British Trade after Brexit: It's Complicated

While the United Kingdom (UK) is working out its relationship status with Europe, it will also have to resolve its trade relations with the rest of the world. As my colleague Owen Barder discussed here, the UK’s Parliament will need to pass legislation to provide unilateral trade preferences for developing countries, hopefully embracing the model of the EU’s Everything But Arms program and providing full market access for the world’s least developed countries. In addition, the UK faces the daunting task of deciding which of the EU’s bilateral trade agreements it wants to try to replicate. Again, I favor agreements that ensure developing countries are not made worse off in the process.

But even before taking such steps, the UK will need to establish the foundation on which new trade relationships will be built—that means bringing its membership in the World Trade Organization (WTO) up to date. There is no precedent, so much about how this process will play out remains murky at best. The UK is already a member of the WTO, though the European Union (EU) is responsible for negotiating trade deals on behalf of all EU member countries. While the UK does not have to negotiate an accession agreement to join the WTO, there will be a number of issues that will need to be resolved, as Alan Beattie noted recently in the Financial Times.

The large majority of UK tariffs will stay where they are now in the EU tariff schedule and no negotiations are necessary. PIIE’s Chad Bown estimates that this will leave the UK with an average tariff of 5.5 percent. Two areas that could raise additional complications, however, are agriculture and services.

Agriculture

In the wake of Brexit, the UK will have to develop its own agricultural policy with respect to both trade and domestic support for the sector. Currently, just over 10 percent of EU tariff lines are covered by tariff-rate quotas (TRQs) for agricultural products. These measures limit imports of sensitive products by setting a quantitative limit above which very high, often prohibitive, tariffs apply. Imports below the quota level are subject to much lower or zero tariffs. The UK could presumably avoid having to negotiate over these products if policymakers adopt the lower, in-quota tariff rates and forgo quantitative limits. Such a move could be boon to developing countries, but British producers of at least some products would no doubt object.

For sensitive agricultural products, the UK is likely to have to negotiate TRQ quota levels and how difficult that proves will depend, in part, on how the EU responds. If the EU chooses not to adjust (i.e., lower) current TRQ levels to reflect the UK’s departure, then any new TRQs created under the new British policy would represent new access for exporters and might be easier to negotiate. If the EU chooses to adjust at least some of the existing TRQs, where the UK accounts for a relatively large share of imports, things are likely to get messier.

British politicians have long complained about the EU Common Agriculture Policy that provides billions of euros in subsidies to the region’s farmers. Like most countries around the world, however, the government could face strong opposition to forswearing agricultural subsidies. Assuming the UK does not, it might have to negotiate a “schedule” that sets ceilings on the amount of trade-distorting support it can provide, as required by the Uruguay Round Agricultural Agreement. As an alternative, if the UK keeps the levels low enough, it might be able to accept the WTO ceilings for de minimis support and avoid negotiations over a schedule.

Services

The Uruguay Round also developed new rules for trade in services and required participating economies to submit schedules specifying the sectors where they would provide minimum levels of market access for imports. As with tariffs, the UK might just adopt the EU schedule. Since this would not result in changes in access for either exporting sectors or import-competing British firms, this could be the path of least resistance. Moreover, in most services sectors, OECD estimates suggest that, on average, the UK is more liberal than other countries in the database, as well as the OECD countries as a group. That could limit the demands from other WTO members for the UK to do more market opening. On the other hand, the EU’s Uruguay Round commitments still represent a compromise and the new British government may be under pressure from to renegotiate access in some areas. The UK’s trade partners could also challenge a UK decision to simply adopt the EU schedule as its own and push for additional access in sectors of interest to their exporters.

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Overall, the more open the UK chooses to be with its new, independent trade policy, the easier negotiations to update its WTO membership will be. As an added bonus, developing countries would see improved access to one of their key markets.