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Brexit and International Trade

One consequence of the UK’s membership of the EU is that many aspects of the UK’s external relations are now conducted partly or wholly through the EU. As a result of Brexit, the UK would be able to re-assume direct control of its external relations, including trade relations.  The pro-Remain camp suggested in the campaign that Brexit would result in years of uncertainty while the UK renegotiates its international trade arrangements.

This contention is not supported by the facts and evidence.  As we explain in more detail in this research piece:
  • The UK cannot currently decide the level of tariffs which we levy on imports, because these are set at a uniform level for the EU as a whole under the EU's customs union. After exit, WTO rules would apply which would allow the UK to decide the level of our own tariffs on imports, provided that tariffs on average are no higher than under the EU customs union.

  • Again, because of the EU customs union and 'common commercial policy', the UK is not able to negotiate its own trade agreements with non-member countries -- we can only do so as part of the EU. The UK will be able to participate in new trade agreements with non-member countries from the day after exit.  The process of negotiating new trade deals can be started during the 2-year notice period leading up to Brexit, with a view to bringing them into force on or soon after the date of exit.

  • The EU has existing free trade agreements which currently apply to the UK as an EU member.  Most of these EU agreements are with micro-States or developing countries and only a small number represent significant export markets for the UK.  Both the EU and the member states (including the UK) are parties to these agreements. The UK could simply continue to apply the substantive terms of these agreements on a reciprocal basis after exit unless the counterparty State were actively to object. We can see no rational reason why the counterparty States would object to this course since that would subject their existing export trade into the UK market, which is currently tariff free, to new tariffs. There will be no need for complicated renegotiation of these existing agreements as was misleadingly claimed by pro-Remain propaganda.

  • The UK was a founder member of EFTA but withdrew when we joined the EEC in 1973.  We could apply to re-join with effect from the day after Brexit. There is no reason why the four current EFTA countries would not welcome us back, given that the UK is one of EFTA's largest export markets.  EFTA membership would allow us to continue uninterrupted free trade relations with the four EFTA countries, and also to participate in EFTA's promotion of free trade deals with non-member countries around the world.

  • The EU is seriously encumbered in trying to negotiate trade agreements by the large number of vociferous protectionist special interests within its borders.  After Brexit, the UK would be able to negotiate new trade deals unencumbered by these special interests much faster than the EU, and with a higher priority for faciliting access to markets for our own export industries including services.

  • It is completely untrue that you need to be a member of a large bloc like the EU in order to strike trade deals.  The actual record of the EU compared to that (for example) of the EFTA countries demonstrates the direct opposite.

  • The baseline of our trade relationship with the remaining EU states would be governed by WTO rules which provide for non-discrimination in tariffs, and outlaw discriminatory non-tariff measures. From this baseline, and as the remaining EU's largest single export market,  we would be in a strong position to negotiate a mutually beneficial deal providing for the continued free flow of goods and services in both directions.  We explain what such a deal would look like in our section on Brexit - doing a deal with the EU.

The EU and the common commercial policy

The EU is a customs union, not simply a free trade area.  We will explain some of the intricacies and consequences of the difference between a customs union and a free trade area later.  But the point of a customs union is that all its members operate a single unified system of customs tariffs so that any particular category of goods will be charged the same tariff whether it enters the EU via, say, Rotterdam or via Felixstowe.

Because the external tariff wall is identical for all members, the members of a customs union need to operate as a bloc when they enter into trade agreements involving tariffs with other countries.  An agreement to reduce or get rid of tariffs on imports from another country necessarily involves the customs union as a whole.  For example, if one country in the customs union acting alone were to reduce tariffs on goods from an external country, those goods would then flow in through its ports and circulate around the whole customs union, by-passing the higher tariffs imposed at the ports of the other customs union members.

For this reason, a common external trade policy was built into the Treaty of Rome from the inception of the EEC, as a necessary counterpart of the customs union created by that Treaty.  This was called the “common commercial policy”. Under that policy, the European Commission is entrusted with the primary responsibility for negotiating trade agreements, under the supervision of the Member States acting through the Council of Ministers.  Trade agreements may then be concluded by the EEC (now the EU) in its own name, which has so-called “exclusive competence” to conclude agreements with non-member countries falling within the field of the common commercial policy.  The word “competence” here has the French legal meaning of the legal power to do something.

