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-tariff 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 tariffs on goods imported into the EU from non-EU countries. This facilitates trade between Member States by largely 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.
The Brexit negotiations started in June 2017. The future trade relationship between the UK and EU is not expected to be discussed until the EU considers that sufficient progress has been made on withdrawal issues, such as the UK's financial contribution to the EU, the rights of citizens and the Irish border. The EU is expected to take a decision on whether sufficient progress has been made at a meeting of the European Council on 19-20 October. It is generally believed that the EU is unlikely to conclude that sufficient progress has been made on the withdrawal issues to allow trade negotiations to start.
The Government has said it is seeking an ambitious new economic partnership with the EU. The Government’s Brexit White Paper said it was aiming “for the freest possible trade in goods and services between the UK and the EU.” The Government’s policy is for the UK to leave the single market and customs union after Brexit. Staying in the single market would mean complying with the EU’s four freedoms (freedom of movement of goods, services, people and capital) and a continuing role for the European Court of Justice. Leaving the customs union would allow the UK to negotiate its own trade deals but would be likely to mean greater customs checks on UK trade with the EU. Further detail on the customs union was provided in a position paper published by the Government in August 2017. The UK Government also published White Papers on customs and trade in October 2017.
In her Florence speech, the Prime Minister said that the UK was not looking to copy an existing model of relations with the EU and ruled out membership of the European Economic Area (EEA) or an agreement based on the EU’s recent trade deal with Canada. The Prime Minister also called for a “period of implementation “lasting for around two years after Brexit. The Prime Minister argued that the UK and EU should have access to each other’s markets on current terms during this period.
Two alternatives to the Government’s proposals are trading on World Trade Organization (WTO) rules and membership of the EEA. The EEA option would be the closest to EU membership while the WTO option would be the most radical break.
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 and no free movement of people.
Another 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 the free movement of people and contributions to EU spending. Non-EU EEA countries are outside the EU customs union.
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 EU. The Government has said that it is entitled to hold discussions with potential trade partners while the UK remains in the EU. In July 2017, the Government said that 10 trade working groups had been set up covering 15 countries Australia, China, India, Israel, New Zealand, Norway, South Korea, the Gulf Co-operation Council, Turkey and the US.
Commons Briefing papers CBP-7694
Author: Dominic Webb