There has been much speculation about what the UK and EU will do in the event of No Deal, focused in the UK on the no-deal planning notices emanating from the Department for Exiting the European Union. What little attention has been paid to the Department for International Trade (DIT) has usually taken the form of criticism that crucial deals for the UK’s external trade will be lost because we will have failed to novate or roll over the agreements with a host of countries we have through the EU.
Any DIT announcement of a successful roll over or novation is usually accompanied by howls of derision from various doomsayers who say that this is a small percentage of the number of agreements the UK has through the EU with other countries outside the EU27. Reference is often made to 60 or 70 agreements that fall into this bucket (it is actually around 40 agreements covering around 70 countries).
When it comes to what we might have if we leave with no deal, the analysis is entirely static, assuming that some mythical gate will come down and foreclose all trade if we have not immediately rolled over all agreements, and assuming that whatever we have when we leave will remain the status quo forever from that point. It is also fair to point out that our trading partners have been confused by the UK’s EU negotiating strategy, something on which DIT has no input, and this has led our trading partners to doubt that we will ultimately be in a position to offer deep liberalisation in the future, because we will be locked into the EU Customs Union or have such high regulatory alignment that we will be unable to have the requisite regulatory autonomy to make us relevant to them.
This uncertainty has certainly impacted their negotiating strategy, and made them more determined to extract as much as possible from us now, because they believe our EU strategy will mean we will be unable to negotiate properly in the future. The more that parliamentary voices lobby hard to take No Deal off the table or extend Article 50, the less incentive these countries have to close these agreements with any urgency, so our own lack of discipline is contributing to the issue.
Despite this hostile working environment, DIT has been quietly and successfully rolling over many of these agreements; and with regard to the ones that matter – and that actually impact meaningful amounts of UK trade (as opposed to say agreements with Andorra and San Marino) – progress is relatively good (with a couple of exceptions which I will discuss below), even in the event of the UK leaving the EU without a signed withdrawal agreement.
First of all, some threshold points. It is often assumed that if 1% of our trade is with country X, and country X has a trade deal with the EU, this means that if that EU-X agreement is not rolled over in favour of the UK, then that means all of that 1% of our trade will fall to zero. But this is not how trade works. Clearly for some products, especially agricultural trade where tariffs are high, failure to novate could have a big impact on our exports (assuming the agreement in question lowers agricultural tariffs for country X, not always the case in the EU-X agreements).
But equally, where the tariffs are low, and industrial goods tariffs are very low (Most Favoured Nation rates for industrial goods are on average 3%-4%), then failure to novate will simply mean a marginally higher tariff that may be compensated for by a host of other factors such as currency fluctuations or tax policy. Right now, even in some of the most established agreements, such as NAFTA and the EU-South Korea agreement for example, some traders still choose to pay the MFN rate and do not take the benefit of the preferential rate because proving origin is more hassle than just paying the low MFN rate.
With that caution, let’s look at progress to date. The agreements that we have through the EU (excluding the recently-signed Japan agreement where tariff cuts only commence in January 2020) account for 11% of our total trade. Looking at how much trade is duty free around the world (or duty free under a GSP programme), it would not be surprising if the trade actually affected – in case the agreements are not rolled over – would be approximately half of that. Of these, the Swiss agreement alone – which has been rolled over – is worth 20% of our trade. Other significant agreements here include CETA, covering a further 12% of the trade under these agreements (almost rolled over), and the EU’s agreements with South Korea and Singapore, each covering around 10% of this trade.
Equally it is worth pointing out that 20 of these EU-X agreements account for only 0.8% of total UK trade. Many of the EU-X agreements are Economic Partnership Agreements (EPAs) that are with small developing countries, not critical to UK trade. We would certainly like to replace these arrangements with UK arrangements, but we should take the opportunity of having a different approach to development here. The EU’s approach to development is to charge high tariffs on the products that developing countries produce (often with significant tariff escalation), and to compensate by lowering that rate through its preference programmes such as GSP, and GSP+ which are conditional (and could be lost by the developing country for any number of reasons outside of the control of individual traders and exporters), and to limit the unconditional programmes (Everything But Arms) to only the poorest of the poor.
A smarter approach for all sides is for the UK to actually be genuinely open to the products of these countries, but to compensate them on a one-off basis for the preference erosion that this will cause. We should also eliminate tariff scalation from our schedules so that these countries are incentivised to go up the value chain and garner more value for their producers – a key element of development. Notwithstanding this, the UK and the Eastern and Southern African states have now rolled over their agreement with the EU.