The WTO Agreements and “mixed competence”

In practice,  trade agreements almost always extend to cover broader subject matter than just tariffs and related matters falling within the scope of the EEC/EU common commercial policy.  Where an external agreement contains provisions which extend beyond the scope of the common commercial policy or the EU’s other powers to conclude external agreements in its own name, it is necessary for the Member States as well as the EU to be parties to the agreement.  This is called a “mixed” or “shared” competence agreement: where part of the competence to conclude the agreement belongs to the EU, but part of it remains with the Member States.

One particularly important series of agreements which involved mixed competence were the World Trade Organisation (WTO) Agreements which were concluded in 1993 as a result of the Uruguay Round Multilateral Trade Negotiations.  This linked series of Agreements forms the bedrock of global trade.

Both the individual Member States including the UK, and the EU itself, are parties to the WTO Agreements. The respective legal powers of the EC (as it then was) and the Member States were ruled upon by the European Court of Justice in Op 1/94 Re the Uruguay Round Agreements [1994] ECR I-5267.  The Court rejected a contention by the European Commission that the EC had across-the-board competence to conclude the WTO Agreements in its own name.  Although the core provisions of the WTO Agreements relating to trade in goods fell within the EC’s exclusive competence under the common commercial policy, the Court ruled that other areas covered by the WTO Agreements relating to services (parts of the General Agreement on Trade in Services - GATS) and the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) were outside the EC’s competence or were areas where the EC’s competence was shared with the Member States.

The upshot of this “mixed competence” scenario is that vis-a-vis other parties, the EC/EU is responsible for compliance with, and entitled to the benefit of, certain aspects of the WTO Agreements; while the Member States individually remain responsible for, and entitled to the benefit of, the remaining aspects.  The boundary between EC/EU and Member State competences is not stationary: under the ECJ’s Lugano doctrine, the EU acquires external competence in areas where internal EU harmonisation occurs, and a significant shift in competence took place under the Lisbon Treaty which made the trade-related aspects of intellectual property part of the EU’s commercial policy.  While this fluctuating boundary line may be confusing for other WTO members, it is in general accepted by them.

However, the consequence of this after Brexit is straightforward.  The EU will cease to have any competence in respect of the UK’s trade or other external relations, and the UK will automatically assume rights and responsibilities in respect of 100% of its relationship with other members under the WTO Agreements.  In addition, trade relations between the UK and the remaining EU (“the r-EU”) will cease to be governed by the EU treaties, and will automatically be governed by the framework of the WTO Agreements - unless of course a replacement trade agreement is negotiated between the UK and the r-EU which comes into force on exit.

There is no question of the UK having to leave the WTO or to re-apply for membership. The UK is one of the original founding members of the WTO, as laid down by Article XI(1) of the WTO Agreement:
Article XI
Original Membership
1. The contracting parties to GATT 1947 as of the date of entry into force of this Agreement, and the European Communities, which accept this Agreement and the Multilateral Trade Agreements and for which Schedules of Concessions and Commitments are annexed to GATT 1994 and for which Schedules of Specific Commitments are annexed to GATS shall become original Members of the WTO.

Rights and obligations under the WTO Agreements

The WTO Agreements provide the present-day framework for global trade and contain a number of very important principles and rules, as well as a mechanism for the adjudication of disputes under the World Trade Organisation.  Resort to the WTO disputes mechanism is at present precluded to the UK in any disagreement with the EU or other Member States by Article 344 of the Treaty on the Functioning of the European Union (TFEU), which states that:
“Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein.”
One of the key principles of the WTO Agreements is non-discrimination in trade relations.  This means that WTO members are not allowed, for example, to charge different tariffs on goods imported from different countries except in clearly defined and limited circumstances.  Thus, following Brexit and assuming for the sake of argument that no trade agreement were reached between the UK and the r-EU, the r-EU would apply its standard external tariff rates to imports from the UK but would not be allowed to discriminate by charging higher rates to the UK than to other non-EU countries.  Similarly, the UK would apply its standard external tariffs to imports from the r-EU.

However, the UK would not be obliged to charge tariffs on its imports at the same rates as it is obliged to charge while it is a member of the EU customs union, and would certainly have the legal right to reduce them as it sees fit.  The EU has given a large number of commitments in multilateral trade talks not to increase its tariffs above certain levels (so-called "bound tariffs").  Because, as explained above, these commitments were given by the EU itself on a matter falling within its exclusive competence and not by the individual Member States, it is probable as a matter of legal theory that the UK after exit would not be bound by these commitments and therefore could in theory raise its tariffs above the levels of the EU's bound tariffs.

