Preparing for a no-deal Brexit: trade with EU countries

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As with all guest blogs, what follows are the views of the author, not those of SPICe or indeed the Scottish Parliament.

On 23 August the UK Government began publishing technical notes on the effect of a no-deal Brexit. These notes are intended to provide guidance to citizens, businesses, public sector bodies and Non-Government Organisations in the United Kingdom on how to prepare for the possibility of the UK leaving the EU next March without concluding a Withdrawal Agreement. It is expected that around eighty technical notes will be published in total. Over the next two months SPICe Spotlight will provide analysis and comparative information on a number of these. The first blog provided an overview of the UK Government’s Preparations for a no-deal Brexit.

Falling back on WTO rules
The UK Government, in one of its no-deal technical notes, explained that trade between the UK and the other 27 countries of the EU (the EU27) will necessarily change. This blogpost summarises and complements some of the points raised in the UK government’s note.

The UK is trying to agree a deal with the EU27 to maintain the frictionless movement of goods across the EU single market. A no-deal Brexit, therefore, would cause a roll back of the privileged trade relationship the UK enjoys as a member of the EU.
Currently, the UK’s membership of the EU ensures the free circulation of goods between the UK and the EU27. In a no-deal scenario, UK goods would enter the EU27 under the same rules applicable to, say, goods from the US. Likewise, goods from EU27 countries would no longer enter freely into the UK; they would undergo custom checks and respect specific UK requirements.

Scotland’s biggest trading partner for imports and exports is the rest of the UK. Yet, Scotland exports up to 17% of all its exports to EU countries and almost half of its international exports. Roughly 40% of the internationally imported goods into Scotland come from the EU.

In the event of no-deal, the EU27 and the UK will no longer enjoy a free trading relationship, but will instead fall back on the World Trade Organization rules. Under these rules, discriminating among countries is normally prohibited, as is increasing tariffs unilaterally. Certain trade barriers, like unjustifiable import bans or unreasonable sanitary restrictions, are also prohibited. Trade can thus flow without facing unfair obstacles even after Brexit, but some changes will inevitably slow its course down.

Implications of no-deal
A no-deal Brexit will affect trade of goods between the UK and the EU27. The UK government’s note lists some of the major repercussions:

  • Duty-free trade would cease. UK goods entering the EU27 might be subject to tariffs (i.e., duties imposed on goods at the border, collected by the authorities of the importing State), and so might EU goods entering the UK.
  • Mutual recognition would cease. In the EU single market, minimum harmonised standards apply. Besides those, goods cleared for circulation in one country are normally allowed into the others. Manufacturers can trade across the EU even if their products do not comply with 28 domestic standards, which might be slightly different without discernible reason. EU countries thus recognise the soundness of each other’s regulations (on safety, health etc). Post-Brexit, UK goods would have to satisfy EU product requirements, and vice versa.
  • The EU27 will apply to UK goods the Common Customs Tariffs (CCT) for goods from countries without preferential deals with the EU. The WTO caps these rates and requires that they apply uniformly to goods coming from all countries. For instance, live lambs coming into the EU are subject to a duty of 80.5€/100kg, while Scottish cheddar would face a steep custom duty (possibly up to 167.10 €/100 kg).
  • Conversely, EU27 goods coming into the UK (like French wines) could, in a no-deal scenario, face duties determined by the UK. The UK currently applies common EU tariffs to third-country goods. For instance, third-country wines now attract a tariff of 32€/100lt upon entering the UK. The post-Brexit UK customs regime might replicate the EU one, but the UK Government’s note warned that rates “may be different from the rates in the EU’s Common Customs Tariffs.”
  • To permit custom checks, imported and exported goods crossing the UK/EU27 border would have to come with export and import custom declarations. Safety and security declarations would also be necessary.
  • Rules of origin would apply to consignments between the UK and EU27, to determine the provenance of goods. A separate post will address rules of origin schemes in general, and the post-Brexit developments.

Trade with non-EU countries
After Brexit, trade between the UK and countries that have no special trade deal with the EU will stay the same. Trade with EU preferential trade partners might change. The UK Government’s note did not elaborate upon the difficulty that the UK might face to retain the trade privileges it currently enjoys, as an EU member, in trade with several strategic partners.

The EU has free trade agreements with five of the eleven biggest exporting countries into the EU (Switzerland, Turkey, Norway, South Korea, Canada). Two further deals were finalised (Japan and Vietnam) and negotiations are ongoing with China and the United States. There is no free trade agreement with India, but Indian goods receive preferential market access (i.e., lower duties) thanks to a WTO-legal scheme of assistance to developing countries through trade privileges.

In a no-deal scenario, UK exports to the EU27 would be at a disadvantage compared to goods from countries that have free trade agreements with the EU. Conversely, when the UK enters into free trade agreements in its own name, its goods would be better positioned than EU27 goods to penetrate those markets where the EU has no deal. This dynamic explains the “run to negotiation,” whereby the UK and the EU rush to strike a deal with the same third countries (for instance, Australia and New Zealand): the first to obtain preferential treatment will improve its competitive edge on the other.

A cheddar-based example illustrates the point. Under the EU-Japan free trade agreement, Japan grants duty-free access to EU cheese. If the UK is excluded from the deal after Brexit, import of UK cheddar into Japan would be more costly, due to the “third country” 30% custom duty.

Accordingly, the UK seeks to retain the advantages of the extant EU free trade agreements. From the UK Government’s note:

the UK intends … to seek to transition all EU Free Trade Agreements for day 1 in order to ensure continuity for both goods imported to the UK, and for UK exports. Maintaining these benefits is of clear importance to businesses, consumers and investors, and will ensure a smooth transition for users of these provisions as we leave the EU.

The “roll over” option is still outstanding and, arguably, cannot happen unilaterally. Depending on the specific “transition” pathway envisaged, the UK might need the EU27’s consent to the roll over – something that contradicts the premise of the no-deal scenario. Furthermore, the prosecution of EU trade agreements for a separated UK would require the consent of the third countries involved (e.g., Canada, Singapore, Japan, Turkey, Switzerland). Several countries are likely to be interested in a trade deal with the UK, but the outcome of specific trade negotiations is difficult to predict.

Filippo Fontanelli, SPICe Academic Fellow, University of Edinburgh