Brexit: the options for trade Contents

Brexit: the options for trade

Chapter 1: Introduction

1.Brexit will, for the first time in over 40 years, require the UK to determine the terms of its trade with the EU,3 its biggest trading partner, and the rest of the world. In 2015, 44% (£222 billion) of UK exports (in goods and services) went to the EU, and 53% (£291 billion) of imports came from the EU.4 While Brexit provides the UK with new opportunities, it also introduces major risks and will require complex negotiations involving difficult trade-offs. The withdrawal of the UK, a major Member State, puts both the UK and the EU in an unprecedented position.

2.Following the referendum on 23 June 2016, the European Union Committee and its six sub-committees launched a coordinated series of short inquiries, addressing the most important cross-cutting issues that will arise in the course of negotiations on Brexit.5 The pace of events means that these inquiries will necessarily be short, with only two or three public oral evidence sessions in each case, and limited amounts of written evidence. But within these constraints, we are seeking to outline the major opportunities and risks that Brexit presents to the United Kingdom. A number of these inquiries are relevant to this report, such as the inquiries into financial services, UK-Irish relations and the implications of Brexit for the UK’s crown dependencies. We do not comment on these issues in our report, although we recognise their importance.

3.This report deals with the critical issue of the future trading framework between the UK and the EU. It is based on an inquiry conducted jointly by the External Affairs and Internal Market Sub-Committees of the European Union Committee, and provides an early basis for parliamentary consideration of the trade options before Article 50 is triggered. Whatever the final outcome of the legal case before the Supreme Court on Parliament’s role in the process of triggering Article 50, this report will help parliamentarians and the public to explore in detail the possible frameworks for a future trading relationship with the EU, and to understand the options, trade-offs, opportunities and risks each framework presents. As one of our witnesses, Dr Ulf Sverdrup, Director, Norwegian Institute of International Affairs, remarked: “There is no free lunch.”6

4.This report will also provide a foundation for the two Sub-Committees’ subsequent inquiries assessing the more detailed implications of Brexit for the UK’s future trade with the EU in goods (by the External Affairs Sub-Committee) and services (by the Internal Market Sub-Committee).

5.All the inquiries undertaken by the European Union Committee are running in parallel with the work currently being undertaken across Government, where departments are engaging with stakeholders, with a view to drawing up negotiating guidelines. But while much of the Government’s work is necessarily being conducted in private, our aim is to stimulate informed debate, in Parliament and beyond, on the many areas of vital national interest that will be covered in the negotiations. As far as possible we aim to complete this work before March 2017.

Brexit: Future frameworks for trade between the UK and the EU

6.This report consists of eight chapters. Chapter 2 considers the UK’s current trading relationship with the EU (through membership of the Single Market), its trading relationship with third countries, and what the Government has said about its aspirations for a new trading relationship with the EU. Subsequent chapters consider the different possible frameworks for its future trading relationship with the EU, and the extent to which they could be adapted or changed to better meet the UK’s interests (reflecting the Government’s desire for a bespoke deal).7 The frameworks considered are briefly outlined in Table 1 below.

Table 1: Possible frameworks for future trading relationship

Provisions included in each framework

EEA

Chapter 3

Customs union

Chapter 4

Free trade agreement (FTA)

Chapter 5

WTO

Chapter 6

Trade with the Single Market

Full membership of the Single Market in services, partial market access for trade in goods.

Almost full membership of the Single Market in goods, no market access for trade in services.

This depends on the scope and depth of the FTA.

Based on the EU’s schedules of concessions at the WTO, applied on a Most Favoured Nation8 basis.

Participation in the EU’s customs union

No.

Yes.

No.

No.

Accept the principle of free movement of persons

Yes.

No.

No.

No.

Budget contributions

Yes.

No.*

No.*

No.

Autonomy over trade policy

Yes, although not able to change standards or regulations.

No, although FTAs can be sought on those aspects not covered by the customs union arrangement.

Yes.

Yes.

Dispute resolution

Through the EEA Joint Committee, and the EFTA Court.**

N/A.

Through state-to-state dispute resolution mechanisms.

State-to-state use of the WTO dispute settlement process.

* Although arrangements can be made through separate treaties. Turkey is the only non-EU country to participate in a customs union with the EU, and does not pool revenue from the Common External Tariff with the EU. See Chapter 4.

** Although not under the jurisdiction of the European Court of Justice (CJEU), the EFTA Court does closely follow CJEU judgments. See Chapter 3. Source: House of Lords.

7.Each chapter considers the implications of the different frameworks on the UK’s laws. The more comprehensive the framework, the larger the obligation for the UK to share rules and regulations with the EU. We note that the Government and Parliament’s review of which EU legislation to retain after the Great Repeal Bill has been passed, will in part be influenced by the choice of future trading relationship.

8.We also note that the future trading relationship between the UK and the EU may be considered as part of a wider deal covering co-operation on issues including home affairs, security, research, acquired rights and climate change.

9.Chapter 7 evaluates the Government’s approach to negotiating a framework for trade with the EU and third countries. It considers the Government’s engagement with stakeholders in industry, resources, and co-ordination across departments. The final chapter compares the advantages and disadvantages of all the frameworks on offer, and considers their implications for the sequencing of negotiations and the case for transitional trading arrangements.

10.The EU External Affairs and the EU Internal Market Sub-Committees, whose members are listed in Appendix 1, met jointly in September and October 2016 to take oral evidence from the witnesses listed in Appendix 2. The Committee is grateful for their participation in this inquiry. We also thank our two Specialist Advisers, Dr Holger Hestermeyer and Dr Ingo Borchert.

11.We make this report for debate.


3 Trade is undertaken with the 27 other Member States of the EU. Throughout this report, we use the term ‘trade with the EU’ to mean trade with these Member States, rather than with the institutions of the EU.

4 Institute for Fiscal Studies, The EU Single Market: the Value of Membership versus Access to the UK (August 2016), p 5: https://www.ifs.org.uk/uploads/publications/comms/R119%20-%20The%20EU%20Single
%20market%20-%20Final.pdf
[accessed 28 November 2016]

5 European Union Committee, Scrutinising Brexit: the role of Parliament (1st Report, Session 2016–17, HL Paper 33)

6 25 (Dr Ulf Sverdrup)

7 Q 40 (Lord Bridges)

8 ‘Most Favoured Nation’ in the WTO refers to the principle that members cannot discriminate between other WTO members trading partners. If they grant a lower duty on the import of a certain product, they have to do that for all other members too. WTO, ‘Understanding the WTO: basics—Principles of the trading system’: https://www.wto.org/English/thewto_e/whatis_e/tif_e/fact2_e.htm#seebox [accessed 28 November 2016]




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