Nearly four years after the narrowly won referendum to leave the European Union, so-called “Brexit” was delivered on 31 January when the United Kingdom withdrew from EU membership. The two big questions are whether the two sides will be able to conclude even a bare bone free trade agreement within the allotted time to avoid imposition of tariffs and customs formalities, and how much the UK regulatory environment will change. The two questions are closely related: the further the UK deviates from EU rules, the harder it will be to conclude an agreement with the EU. Conversely, such divergence could pave the way for trade deals with the United States and other countries.
Has the UK left or not?
A transition period is now in place to allow the UK and the EU club of now 27 Member States to negotiate its future relationship. The transition period will conclude at the end of the year unless, by July 2020, both parties agree to extend it for another year or two. During the transition period, the UK remains a member of the EU’s customs union and single market and continues to apply EU law but no longer holds a seat at the European Parliament or participates in shaping EU rules. At the same time, the UK is free to begin courting other countries to conclude free trade agreements and to prepare divergence from EU rules as of the end of the transition period.
What are the UK trade priorities?
Within a week of its withdrawal, British Foreign Secretary Dominic Raab announced in Canberra the UK’s hope for an early deal with Australia. Days later, UK Trade Minister Lizz Truss laid out her trade objectives:
- Immediate deals with the United States, Australia, Japan, and New Zealand;
- Joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership; and
- Having 80 per cent of current UK trade covered by free trade agreements within three years.
A new trade bill is expected to be tabled within a month and the government has launched a public consultation on the UK’s proposed tariff schedule following the end of the transition period.
Will the UK diverge from EU legislation?
On the UK legislative and regulatory front, the UK already has signalled that it may divert from EU law – to either reduce or enhance requirements - in connection with the regulation of medicines and devices, data protection, the environment, competition and subsidy policy, and procurement. These could include:
- Changes concerning medicines and devices to create a more attractive space for life sciences through faster regulatory approvals.
- Potentially more flexible approaches to data protection to take into account rapidly evolving technologies such as AI.
- Possible deregulation in some areas of environmental law to have more flexibility in negotiating trade deals with the U.S. and other countries;
- Creation of its own carbon pricing and trading scheme; and
- Divergence of laws on anti-competitive agreements and abuse of a dominant position and new block exemptions to exempt specific categories of agreements.
UK subsidy policy could diverge from that of the EU’s post-transition period but would still need to comply with basic rules set out in the WTO Agreement on Subsidies and Countervailing Measures. On public procurement, EU public procurement laws will cease to apply in the UK, however, it is unlikely there would be significant changes to the current regime, which is compliant with the WTO’s Agreement on Government Procurement to which the UK is a party.
What are the likely Trade-offs?
As it embarks on its future, the UK will be weighing the opportunities available to it. In 2018, 49 per cent of the UK’s trade was with the EU and 11 per cent with nations under EU-third country trade agreements. The remaining 40 per cent of UK trade in 2018 was with the rest of the world. While rest-of-world trade currently is less than trade with the EU, the UK believes that trade with countries such as Australia that was previously not possible due to UK membership in the EU will open up and results in significant changes in the balance of trade.
What lies ahead in the EU-UK “future relationship” talks?
Hard bargaining lies ahead for the EU and UK to secure a deal on their future relationship. Just days after Brexit, both sides laid out their initial negotiating positions. According to the EU’s draft priorities, Brussels stands ready to negotiate a highly ambitious trade deal covering both goods and services and cooperation in various areas, including mobility, transport, digital trade, intellectual property, public procurement, financial services, and energy and raw materials. The EU also proposes to eliminate all tariffs and quotas for goods. The UK, on the other hand, is pushing for a free trade deal similar to the one the EU has with Canada or, alternatively, a looser arrangement like the EU-Australian Partnership Framework. The former is a broad agreement that eliminates 98 percent of the tariffs between Canada and the EU and addresses many other areas of activity including protection for investments, product standards, professional certification, and procurement. The latter contains a number of economic and trade cooperation agreements but operates largely on WTO terms.
EU sources insist that any ambitious free trade agreement with the UK such as a Canada-style deal is dependent on a “level playing field” and products’ compliance with the rules of the importing party, including checks on imports for safety, health and other public policy reasons, so as to avoid unfair competition and the UK undercutting EU standards. This also includes alignment with EU rules on state aid, workers’ rights and the environment. The EU further is pushing for the European Court of Justice to have jurisdiction over trade disputes arising under any post-Brexit trade deal. In opening sallies, the UK has rejected signing up to a treaty mandating alignment with EU rules and the jurisdiction of European courts. The UK insists that it will push for an Australia-style arrangement if the EU is not willing to forgo its demand for regulatory alignment.
What’s the timing for EU-UK negotiations and what if they fail?
Talks between the UK and the EU are expected to begin in earnest in early March after approval of the EU negotiating mandate by the EU Member States. In the meantime, the UK has adopted legislation that would prevent it from agreeing to extend the transition period beyond the end of 2020. This leaves roughly eight months for the EU and UK to reach a deal, as the EU aims to wrap up negotiations by the mid-October EU Summit to allow for ratification before year end. The EU claims that even a looser arrangement like an Australia-style deal cannot be negotiated within the short time period available this year.
If a deal cannot be reached by the end of 2020 and WTO terms become applicable, economies on both sides of the Channel likely would be damaged. Economists forecast that the EU would lose approximately 1.5 percent of GDP and that the UK would have to bear a reduction in GDP of around 4.4 percent.
Two things are certain: the UK will be hedging its bets through talks with the United States, Australia, Japan and other major trading partners and multinationals will be closely monitoring developments to assess impacts and opportunities.