Brexit: the options for trade Contents

Summary of conclusions and recommendations

The UK’s trade as a member of the EU

1.It is important to distinguish between ‘access to’ and ‘membership of’ of the Single Market. Many countries have access to the Single Market through trade agreements and the rules of the WTO. Only EU Member States have full membership of the Single Market—setting, implementing and enforcing all the EU’s rules to enjoy highly liberalised trade in all the areas that the Single Market operates. (Paragraph 50)

2.We note that the Government’s aspiration, to secure a bespoke agreement with the EU which ensures open and free trade and control over the UK’s borders and laws, is in tension with the fundamental principles of the Single Market—which require members to accept all the Four Freedoms, including the free movement of persons. (Paragraph 51)

3.Moreover, the Government’s desire for a bespoke deal will also need to be compatible with the rules of the WTO, where the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS) prohibit trade agreements focused only on one sector. (Paragraph 52)

4.The Single Market includes clear mechanisms through which to implement, enforce and handle disputes about the rules that govern trade between its members. When the Government is evaluating the different frameworks for trade between the UK and the EU, it should consider what mechanisms it will find acceptable to handle possible future disputes. (Paragraph 53)

Membership of the European Economic Area

5.EEA membership would be the least disruptive option for UK-EU trade, not least because it would maintain membership of the Single Market for services. It would also provide partial membership of the Single Market for goods, though businesses would have to comply with rules of origin. (Paragraph 82)

6.The process of joining the EEA as a non-EU Member State appears to be technically possible. It is unclear, however, whether other non-EU EEA countries would be amenable to the UK’s entry. (Paragraph 83)

7.We urge the Government to offer clarity on the legal question of whether the UK would have to leave the EEA Agreement altogether before joining as a non-EU country (under EFTA). (Paragraph 84)

8.Becoming a non-EU EEA member would significantly restrict the UK’s ability to limit the free movement of persons. It would also require the UK to adopt existing and future EU laws relevant to the EEA Agreement in the same way as an EU Member State, without having any voting rights. (Paragraph 85)

9.We see little prospect that the EEA Agreement will be reformed to give the non-EU EEA states voting rights on new EU laws. Thus if it became a non-EU EEA member, the UK would be unable to exercise control over the pace of integration with the EU’s laws and practices. As a non-EU EEA state, the UK would be able to negotiate FTAs with third countries, but would be constrained by its obligations to comply with EU law in areas covered by the EEA Agreement. It is unlikely that EFTA’s existing FTAs with third countries would be open, or attractive, to the UK. (Paragraph 86)

Membership of the EU’s customs union

10.A key aspect of Brexit will be the feasibility of the UK remaining part of the customs union: the Government will need to decide early on whether or not the UK should do so. Although Turkey offers an example of a country outside the EU having a customs union with the EU, its participation is fundamentally different from the UK’s participation as a full EU Member State. (Paragraph 110)

11.We are concerned that the Government appears not yet to have given sufficient consideration to the implications of leaving the EU’s customs union. While there may be opportunities to use digital technologies to streamline customs procedures, we are troubled that the Government presently has no estimate of the cost to businesses of administrative delays, compliance with customs checks, and the rules of origin if the UK left the customs union, and that it was unable to confirm whether or not such information would be available before triggering Article 50. Our concerns are made more acute by the implications of leaving the customs union for the UK’s land border with the Republic of Ireland. (Paragraph 111)

12.Before Article 50 is triggered, the Government should undertake and conclude a rigorous analysis of the cost to business and to taxpayers of leaving the customs union. We will also investigate these issues in greater detail in our follow-up report on future UK-EU trade in goods. (Paragraph 112)

13.A customs union with the EU similar to Turkey’s arrangement would require the UK to adopt the EU’s standards and regulations for all goods under the customs union arrangement. There would also be common customs procedures. (Paragraph 113)

14.Despite the Government informing us that all the possible frameworks for future trade between the UK and the EU were ‘on the table’, the remit of the new Department for International Trade suggests that the Government intends to pursue an independent trade policy.(Paragraph 114)

15.Seeking to pursue an independent trade policy while coming to an arrangement with the EU’s customs union, as Turkey has done, is a difficult balancing act, which would severely curtail the UK’s leverage in future trade negotiations with third countries. (Paragraph 115)

16.If it has not done so already, the Government should consider the merits of remaining a member of the EU’s customs union as an interim arrangement, until the terms of the UK’s future trading relationship with the EU have been settled. We are also conscious of the practical challenges of introducing full customs controls within two years. (Paragraph 116)

