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Brexit deadlock leaves trade deals high and dry

Wednesday, 18 September 2019
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Wednesday, 13 February 2019

With just 44 days to go until the UK is scheduled to leave the EU, the UK government seems unlikely to secure  the continuation of most trade arrangements with third countries currently covered by EU-negotiated agreements in time for Brexit.  What does this mean for imports and exports of goods?

The problem

By virtue of its membership of the EU, the UK has free trade agreements with over 60 territories.  It also benefits from EU-negotiated arrangements with countries such as China, the US, Japan, India and South Korea  relating to trade facilitation (which include measures designed to ease the passage of goods through customs, for example).  Unless agreement is reached for these arrangements to continue, they will fall away at 11 pm UK time on 29 March - even if the UK reaches a deal with the EU (which is currently far from certain).

So far, only six “continuity” free trade agreements have either been signed or are said to be close to signature;  a further five are said to be at various stages of negotiation (some are apparently nearer finalisation than others – but for the majority of EU-negotiated free trade agreements, no update on progress has been provided).  As regards trade facilitation arrangements, a mere four have been signed (in relation to New Zealand and Australia only).  It therefore looks increasingly unlikely that the UK will have managed to agree replacement arrangements covering the majority of the affected territories in time for Brexit.

Deal or no deal

The impact of a failure to agree replacement arrangements depends on whether the UK leaves the EU subject to the draft Withdrawal Agreement.  If the UK leaves without a deal, then in the absence of continuity arrangements, trade with countries currently covered by EU-negotiated free trade agreements will revert to WTO terms.  This means that importers are likely to face higher tariffs when bringing relevant goods into the UK.  Meanwhile, UK exporters to those countries are likely to become less competitive as their goods will in many cases also be subject to higher duties and – where trade facilitation arrangements are relevant - may be subject to increased border red tape.

If, on the other hand, the UK leaves the EU subject to the draft Withdrawal Agreement (WA), UK importers should not face any immediate adverse effects.  This is because the WA provides that, during the 21 month transition, the UK must continue to honour the terms of any trade agreements negotiated by the EU.  However, UK exporters will be confronted with much the same prospect as they would face under a no deal scenario i.e. higher tariffs on many products and in some cases increased border red tape (unless the country they are selling to has agreed to "rollover" the existing arrangements into the transition).  Had the UK ratified the WA, the EU might have been expected to have put pressure on third countries to agree to a continuation of current arrangements in time for Brexit – but it has little incentive to do so until the UK Parliament has signified its agreement to the WA.   With the Brexit negotiations looking as if they will drag on into March, the government's promised smooth "rollover" of existing trade agreements appears to have fallen victim to the continuing political deadlock.

How bad is the impact likely to be?

EU-negotiated free trade agreements have been estimated to apply to about 15% of UK trade with the rest of the world (including the EU) – but this figure does not take account of the impact of trade facilitation arrangements, which would apply to a much higher proportion of total UK trade.  Whilst the UK could potentially mitigate some of the adverse effects on importers (and has effectively committed itself to doing so if it leaves the EU based on the WA), it will not be able to do much to prevent exporters being subject to increased tariffs and additional border red tape.  There is also the impact on services to consider;  whilst the extent of preferential access in relation to services can vary considerably depending on the agreement, some EU-negotiated arrangements (such as the free trade agreement with South Korea) provide quite significant access for UK services businesses in particular sectors (as compared with the position under WTO terms).

If you would like assistance with assessing whether the loss of EU-negotiated free trade agreements will affect your business (and how you can mitigate any adverse impacts), please contact Ben Chivers or Jonathan Rush.  For more information on how we can help with planning for a hard Brexit, click here.

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