James Cleverly and fellow members of the International Trade Select Committee has looked at a number of trade options that the UK could pursue after we leave the EU.
The two options that are spoken about most widely are a trade deal with the EU or trading on World Trade Organisation rules. We explore both these options in detail but also look at the implications of getting a series of bilateral trade deals or rejoining EFTA, the European Free Association.
It is clear that there will be a degree of upheaval as we depart from the EU but there are a number of trading options available to us once we do. The government should explore all the options including the EFTA option.
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Report Summary
The International Trade Committee’s first inquiry has examined the different potential models for UK international trade after the UK leaves the EU. We have sought to understand the factual implications for the UK’s future trading relationships of the UK’s different options for trade after Brexit, and the issues that the Government will need to resolve in each case. In the report we consider the UK’s relationship with the World Trade Organization (WTO); the Free Trade Agreement (FTA) the Government plans to strike with the EU; the implications of the UK falling back on trading with the EU under WTO rules alone; and the UK’s future trading relationship with non-EU countries.
The UK’s membership of the WTO will form the basis of its future trading relationships. The UK’s status as a WTO member is beyond doubt but it needs to establish its own schedules of concessions and commitments separate from the EU’s. This involves first setting maximum tariff levels, which should be straightforward. Second, it involves setting upper limits for Tariff Rate Quotas and Aggregate Measurement of Support. Opinion is divided as to whether or not this will prove to be a difficult and lengthy process. Nothing should be left to chance.
The Department has quite correctly made an early start on establishing its position at the WTO. It should report to the Committee about this regularly, and at least every quarter.
As part of a Free Trade Agreement with the EU, the UK must seek a reciprocal tariff-free basis for trade. Non-tariff barriers are arguably of much greater importance than tariffs. The Government should seek to retain the mutual recognition of rules and standards, and conformity assessment, that the UK currently has with the EU. The Government appears confident that non-tariff barriers to trade in goods would not be increased in a UK-EU FTA. However, regulatory divergence is likely to occur over time after Brexit. In respect of the services sector, the UK at present benefits from right of establishment and mutual recognition of professional qualifications. The UK should seek to preserve these as far as possible in a UK-EU FTA. At present, financial service firms based in the UK can rely on “passporting” to do business in the rest of the EU. The Government should seek the nearest achievable approximation to this. This is a matter to which the Committee will return, including the examination of regulatory change.
Were the UK to conclude an FTA with the EU without a customs union, rules of origin would apply and a customs border would consequently exist between the UK and the EU. This would create trade friction at the border and some UK products might not actually meet the criteria for sale in the EU under rules of origin.
The Government wants the UK to have “a customs agreement with the EU” but not a customs union. It must be much clearer about the defining characteristics of this. The Government should clarify if there will be a significant sectoral aspect to the arrangement they are seeking and whether that would impact on future international trade policy. Whatever option applies, the Government must clarify arrangements for customs and border operations, and specify the expected number and intensity of customs checks. Planning for this is a matter of urgency now.
The Government must set out as clearly as possible the likely consequences of trading under WTO rules alone. It must also show what contingency planning it is undertaking for that eventuality. Trading under WTO rules alone would mean that UK exports to the EU inevitably faced EU tariffs. Most of the EU’s Most Favoured Nation (MFN) tariffs are low, with a few significant exceptions: the automotive industry, agriculture and textiles. WTO rules do not cover regulatory restrictions, geographic indicators or standards, so the UK cannot rely on them to prevent the occurrence of this type of trade barrier. The effect of trading under WTO rules on trade in services is complex to gauge, but trading in financial services under WTO rules alone would mean the loss of passporting rights, with no agreed substitute.
While there seems to be a broad consensus that the UK can, legally, undertake informal discussions with non-EU countries about future trade relationships, it is not clear how far the Government can go towards negotiating new agreements before leaving the EU. Given that striking new FTAs is a major strand of the Government’s Brexit strategy, it is untenable that it should proceed in this work without clarity on this point.
The Government will need to prioritise countries or regions for new FTAs. The Department’s priority is to “grandfather” those that the EU has with third countries, but uncertainty remains about whether the UK will have rights under these FTAs, and the Government must seek the earliest possible clarity on this matter. Clearly, there is a limit to how many FTAs can be negotiated at one time. Negotiating new FTAs is not something the UK has needed to do since joining the EU’s predecessor in 1973. The Department was unable to say how many the UK would be able to manage simultaneously. There will have to be priorities, and the Government must be clear about what those priorities are, what negotiating resources it is able and willing to procure, and how those resources will be deployed.
