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Brexit: Challenges for the UK in negotiating an FTA with the EU (a trade negotiator’s perspective) by Luis González García
Narrowing the trade options
The challenges ahead for the United Kingdom (UK) will depend on the trade model adopted. As I understand, the UK government is seeking to achieve deep economic integration with the European Union (EU) and at the same time ‘maximum freedom’ to negotiate trade agreements with third countries. If this becomes the trade policy of the UK then I believe it would be appropriate to exclude from the equation two trade models discussed during the referendum campaign. First, the Customs Union model (known as the Turkish model) would not be a viable option because the UK would have to adopt the EU external tariff and, as a result, become tied to a large extent to the Common Commercial Policy (CCP), giving the UK little flexibility in its trade negotiations with third countries. Second, the “zero tariff” model (unilaterally putting import tariffs at zero) could not be an option (leaving aside the arguments on the negative impact on many British industries) for the simple reason that no trading nation would want to negotiate a preferential trade deal with the UK.
This, theoretically, leaves the UK with two viable options: (1) the so-called ‘single market’ option or European Economic Area (EEA) model, and (2) the free trade agreement (FTA) model or ‘simple’ integration approach. It is, however, almost inevitable that a future trade deal with the EU would be the result of a mix of these two models. I would suggest that the EEA model is not a realistic option and the ‘simple’ integration model would not be in the best interest of the UK and the EU. First, the EEA option is not the easy solution it may appear to be. The EEA process would entail for the UK a mountain of obstacles along the way and some challenging policy decisions which may be in contradiction to the reasons for exiting the EU. It is important to note that a European state cannot just sign up to the EEA because it is not an organisation. The EEA is a preferential trade area exclusively available to the members of two organisations: the EU and EFTA. If the UK is not a member of either the EU or the EFTA then it cannot become part of the EEA. The UK would need to re-apply to EFTA after exiting the EU. In the event the UK adopts the single market/EEA model this, on the one hand, will mean that the UK accepts the EU’s ‘four freedoms’, pays contributions to Brussels and accepts the supremacy of EU law. On the other hand, its entry would be on the assumption that the small economies of Norway, Switzerland, Lichtenstein and Iceland would be more than happy to accept that the current balance of power between them be dramatically changed with the incorporation of the fifth biggest economy in the world (i.e. the UK) into their EFTA club.
The second alternative (the simple integration approach) does not seem to be a viable option either. It would not achieve the UK’s objective of maintaining a close economic integration with the EU. The close relationship, geographical location, interdependence, and long-standing common European standards between the UK and the EU inevitably lead to the conclusion that both sides are likely to adopt an ad-hoc deep integration economic model (i.e. FTA-plus) which will certainly be unique in EU relations with third countries. In the end it is geography which shapes trade policy not politics.
Whatever the shape and form of this ad-hoc trade model, it seems likely that the UK will have to (1) engage in complex technical trade negotiations with the EU, (2) define its own agricultural and fisheries policy; (3) set up its own external tariff regime, (4) re-establish its preferential trade relationship with third countries and, most importantly, (5) its legal status as an independent member of the WTO. I will deal with the WTO implications at the end of this article.
At the outset I would like to point out that there is nothing easy or simple in the negotiation of trade agreements. Experience shows that it is not possible to achieve positive results in trade negotiations without hard concessions. This is particularly true in the negotiation of a trade agreement with the EU and even more so considering the UK’s complex and challenging process of withdrawal from the EU. The following are some challenges in the negotiation of an FTA with the EU, from a trade negotiator’s perspective.
Preparing for formal trade negotiations
The outcome of international trade negotiations largely depends on the bargaining power of the parties involved. In international trade negotiations, economic power equals bargaining power. It is needless to point out that the UK would be negotiating with the world’s most important economic bloc. This makes an effective pre-negotiation strategy even more important for the UK. It requires the UK government to take the following steps:
- Set up an integrated, highly competent, experienced, motivated and coordinated negotiating team.
- Launch a nation-wide programme of consultations with (1) the public sector including the relevant ministries and government departments which may be affected by the trade agreement, (2) the private sector including agricultural and fisheries organisations, consumer groups, business, import and export associations, academic, technology and science institutions, trade unions, automotive, aerospace, banking, food and drinks, insurance, manufacturing, and pharmaceutical industries.
- Incorporate in its negotiating position the interests of all these groups.
- Conduct an analysis of the political, economic and legal implications of the potential impact of any trade model.
- Define the government’s broad negotiating objectives (by identifying its national interests), including its ‘non-negotiables’ or ‘red line’ positions.
- Ensure that the negotiating position corresponds with the government’s strategic objectives within its broader trade policy (i.e. the WTO and potential FTAs with third countries).
- Ensure sufficient domestic political support for the negotiation process.
Four additional factors need to be taken into account in the pre-negotiation strategic planning. First, it is critical that the government gathers political support from key EU Member States to increase its influence vis- à –vis the Council and the Commission. This is also important because the EU negotiating power in relation to the UK will largely depend not only on its economic strength as a bloc, but also on the level of coherence within the EU on key aspects of the negotiation. In agriculture, for example, the EU negotiating power is strong in the WTO because there is a high degree of convergence within the EU Member States in relation to the Common Agricultural Policy (CAP).