But it is in practice very unlikely that the UK would wish to raise tariffs after exit, except perhaps in some narrow and exceptional circumstances.  As a global trading nation, the UK has a strong interest in the general reduction of tariff levels around the world and would certainly not wish to act in way which would be against the spirit if not the letter of the WTO Agreements. Under Article XXIV of GATT 1994, when a customs union is formed its overall weighted average of tariffs needs to be the same as or lower than the weighted average of tariffs of its component states,  and the UK would certainly wish to apply a  similar principle when it leaves; i.e. to keep its average tariffs the same as or lower than under the EU’s current tariff regime.

This is an important point.  The UK would be under no obligation to maintain its tariffs at the same level as it is currently obliged to impose under the EU customs union. In many cases EU tariffs are set at high levels in order to protect industries in other parts of the EU where the UK has little or no domestic industry to protect,  such as textiles and clothing, shoes and many kinds of heavily protected agricultural produce. In these cases the UK receives no benefit but pays twice over for the privilege of protecting foreign industries from lower cost competition in the world market:  our consumers pay higher prices than they need for the products concerned, and on top of that and to add insult to injury, we have to hand over the tariffs collected at our ports to the EU as part of its so-called "own resources".

One astonishing aspect of the May 2016 Treasury study purporting to demonstrate the economic disadvantages of leaving the EU is its assumption that the UK post Brexit would continue to levy tariffs on imports at the same levels as those imposed under the EU customs union, so needlessly punishing our own consumers by forcing them to pay higher prices than available on world markets.  It would be a clear and unequivocal benefit of leaving the EU to have the right to set tariffs at levels which suit our own circumstances and probably, as a nation with a bias to free trade, reducing them in many cases.

As a lawyers' group, we do not feel qualified to attempt to quantify this potential benefit in money terms but point to the study published by Prof Patrick Minford and others which suggests that leaving the EU and adopting a liberal tariff and trade policy will decrease prices and boost GDP.

Under Article XXIV paragraph 5 of GATT 1994, members of the WTO are entitled to form customs unions or free trade areas and to abolish tariffs between themselves without this being regarded as discriminatory against other countries.  The EU is a customs union.  After Brexit, the UK could therefore maintain a zero tariff regime in both directions between itself and the r-EU either by continuing to belong to the EU customs union or by entering into a free trade agreement.

According to the latest figures (2015, ONS “Pink Book”) the UK exported 134.3bn worth of goods to the r-EU but imported 223.0bn.  This indicates that the imposition of tariffs on bilateral trade between the UK and the r-EU after Brexit would be very substantially more painful for r-EU exporters than for UK exporters, were it allowed to occur.

We deal with the likely terms of a UK-EU post-Brexit trade agreement,  in a later section.  In this section we concentrate on the UK's post-Brexit trade relations with non-EU states.

The EU’s Free Trade Agreements and the UK

The EU has concluded a number of free trade agreements with non-member States.  These provide for the elimination of tariffs on trade in most goods, and typically also seek to eliminate or at least reduce non-tariff barriers.  A number of these agreements provide for free trade in services as well as goods.

For the reasons explained above about ‘mixed competence’, the EU Member States (including the UK) are normally parties to these free trade agreements as well as the EU itself.  This has important implications when it comes to Brexit, as we shall explain.

Taking for example the EU-Korea Free Trade Agreement concluded in 2011, both the EU itself and the Member States are parties to the treaty with the Republic of Korea.  The definition of the Parties in Article 1.2 refers to the “mixed competence” explained above:  the ‘EU Party’ is defined as ‘the European Union or its Member States or the European Union and its Member States within their respective areas of competence as derived from’ the EU Treaties.

The substantive obligations in the agreement are expressed to apply between the Parties.  Thus, for example, the obligation in Article 2.5 to eliminate customs duties states that “each Party shall eliminate its customs duties on originating goods of the other Party in accordance with its Schedule included in Annex 2-A.”  The FTA also contains mutual obligations regarding freedom to provide services, intellectual property and other matters.

