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1 December 2016

What will UK-EU trade look like?

We now know that the UK would like single market access to the greatest extent the EU Members States will agree. It is important to remember that the key in this negotiation is the individual Member States like Germany, because the ‘EU’ itself in the form of the EU Commission has no say on the deal
the UK reaches. Therefore, when assessing likely trade deals, it is the comment of nation states that really matter.

Should full single market access not be agreed, we also know that there will be distinct areas of focus based on sectoral needs led by the Department for EU Exit, in conjunction with the Foreign Office and the Department of Trade. The focus based on the comments from Government sources will be on making clear that the UK sees two positions as feasible, the first is full market access, the other is trade on the WTO tariff system in the same way the USA trades with Europe.

Unlike negotiations to remove complex tariffs between  countries,  retaining zero tariffs is simplicity itself. The EU has a common  external  tariff  which the UK will inherit and honour on the basis of the presently intended Great Repeal Bill approach. That system sets the highest tariff we could apply to each other, which although less desirable than continuing tariff free trade, is equally simple. It requires no negotiation at all and will be the UK’s final fall-back position. It is for this reason the UK is confident of exiting the EU structures after Brexit.

The most likely outcome will be a position between the two where goods and certain services are treated as having full single market access. We explore elsewhere in this edition how it might work for IP in either the European Economic Area (EEA) or the European Free Trade Area (EFTA) for example. Both extreme positions are slowly being understood as acceptable to the UK.

The average tariff exporters to the EU would face would be about 4 per cent (that includes agricultural products, manufacturers average 2.4 per cent). Given the recent 12 per cent exchange rate movement in favour of UK based exporters, they would remain better off. By contrast, continental exporters would have to absorb the tariffs on top of a 12 per cent loss of competitiveness. Tariff-free access at any price is not worth continuing as the UK net budget contribution annually is around £10 billion, which is equivalent to a seven per cent tariff.

The loss of the UK contribution is also an important point when looking at the pragmatic comments of our near neighbours, who wish to see their economies flourishing through positive trade. The EU has free trade agreements with over 50 countries, all but three of which involve neither budgetary contribution nor free movement, and so again contrary to some press coverage there should not be significant issues with the UK position.

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