A UK-EU free trade agreement

17.The Government has made clear its desire to open negotiations on the future trading relationship between the UK and the EU as part of the withdrawal negotiations under Article 50. This desire will only be fulfilled if both sides agree. Before triggering Article 50, the Government must, as a priority, seek confirmation from all parties that the framework for a future trading relationship will be included within the Article 50 negotiations.
(Paragraph 159)

18.Negotiation of a Free Trade Agreement between the UK and the EU would be unprecedented. While FTA negotiations usually aim to increase market integration between two sides, the UK would start from a position of full integration, and would presumably seek to maintain many aspects of the status quo while reducing integration in some areas. (Paragraph 160)

19.As, for the time being, the UK is compliant with EU law (and the announcement of the Great Repeal Bill by the Government suggests that in general much of EU law will be maintained in national law, at least in the period immediately following Brexit), the complex issue of harmonising rules and regulations between two sides can be deferred in the short term. (Paragraph 161)

20.Nonetheless, experience demonstrates that FTA negotiations with the EU are complex and slow moving. We conclude that, even if it were possible to negotiate a FTA within the terms of Article 50, it would be impossible to agree it within two years. It follows that if the Government is minded to seek a FTA as the long-term basis for future UK-EU trade, it should clarify whether it is also considering a transitional trading arrangement.
(Paragraph 162)

21.Even the most advanced FTAs do not provide the level of market access for goods that the UK currently enjoys by virtue of membership of the Single Market. We also note that providing equivalent liberal market access for services in a FTA with the EU would be unprecedented. (Paragraph 163)

22.The level of market access the UK is able to negotiate with the EU would depend in part on the extent to which it was willing to accept and adopt EU law or demonstrate equivalence with EU rules. In the medium to long-term the UK may have to continue to update its domestic law to be consistent with EU law. (Paragraph 164)

23.The UK and the EU may require stronger institutions than are normally included in FTAs to police their trading relationship. While a UK-EU court could help to achieve this, we note any such arrangement could be subject the decisions of the Court of Justice of the European Union. (Paragraph 165)

24.These constraints on a UK-EU FTA notwithstanding, its key benefit would be flexibility. It would not require the UK to accept the principle of the free movement of persons; it would give the UK autonomy over its laws and trade policy with third countries; and it could be supported by separate agreements regarding other areas of interest to the UK if desired. A FTA could also avoid the imposition of tariffs on goods traded between the UK and the EU, although rules of origin would apply. (Paragraph 166)

25.We invite the Government to confirm whether it is giving consideration to an Association Agreement, incorporating a FTA, such as that agreed with Ukraine, as the basis for a future political and trade relationship with the EU. (Paragraph 167)

26.On the balance of evidence, we conclude that the UK is unlikely to be able to retain access to the EU’s FTAs with third countries following Brexit, whether they are mixed agreements or not. We urge the Government to confirm that this is the case. (Paragraph 168)

27.We doubt that the UK would be able to conclude new agreements to replace EU FTAs with third countries within the two-year timeframe for withdrawal negotiations prescribed by Article 50. Nor, while the UK remains an EU Member State, is it able formally to conclude such negotiations, although we note that substantive preliminary discussions are already being conducted to prepare the ground for future FTAs. (Paragraph 169)

28.It follows that the Government must develop a contingency arrangement to secure continuation of the level of market access currently enjoyed by the UK to third countries under EU FTAs, following the completion of withdrawal under Article 50. (Paragraph 170)

Trade under WTO rules

29.If a preferential trade deal were not reached with the EU, then WTO rules would govern trade between the UK and the EU. Of all the trading frameworks considered in this report, reliance on WTO schedules would lead to the most dramatic change in the UK’s terms of trade with the EU. (Paragraph 209)

30.Trade in goods would face significant tariffs, and trade in services would be subject to much greater restrictions. Regulatory restrictions, geographic indicators, and standards are largely untouched by WTO agreements. If it were to trade with the Single Market under WTO rules, the UK would therefore face a significant number of non-tariff as well as tariff barriers. (Paragraph 210)

31.In order to have a trade policy independent of the EU, the UK will have to negotiate and secure agreement to its schedules of concessions (the commitments countries make at the WTO on tariffs, quotas and subsidies). We welcome the fact that the Government has begun to engage with the EU and the WTO about developing and securing UK schedules of concessions. (Paragraph 211)