Second, the UK would need to be realistic on what it can and cannot achieve in the negotiations. In my experience, the EU is very hesitant to agree on terms which can set a precedent internally and in future trade negotiations with third countries. The EU is also very reluctant to accept proposals which entail a departure from its core principles or institutional framework.
Third, it is a fundamental principle of negotiation planning that the party seeking trade negotiations focuses on what it would do in the event of no deal. This is important because the limits of a trade negotiation are set by the parties’ respective plan B. To put simply, the better the plan B the less need for plan A. This strengthens the bargaining power of the party with a well-prepared plan B.
Fourth, before the start of formal trade negotiations it is important to bear in mind that the EU decision-making process in the negotiation of FTAs is very complex and rather confusing. The UK would be negotiating (and/or dealing) with 27 Member States (individually and collectively within the Council), the President of the Commission, the Commission’s Brexit negotiator, its Trade Commissioner, Foreign Policy Representative and other relevant DGs, for example Agriculture, Competition, Internal Market and, very importantly, the EU’s Legal Services. On top of that, it would also be negotiating with the European Parliament. Given that the future trade relationship between the UK and the EU would involve competences from both Member States and the EU, the future trade agreement is likely to qualify as a ‘mixed’ agreement, adding complexity and uncertainty to the negotiation process since the trade pact will require consent not only of the European Parliament but also of the 27 national parliaments. In order to avoid economic disruption and delays, it may be prudent to separate the agreement into different parts through partial agreements in order to facilitate the entry into force of those trade and non-trade issues which would fall exclusively under the competences of the EU.
The triggering of formal negotiations
Having considered the above factors, an important question arises. When should the UK trigger Article 50? The decision is likely to depend on a combination of external political and technical factors. The UK would have to consider the effect of upcoming presidential or parliamentary elections in key EU Member States, their willingness to negotiate, and the EU’s political and institutional structures regarding Brexit. It is critical that the EU allocates competences and tasks among its institutions before the formal negotiations begin. Triggering Article 50 without having first taken into account the above factors may weaken the negotiating power of the UK.
It may also be sensible for the Council to set out in clear terms the scope of Article 50 before the UK formally notifies the EU of its withdrawal. There are a number of issues which are unclear from the express language of Article 50 and which will likely trigger discussions and further negotiations thus potentially delaying the Brexit negotiations. From a trade negotiator’s perspective, an essential question is whether the UK could negotiate a trade agreement with the EU while it is still a member of the EU. Article 50(2) provides that the UK and the EU shall negotiate a withdrawal agreement ‘taking account of the framework for its future relationship with the union’. What ‘framework’ means is unclear from the express terms of Article 50(2). Does it mean that the UK and the EU could only agree on a mandate to negotiate the technical issues of a future trade agreement? According to the EU’s Trade Commissioner:
There are actually two negotiations. First you exit, and then you negotiate the new relationship, whatever that is.
This is a rather strict interpretation of Article 50 of the TFEU. In my opinion, such an interpretation would be contrary to the purpose of Article 50. The broad reference to ‘framework’ should be interpreted broadly in a way which ensures future stable and predictable trade rules to the benefit of businesses, investors, citizens and consumers of the UK and the EU after the UK exit from the EU. This means that the UK and the EU should enter into parallel negotiations of a free trade agreement.
The multiplicity of simultaneous trade negotiations
The Brexit trade negotiation would require multiple negotiations simultaneously with the EU, the WTO and possibly with third countries. Apart from the global/comprehensive trade agreement between the UK and the EU, both sides would immediately need to engage in negotiations about their respective agricultural and fisheries positions because (1) these would form the basis for the UK and EU negotiation in the WTO, and (2) would have an impact on any future FTA negotiation with third countries (in particular the NAFTA countries, Australia, Brazil, South Africa, India and China). Second, the UK may want to continue benefiting from the current EU’s FTAs with third countries, including the EFTA countries, several Latin American countries, the African, Caribbean and Pacific (ACP) countries and South Korea among others. These negotiations would not necessarily require a complicated negotiating process because most of the trade and trade-related topics in the EU FTAs would not need changes in regulations or supply chains (if a UK-EU FTA is in place) given the accumulation of origin provision found in most modern EU FTAs. Significant adjustments, however, may be required on access to agricultural goods. Again, this would largely depend on the arrangements between the UK and the EU regarding the agricultural and fisheries policy. Third, the UK would need to take a decision on whether it wishes to continue granting unilateral preferences to ‘countries-most-in-need’ under the Generalised Scheme of Preferences (GSP). There are currently around 90 countries benefiting from the GSP.
Finally, the UK will be required to negotiate its legal status in the WTO as an individual member. Given the complexity and importance of the negotiation in the WTO I will now examine this question.
