This paper looks at possible options for the UK's trading relationships with the EU after Brexit. The paper has been updated to include a new chapter on trade with non-EU countries.Jump to full report >>
The UK’s future trading relationship with the EU is a key issue, given that nearly half of the UK’s trade is with other EU Member States. At the moment, as a member of the EU, the UK is part of the EU single market and the customs union. This means no tariffs or quotas on trade between Member States. It also means elimination of non-tariff barriers, such as differing technical specifications and rules on labelling of products. Given that average tariffs are now low, these non-tariffs barriers are considered to be a more important barrier to trade, although tariffs on some individual products are still high. The EU tariff on cars is around 10% and agricultural tariffs are generally higher than those on non-agricultural products.
The key feature of the customs union is that all EU member states set the same tariff on goods imported into the EU from non-EU countries. This facilitates trade between Member States by removing the need for checks on where products are made. However, being part of the customs union makes it very difficult for a country to negotiate its own free trade agreements.
While the Government has said it does not want an off the shelf option, existing trade arrangements provide a starting point for considering what the UK’s future trading relationship with the EU might look like. Three options are considered in this note: membership of the European Economic Area (EEA), a free trade agreement (FTA) and trading under World Trade Organization (WTO) rules.
The WTO option would apply in the absence of a negotiated deal with the EU. In this sense it can be thought of as the default option, although some argue for it on its own merits. This would involve access to the single market on the least advantageous terms. The UK would still have “access” to the EU market in the same way that any other country without a trade agreement with the EU (such as the US) can export to it. Exports of UK goods to the EU would be subject to the EU’s tariffs and vice versa. The EU would not be able to set discriminatory tariffs on imports from the UK. The WTO option would mean no contribution to the EU budget or free movement of people.
A free trade agreement between the UK and the EU would be an intermediate option between EEA membership and trading under WTO rules. It is not possible to know with certainty what such a deal would look like as this would depend on the outcome of negotiations between the UK and the EU. The Government has said it is aiming for “an ambitious and comprehensive Free Trade Agreement and a new customs agreement”. The Government wishes to secure “the freest and most frictionless trade possible in goods and services.” Free trade agreements often include a range of measures beyond those reducing or eliminating tariffs and quotas.
The last option would be UK membership of the European Economic Area (EEA). The EEA includes all EU Member States plus Iceland, Liechtenstein and Norway. The EEA option involves considerable (but not complete) access to the single market. It also involves contributions to EU spending and free movement of people. Non-EU EEA countries are outside the EU customs union.
The Government’s negotiating objectives were set out by the Prime Minister in a speech in January. A White Paper was published shortly afterwards. The Prime Minister said that the UK would “pursue a bold and ambitious free trade agreement” with the EU. This would involve “the freest possible trade in goods and services”. However, the UK would not seek continued membership of the EU single market, as this would mean complying with the EU’s four freedoms (freedom of movement of goods, services, people and capital). It would mean a continuing role for the European Court of Justice. The proposed trade agreement might “take in elements of current single market arrangements in certain areas” such as cars and financial services.
On the customs union, the Prime Minister said that she wanted the UK to be able to negotiate its own trade deals. This would mean not being bound by the common external tariff. However, “a customs agreement” with the EU would be sought.
The Prime Minister said that she wanted an agreement about the future relationship with the EU to be concluded within the two year timetable set out by Article 50. After that, a “phased process of implementation” was proposed.
While the Government was hopeful that such a deal could be reached as it would be in the economic interest of both the UK and the EU, the Prime Minister said that “no deal for Britain is better than a bad deal for Britain.”
The speech raised a number of issues including the effect on the economy, whether a trade deal could be negotiated within two years, and how the proposed customs agreement would work.
Brexit will also affect trade with countries outside the EU. At the moment, the UK’s trade with these countries is governed by the EU. As a result of EU membership, the UK currently has trade agreements with over 60 countries. While the position is not entirely clear, the balance of evidence suggests that the UK will no longer benefit from these deals after Brexit.
After Brexit, the UK will be able to negotiate its own trade deals with other countries. Agreements cannot be concluded while the UK remains in the UK. The Government has said that it is entitled to hold discussions with potential trade partners while the UK remains in the EU. Nine working groups have been set up with partners: Australia, China, India, New Zealand, Norway, South Korea, the Gulf Co-operation Council, Turkey and Israel.
Commons Briefing papers CBP-7694
Author: Dominic Webb