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Brexit: UK trade relations with third countries (Part 2) by Luis González García
After Brexit the UK will have to shape new trade relationships with third countries and regularise its independent status in the WTO. In doing so, the UK will have to decide what import tariffs, trade defences, industrial, fisheries, and agricultural policies it wishes to follow. The two priorities in the UK’s new trade policy should be to: (1) minimise any trade disruption with the EU; and (2) avoid losing the preferential treatment the UK currently enjoys under the EU’s trade agreements (FTAs). The former was addressed in Part 1. The latter will be addressed in this article (Part 2), and is based on the assumption that the UK will not pursue a comprehensive customs union with the EU.
Trade agreements with third countries
The EU has an extensive network of trade agreements of various types with around 50 countries. Some are comprehensive free trade agreements such as the FTAs with Canada, CARIFORUM states, Chile, Mexico and Korea. Once the UK exits the EU, the existing EU FTAs will no longer be applicable to the UK. This means that the UK will lose preferential market access to the EU’s partner countries. Some commentators have suggested that, under international law, the UK could potentially remain a party to some of the EU FTAs post Brexit. In my opinion, there are legal and practical reasons why current EU FTAs cannot continue to apply to the UK automatically.
From a legal perspective, the EU FTAs would cease to apply to the UK because the UK’s rights and obligations under these treaties only apply to the UK in its capacity as a Member State and not as a sovereign state in its own capacity. More importantly, core disciplines covered in all EU FTAs are those which are considered to be of exclusive competence of the EU, including the common commercial policy (CCP). Although the scope of the CCP is the cause of much controversy, there is no doubt that it covers at least the following disciplines: trade in goods, trade defences, foreign investment, services, the commercial aspects of intellectual property and competition. Consequently, once the UK leaves the EU, the rights and commitments the UK enjoys under the CCP will no longer apply to the UK because such rights emanate only as a result of the UK’s status as a Member State. Even assuming that, in theory, the UK has residual rights under the EU FTAs, the territorial scope of the EU FTAs means that the UK territory will be excluded from the FTAs once Britain leaves the EU. All EU FTAs employ the term “the territory of each Party” or “the territory of the importing Party”. The term “Party” is defined, on the one hand, the “European Union and its Member States” as one party, and the third country as the other party. The term “territory” is also defined in more or less the same terms. For example the EU-Mexico FTA provides that, “[t]his Agreement shall apply to the territory in which the Treaty establishing the European Community is applied under the conditions laid down in that Treaty, on the one hand, and to the territory of the United Mexican States, on the other.” It is thus clear that the intent is that the FTAs only apply to states which are governed by the EU treaties. Once the UK exits the EU the EU treaties will no longer be applicable to the UK, hence, the EU FTAs cease to apply to the UK because the UK will be outside the territorial scope of the treaties.
It is also worth noting that a UK unilateral declaration or even an agreement between the EU, the UK and third countries to allow the UK to continue benefiting from the EU FTAs would not resolve the risk of trade disruption. Certain protocols would need to be put in place to cover the practicalities of dealing with, for example, tariff quotas, the separate rights and obligations of all parties, and the dispute resolution mechanism in case of an alleged breach of the treaty. From a practical perspective, the UK would need to negotiate new FTAs. Given the limited human capabilities to negotiate a considerable number of trade agreements with third countries in a short period of time, the UK could negotiate interim agreements (very similar terms as the EU FTAs) with a number of like-minded EU trade partners during the two year period. This would be crucial to minimise disruption and ensure British companies to continue benefiting from existing EU FTAs.
UK businesses would continue to trade with the rest of the world under WTO non-discrimination Most Favoured Nation (MFN) rules as soon as it exits the EU because 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. This means that the UK and the EU would need to agree on how to disentangle their respective WTO rights, concessions and commitments. These include the disentanglement of the joint tariff rate quotas (TRQs) and the allocation of the EU’s subsidy limits for agricultural goods (AMS). 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 should be a relatively straightforward negotiation with the members of the WTO who would need to agree to the UK-EU allocation of their WTO commitments. Once the UK reaches an agreement with the WTO members, it can submit its schedules to the WTO Secretariat. The process concludes with the certification of the schedules by the rest of the WTO members.
The extent to which the negotiation is simple or complex is likely to depend to a large extend on the reasonableness of the UK’s WTO proposal, its diplomatic skills and whether the WTO members want to make the UK’s life post Brexit easy or difficult.
It is also important to note that the UK will likely replicate the EU MFN schedule almost in its entirety. This, in my view, would be a positive approach by the UK because it would minimize any trade disruption with third countries. This means, however, that in a WTO default scenario (i.e. there is no UK-EU trade agreement in place on Brexit date) goods from the EU will be treated as goods from a third country, hence, subject to ad valorem and non-ad valorem tariff rates. This will likely result in higher domestic prices in the UK. Although this scenario can be avoided by lowering the MFN tariff on certain products it is not a preferable scenario in the long term because it will lower the negotiating power of the UK vis-à-vis third states. This makes it imperative that a conclusion of a UK-EU FTA during negotiation is achieved or, at the very least, a transitional arrangement to minimize trade disruptions in the UK.
Generalised Scheme of Preferences (GSP)
To avoid trade disruption with the least developed countries (LDCs), the UK could continue (or even improve) the EU’s unilateral tariff preferences to ‘countries-most-in-need’ under the GSP which allows tariff free and quota free treatment to the UK market to all least developed countries This is arguably (1) the easiest of the UK’s trade tasks post-Brexit since no negotiation is required to implement the market access for LDCs, (2) a trade action which is and should continue to contribute not just to the GDP, investment and employment in the developing world but would also bring tangible benefits to British consumers by having access to a wide variety of high quality and cheaper products.
After Brexit, the EU’s trade defence measures will no longer be applicable to the UK. This means that UK industries, like the steel industry, could potentially suffer material injury from dumped imports. There are three main trade defences: antidumping, countervailing and safeguards actions. Today, antidumping is the EU’s most important trade defence measure. It prevents dumped imports to cause or continue to cause injury to domestic EU industries. Currently, the EU has 93 antidumping cases. Most of the antidumping measures have been imposed on products originating in, or imported from Asia (mostly China). To minimise a negative impact on the UK industries, the UK will need to quickly develop its own trade defence mechanisms and impose its own antidumping, countervailing or safeguard measures in accordance with WTO law.
UK industries exporting to the EU could also be subject to EU trade defence measures after Brexit. To minimise the risk of trade wars between the UK and the EU post-Brexit, the two sides could agree not to initiate any trade defence investigation or measure against each other. For this to happen, the UK would have to accept the obligation of complying with the relevant parts of EU competition law aimed at eliminating predatory practices.