The UK is very close to rolling over the EEA agreements which cover around 2% of UK trade, mostly with Norway, as Liam Fox pointed out in a ministerial statement last week. We have also rolled over a series of nuclear safeguarding agreements. The UK has acceded to the Common Transit Convention. Although the UK is a member of the WTO by right, and does not have to re-accede to it, it does have to accede to the WTO Government Procurement Agreement, and is in the process of doing so. The recently-signed Swiss agreement also contains important cumulation provisions covering goods originating in the EU, EFTA and Turkey. Crucially, goods that would have been considered ‘of community origin’ by either the UK or Switzerland will remain so.
But trade is also more than just about trade agreements. The UK has been able to roll over a number of mutual recognition agreements (MRAs) that are very important to facilitate trade. MRAs make it easier for people to trade and easier to prove that their products satisfy the standards and regulatory requirements of the other party. The UK has already signed MRAs with the US, Australia, Israel and New Zealand. There are sectoral agreements on insurance with the US and Switzerland, on wine with Australia, and the US. A range of air services agreements have been signed with the US, Canada, Switzerland, and Israel to name a few. The UK and New Zealand have rolled over the UK-NZ veterinary agreement. A distilled spirits mutual recognition agreement with the US (with whom there is a rapidly growing whisky trade) has been signed and a similar agreement is due to be signed shortly with Mexico.
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It is true that there are issues with the Japanese and South Korean novations, but it is important to understand why this is the case. In the case of Japan, the Japanese recognise that the EU deal is not an ideal agreement in terms of Japanese trade policy. Japan has made concessions on data that do not suit its IP-based economy that relies on data flow. The Japanese would rather have the UK in the CPTPP arrangement rather than simply rolling over the agreement, and that would be in our interests too. They rightly don’t want the new EU-Japan agreement to be the basis for the UK-Japan trading relationship going forward. This is because Japan is particularly concerned about countries like its large neighbour, China, which are increasingly pushing anti-competitive and prescriptive regulations domestically and on the rest of the world. This would stifle their own innovative industries.
Like many global supply chain managers, Japan needs an open trading, pro-competitive regulatory environment. It sees the UK as potentially moving in that direction, and if the UK accedes to the CPTPP, it also sees a possibility that the US will one day return to the TPP fold. If the UK, US and new accession countries like Indonesia and South Korea accede to the CPTPP, then it will command 45% of the world’s GDP, and include the fastest growing countries in the world (compared to the EU27’s 20% assuming static performance over time, whereas it is likely that on current trends the EU27 will decline from this 20% figure).
Indeed, the Japanese may also think that their current negotiating position will prevent a “No Deal” situation arising. There is also a specific nuance with the EU-Japan agreement because it is a new agreement and the tariff cuts are only just starting, and the MFN rate applies to all UK and EU trade until January 2020 anyway. Whatever else is said, the Japanese are committed to a better agreement with the UK than the EU, but only want to go to the Diet for approval once with a better agreement. Other countries have complicated legislative processes too.
In the case of South Korea, they want to see more liberalisation from the UK than they secured from the EU, which is also to be expected. The UK can liberalise more than the EU, but does need a base line from which to operate. It is fair to say that the Koreans have been particularly affected by the confusion in Parliament regarding an extension of Article 50. Why should they negotiate with any urgency, if in fact there is no need to do so?
Additionally, both the Koreans and Japanese have given confused messages – on the one hand seeking more liberalisation either directly or through CPTPP accession, while maintaining that the UK should disturb their UK-EU27 supply chains as little as possible – two inconsistent positions. It would be better for all if these managers of global supply chains took the position that they wanted maximum trade openness between the UK and EU through a comprehensive, advanced FTA consistent with allowing their global trade ambitions of more liberalisation and pro-competitive regulation to be simultaneously fulfilled.
With regard to Turkey, the hysteria is even more divorced from reality. We could never negotiate anything with Turkey until we have actually left because Turkey is in a partial customs union with the EU. Nothing has changed there. It is not news that this particular agreement won’t be rolled over by March 2019.
Of course, if a deal can be agreed, the EU-X deals would continue to apply in their entirety until the end of the transition period. No-one wants a no-deal scenario, but the UK has made sufficient progress on rolling over some of the existing FTAs, MRAs and other sectoral agreements such that leaving without a deal would not be the disaster that some have painted.
We would of course continue this process after we have left the EU, and extend it to include further and deeper liberalisation. However, amendments like Cooper-Boles force other countries to assume that No Deal is in fact off the table, and so there is no point in drawing down political capital with their own legislatures if it not necessary – another example of the UK shooting itself in the foot, but that’s a mistake that is being made by those voices calling for No Deal to be taken off the table or for Article 50 to be extended. It cannot be laid at the door of the DIT. It’s a bit like sending your army into battle, but deliberately taking away its weapons.
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