16 Aug 2016

The UK's current membership of the Europe Union (EU) means it is part of the EU single market so that no tariffs apply to trade between member countries. The vote to leave means the extent to which the UK will continue to enjoy this privilege will depend on the terms of any replacement trade agreement.

A future trade agreement with continuing members of the EU could be based on, or similar to, existing models between the EU and countries such as Norway, Switzerland, Turkey and Canada.  If an agreement cannot be reached within the two year period following the UK Government's triggering of article 50 (and in the absence of unanimous agreement amongst the 27 remaining EU states to extend that period), the UK may default to trading under the rules of the World Trade Organisation (WTO).

Given that the EU is the UK's biggest trade partner (with over 50% of UK exports going to EU countries) the terms of any future trade agreement with the EU will be of significance for UK manufacturers.  It is to be hoped that the interests of Britain’s manufacturing sector (which represents 10% of the country’s £1.8 trillion GDP) will be prioritised given the significance of the sector to the country's economy.

The current position

To benefit from access the single market and to participate in decisions affecting the single market, EU countries agree to the following:

  • to allow free movement of people
  • to comply with EU regulations
  • to accept restrictions on their ability to set trade tariffs with the rest of the world.

The current alternative models

  • The Norway model: Norway, Iceland and Liechtenstein have entered into the European Economic Area (EEA) Agreement with the EU member states which gives Norway access to the single market.  
  • The Switzerland model: Switzerland is a member of the European Free Trade Association (EFTA) which allows it to access the single market in certain trade areas on the basis set out in a series of over 120 bilateral agreements. 
  • The Turkey model: Turkey is part of the EU's customs union, which removes tariffs on industrial goods it sends within the EU but means it has to apply the EU's common external tariff (a set rate of tariffs on goods from outside the EU) on those goods too.
  • The Canada model: Canada has negotiated a Comprehensive Economic and Trade Agreement (CETA) which gives Canada preferential access to the EU single market without all the obligations that Norway and Switzerland face but the CETA is not yet in force, despite seven years of development.
  • WTO: The WTO deals with the rules of trade between nations, setting tariffs between participating countries.  

Key issues for manufacturers:

Freedom of movement: 

One of the key issues in relation to any future trade agreement will be the extent to which the UK is permitted full preferential access to the single market without having to accept freedom of movement.  
No country has managed such a deal so far and some European politicians have said they would oppose it for the UK.

From a manufacturing perspective, the end of free movement could both exacerbate the current shortage of skilled workers (e.g. the car industry is currently thought to rely heavily on hiring skilled workers from Europe) and create issues in areas which depend on the availability of migrant workers (e.g. currently over 30% of workers in food manufacturing are thought to be migrant workers).  Together these elements run the risk of making the UK less attractive to international investors.

Compliance with regulations: 

Although exiting the EU might seem to present an opportunity to alleviate some of the regulatory burdens imposed by the EU, the commercial reality is that in many cases businesses will need to comply with standards which are equivalent to EU legislation.  

As products become more complex, international standards are becoming more important.  So for example, design and manufacturing standards are typically international. For example, construction materials imported into the UK will almost certainly need to comply with EU standards and construction materials manufactured in the UK will need to comply with EU standards if they are to be exportable. 
It is to be anticipated that the form of the UK's continued access to the single market is likely to require the UK to sign up to at least some EU legislation (e.g. the General Data Protection Regulation) or laws equivalent to it.
In industries such as aerospace, a concern is that UK businesses will need to comply with EU regulations without being able to have a say in how such regulations are developed.  None of the current trade models with the EU enable non-EU member countries to have significant influence over how EU regulations develop.

One area which could lead to additional costs is how the "rules of origin" will apply to the UK: the European community applies a common customs duty to goods imported from outside the community. The EU's existing trade agreements determine the rate of duty and customs conditions which apply to goods imported from or exported to certain countries and the position the UK negotiates may have a significant effect both on pricing and administration costs for manufacturers.

Tariffs with the rest of the world:

The UK currently benefits from over 50 trade agreements between the EU and the rest of the world.  These will need to be replaced for the UK to carry on trading without facing tariffs so that the prospect of price increases for exporting is avoided. 

The extent to which the UK is seen as a strong enough market that other countries are keen to replicate the current arrangements remains to be seen.  

Conclusion

The trade model the UK negotiates with the EU may be based on examples from other nations, but is likely be unique to the UK.  At this point it is unclear when the Government will invoke article 50, how long negotiations will take and what the resulting economic model will be. Maintaining a watching brief and factoring into decision-making likely issues resulting from the changing environment therefore continue to be essential.  

Bond Dickinson has a dedicated sector-focused manufacturing team with experience in international trade.  If you have any queries relating to this article, please do not hesitate to contact us.