There would be no difficulty in the UK continuing to comply with the substantive obligations of this FTA after Brexit; and Korea on a reciprocal basis would have no difficulty continuing to apply these substantive provisions both to the UK and the r-EU.  This step would not require any renegotiation of the substantive provisions of the FTA:  all that would be needed would be a statement by the UK that it intended after Brexit to continue to operate the terms of the FTA between itself and Korea, and an acknowledgement by Korea that it would likewise continue to do so.

There are also procedural provisions in the FTA which involve bilateral joint committees or bilateral disputes and arbitration procedures between the EU and Korea.  Clearly it would not be appropriate for the UK to continue to be represented by the European Commission or other EU organs in its relations with Korea after Brexit, so these would need to be operated on a bilateral UK/Korea basis in respect of the UK’s obligations under the FTA.

In order to provide for the smooth and continued flow of trade in both directions on Brexit, no new FTA or renegotiation of the substantive terms of the EU-Korea FTA would be necessary.  All that would be required would be a simple acknowledgement by the UK and Korea that they would continue to operate its substantive terms on a mutual basis until further notice, and to set up bilateral UK/Korea machinery to mirror the bilateral EU/Korea machinery of the FTA.  It is likely that after Brexit the UK would wish to go further and both strengthen and deepen existing FTAs such as the one with Korea and negotiate new FTAs with other parties; but this longer term process would in no way prevent the rolling over of the terms of the existing EU FTAs into UK FTAs.

Korea could in theory object to the rolling over of the FTA in this way, but it is impossible to see what conceivable reason it would have to do so.  If Korea were to bring to an end the existing free trade relationship between itself and the UK as an EU Member State, it would result in the renewed imposition of tariffs on Korea’s goods exports to the UK, which are substantial and include cars and electronic goods.

We have taken the EU-Korea FTA as an example, but very much the same points would apply to the EU’s other FTAs (which normally include the UK and Member States as treaty parties as well as the EU for the reasons explained above).  In fact, this kind of “rolling over” of treaty obligations is a familiar process in international law.  It happens in cases of “State succession” where an existing State splits and the component parts wish to continue existing treaty relationships with other States.  For example, when Czechoslovakia split into the separate states of the Czech Republic and Slovakia on 31 December 1992, both new States agreed to assume and continue to honour the treaty obligations of the former State of Czechoslovakia, and other States and international bodies accepted the succession as being effective,  where necessary agreeing new machinery for the separate representation of the two new States.

The exit of the UK from the EU is not legally a case of State succession. As explained above, the UK will reassume the full powers of its existing Statehood by re-assuming rights and responsibilities for its own international relations in areas at present where its interests are represented via the EU.  However, the practical issues involved are very similar and there is a similar mutual interest in preserving the continuity of existing treaty arrangements, particularly those which affect day-to-day existing trade, unless there is some good and concrete reason for changing those arrangements.  It follows that the international counterparties to the existing EU FTAs will almost certainly follow general State practice in State succession cases and accept the rolling over of FTA arrangements so that they continue to apply to the UK after Brexit.

The European Free Trade Association (EFTA)

The UK was a founder member of the European Free Trade Association (EFTA) when it was formed in 1960.  EFTA operated as a free trade area in Europe alongside the EEC and contained, in addition to the UK, Norway, Sweden, Denmark, Switzerland, Austria, and Portugal.  In 1973, the UK and Denmark joined the EEC and as a result withdrew from EFTA.

As explained above, the EEC is a customs union and it is not possible for individual member states who are within a customs union to belong to a free trade area with external countries: it is necessary for the customs union as a bloc to belong to a free trade area.  It was clearly not desired for the UK and Denmark to terminate their free trade relationship with the other EFTA states when they joined the EEC in 1973, and the solution adopted was for the EEC as a whole to enter into free trade agreements with the remaining EFTA states.  This preserved the free-trade relationship between the UK and Denmark and the other EFTA states, and indeed expanded it so the EFTA members also came into free trade relations with the other EEC Members (the original Six).

Sweden, Austria and Portugal also subsequently joined the EEC and as a result withdrew from EFTA, although preserving their free trade relationships with the EFTA states as a result of the bilateral free trade agreements between the EEC and the remaining EFTA countries.  EFTA now consists of Norway, Iceland, Switzerland and Liechtenstein.  As regards 3 of those States, the European Economic Area Agreement (to which the EU and the EU Member States are parties) now largely regulates free trade relations between those three states and between them and the EU.  However, Switzerland declined to join the EEA and as a result the trade relations  between itself and the other EFTA States are still governed by the EFTA agreement (now revised and known as the Vaduz Convention).

