you done by this bloc of which you are a member is going to be more effective than doing it yourself.200

218.Dr Niblett explained that “the EU is slow” because it consists of 28 Member States with “different economic profiles, different areas of competitiveness, different political systems, and often, when they are negotiating, different political parties with different perspectives behind them”.201

219.Those representing the leave campaign also argued that the politics of EU trade negotiations meant that they failed to cover areas in which the UK had an advantage. Boris Johnson highlighted French objections to trade deals covering the audio-visual sector (i.e. films, television and music) as an example of the compromises that must be made when concluding trade deals as part of a 28-member bloc.202

220.Many witnesses pointed to the EU’s failure to negotiate a trade agreement with China, something that has recently been achieved by Iceland and Switzerland. Others noted that the Icelandic and Swiss agreements were limited in scope, and gave China immediate access to Swiss and Icelandic markets, in return for a promise of access to Chinese markets several years in the future. The EU does have an Agreement on Trade and Economic Co-operation with China, intended “to promote and intensify trade” and “encourage the steady expansion of economic co-operation”, although this does not reduce tariffs below WTO levels.

221.Witnesses were asked whether the trade agreements negotiated by the EU would continue to apply to the UK after it had left. Most evidence on this question draws a distinction between those agreements concluded by the EU in the exercise of its exclusive competence and signed only by the EU, and those concluded through mixed competence, to which both the EU and its Member States are signatories. For those agreements concluded through exclusive competence, it is likely that the UK would need to renegotiate the terms with the parties concerned. These are comparatively few in number, but some do cover potentially sensitive areas, such as protections for the use of the name “Scotch Whisky” in the United States. For mixed agreements, there was considerable uncertainty about the UK’s (or the EU’s) legal rights, and a consensus that it would ultimately be a political decision between the contracting parties as to whether they would remain in place. For instance, in written evidence to the Committee, Professor Dougan stated that:

The best case scenario would be that certain deals could remain in place, between the UK and the relevant contracting party, but depending upon a case-by-case analysis of their legal basis and detailed content. In practice, however, much will surely depend on the attitude of the relevant contracting parties–who might decide to accommodate or reject the UK’s desire for continued participation in an existing trade deal on a truly bilateral basis. That calculation would obviously take into account the fact that those third countries had bargained away access to their markets in return for access to the single market: would they have offered the same terms to the UK acting alone, for access only to the UK’s domestic market? If not, they might well be happy to terminate any existing trade relationship vis-à-vis the UK and seek (if at all) to negotiate some new arrangement based on the latest economic and political realities.203

222.The law firm Clifford Chance wrote that “there are some grounds to suggest that the UK may remain bound by certain aspects of these agreements but this is very uncertain and without legal precedent”. It added that “a positive statement of acceptance would probably have to be sought from the EU and other contracting parties, failing which the UK would, at worst, either have to negotiate fresh bilateral FTAs with those countries, or fall back on its generic WTO rights (e.g. MFN tariffs [on goods] and GATS rules for services)”.204

223.Witnesses agreed that, on leaving, the UK could not expect to continue to participate in trade negotiations currently being conducted by the EU with, for instance, the United States and India. President Obama has already said the UK would be “at the back of the queue”.

224.The EU is slow and cumbersome at negotiating trade agreements. However, it has reached a larger number of trade deals than any other country or bloc. It has also increased its openness to trade in recent decades by reducing its external tariffs. Though several Member States may instinctively be more protectionist than the UK, the EU as a whole has matched non-EU peers in becoming less so over time.

225.The trade deals that the EU strikes may in some respects not reflect the UK’s interests. In particular, services are the fastest-growing sector of the global economy, and the UK stands to benefit from further liberalisation of services trade; but even in its most comprehensive trade deals, the EU’s has had limited success in obtaining market access. However, it is uncertain that, post-Brexit the UK will be able to deliver such privileged access to those markets.

226.The access that the UK gains to non-EU markets through trade agreements negotiated by the EU is economically beneficial. Were the UK to leave the EU, it is very uncertain whether it would be able to continue to participate in these agreements. The extent to which the UK would have to enter into negotiations to ensure its continued participation would probably depend on the attitude of the contracting parties, about which little is known. Were the UK to vote to remain in the EU on 23 June, it should be a priority of the Government to seek to exert greater influence on the efficiency and quality of EU trade negotiations, which are currently unduly protracted, even considering the need to get 28 Member States to reach agreement.

