The UK’s decision to leave the EU will fundamentally change its terms of trade with the 27 other Member States, and with the rest of the world. The Government has stated that it will trigger Article 50 by the end of March 2017. The UK’s current trading arrangements with the EU will cease at the end of the two-year period specified by Article 50, unless this period is extended by the unanimous agreement of the EU-27. This report considers the principal possible frameworks for trade after this time, namely joining the European Economic Area (EEA), a customs union with the EU, a Free Trade Agreement (FTA) or trade based on World Trade Organisation (WTO) rules. It asks whether they might be modified—in line with the Government’s desire for a “bespoke UK agreement”—and explores the implications of the different options for the sequencing and timeline of negotiations.
The UK is entering uncharted waters—no major Member State has ever left the EU. While there is an interest on both sides in reaching an amicable agreement, the UK’s withdrawal is an existential challenge to the EU. Its negotiating stance will be affected by elections and referendums in Member States over the coming months and is unlikely to be easy or accommodating. We recognise that deciding the future UK-EU trading relationship is likely to form part of wider negotiations on UK-EU co-operation on issues such as home affairs, security, research, acquired rights, and climate change.
There is always an inherent trade-off between liberalising trade and the exercise of sovereignty. The UK’s original decision to join the European Economic Community involved a trade-off between sovereignty and preferential access to Member States’ markets. Similarly, our analysis of the frameworks for trade finds that the more comprehensive the trade relationship, the greater the curtailment of national sovereignty. We highlight the importance of effective dispute resolution mechanisms for trade, and recommend that the Government consider which mechanisms it would find acceptable after Brexit.
From the outset, it is important that the Government, Parliament and the public are clear about the distinction between ‘access to’ and ‘membership of’ the Single Market. Many countries have ‘access to’ the EU’s Single Market, either through agreed tariffs at the WTO or via a FTA. However, the only countries which have full membership of the Single Market—which entails the liberalised movement of goods, services, people and capital (the ‘Four Freedoms’), secured through common rules interpreted by the European Court of Justice (CJEU)—are EU Member States. The EEA states only enjoy partial membership, because the EEA agreement does not include a customs union. On the other hand, Turkey’s inclusion in a customs union with the EU does not entail the free movement of services, people or capital. Fundamentally, full membership of the Single Market is predicated upon acceptance of all Four Freedoms.
This principle is in tension with the Government’s commitment to maintaining liberalised trade with the EU while also curbing the free movement of persons and the reach of the CJEU, via a bespoke arrangement. We note that both the process for pursuing this, and what such an agreement might contain, are unclear. Nonetheless, this report investigates the extent to which the different frameworks for trade might be adapted to better suit the UK’s interests and result in a bespoke outcome. We conclude that the prospect of fundamental modifications to the ‘off-the-shelf’ models is unlikely. Reform of the EEA Agreement to limit free movement and include voting rights on EU legislation is improbable. Creating a customs union arrangement with the EU would limit the UK’s ability to have an independent trade policy. Even in areas not covered by the customs union, pressure would be put on the UK to shadow the EU’s trade negotiations.
While a FTA provides the greatest flexibility in securing a bespoke deal and could potentially be combined with wider UK-EU co-operation after Brexit through an Association Agreement, we see no evidence that trade on terms equivalent to full membership of the Single Market (especially in services) could be achieved. We do not think it will be possible to negotiate a comprehensive UK-EU FTA within two-years. The Government therefore needs to have a clear ‘game plan’ for possible transitional arrangements before Article 50 is invoked. Although this would require clarity on the principles of what the UK is transitioning to, it would not delay the UK’s withdrawal. But it would safeguard current trade and provide adequate time for negotiations. Temporary extension of participation in the customs union could be one important element of a transitional arrangement.
If no alternative trading arrangement is in place two years after Article 50 is triggered, UK-EU trade would by default take place under WTO rules. As the UK is unlikely to be able to retain access to the EU’s FTAs with third countries after Brexit, WTO rules will also form the basis of the UK’s trade with the rest of the world. But trading under WTO rules—often described as a fall-back option—is not straightforward. The UK must establish its own schedules of concessions, and negotiate with the EU its share of tariff rate quotas and subsidies. While the technical details appear relatively straightforward, politics may intrude: negotiations with the EU and other WTO members could complicate this process, further adding to the uncertainty.
We recommend the Government should initially focus on its future trading relationship with the EU and its WTO schedules. It should come to an early decision on whether the UK should remain in the customs union. Trade deals with third countries will be contingent on the outcomes of these negotiations, and so should be sequenced accordingly. As part of working towards these priorities, the Government should provide clarity on a number of important issues, including whether and to what extent the withdrawal negotiations with the EU will encompass negotiations on the future UK-EU trading relationship.
A transitional agreement will almost certainly be necessary. We see little evidence that agreeing a transitional arrangement would put the UK’s wider interests at risk. Quite the opposite: a transitional arrangement would allow negotiations to be conducted in a less pressured environment, benefiting all concerned. We urge the Government to establish at the outset of negotiations a clear strategy for a future transitional agreement, with specific proposals as to what form it should take.
The timetable to engage with industry stakeholders, analyse the possible frameworks, and have simultaneous negotiations at the WTO is extremely tight. The Government needs significantly and systematically to scale up capacity in all its departments. The Government needs to provide clear leadership across Whitehall to deliver this highly complex and unprecedented task.
1 (Lord Bridges of Headley)
2 Greenland voted to leave the EU’s predecessor, the European Economic Community, in 1982 and left in 1985.