We recommend that the Government now evaluate the implications of the UK’s rejoining the European Free Trade Association (EFTA), which would offer an opportunity for a smoother transition as the UK exits the EU in 2019. We were impressed by the potential benefits of EFTA membership, given there is close alignment between the UK’s economy and those of EFTA members, albeit the UK would be considerably the largest member were it to join. The prospect of UK membership of EFTA from 2019 onwards could clearly be to Britain’s advantage and we, therefore, recommend that the Secretary of State publish a White Paper on EFTA membership before summer 2017, so that negotiations can commence before the end of the year.
Conclusions and recommendations
Establishing the UK’s position at the WTO
1.The UK’s position in the WTO will be the foundation stone for all our future trading relationships after Brexit. DIT was, therefore, quite right to start work on this as soon as possible. There is no doubt that the UK is a member of the WTO in its own right, and establishing the bound-tariff element of separate UK schedules appears to be a straightforward matter. However, there is rather less certainty about how quickly and easily it will be possible to disaggregate the UK element from the quantitative aspect of the EU’s schedules, in respect of Tariff Rate Quotas and Aggregate Measures of Support. (Paragraph 32)
2.Nothing should be left to chance and the devil will be very much in the detail of these arrangements. DIT ministers should report to this Committee regularly, and at least every quarter, regarding the progress of this work. (Paragraph 32)
3.In addition, the Government must seek early legal clarity on the consequences for the UK in the event that separate UK schedules at the WTO have not been agreed or certified by the time that Brexit occurs. The Government should make sure it has whatever contingency arrangements may be necessary. (Paragraph 33)
4.The Government should consider that negotiations concerning the establishment of the UK’s position at the WTO are appropriately sequenced with those concerning a UK-EU Free Trade Agreement (FTA)—for instance in respect of the UK’s interest in the determination of the EU’s revised Tariff Rate Quotas after Brexit. (Paragraph 34)
5.DIT must give a full account of the legislative and administrative preparations that the Government is making in respect of arrangements for UK trade defence instruments to take effect at the point of Brexit. (Paragraph 35)
6.Material changes to the UK’s position at the WTO should be subject to appropriate parliamentary scrutiny. If applicable, the Government will need to consider how this will be achieved in respect of bound tariffs, Tariff Rate Quotas and Aggregate Measurement of Support. The Government should also clarify, when appropriate, what the purpose is of the Customs Bill that it proposes to bring forward. (Paragraph 36)
“Deal”—a UK Free Trade Agreement with the EU
7.The government must initiate negotiations for an EU-UK FTA, including customs arrangements and a phased process of implementation, in parallel to the Article 50 negotiations. The Government should identify and address the legal implications of doing so and should make clear how it will address the resourcing implications of doing so. (Paragraph 122)
8.The Government must seek a reciprocal tariff-free basis for trade with the EU after Brexit. In addition, a UK-EU FTA should seek to retain the mutual recognition of rules and standards, and conformity assessment, that the UK currently has as an EU member—bearing in mind the potential need to align rules and standards with those of other trading partners. Even if this is not possible, a UK-EU FTA should allow for equivalence of assessment (including mutual recognition of assessment), in order to minimise as far as possible the friction to trade caused by any regulatory barriers to trade in goods. (Paragraph 123)
9.In respect of trade in services in general, a UK-EU FTA should seek as far as possible to reproduce the right of establishment and mutual recognition of professional qualifications from which the UK currently benefits as a member of the EU. Regarding trade in financial services, the Government should seek the nearest achievable approximation to the EU system of “passporting”. This is a matter to which the Committee will return, including the examination of regulatory change. (Paragraph 124)
10.It would be helpful if the Government could be clearer about the design principles for the dispute-resolution mechanism it will seek as part of a UK-EU FTA. In particular, it should say whether it envisages the possibility of such a mechanism involving provision for foreign investment protection along the lines of the Investor-State Dispute Settlement system. Clarity on how complex disputes in the financial services sector will be resolved without the involvement of the European Court of Justice (ECJ) would also be welcome. (Paragraph 125)
11.A UK-EU FTA should also take full account of the importance of inward investment for the UK economy, and the importance of UK outward investment into the remaining 27 member states. (Paragraph 126)
12.The Government says that it does not wish the UK to continue in a customs union with the EU and that it aspires instead to some form of post-Brexit “customs arrangement”—but the latter has thus far been described only in very vague terms. The current uncertainty is delaying investment decisions, particularly in the manufacturing sector. (Paragraph 127)
13.The Government must be much clearer about the defining characteristics of the proposed “customs arrangement” and explain how it would differ from a customs union. The Government should clarify if there will be a significant sectoral aspect to the arrangement they are seeking and whether that would impact on future international trade policy. (Paragraph 127)
