What impact will Brexit have on Free Trade Agreements?

8 minute read
21 May 2019

With just over five months to go until the extended Brexit deadline of 31 October 2019, one of the core areas for debate and concern has been the impact on UK businesses that trade with both EU and non-EU countries, especially when it comes to free trade agreements.

While there is still so much uncertainty, it is difficult to predict the true impact on business. However, what we do know is that Brexit will result in fundamental changes in the way the UK trades with both the EU and non-EU countries. Businesses with continental European suppliers or customers will be impacted, while trade with non-EU countries will be affected by losing access to the EU's current free trade arrangements and any customs blockages.

Here, we look at the current direction of travel and what steps businesses can be taking now to prepare.

What is a Free Trade Agreement (FTA)?

A free trade agreement (FTA) is defined by the World Trade Organisation (WTO) as an agreement between countries that removes tariffs and other restrictions on 'substantially all' goods traded between them.

These agreements differ from customs unions in that countries remove tariffs on goods traded between them but do not adopt the same tariffs on goods imported from other countries.

Which countries are the UK's top trading partners?

According to the most recent ONS UK Balance of Payments, The Pink Book: 2018, the UK's top 10 trading partners are:

  • US
  • Germany
  • Netherlands
  • France
  • China
  • Ireland
  • Spain
  • Belgium
  • Italy
  • Switzerland

In total, these account for over £370bn UK exports, so a robust trading framework is vital for the health of the UK economy.

Will the UK have an FTA with the EU?

While the UK is a member of the EU's customs union, goods transported between the UK and EU are not subject to tariffs. However, this will change when the UK leaves the EU. Several options have been debated and with Theresa May's deal - which included a 'facilitated customs arrangement', whereby the UK remains in a customs partnership with the EU for goods - being rejected three times, two further options broadly remain:

  1. 'No deal' - in which the UK-EU trade is governed by WTO rules
  2. A negotiated FTA - where the UK sits outside the customs union and a preferential trade agreement exists between the UK and EU (likened to the so-called 'Canada model')

Although it is still unclear what trade deal will be negotiated with the EU - with the pros and cons of the 'Canada model' being widely debated - there have been hints that an FTA is the more likely option on the table. In fact, recent research from Reuters, which polled a number of economists, predicted that the UK will eventually leave the EU and agree an FTA with the bloc. However, as FTAs traditionally only covered trade in goods rather than services until relatively recently, the UK will be acutely mindful of safeguarding its hugely important service industry.

So, while the final outcome is still very uncertain, there are steps businesses can take in the event of an FTA with the EU.

How to prepare for an UK-EU FTA

UK businesses exporting to the EU will need to demonstrate their goods are manufactured in the UK to qualify for preferential treatment - also known as the 'rules of origin'. This will be key for UK businesses that sell goods into the EU and supply chains that straddle two customs territories.

However, it is not clear what rules of origin will apply in an EU-UK FTA as different trade deals require different types of proof to be submitted. The government has said it will publish detailed guidance when the UK leaves the EU.

We have outlined in more detail what could be expected - using the Canada model as an indicator - in our 'Brexit: Customs & Trade' guide.

In the meantime, businesses can take a number of practical steps including:

  • Register with the HMRC as an exporter and obtain an EORI number
  • Register for the REX (registered exporter) system
  • Review your current bill of materials and assess whether your good would currently meet origin thresholds
  • Identify the origin of your component parts and where Brexit will cut across your supply chain.

What trade agreements are currently in place with non-EU countries?

When trading with territories outside the EU, the UK is currently automatically part of approximately 40 trade agreements which the EU has with over 70 countries. If a deal cannot be reached by the extended deadline, then the UK will lose these trade deals immediately. These agreements currently constitute around 11 percent of the UK's trade.

In the event of a no deal scenario, the government has the ambition to replicate the EU's trade agreements 'as far as possible'.

However, the latest update from the government showed that progress has been slow, with the UK signing nine out of 40 'continuity deals', including Norway and Iceland, Switzerland and the Caribbean countries.

The UK has also signed 'mutual recognition agreements' with the US, Australia and New Zealand, but these do not amount to FTAs.

However, on 21 February, the government said it would not be able to replicate the EU's free trade deal with Japan and countries such as Turkey, Andorra and San Marino, with many commentators expressing that it would significantly impact business.

Where the UK has no formal trade agreement by the time it leaves the EU, both countries would have to trade under WTO rules, meaning some businesses could be impacted by tariffs.

How Gowling can WLG help

Gowling WLG's Brexit Unit is helping businesses that have cross-border operations navigate a wide range of issues.

Further information on the impact of Brexit on international trade is available in our 'Brexit: Customs & Trade' guide, which is designed to provide practical advice to businesses in preparing for the change in how the UK trades with the EU, and our 'Trade Deal or No Deal' report, which looks at the implications of Brexit on Transatlantic trade.

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