UK after Brexit: options for trade deals if voters elect to leave
It is the morning of June 24 and the UK has voted to leave the EU. The government must act quickly to contain economic fallout and try to realise the Brexit camp’s vision of a post-EU world based on “free trade and friendly co-operation”.
Joining the European Economic Area, an agreement that covers EU states and some European countries that are not in the bloc, would give the UK access to the single market, but it would not be bound by agriculture, fisheries, judicial or foreign affairs policy.
This would be the least disruptive option from an economic perspective. But political considerations make it is less likely because Britain would still have to pay into the EU budget, implement Brussels regulations, and accept free movement of workers.
The FT looks at what kind of trade deals Britain could try to construct and factors it will have to consider.
Tariff-free trade over a customs union
Britain is unlikely to want to join the EU customs union as Turkey has done. While that would give it straightforward access to Europe’s goods markets, it would not allow the UK to benefit from other deals the bloc strikes.
It would bank instead on being able to make an agreement with the EU for tariff-free trade in goods. Many such agreements have been struck before and UK standards are already in line with the EU, easing the transition.
However, these deals are generally part of much more wide-ranging trade agreements. Moreover, some EU states have threatened to strike a hard bargain if Britain leaves.
One risk to the UK economy is that much of the trade in today’s world of global supply chains is in intermediate goods such as motor parts and electronic components.
British businesses — and foreign businesses based in Britain — would be likely to find themselves at an immediate disadvantage and potentially excluded from those supply chains. The government would have to find a way to plug the gap quickly.
This would mean speedily negotiating, item by item, the treatment of thousands of products and classes of parts. Any agreement would also have to tackle myriad other details such as rules of origin to prevent Britain being used as a backdoor by other nations to access the European market.
Ripping up the rule book
Maintaining a healthy trade relationship with European neighbours would mean still being subject to many EU rules.
A British pork farmer wanting to sell into Europe would still be subject to EU animal health regulations, British-made cars would still have to meet EU safety standards and so on.
Britain could choose to set up a separate regulatory regime but that would add expense and paperwork for companies that do business with the EU.
The EU would also not give up the right to impose penalties if it believed British firms were undercutting European competitors because of government subsidies or lower regulatory standards.
In practice, this would mean that if Britain gave state aid to an industry that exported to Europe it would face punitive tariffs.
Free trade or not free trade
Britain will want to push ahead in trying to sign as many trade deals with large powers as possible. There is a model already in place for Canada, but other deals will be tricky and come down to trials of strength.
Leave campaigners say Britain’s large deficit with the eurozone would give it significant leverage. But half of this is accounted for by just two states: Germany and the Netherlands. The Centre for European Reform points out that most EU states buy more from Britain than they sell to it and that while the EU buys half the UK’s exports, Britain buys a little over 10 per cent of exports from the rest of the EU.
While the recently concluded China-Switzerland deal is often cited as an example of what is possible, it has also been criticised for what the Swiss failed to secure, such as lower Chinese tariffs for imported Swiss watches.
Britain would also need to start hiring. The UK has not had any trade negotiators since 1973 so it will have to find people to negotiate these new deals.
For most deals the term “free trade” is a misnomer. Plenty of barriers can remain and what is really at stake is better market access than provided by World Trade Organisation rules. Via the EU, Britain currently has favourable terms with at least 60 nations. These would have to be revisited.
Britain would also find itself on the sidelines of the leading trade negotiations under way. The US under President Barack Obama, for example, has stopped negotiating bilateral deals with other countries and said pointedly it has little interest in doing so with Britain.
Its preference is for big regional agreements, such as the Transatlantic Trade and Investment Partnership now being discussed with the EU, something Britain would be left out of.
The big question of services
The service sector accounts for 80 per cent of the UK economy and Barclays estimates within a decade it should account for half of Britain’s exports. But most existing trade deals explicitly exclude services and the deals with the EU that do include services also require free movement of people and common regulations.
The US and EU have been leading negotiations on liberalising worldwide trade in services. Given its strength in the sector, Britain would probably want to join those.
With the EU, the UK’s best shot is likely to be to try to set up bilateral deals for those areas where agreement has already been struck, such as in the digital services.
It will also want to retain deals such as in telephony, so UK consumers benefit from the abolition of roaming charges. Though if eastern European nations are hit by stricter British immigration rules, they could be in a position to block such deals.
A ‘passport’ for financial markets
This is where the biggest difficulties are likely to be. London’s status as a financial market capital is built on “passporting rights” that allow companies based in Britain to conduct business across the EU. This — and the language — means London has become the favoured headquarters of many US and international firms.
“Protect the bankers” is an unlikely populist campaign slogan but because financial services make up almost a tenth of the UK’s gross domestic product lack of access would really hurt.
If Britain leaves the EU, the European Central Bank is unlikely to permit many forms of trading — such as euro clearing — to take place in Britain.
Shifting immigration priorities
Britain will need to strike a deal to protect Britons living in the rest of Europe. This will need to be accompanied by a reciprocal agreement for the estimated 2m plus European nationals already in Britain. Polish plumbers will not be going home at any point soon.
As such, the stricter entry rules the Brexit campaign focused on will mainly apply to new arrivals.
Britain is likely to raise the barrier to lower-skilled migrants while easing requirements for high-skilled migrants from outside the EU. In effect, this will hit eastern European countries hard and make it easier for North Americans to work in Britain.