01 June 2017

Negotiating Free Trade Agreements – a tough task ahead

Richard Frogson, partner looks at the task ahead, negotiating Free Trace Agreements in a post Brexit market.

Following the election the new government will have to face up to the pending Brexit negotiations. A vision for a “Global Britain” had been set out by the Tory Government, in the Brexit White Paper published on 2 February 2017 in which Britain enjoys unrestricted and tariff-free access to the major economies of the world via multiple free trade agreements.

But, trade deals take many forms and are notoriously difficult and time consuming to negotiate. Most existing trade agreements either exclude services or apply in limited respects to services and the UK is very heavily dependent on them and account for approximately 80% of GDP.

The EU itself has free trade agreements with around 60 countries (which the UK currently benefits from) including Switzerland, Norway and South Africa, but it has failed to negotiate agreements with any of the major economies of the world.

So, what will be the position if the trade deals don’t materialise or take years to negotiate?

At the moment, the UK is part of the EU’s single market and customs union. As such, UK businesses can sell their goods to customers anywhere in the EU without those customers having to pay any import tariff. Likewise, UK consumers can import goods without having to pay import tariffs. In 2015 44% of UK exports and 53% of UK imports were with/from the EU.

In the event that the Brexit negotiations don’t result in a trade agreement with the EU, then the parties will fall back on the rules and tariffs of the World Trade Organisation (WTO). This would result in tariffs on trade between the UK and the EU. However, whilst the UK is a founding member of the WTO, it would need to renegotiate with the WTO its own trade regime setting for example upper tariff limits. The other 163 members of the WTO (including the EU) could themselves delay such a renegotiation.

In relation to post Brexit trade with non EU members, again, to the extent that the UK has no separate trade agreement in place, the WTO rules would apply.

The UK hasn’t negotiated a trade deal since 1973, so clearly there is much work for the UK government. As Teresa May had already signalled, some form of transitional agreement with the EU looks likely.

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