Brexit: the options for trade

The UK’s decision to leave the EU will fundamentally change its terms of trade with the 27 other Member States, and with the rest of the world. The Government has stated that it will trigger Article 50 by the end of March 2017. The UK’s current trading arrangements with the EU will cease at the end of the two-year period specified by Article 50, unless this period is extended by the
unanimous agreement of the EU-27. This report considers the principal possible frameworks for trade after this time, namely joining the European Economic Area (EEA), a customs union with the EU, a Free Trade Agreement (FTA) or trade based on World Trade Organisation (WTO) rules. It asks whether they might be modified and explores the implications of the different options for the sequencing and timeline of negotiations. The UK is entering uncharted waters — no major Member State has ever left the EU. While there is an interest on both sides in reaching an amicable agreement, the UK’s withdrawal is an existential challenge to the EU. Its negotiating stance will be affected by elections and referendums in Member States over the coming months and is unlikely to be easy or accommodating. We recognise that deciding the future UK-EU trading relationship is likely to form part of wider negotiations on UK-EU co-operation on issues such as home affairs, security, research, acquired rights, and climate change. While a FTA provides the greatest flexibility in securing a bespoke deal and could potentially be combined with wider UK-EU co-operation after Brexit through an Association Agreement, we see no evidence that trade on terms equivalent to full membership of the Single Market (especially in services) could be achieved. We do not think it will be possible to negotiate a comprehensive UK-EU FTA within two-years. The Government therefore needs to have a clear ‘game plan’ for possible transitional arrangements before Article 50 is invoked. Although this would require clarity on the principles of what the UK is transitioning to, it would not delay the UK’s withdrawal. But it would safeguard current trade and provide adequate time for negotiations. Temporary extension of participation in the customs union could be one important element of a transitional arrangement. If no alternative trading arrangement is in place two years after Article 50 is triggered, UK-EU trade would by default take place under WTO rules. As the UK is unlikely to be able to retain access to the EU’s FTAs with third countries after Brexit, WTO rules will also form the basis of the UK’s trade with the rest of the world. But trading under WTO rules is not straightforward. The UK must establish its own schedules of concessions, and negotiate with the EU its share of tariff rate quotas and subsidies. While the technical details appear relatively straightforward, politics may intrude: negotiations with the EU and other WTO members could complicate this process, further adding to the uncertainty. We recommend the Government should initially focus on its future trading relationship with the EU and its WTO schedules. It should come to an early decision on whether the UK should remain in the customs union. Trade deals with third countries will be contingent on the outcomes of these negotiations, and so should be sequenced accordingly. As part of working towards these priorities, the Government should provide clarity on a number of important issues, including whether and to what extent the withdrawal negotiations with the EU will encompass negotiations on the future UK-EU trading relationship. A transitional agreement will almost certainly be necessary. We see little evidence that agreeing a transitional arrangement would put the UK’s wider interests at risk. We urge the Government to establish at the outset of negotiations a clear strategy for a future transitional agreement, with specific proposals as to what form it should take. The timetable to engage with industry stakeholders, analyse the possible frameworks, and have simultaneous negotiations at the WTO is extremely tight. The Government needs significantly and systematically to scale up capacity in all its departments. The Government needs to provide clear leadership across Whitehall to deliver this highly complex and unprecedented task.