How will Brexit affect Britain’s trade with Europe?
Britain will have to reach a new trade agreement with the European Union following its decision to sever links with Brussels. The task will be complex and will have to be carried out under the pressure of a two-year deadline. Here are some of the key issues.
1) Will a post-Brexit UK need a new trade deal with the European Union?
Yes. Once the UK’s formal decision to leave the EU is notified to the European council of EU leaders, under article 50 of the Lisbon treaty, the UK will be giving formal notice that it will be leaving the EU. Article 50 sets a two-year window to renegotiate a new legal basis for Britain’s trade relationship with the EU – although it also allows for an extension.
These discussions will need to consider the framework for exporting and importing goods (cars and food) and the basis for continued services trade (such as legal advice on big company takeovers) to and from the EU. In addition, negotiations will have to cover customs procedures, passport controls for business travellers and regulation on issues such as environmental, health and safety standards.
2) Will tariffs be imposed on UK goods and services under a new trade deal with the EU?
This is entirely possible and up for discussion under a grand UK-EU deal. Currently, UK companies are able to trade with the EU on a tariff free and quota free basis. During negotiations for a new trade deal, there is nothing to stop Brussels seeking to impose a 5% tariff on all UK car exports (more than eight of 10 UK-made cars are sold abroad). The UK can, of course, threaten tit-for-tat tariffs on BMW or Fiat cars, but it means consumers on both sides of the Channel suffer. There is also the risk that the EU will impose quotas, which limit the amount of goods and services that can be sold into Europe.
3) Will the negotiations take place on a country-by-country basis?
No. According to John Forrest, the head of international trade at law firm DLA Piper, the UK will simply be required to negotiate a single deal with the 27 remaining EU states under the EU’s common commercial policy. “It will definitely not be on a country-by-country basis. The EU maintains a single harmonised customs border and the UK will simply negotiate with the EU the continued terms of trade with the EU,” he says.
4) Does the British government and civil bureaucracy have the skills to negotiate an EU trade deal?
According to Forrest, there is a high degree of expertise in the British government in terms of understanding which sectors need to be covered by a new agreement. “The UK government retains a high degree of expertise, backed up by input from UK companies and trade associations, with regard to the UK’s priorities for any trade agreement.”
But, he adds, there might be an issue over securing the right number of skilled individuals required to pull off a wide range of bilateral and regional trade deals within a short time frame. “There may be a degree of concern over the level of negotiating resources. Undertaking a broad suite of regional and bilateral trade negotiations requires a significant number of qualified and experienced individuals.”
5) What happens to Britain’s financial services industry?
Britain’s financial and professional services industry – banks, accountants, corporate lawyers, investment managers is a significant contributor to GDP (around 12%, which is more than manufacturing). On Saturday, a senior figure at the European Central Bank said banks in the City of London risked being stripped of their lucrative EU “passports” that allow them to sell services to the rest of the union. The City, as the industry is better known, will want to retain that passport; otherwise it will not, for instance, be able to advise on a mega-euro takeover in Germany or sell euro-denominated products such as derivatives. To do that simply, the City will need to join the single market, or the European Economic Area that encapsulates the EU and non-members such as Norway. That will, in turn, require accepting freedom of movement.
Or the City can go it alone and operate in a much looser regulatory environment, which will please hedge funds and bankers keen to avoid an EU-imposed cap on bonus payments.
6) Will it affect trade with the US?
No. The ability to trade with the US on current terms will not be affected. However, the UK will not be part of the controversial TTIP trade deal between the EU and US.
7) Who will be on the other side of the negotiating table to the UK?
UK negotiators will need to engage via a number of bodies including the European council, individual European member states and the European commission (the EU’s executive arm, which administers EU law).
8) Will the UK be able to pull off a trade deal in two years?
This will be challenging, particularly if the option of joining the EEA is pursued but the British government balks at accepting freedom of movement as a quid pro quo.
9) What if no deal is reached within two years?
According to Forrest, there are a number of potential scenarios, including that the current status quo prevails and the UK carries on trading with the EU under existing free movement principles. “That outcome is not beyond the realms of possibility,” he says. However, that means freedom of movement for goods, people and capital between the UK and EU will continue to operate. For millions of people who campaigned and voted for leaving the EU, this is will be difficult to accept.