For the past 44 years, the UK has relied upon the European Union, formerly the European Economic Community, to negotiate trade deals. As an EU member, Britain cannot strike its own trade deals, but the bloc has successfully secured 36 trade agreements for its member-states, spanning more than 60 countries. It is unclear whether Britain can continue to participate in these deals once it leaves the EU.
Last week, former trade minister Mark Price tweeted that all of these non-EU countries “have agreed to roll over” their EU agreements with the UK. When trade secretary Liam Fox was questioned about this comment in a select committee hearing on 1st November, he conceded that “it is not quite as simple as rolling them over,” and admitted the government has no binding agreement on any of the deals. He did say that all countries have expressed their intention to “continue where we are.” But might negotiations be more difficult than Fox suggests?
In 2015, countries with EU trade agreements accounted for over 15 per cent of all British imports and exports. Without the deals, the UK would be thrust onto World Trade Organisation terms with these countries. Britain’s exporters would face costly tariff increases and in some cases more stringent customs checks, with average tariffs levied from between 5 per cent (Israel) to almost 30 per cent (Egypt). The UK would also have to impose tariffs, raising consumer prices. Britain would lose deeper access to services, as it would no longer participate in the 14 services agreements struck by the EU, including the trade agreement concluded with South Korea.
The need for a resolution is urgent, but Fox is constrained—the UK cannot conclude binding agreements until it has left the EU, since it is still bound by the EU’s exclusive right to strike trade deals. On March 29th 2019 the UK will cease to be a member state, so the wording in most free trade agreements will no longer apply to Britain. The government has asked for an “implementation period” with continued membership of the single market and customs union after the Brexit date, to provide time to negotiate a trade agreement with the EU. During the transition period, the UK might try to get the EU and its trade partners to add a few words to the text of their trade agreements, to make clear they apply to “the EU, its member-states and the United Kingdom.”
After the transition period, however, the UK will be seeking to replicate the EU’s deals independently. Liam Fox indicated that the government will attempt to clone the EU’s deals, copying and pasting the EU agreement and making the relevant technical revisions. It is likely this will be possible for many of the EU’s agreements. These would technically be new agreements, but their provisions would remain the same, and other countries would have an incentive to simply sign on the dotted line. But the tight Brexit deadline could mean that some countries might try to obtain trade concessions.
As well as political obstacles, Fox faces a number of technical issues. All trade deals include a “most favoured nation” (MFN) clause, which mean that if one partner signs a better trade deal with another country, all previous trade partners are entitled to the same upgrade. Some of the EU’s FTAs were signed many years ago. By rolling over the newer, more comprehensive deals, the UK could trigger MFN clauses in older, narrower ones, prompting governments to demand a parallel upgrade.
A further problem is presented by “rules of origin,” a feature of all trade agreements. These rules establish the proportion of a product that must be produced domestically in order to qualify for free trade. A common threshold is around 40 per cent. Many products include some imported parts—the UK imports $80 billion worth of goods from third countries for use in British production (excluding precious metals and stones).
Where two countries with an FTA supply a lot of components and commodities to one another, they often agree that their components can be added together, or “cumulated,” to meet the threshold. It is likely that the EU and UK will agree to cumulation between themselves. But when third countries are also involved, it becomes more complex. When the UK and EU are no longer one entity, the UK will be unable to cumulate domestic components with those from the EU and meet, say, Canadian rules of origin, without a cumulation agreement with Canada. Many British products would no longer satisfy Canada’s threshold, and so producers would be forced to pay Canadian tariffs on imports.
There are two possible solutions. First, the EU, Canada and the UK could rewrite the Canada-EU FTA to enable “diagonal” cumulation between the three parties. This would need to be negotiated for all of the EU’s agreements, and would require consent from both the EU and the other country. But the EU may not be willing to renegotiate its rules of origin agreements with other countries for British benefit, especially because its own exporters might be able to take market share from British ones in countries outside Europe.
Second, the UK could go it alone, and negotiate lower local content rules. The other countries, if they agree, would then also have a lower threshold, with potential benefits for their exporters. But governments may refuse to relax the rules in those sectors where British exporters are more competitive.
It should be clear that rolling over will not be automatic in many cases. The EU will not want to amend agreements to accommodate the British, and countries might demand better terms. One irony of Brexit is that champions of “global Britain” like Liam Fox are being forced to work hard to prevent trade barriers from rising in the first place. Fox may now understand that conservative principle: “first, do no harm.”