Negotiating trade deals outside the EU

227.Outside the EU, it would be easier for the UK to act on its own priorities for pursuing trade deals, and establish a negotiating position that reflected its interests. Roger Bootle pointed out that “lots of small countries around the world have successfully negotiated free trade deals, including with very large countries like China”.205

Figure 4: share of foreign trade covered by free trade agreements, selected countries

Source: Open Europe, Where next? A liberal, free-market guide to Brexit, April 2016, p11

228.However, this agility would be counterbalanced by the fact that, being one-sixth of the size of the EU, the potential benefits to other countries of concluding a deal with the UK are smaller.206 The preference for concluding agreements with larger blocs of countries was highlighted by US Trade Representative Michael Froman in his comments to Reuters in October 2015: “we are not particularly in the market for FTAs with individual countries. We’re building platforms that other countries can join over time”.207

229.Philippe Legrain noted that China’s economic transition presented opportunities for the UK “for financial services and professional services, English-language education, all sorts of things”.208 However, witnesses were less optimistic about the possibility of the UK striking a comprehensive trade deal. Dr Niblett said that, although “the Chinese definitely see the UK market as a market in itself”,209 the negotiation of a meaningful trade agreement would be “incredibly complicated”.

You could do something that looks like an agreement, but it would not be a deep agreement—let us put it that way. The UK’s ability to negotiate improved access in the areas where it has particular advantage–i.e. services–will be dependent on what we are willing to give in return, because we will not be able to be part of offering access to a 500-million-person market; it will be access to a 60-something-million-person market. The price will be higher. We go back to what is sovereignty and what is not sovereignty.210

Simon Tilford gave a similar view: “I cannot see a bilateral deal delivering the kind of market access to China that an EU deal would do.”211 The EU has not, so far, done a deal with China, in part because it insists on human rights being part of the agreement, which the Chinese Government seems unlikely to agree in the foreseeable future.

230.Witnesses agreed that concluding trade deals after Brexit and securing the continuation of those that the UK was party to by virtue of its EU membership would require significant resources. Andy Lebrecht said:

You would need people with the expertise to understand how trade agreements work, to understand our interests and communicate with stakeholders about those interests, and then to negotiate with the countries concerned. For every agreement that had to be negotiated, at any one time you would need a specific team. We are talking significant numbers and a fairly broad range of expertise.212

Asked whether the UK Civil Service presently had the capacity and competence to conclude trade deals with the rest of the world, Dominic Cummings said that:

I certainly would not be confident now with the Foreign Office and the rest of Whitehall negotiating almost anything.W e have seen what an appallingly cackhanded job they have just done of the last EU negotiations; a lot of these guys cannot negotiate their way out of a paper bag. In the short term, no; there would have to be a huge amount of work done in order for people to raise their game.

231.Free trade is at the heart of the economic case for Brexit. It is not possible to say with certainty how successful the UK would be in retaining the access to non-EU markets that it enjoys as part of the EU, nor how quickly it would be able to negotiate trade agreements with other countries. Leaders of the US and China have made clear that a trade agreement with the EU would be a greater prize than one with the UK, but given the complexities involved in negotiating with a bloc of 28 different countries, they could nonetheless find it more straightforward to strike a deal with the UK on its own, although the time taken to agree such agreements is often lengthy.

232.In order to make the best of Brexit, the trade deals that the UK negotiated with non-EU countries would need to be comprehensive, and provide good access to the services markets in which the UK has an advantage. Reaching high-quality trade agreements with countries like China, India and the United States, while securing access to the agreements to which the UK is party by virtue of its EU membership, would be a considerable diplomatic challenge; it would take time, resources and the goodwill of other governments. The cases of Australia and New Zealand show that it is nonetheless possible for relatively small countries, acting on their own, to agree a large number of free trade agreements covering a high proportion of their trade.

233.There may also be economic advantages for the UK in applying a different tariff regime to that currently imposed by the EU on trade with non-EU countries. However, the Committee reiterates the point made earlier about the implications of unilateral tariff abolition. Classical economic theory suggests that this would be economically beneficial. But eliminating tariffs would leave very little incentive for non-EU countries, and particularly emerging markets that export large volumes of manufactured goods to the UK, to grant preferential access to their goods and services markets.

198 Uktradeinfo databse

199 Q36

200 Q37

201 Q109

202 Q1224

203 EUK0005

204 EUK0010

205 Q36

206 Eurostat database

207 Reuters, US trade czar says Britain would lost on trade outside EU, 28 October 2015

208 Q17

209 Q121

210 Q190

211 Q56

212 Q114

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27 May 2016