In the event of a Brexit decision, it would be logical for the UK to apply for readmission to EFTA in advance of Brexit, with a view to its membership taking effect immediately upon EU exit.  There seems no reason why the four current EFTA states should not welcome such an application. The EU and its Member States are not parties to the EFTA convention and would have no say over such an application for membership.  The immediate effect of the UK joining EFTA upon Brexit would be to preserve the existing free trade relations between the UK and the EFTA states, avoiding the risk of, say, Swiss exports into the UK being subjected to tariffs (and vice versa).  Notably, in 2013, the UK was Switzerland’s fifth most important export market in the world (Swiss official website), while the UK was Norway’s single most important trading partner receiving 25% of Norway’s total exports in that year (Norway official website).

The revised EFTA convention (the Vaduz Convention) extends beyond free trade in goods, and includes provisions on free trade in services and the free movement of capital and of persons. None of these should be problematical to the UK given that the Vaduz Convention only applies between its members and so would not act as a gateway for the free movement of persons from the r-EU or elsewhere.  All four EFTA states have standards of living comparable to or even higher than the UK so do not present any mass migration risk. (The last occasion on which uncontrolled migration from Norway was problematical was when the invading Norwegian army under King Harald Hardrada was defeated by King Harold Godwinson of England at the Battle of Stamford Bridge on 25 September 1066).

Rejoining EFTA would have an importance beyond direct trade relations between the UK and the EFTA states.  This is because in addition to facilitating and deepening free trade between its own members, EFTA also facilitates free trade relations between itself and other countries. In this regard, EFTA has been notably more successful than the EU, contrary to pro-Remain mythology peddled in the campaign which claimed, contrary to the facts and objective evidence, that it is beneficial to belong to a large bloc like the EU in order to forge trade agreements with other countries.

In fact, it is a positive barrier to the successful conclusion of free trade agreements to belong to the EU.  As recently as 26 April 2016, El Pais reported that France and a group of other EU Member States pressed the EU Commission to delay the restart of the already heavily delayed free trade talks between the EU and Mercosur, the Latin American bloc which includes Brazil and Argentina.  Their concern is the potentially harmful effects of free trade on some sectors of EU agricultural producers who would be exposed to competition from South American producers.

More recently, the coming into force of the long awaited Canada-EU trade agreement has been delayed by the refusal of Romania to rafiry the agreement because of a visa dispute with Canada.

Similarly,  the long drawn out EU-USA attempts to negotiate a Trans Atlantic Trade and Investment Partnership (TTIP) have been severely hampered by France's requirement that the EU should insist on the French film industry being shielded from open competition from Hollywood.  Since Hollywood is one of the USA's most important export industries,  this and other protectionist demands have caused severe problems in progressing the talks and it is far from clear that the EU will ever be able actually to conclude a free trade agreement with the USA.

As a consequence of the EU's lack of success in negotiating free trade agreements with major export markets, the EU’s trade agreements are heavily skewed towards agreements with less developed countries, in Eastern Europe and elsewhere, and a large number of micro-states (Map of EU FTAs).  These agreements may be worthwhile for reasons other than trading self interest, for example to assist in the development and political stabilisation of these countries, and for those reasons the UK may well wish to continue these free trade arrangements after exit.  But as regards significant export markets, the EU has only concluded its agreement with Korea in 2011 and has only just reached an agreement with Canada after years of negotiation.

By contrast, EFTA has been notably successful in reaching agreements with large and growing export markets around the world (EFTA Free Trade Map), and has ongoing negotiations with major and growing export markets such as India, Malaysia and Indonesia.

By rejoining EFTA, the UK would be able to seek the extension of existing EFTA FTAs to itself, and also to give a large positive impetus in collaboration with its EFTA partners to forging new agreements and extending existing free trade agreements particularly in the area of trade in services.

Negotiating trade deals with with non-EU countries before exit

The machinery of Article 50 of the Treaty on European Union means that there is likely to be a period of 2 years between the UK's formal notification of its decision to leave the EU and the actual exit date when the EU Treaties cease to apply to the UK and it ceases to be a member state. Although claims have been made to the contrary, it is clear that the UK is legally entitled to negotiate and conclude, during the period before exit, trade agreements which will come into force from and after the date of exit: see Negotiating International Trade Treaties before Exit.