Danish companies: Preparation for EU and UK future trade deal

Yesterday – at a time when negotiations between EU and the UK are likely to transition into phase 2 – Søren Skibsted was invited by the British Embassy in Denmark to a roundtable discussion about future customs arrangements between EU and the UK.

Participants were representatives from HM Treasury of the UK government, the British Embassy and Danish companies doing business in the UK. Danish companies need predictability in terms of the substance and timing of the future trading relationship between EU and the UK. Conclusions of the discussions included:

 

  • The UK prefers access to the single market on current terms.
  • The UK is conscious of the need to preserve single market integrity, e.g. avoiding the famous US chlorine chickens in EU markets.
  • The UK is prepared to have an interim period as long as it is needed for companies to adapt to a new regime. The period of two years mentioned by Theresa May in her Florence speech was repeated.

As matters stand today, the EU and UK trade deal is likely to involve one of the options below. Surely, much uncertainty persists, but one viable option seems to be the "Free Trade Agreement option" in combination with an interim period of three–five years during which rules roughly similar to the current EU membership will continue to apply.

 

1. Preferred Brexit scenarios by the UK

The Bespoke option

The UK Government’s Brexit White Paper says that it prefers a new comprehensive, bold and ambitious free trade agreement and that such agreement may take in elements of current single market arrangements. Potentially, under such option:

 

  • the UK could remain part of the single market and the customs union, and EU rules would continue to apply to trade in goods. Product standards and re-introduction of non-tariff barriers could be subject to an agreement on regulatory divergence
  • for services, the existing level of liberalisation could be maintained, coupled with sectoral agreements on regulatory cooperation and mutual recognition with provision for dual regulation where appropriate.

While this option would have a lot of advantages in terms of facilitating EU/UK trade, it is unclear how it could be reconciled with the red lines of the UK government on e.g. ending free movement of persons, ending the jurisdiction of the Court of Justice of the European Union, and freedom for the UK to conclude new FTAs with third countries (regarding goods, this would be restricted by membership of the EU customs union).

The Free Trade Agreement option

The EU/UK trade relationship could be based on a comprehensive free trade agreement. Potentially, under such option:

 

  • EU/UK trade continues to be tariff-free regarding EU and UK goods
  • treatment of goods originating in third countries is likely to depend on whether UK remains part of the customs union, and on what terms
  • the UK may have access to the whole or parts of the EU single market for services, although the most extensive EU FTA to date, EU's agreement with Canada, does not grant comprehensive access
  • the UK would need to comply with EU product standards for exports to the EU.

It is likely that this option would take a long time to negotiate. UK's access to the single market, and influence over single market rules, would likely be less than at present, but the UK would have greater power to make its own rules. This would seem to be a viable option in combination with an interim period of three – five years during which rules roughly similar to the current EU membership will continue to apply.

 

2. Brexit Scenarios not preferred by the UK

The following scenarios, which do not seem to be unlikely scenarios, are officially not the preference of the British government.

The WTO default option

If the EU and the UK fail to reach an agreement on withdrawal and the future relationship within the two-year period allowed by Article 50 or within an agreed extension period, the EU Treaties and European law will automatically cease to apply to the UK, and the rules applicable to EU/UK trade will, by default, be the rules of the WTO. Under these rules:

 

  • trade in goods is governed by the General Agreement on Tariffs and Trade (GATT), and trade in services by the General Agreement on Trade in Services (GATS)
  • the UK is not subject to EU single market rules, but would still need to comply with EU product standards for exports to the EU
  • the UK is not part of the EU customs union. UK exports to the EU are subject to the EU’s common external tariff. EU exports to the UK are subject to whatever tariff the UK chooses to set as its Most Favoured Nation (MFN) tariff for those countries with which it does not have a free trade agreement (FTA)
  • services under GATS are liberalised only to the extent that individual members agree to grant concessions. EU/UK trade in services would de facto be constrained by significant non-tariff barriers.

The WTO option seems unattractive both to the UK and the EU. This is likely to be the solution only if negotiations on withdrawal and the future relationship ultimately fails. 

The adoption of existing regimes

Talks in respect of existing regimes have centered around the Norwegian and the Turkish option. 

 

Under the Norwegian option:

  • the UK would have membership of the European Economic Area (EEA)
  • the UK would be outside EU customs union. EU/UK trade in goods within the scope is tariff-free, but subject to rules of origin conditions
  • the UK would be part of the single market, and must comply with single market rules. This includes free movement of people. The UK would need to comply with EU product standards for exports to the EU
  • the UK would be free to negotiate FTAs with third countries, either on its own or with EFTA 
  • the UK must pay for access to the single market, probably nearly as much as it currently pays.

Remaining fully bound by single market rules but having little or no say in making those rules while remaining ultimately subject to the jurisdiction of the European Court of Justice appears an unattractive option for the UK. 

 

Under the Turkish option:

  • the UK remains a member of the EU customs union, but outside the EU single market
  • regarding goods, EU/UK trade is tariff-free, regardless of the country of origin, but UK would not be allowed to negotiate its own FTAs for trade in goods with third countries
  • the UK would be obliged to apply the EU’s common external tariff to imports from third countries
  • the UK would need to comply with EU product/service standards for exports to the EU
  • the UK would not be part of the single market in services, and membership of the customs union does not improve on WTO rules regarding trade in services.

The UK Government’s Brexit White Paper says that the UK is not seeking to adopt a model already enjoyed by other countries.