The future of trade relationships between the UK and the rest of the world

At her speech at the Conservative Party Conference, the Prime Minister referred to ‘Global Britain’. She talked about ‘a country with the self-confidence and the freedom to look beyond the continent of Europe and to the economic and diplomatic opportunities of the wider world’.  This theme was a constant in the referendum campaign and also appears to be a central plank of the post-referendum Brexit agenda and appears in a number of speeches made by Liam Fox MP, Secretary of State for International Trade, who has spoken of ‘scoping out’ international trade agreements.

Here I provide an overview of the legal issues that the UK will face in its efforts to shape its trade relationships with the rest of the world.

Change in legal terms

There are agreements with third countries from which the UK benefits due to its EU membership (e.g. with South Africa on trade in wine, with Israel on government procurement, and with Australia on mutual recognition in relation to conformity assessment). These would cease to apply to the UK after Brexit.

There are also agreements in which the UK participates along with the EU (e.g. South Korea, or the Comprehensive Economic and Trade Agreement – CETA – with Canada which has been negotiated but not yet concluded). In legal terms, in most of these treaties, the UK participates as a member of the EU. This is clear in the wording of the treaties. Once it has left the EU, these treaties will not be applicable to Britain.

Renegotiation, therefore, appears to be the only plausible option in legal terms should the UK choose to pursue the trade agreement route. An alternative to renegotiation is the possibility of ‘rolling over’ according to which the UK will simply agree with third countries a rolling over of the provisions of the existing agreements. This, however, would give rise to considerable uncertainty. Trade treaties are the outcome of long and complex negotiations and of package deals and compromises reached in a very specific policy context. Once the UK relied on the good will of a third country to extend these deals to a completely new context, it could not be certain that the latter party would resist the temptation to unravel specific aspects of the deal.

Trade agreements

Negotiating trade agreements is bound to be a long and complex process.

  • The UK has not negotiated trade agreements for over 40 years and its competence in this area has been transferred to the EU. Whilst there is no doubt that British diplomats and civil servants are highly skilled, this is a muscle that they have not flexed for a very long time.
  • There is an increasing tendency in international treaty-making for big package deals. These are more ambitious than traditional trade agreements: rather than focusing on the more straightforward trade restrictions (such as tariffs), they aim to reach the highest possible degree of liberalisation in areas such as services and investment, to cover intellectual property rights and competition. The bigger the market, the greater the negotiating power, and the more attractive such deals are. A case in point is the unbalanced agreement that Switzerland concluded with China.
  • Negotiating agreements takes time: take CETA: negotiations started in 2009 and the agreement is not yet in force. Long negotiations are not confined to the EU: the trade agreement between Canada and South Korea took 14 rounds of negotiation over nine years to conclude.

Timing and outcome

Until the UK has left the EU, it will be bound by EU law. Trade policy falls within the Union’s exclusive competence – this has been the case for a very long time. For that reason, the UK may not negotiate trade deals with third countries whilst still a Member State.

Does it mean that we may not talk to them at all? Does it mean that the UK may not even have some exploratory discussions? Three issues are worth raising.

  • The first is legal: there is an EU law principle, the duty of cooperation, which limits considerably what the UK may do in international negotiations. This has been construed broadly by the Court of Justice – and has been applied rigorously in cases where the Commission has relied upon the Court of Justice. In principle, the Commission could start infringement proceedings against the UK for violations of this duty. In practice, whether there may be any leeway as to what the UK would be able to do would depend on the spirit of the Article 50 negotiations. This is crucial: the less confrontational these negotiations, the more likely that the UK would find the EU institutions sympathetic to its efforts to test the waters with third countries about future trade deals.
  • The second issue is practical: engaging in negotiations with third countries is a complex task – and would not be made any easier by the need to negotiate for the withdrawal from the EU and to plan and negotiate for the future relationship between the UK and the EU. If we added the paucity of trade negotiators in our civil service, it would be very difficult to see how the UK would be able to engage in meaningful negotiations with third countries at the same time.
  • The third issue is policy-related: third countries would need to know what kind of relationship the UK had with the EU before they embarked on serious negotiations about their own trade links with the country. This point was made abundantly clear by Australia recently.

WTO rules

Somehow, WTO (World Trade Organisation) law is considered a safe fall back solution for the UK. After all, the UK is a party to the WTO. This view, however, is not unproblematic.

  • The rights, commitments and concessions of the UK under WTO rules are currently tied in with those of the EU. After it leaves the EU, the UK is no longer covered by the common schedules which the EU submitted for all the Member States. Instead, it would have to draw up and submit its own schedules of concessions and commitments on market access, as well as its own list of exemptions from the MFN (most favoured nation) treatment obligation.
  • Even if it were to maintain the existing schedules, this could be considered to be a modification of the country’s terms of membership and, therefore, of the WTO agreement. As such, they would have to be accepted by all other WTO members.
  • The WTO membership of the UK is not controversial. It would, however, have to be negotiated. And no negotiation is without complexities or surprises. There is, for instance, an inherent element of uncertainty in so far as one or more WTO member may be tempted to make life difficult for the UK – either in order to make a political point, or in order to modify their own schedules in response to the UK request. After all, this is a package deal – once an aspect of it is up for amendment, the whole package might unravel.

Complex process

Where does this leave us?

First, in order to establish its trade relationships with the rest of the world, the UK will have to go through a process of extraordinary legal complexity. This process would take time and energy and may turn out to feature surprises (not necessarily pleasant).

Secondly, the practical complexities of this process would also be staggering. To build up a body of experienced trade negotiators, to make this body sufficiently large, and to give them time to develop the country’s trade links at a time when the country would negotiate both a divorce and an agreement about its future relationship with the EU – this is no easy feat. Thirdly, this process could become considerably smoother if the UK had the assistance of the EU institutions, in particular the European Commission. After all, the UK co-exists with the EU, in one way or another, in its current trade relationships with the rest of the world. The spirit in which the Article 50 negotiations are carried out would be an important factor in the country’s ability to shape its trade relations with the rest of the world as smoothly as possible.

 


Panos Koutrakos, Professor of EU Law and Jean Monnet Professor of EU Law at City University and a barrister at Monckton Chambers. This is an edited version of his address to the Institute of Export’s World Trade Summit 2016 which took place in London last month.
www.monckton.com

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