Brexit and the Promised Land of Free Trade Agreements
Dr Billy Melo Araujo examines the legal, political and even practical obstacles that the UK must contend with before being in a position to negotiate its own Free Trade Agreements.
Throughout the campaign leading up to the UK referendum, one of the central arguments put forward by those advocating a UK withdrawal from the EU was the idea that the UK, freed from the shackles of the EU, would be able to sign a multitude of free trade agreements (FTAs) and secure access to hitherto-untapped lucrative markets across the globe. Proponents of Brexit pointed to the stagnating European economy and argued that the UK would be far better off negotiating its own trade deals with fast growing economies – large emerging economies such as China and India.
This could eventually prove to be the case, but in the meantime it is worth considering the extent to which the Leave EU campaign’s lofty trade policy ambitions for the UK can be put into practice. As will be discussed, there are a number of legal, political and even practical obstacles that the UK must contend with before reaching the supposed promised land of FTAs and the chances of the UK concluding a raft of new trade deals in the short to medium-term are relatively remote.
Firstly, the result of the referendum does not equate to an exit, meaning that as things currently stand, the UK remains a member of the EU and continues to be bound by EU law. This precludes it, for the time being, of the ability to pursue its own trade policy. This is because, under Article 3 of the TFEU, the EU has the exclusive competence to conduct trade policy (referred to in the EU Treaties as the ‘Common Commercial Policy’) on behalf of the Member States.
Indeed, as a customs union, one of the key features of the EU is that it has a common external trade policy. The EU, for example, has a common customs tariff, which ensures that goods entering the EU are subject to the same tariffs irrespective of their point of entry. By ensuring that all non-EU products are subject to the same treatment, the EU avoids distortions of trade patterns within the internal market that would result from the application of differing tariff and non-tariff measures by the various Member States. To allow the UK to apply its own FTAs whilst still a Member of the EU, would effectively undermine the function of the internal market.
Secondly, even if the UK decides to trigger the most famous EU Treaty provision (Article 50 TEU on withdrawal of a Member State from the EU), by notifying its intent to leave the EU, the UK will remain subject to the EU Treaties until such time as a withdrawal agreement enters into effect or, failing that, two years after the notification of the intent to withdraw. In other words, as long as the UK is in the process of withdrawing from the EU, it remains a Member State and, as a matter of law, its trade policy remains an exclusive competence of the EU.
Again, this makes sense to the extent that, as an EU Member State, the UK will continue to benefit from full and unfettered access to the internal market. To allow the UK to sign its own preferential trade deals during this period would lead to the type of distortions of trade within the internal market that the common external trade policy was designed to avoid. However, from a UK perspective, the inability to negotiate trade agreements during this period is problematic. Although the EU would still be acting on its behalf in trade matters, the practical reality is that as a departing EU Member State, the UK’s interests would not be at the forefront of the concerns of EU trade negotiators and, in any event, it is doubtful that the UK would be able to benefit from any trade agreement concluded by the EU on its behalf once it leaves.
The UK may seek to make an agreement with the EU, through which it would be allowed to negotiate FTAs with non-EU countries whilst the Article 50 procedure is ongoing, with the understanding that such agreement would only enter into effect after the UK has formally withdrawn from the EU. This would present the dual benefit of not undermining competition within the internal market whilst at the same time allowing the UK to thrash out free trade agreements that would give it access to non-EU markets.
UK and free trade agreements
If only things were that simple. In reality, it’s difficult to see how the UK could negotiate any FTA in the short term, given that it has no external trade regime to speak of. If the UK wishes to negotiate its own trade deals on an individual basis, it will have to adopt and implement its own external trade regime, including a customs tariff system and regulation on issues such as subsidies, trade sanctions and external aspects of public procurement markets.
