A key part of the UK’s negotiations for leaving the EU will be to agree the future trading relationship with the EU, in the form of trade agreements.

Why do we need trade agreements?

Trade agreements allow better access to domestic markets, by reducing or eliminating trade barriers.

Goods exported from one country to another are normally subject to Customs checks, tariff charges such as Customs duties and quotas, which set a limit on certain goods entering the destination country. These are known as ‘tariff barriers’.

Businesses selling services internationally may be subject to ‘non-tariff barriers’, such as licensing and regulatory obligations. For example, an overseas business may be prevented from selling financial services in a particular country due to domestic regulations.

The UK is currently part of the EU single market, which is a trade agreement between the 28 EU Member States. Two key pillars of the single market are the free movement of goods and services. This means that EU businesses trading with each other can usually do so freely. Leaving the EU will mean losing membership of the single market. Given that EU trade accounts for almost half of all goods and services currently exported from the UK, the government will no doubt be keen to negotiate a trade agreement with the EU, to avoid UK businesses suffering a competitive disadvantage.

What could a trade agreement with the EU look like?

Trade agreements involve a trade-off between the benefits received and concessions provided in return.

For trade agreements concerning goods, this usually involves the the reduction of tariffs, quotas and/or Customs formalities.

For trade agreements concerning services, the negotiation process may be much more complex, hence why such agreements are relatively rare outside the EU.

A summary of the main types of trade agreements

European Economic Area (EEA)

Similar to full membership of the single market, but requires financial contributions to be made to the EU, compliance with EU regulations (without any influence over the setting of those regulations) and free movement of people. Customs checks on goods may also be required.

Free Trade Agreement (FTA)

Bespoke agreement which could, for example, allow tariff free trade in goods and barrier free trade in certain services. Such an agreement may require adoption of EU regulations and, possibly, free movement of people.

World Trade Organisation (WTO)

The UK would set its own tariffs for goods imported into the UK, subject to limits set by the WTO. The UK would not be bound by EU regulations, nor would it have to allow free movement of people. However, the UK would have no special access to the EU market, meaning full Customs checks and tariffs would apply to goods exported to the EU. Licensing and regulatory barriers could apply to exports of services to the EU.

EEA membership could offer the best access to the EU single market, but would place significant obligations on the UK, some of which would be politically sensitive.

The next best option could be an FTA, perhaps based on the Swiss model, but with enhanced access to the single market for financial services businesses (known as the ‘Swiss plus’ model). Such an agreement is unprecedented and would almost certainly require the UK to agree to major concessions, such as agreeing to the free movement of people.

It is expected that the UK will have two years in which to negotiate an agreement with the EU, which is a relatively short period of time.

What about trade agreements with non-EU countries?

Post Brexit, the UK will be free to enter into trade agreements with non-EU countries. New agreements will offer improved access to those markets and should help the UK economy to grow. Some countries, such as Australia, have already indicated an interest in this possibility, but not everyone is so keen. President Obama has said that the UK will be at the ‘back of the queue’ for any new trade agreement. However, the US is already the UK’s biggest trading partner outside the EU, without there being any trade agreement at all.

What does this mean for UK businesses?

Losing membership of the single market could make it more difficult for UK businesses to trade with the EU. It all depends on the type of trade agreement that is finally concluded. If the UK joins the EEA, the impact could be minimal. If the UK settles for the WTO rules, doing business with the EU could become much more difficult. Businesses will need to carefully consider the impact, as details of any trade agreement become known.

Trade agreements with non-EU countries could open up new opportunities for improved access to overseas markets. However, it could be many years before such agreements are concluded.

For more information on the above and how Brexit may impact your business relationship with Europe and the global economy, please contact Menzies Brexit Team or find advice for your business on navigating Brexit.

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