The WTO dilemma
There is a great deal of uncertainty surrounding the complex issue of the so-called ‘WTO option’. One of the most important questions for UK businesses and investors is whether the UK could trade under WTO rules as soon as it exits the EU. In my opinion the answer is twofold. First, the UK would most likely lose market access on goods in certain countries and face legal challenges by some WTO members unless it negotiates with both the EU and the WTO members its status as an independent member of the WTO. Second, in relation to the UK – EU trade relationship, if there is no FTA in place on the date the UK exits the EU, it is highly likely that both sides will treat each other on WTO terms (including MFN tariff rates). Due to the EU’s current trade restrictions to third countries, this is not a desirable outcome for either side.
The best outcome will require two parallel negotiations. First the UK and the EU would need to agree on how to disentangle their respective WTO rights, concessions and commitments. In my opinion, this process should be part of the Brexit negotiation under Article 50. Once the distribution of these commitments has been agreed on, the UK and the EU would need to embark on what can be either a simple or a highly complex and time-consuming negotiation with 161 members of the WTO who would need to agree to the UK-EU allocation of their WTO commitments.
Let us remind ourselves of a fundamental point: the UK does not need to negotiate access to the WTO. Like the EU, the UK is an original member of the General Agreement on Tariffs and Trade (GATT) and a founding member of the WTO. The UK, thus, has rights and commitments in the WTO. These rights, however, are combined with those of the EU. As we know the EU has been attributed with the competence for the Common Commercial Policy (CCP). For example, agricultural and fisheries policy are areas where the EU has exclusive competence. The TFEU widened the scope of the CCP and now covers trade in services and intellectual property rights. It must be noted, however, that in some aspects Member States continue to have some residual individual rights but do not have the competence to engage in negotiations in the WTO. It is the EU’s executive organ, the Commission, which represents the Member States in all WTO negotiations.
Now the EU, like many other individual WTO members, has made specific commitments to other WTO members. This was part of the accession of every member to the WTO. They are called ‘schedule of commitments’. The current EU schedule of commitments is the so-called ‘EU-15’ of 2012. The fact that this is an outdated schedule is likely to complicate matters in the UK’s future WTO negotiation because the EU schedule of concessions and commitments regarding agricultural products, domestic support and export subsidies does not reflect the enlargement of the EU (from 15 to 28 Member States). This means that the UK – EU allocation of commitments will likely lead to a series of requests by third countries seeking new compensations from the EU and the UK. How will third countries react to the UK – EU distribution of concessions is anybody’s guess. But at least one can expect the following: It is highly unlikely that WTO members will challenge the UK’s rights, concessions or commitments on industrial goods, export subsidies entitlements including those on agricultural exports or its schedule of services. The challenge, however, is likely to focus on the EU’s agricultural commitments related to tariff rate quotas (TRQs) to third countries such as Australia, Argentina, Brazil, China, New Zealand, Thailand, Uruguay and the U.S. TRQs are volumes that can be imported with a low or zero tariff. Imports above the quota quantity enter with a higher tariff rate. The UK and the EU would need to negotiate a distribution of the EU’s TRQs. This will be problematic to third countries. They may find the redistribution of the EU’s TRQs as unfair because it would reduce their access to the EU market as a result of the UK’s exit. The TRQs are likely to become the most contentious issue in the UK’s re-establishment of its legal status as an independent member of the WTO.
Now, let us assume that the UK is unable to agree on new commitments with other WTO members on the day it exits the EU. Does that mean that the UK can still trade under WTO tariffs? For imports, the UK could of course adopt the EU’s external tariffs, could lower them or even eliminate import quotas as it wishes (not before facing fierce resistance from some British farmers however). This tariff scheme would become the UK’s MFN tariff for the future and would not be a controversial matter in the WTO. In the case of UK exports to WTO markets including the EU (in case there is no trade agreement in place yet), one would expect WTO members (including the EU) to apply MFN rates to UK products. But this raises doubts as to whether the UK can trade under MFN tariffs without having to make any concessions or commitments to WTO members. Because the UK would be trading on MFN without being forced to grant concessions and TRQ’s to the rest of the WTO members and, thus, creating an unfair scenario for the other WTO members, it is possible that the UK may be subject to MFN restrictions by other WTO Members until it regularizes its legal status which can only occur once it has negotiated a new schedule of commitments.
An additional uncertainty, in this case a legal one, is the legal process under the WTO rules to re-establish the UK as an independent member of the WTO, in particular with regard to the distribution of commitments. There is no provision in the WTO framework which covers the particular situation of the UK. The closest provision seems to be Article 28 of GATT which provides for the modification of schedules. Whether this provision applies to the particular case of the UK is not entirely clear. Despite these complexities, WTO members could allow the UK to trade under WTO rules on an interim basis (one or two years) without a schedule of commitments while it concludes the negotiations with all individual WTO members.
Having said all the above, it must be stressed that nothing prevents the UK negotiation in the WTO from being simple and straightforward. This will depend entirely on the political will of the WTO members on whether they want to make the UK’s life outside the EU easy or complicated.