This external trade regime will be the starting point for any negotiation because the UK cannot offer tariff preferences in the absence of an operational tariff system. And how could the UK’s trading partners even start to approach negotiations if they do not know the areas of UK law that affect their trade interests? Clearly, establishing such a regime will be a lengthy and complex process, unless the UK was to decide to copy-paste the EU’s common customs tariff and the rest of EU external trade legislation into its domestic law. This solution would present the benefit of expediency but it is highly unlikely to occur. Firstly, because many aspects of the EU external trade regime only makes sense in the particular context of the EU (e.g., quota systems) and, secondly, because we must assume that the UK would prefer to adopt a tariff system that would more accurately reflect its economic interests.
Once an external trade regime is in place, a further obstacle emerges: the World Trade Organisation. Brexit would not mean that the UK would have to seek WTO accession from scratch – the UK is after all already a WTO Member and it was, in fact, one of the founders of the General Agreement on Trade in Tariffs in 1947. However, because the UK’s membership is bundled with that of the EU it will be forced to undergo a process akin to that of accession, meaning that it would have to renegotiate the entire terms of its membership, including tariff lines, quotas, subsidies and market access commitments negotiated by the EU on behalf of its Member States. Again, this will be a complex and time consuming effort which will be made all the harder by the fact that potentially every single one of the WTO’s 162 members could hinder the progression of the UK’s attempts to renegotiate the terms of its membership.
After overcoming all these considerable obstacles, the UK can start to explore the possibility of signing FTAs. Here, there is merit to the argument that, without having to contend with the multiplicity of often-conflicting demands from various Member States, the UK will find it easier to negotiate such deals than the EU. For example, sensitive issues such as agriculture, geographical indications, investor-state dispute settlement that are currently holding back EU-Japan FTA and the EU-US Transatlantic Trade and Investment Partnership (TTIP) negotiations would be less problematic from the UK’s perspective.
Such trade deals could, in theory at least, be concluded relatively quickly. However, the terms the UK is likely to secure in such trade agreements will be more modest than those it could secure under an EU trade agreement. Put simply, because the UK’s domestic market is comparatively much smaller than that of the internal market, it has far less to offer its trading partners and, consequently, cannot demand the type of market access concessions and regulatory reforms the EU typically secures in the context of its own trade negotiations.
Another potential problem that the UK may face is that although the emerging economies that it would target in its FTAs, such as India, are not averse to concluding trade deals, they have proven reluctant to address areas that relate to the UK’s offensive interests, such as services liberalisation, intellectual property and public procurement.
Finally, and perhaps more importantly, the UK will also have to contend with the fact that the world’s major trading powers are increasingly looking to conclude so-called mega-regional trade agreements. Examples of this include the recently concluded (but not yet ratified) TransPacific Partnership which covers North America and a number of markets in South America and the Asia Pacific region and the ongoing attempts between the EU and the US to conclude the TTIP and the China-backed Regional and Comprehensive Economic Partnership. These mega-regionals are not just significant in terms of the size of the markets they encompass, but also because one of the key objectives pursued by the proponents of these agreements is to set the future rules of international trade.
With WTO negotiations at a standstill, mega-regionals are being used to regulate issues that are of interest to developed countries, such as cross-border data flows, investment protection and disciplines on state-owned enterprises, with the idea that, as countries that are not party to mega-regionals will feel compelled to align themselves to the regulatory standards included these agreements in order to access these lucrative markets, such rules will progressively become global standards.
This is the unenviable situation the UK may face when it finally withdraws from the EU: not only will it find itself outside looking in to some of the most important trade agreements in the world, but it will also have no choice but to subscribe to a set of rules that have been developed by a small number of trade powers, including, ironically, the EU.
For those campaigning in favour of Brexit, the prospect of leaving the EU was presented as a necessity in order for the UK to recapture some of its supposedly lost sovereignty. But in the area of trade at least, the UK’s decreased importance in the global stage means that the exact opposite will occur. The UK will go from being a rule-maker to being a rule-taker.