A UK-EU free trade deal could cushion Brexit blow in certain sectors, research shows

A Free Trade Agreement (FTA) between the UK and the EU can retain benefits of the Single Market and Customs Union in some sectors but not to current levels, new University of Sussex research shows.

The latest Briefing Paper from the UK Trade Policy Observatory (UKTPO) by Dr Emily Lydgate and Professor L. Alan Winters reveals that any new Free Trade Agreement (FTA) with the EU will fall short of providing the ‘frictionless trade’ that the UK currently enjoys.

Professor Winters said: “While World Trade Organisation rules prevent the UK and EU from offering each other preferential tariffs in a few sectors, once we move beyond that to coordinating external tariffs, having relaxed rules of origin and accepting each other’s regulations in services, they do not effectively constrain policy.

“However, while our research shows that you could do all this, we do not argue that you would necessarily want to.”

The UK government has stated its intention to leave the Single Market and Customs Union.

Yet both the UK and the EU have proclaimed an interest in an ambitious trade deal that preserves elements of these arrangements and many sectors of the UK economy are very concerned about losing their current benefits. The UKTPO paper thus examines: ‘Can a UK-EU FTA preserve the benefits of the Single Market and the Customs Union in some sectors?’.

The authors argue that the UK and the EU27 could design a trade agreement consistent with the World Trade Organization (WTO), which covers both goods and services and goes some way towards preserving current trading conditions in a subset of sectors.

The Customs Union ensures zero tariffs between members and a common external tariff, which means that intra-EU border posts are not required to levy tariffs or enforce Rules of Origin (RoOs). The Single Market contributes further through regulatory harmonisation. It ensures that goods may be exported without requiring additional certification, that customs procedures are harmonised, and that many services can be traded without hindrance through approaches such as ‘passporting’ for financial services and mutual recognition of professional qualifications.

Ben Murray, manager of Maritime UK, the promotional body for the country’s maritime sector, said: “The maritime sector is uniquely responsible for enabling global trade. We move 95% of all UK imports and exports, worth half a trillion pounds per year.

“Therefore it is particularly crucial for us that goods and people can still move through our ports unimpeded.

“London International Shipping Week is being held this week, and industry leaders met with ministers to discuss our priorities for future trade on Tuesday.

“This detailed study of the practicalities of an FTA with the EU is a welcome piece of research in an area that is of vital importance to the future prospects of UK trade.”

The first step to retaining current trading conditions, the authors say, is to agree a simple tariff-free FTA covering all goods. Then Customs Union-like conditions could be achieved by the UK adopting EU external tariffs on the inputs and outputs of certain sectors and agreeing on relaxed Rules of Origin. Single Market-like access could be approximated through sectoral Mutual Recognition Agreements for standards and testing.

Regarding regulations for goods, conformity assessments and services, if there is political will on both sides, it would be possible to convert existing arrangements into Mutual Recognition Agreements (MRAs). This is not as complicated as creating new MRAs because the UK and EU would start from the same place and have worked with each other for decades.

The key challenges would be to ensure that the EU and UK enforce the agreed rules in the same way when the UK is no longer subject to the European Court of Justice, and to modify the MRAs to reflect changing regulation. The UK, as the smaller party,  would have to accept EU leadership in most standards - a voluntary reduction in regulatory self-determination in exchange for market access. 

Moreover, even these arrangements would not achieve the level of integration provided by the Single Market and Customs Union. There would still be some border formalities, and the UK and the EU would need to have FTAs with the same set of third countries. Also, the EU might make preserving very open borders conditional on co-ordination in other areas of policy (such as labour or environmental standards). All this starts to undermine the notion of ‘taking control’ and of an independent UK trade policy. And, of course, it would all take time.

This paper shows that deep sectoral agreements are possible under the WTO. The UK and the EU may not wish to go there but the cause will be a lack of political agreement not the inflexibility of WTO rules.

Mr Murray said: “Much of our trade with the EU is dependent on a functional ‘just in time’ supply chain, so a failure to achieve a trading agreement that preserves this could cause severe disruption not only at UK ports, but also at those of our continental trading partners.

“This study should serve as a reminder of the fact that March 2019 is fast approaching, and that it is time for real trade negotiations to begin, for bluster and grandstanding to be put to one side, and for both sides of the Brexit negotiating table to ensure that frictionless trade is indeed made possible.”

By: James Hakner
Last updated: Thursday, 14 September 2017