14.Regarding the “phased process of implementation” which the Government envisages, it must take particular account of the need to avoid the sudden ending of passporting in financial services. Any such transitional arrangements will need to include fully worked-out arrangements for dispute resolution. (Paragraph 128)
15.As a general principle, we strongly urge that, in the interests of allowing businesses to adapt and plan for new trading arrangements with the EU, the Government provide as much certainty as possible, as early as negotiations allow. (Paragraph 129)
16.Whatever option applies, the Government must clarify arrangements for customs and border operations, and specify the expected number and intensity of customs checks. Planning for this is a matter of urgency now. (Paragraph 130)
“No deal”—Trading under WTO rules alone
17.The Government must set out as clearly as possible the likely consequences of trading under WTO rules alone. It must also show what contingency planning it is undertaking for that eventuality—including in respect of the legislation which it says it is prepared to bring forward “as necessary to mitigate the effects of failing to reach a deal”. (Paragraph 160)
18.When considering policies such as adopting a unilateral zero tariff policy, the DIT should produce evidence showing the likely winners and losers, and the amounts involved. This should also be carried out with the involvement of the devolved assemblies and governments of the UK. (Paragraph 161)
19.It is quite clear that “no deal” is in effect a deal to trade with the EU under WTO rules. The Prime Minister has said that it is her ambition to seek tariff-free trade with the EU and frictionless customs arrangements. It is clear that WTO rules would not permit this. (Paragraph 162)
20.Therefore, the “no deal” option should be discounted entirely. (Paragraph 162)
UK Free Trade Agreements with non-EU countries
21.Given that striking new FTAs is a major strand of the UK’s Brexit strategy, it is untenable that it should proceed in this work without clear knowledge of how far it can go towards negotiating new FTAs before it leaves the EU. Negotiators will need clear guidelines. While we accept that there is no precedent for this situation—and that the EU’s view could differ from that of the UK—the Government’s position must be clear. (Paragraph 201)
22.We request that the Secretary of State write to us setting out clearly the Government’s position on how far it can go towards negotiating new FTAs before the UK leaves the EU. (Paragraph 201)
23.There is a further major element of uncertainty as the UK goes into the Article 50 process: how far is it possible for the UK to negotiate post-Brexit “grandfathering” arrangements in respect of FTAs to which we are currently a party in consequence of our EU membership? (Paragraph 202)
24.Here too, the Government must seek the earliest possible clarity. If such “grandfathering” is legally possible, particular effort should be put into this, with the setting out of a roadmap for this purpose, including early discussions with the WTO about the degree of proactive support they can provide to promote such a smooth transition. (Paragraph 202)
25.We recommend that the Government now evaluate the implications of the UK re-joining the European Free Trade Association (EFTA), which would offer an opportunity for a smoother transition as the UK exits the EU in 2019. We were impressed by the potential benefits of EFTA membership, given there is close alignment between the UK’s economy and those of EFTA members, albeit the UK would be considerably the largest member were it to join. The lighter-touch dispute and arbitration system of EFTA offers a more flexible process than that in operation across EU member states under the ECJ. In addition, membership would give significant advantages in the pursuit of new FTAs across the global economy, in a framework more suitable to UK policy following the referendum decision to exit the EU. And amending EFTA’s 27 FTAs with 38 countries to include the UK could be a more straightforward way of substituting for the EU’s FTAs should a “grandfathering” process in respect of the latter be legally impossible, or prove complex and time-consuming. The prospect of UK membership of EFTA from 2019 onwards could clearly be to Britain’s advantage and we, therefore, recommend that the Secretary of State publish a White Paper on EFTA membership before summer 2017, so that negotiations can commence before the end of the year. (Paragraph 203)
26.If it is legally possible to conduct negotiations regarding the “grandfathering” of EU FTAs and / or membership of EFTA and the adoption of EFTA FTAs during the Article 50 process, appropriate resources will need to be devoted to them. Yet these negotiations will be taking place at a time when the UK’s trade negotiators are likely also to be negotiating a comprehensive FTA with the EU, as well as FTAs with other countries which are neither EU members nor parties to FTAs with the EU. (Paragraph 204)
27.Clearly, there is a limit to how many FTAs can be negotiated at one time. There will have to be priorities (while taking account of issues related to the sequencing of negotiations). The Government must be clear about what those priorities are, what negotiating resources it is able and willing to procure, and how those resources will be deployed. (Paragraph 204)
28.We accept that there is a balance to be struck between not revealing the Government’s hand on FTAs around the world and keeping Parliament informed. (Paragraph 205)
29.Nonetheless, DIT should publish a broad strategy document on negotiating FTAs, describing and justifying the outlines of its approach. (Paragraph 205)