32.Although the Government is confident that this process will be purely technical, a number of political factors could complicate certification. For example, the views of other WTO members, particularly on tariff rate quotas, and on whether the UK and the EU’s actions could be considered to be a ‘modification’ rather than simply a ‘rectification’ of the EU’s schedules, may complicate agreement. (Paragraph 212)

33.Under WTO rules, the UK would only have to comply with EU standards and regulations in those goods and services it traded with EU Member States. However, we note that the EU has played an important role in setting global standards: EU standards have been accepted by third countries with which the UK might wish to trade. (Paragraph 213)

34.While the WTO has its own dispute resolution mechanisms, they are only accessible to businesses and individuals through governments and the process is often lengthy. Unlike in the EU, breaches cannot be remedied in the national courts, and it may take many years to change the practices of a trading partner through sanctions. (Paragraph 214)

35.Whatever framework the Government adopts, it will also need to establish a domestic authority for trade remedy investigations, to replace the work currently undertaken by the Commission on behalf of EU Member States. This will require capacity-building in a specialised area of law. This may take a considerable time, and should therefore be an early priority in preparing for Brexit. (Paragraph 215)

The Government’s approach

36.We recognise that the Government is engaging with industry stakeholders, but are not convinced that the level of engagement and expertise within government are commensurate with the scale of this unprecedented task, particularly given the Government’s commitment to trigger Article 50 by the end of March 2017. (Paragraph 231)

37.We shall address the issue of engagement with stakeholders further in our forthcoming reports on the future trade relationships between the UK and the EU for goods and services. (Paragraph 232)

38.The Government appears to be underestimating the resources required to negotiate a bespoke deal with the EU, to adopt its WTO schedules, and to agree future trading relationships with third countries. We urge the Government to increase significantly the capacity of the Department of International Trade and the Department for Exiting the EU, and we also call on the Government to provide a clear estimate of the number of staff it will need to recruit to both departments, and the cost that this will incur. (Paragraph 233)

39.We are concerned that Government will not be able to recruit the necessary additional skilled personnel to undertake engagement and analysis before Article 50 is triggered. We are also concerned that this timetable is putting considerable strain on resources across government, and has resource implications for the devolved administrations. (Paragraph 234)

40.At this early stage, we note the framework that the Government has put in place to co-ordinate Brexit work across departments. In a fast-moving negotiation, the pressure on cross-departmental working will be intense, and we look to the Government to continue to monitor the framework, and to make improvements whenever they are necessary. (Paragraph 235)

Evaluating the frameworks

41.Negotiations on a new trade relationship with the EU will be conducted against an extraordinarily difficult political and institutional backdrop. (Paragraph 257)

42.Many elements of the different frameworks for future trade between the UK and the EU and between the UK and third countries are interwoven. Nonetheless, it is clear to us that the current priorities are the UK’s relationship with the EU and its schedules at the WTO. The UK’s future trading relationship with third countries will be vital in the longer term, but will inevitably be contingent on what is negotiated with the EU and at the WTO. Negotiations need to be sequenced accordingly. (Paragraph 258)

43.The notion that a country can have complete regulatory sovereignty while engaging in comprehensive free trade with partners is based on a misunderstanding of the nature of free trade. Modern FTAs involve extensive regulatory harmonisation in order to eliminate non-tariff barriers, and surveillance and dispute resolution arrangements to monitor and enforce implementation. The liberalisation of trade thus requires states to agree to limit the exercise of their sovereignty. The four frameworks considered in this report all require different trade-offs between market access and the exercise of sovereignty. As a general rule, the deeper the trade relationship, the greater the loss of sovereignty. (Paragraph 259)

44.Businesses are operating in conditions of considerable uncertainty. Uncertainty undermines investor confidence, and is thus in itself a significant threat to the UK economy. An important step in reducing this uncertainty would be to confirm the Government’s plans. (Paragraph 260)

45.Brexit will dramatically alter the UK’s trading relationship with its biggest trading partner, the EU. The evidence we have heard underlines the importance of establishing transitional or interim arrangements to mitigate the shock that would follow were the UK to leave the EU under the terms of Article 50 without securing agreement on future trading relations with the EU. (Paragraph 261)

46.A transitional agreement will therefore 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 ‘game plan’ for a future transitional agreement, with specific proposals as to what form it should take. (Paragraph 262)

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