The prolonged stalemate in the UK Parliament for approval of the withdrawal agreement led the UK and the EU to agree 3 extensions of the 2-year negotiation period.
On 23 June 2016, the United Kingdom voted to leave the European Union and notified the European Council of its intention, in accordance with Article 50 of the Treaty on European Union (TEU), on 29 March 2017. Although the then Prime Minister, Theresa May, and EU leaders concluded a deal on the UK's withdrawal in November 2018, a majority could not be reached in the House of Commons.
Under a new Prime Minister, Boris Johnson, the Conservative Party won the December 2019 general election by an overwhelming majority. Subsequently, on 23 January 2020, royal assent was given to the UK Withdrawal Agreement Bill. In addition, the European Parliament gave its approval to the Withdrawal Agreement on 29 January 2020.
The UK's withdrawal from the EU entered into force on 1 February 2020. The agreement provides for a transition period from that date until the end of 2020. During this period, the EU and the UK will negotiate their future relationship in a number of areas; a trade agreement has been established as the highest priority.
As a result of the UK's withdrawal from the EU on 1 February 2020 there are two possibilities between the EU and the UK: (i) A scenario where there is agreement; (ii) A scenario where there is no agreement.
Scenario with agreement between the parties
The Single European Market in its postulates provides for the following four indivisible freedoms: goods, services, capital and labour.
In practice, without tariffs or border controls, companies can invest and establish themselves freely in any country, and worker mobility is guaranteed. This is very important for the European single market:
Mutual recognition of production standards, as well as certification of labour skills, although not necessarily fully harmonised.
The recognition of the EU legal system and the role of the EU Court of Justice (ECJ).
The scope of the Single Market includes the EU Member States plus Iceland, Liechtenstein and Norway through the European Economic Area (EEA), as well as Switzerland through bilateral treaties.
In addition, the EU Customs Union ensures duty-free and quota-free access for goods and services between Member States. All EU Member States are part of the customs union. In addition, the EU has three other customs unions with Andorra, San Marino and Turkey. And although goods benefit from free movement in the EU customs union, there are often borders where tariffs and quotas may not be applied in all sectors. Furthermore, as there are no tariffs as a rule in the customs union, the EU's trade policy with external countries is centralised and delegated to the EU, within the framework of the common commercial policy.
The European Union Customs Union means that there is only one border with the rest of the world, so the countries that make up the union all apply the same tariffs to international trade. This feature is vital in order to prevent a single country from entering into lower tariff agreements with external countries.
Despite the many existing agreements, the free movement of capital and labour is not covered by the customs union and requires separate agreements.
To illustrate the challenges that brexit positions imply for the establishment of an agreement, we show the following slide that was presented by the head of the EU negotiating team, Michel Barnier, at the European Council of 15 December 2017 (TF50 (2017) 21). It clearly shows how the UK's 'red lines' intersect with EU laws and principles and, in a way, sets out the shape of the future trade relationship between the EU and the UK.
Two elements are of particular interest to us:
- The UK's refusal of the jurisdiction of the EU Court of Justice disqualifies the UK from accessing the single market,
- The United Kingdom's demand for an independent trade policy disqualifies its membership of the Customs Union.
Finally, the EU's bilateral free trade agreements (FTAs) are trade agreements between the EU and external (third) countries. And according to the UK's current position, an FTA is the most likely future trade relationship between the EU and the UK.
However, FTAs vary considerably in content and rules, because they are always the result of negotiations between the parties.
In the view of experts, there are major differences between FTAs, the customs union and the Single Market that an FTA could never match. For example, although most, if not all, tariffs are reduced to zero, it is noted that:
- Imported goods are still subject to border controls for customs verification.
- Among other things, third country exporters must prove the origin of manufactured goods that justifies the application of preferential tariffs.
- Third country exporters must prove that the goods comply with European Union rules,
- Imported goods are subject to verification by the importing countries at the border.
Considering that the UK Withdrawal Act prohibits the extension of the transition period, the chances of ending without a trade agreement have increased exponentially.
In this scenario, the European Union Member States and the United Kingdom would lose preferential access to their respective markets, and World Trade Organization (WTO) rules would inevitably apply.
The basic WTO regime is the most-favoured-nation (MFN) rule, which prevents any country from applying better terms of trade with one country than with others, unless it is as part of a preferential trade agreement.
The UK Department for International Trade, in October 2019, published the list of tariffs that would have applied if no withdrawal agreement had been reached and suggests that most EU imports into the UK would be duty free. However, tariffs would be maintained to protect specific industries, such as agriculture (beef, lamb, poultry and some dairy products), finished cars (not car parts), ceramics and bioethanol.
The UK Government has recognised the need to maintain certain import tariffs for future trade agreement negotiations with non-EU countries.
The plan disclosed by the United Kingdom aims to achieve a compromise between protecting vulnerable sectors and maintaining prices for consumers. The plan envisages that 88% of imports in value terms will have a zero tariff (80% today). But under the new plan, 82% of UK imports from the EU would be duty free (100% during the transition period). Some 92% of imports from non-EU countries would be subject to zero tariffs (56% today).
In contrast, the latest EU Trade Policy Review (2017) available at the WTO reports that 26% of tariff lines were duty free in the EU.
In addition, the EU applied an average MFN tariff of 14.1 per cent on agricultural products, with the highest being on dairy products (35.6 per cent), followed by sugars and confectionery (26.8 per cent). Non-agricultural products are subject to an average tariff of 4.3%, with the highest average tariff being on fishery products (12.2%) and clothing (11.6%). Note that transport equipment is subject to an average tariff of 5.0 per cent.
The Confederation of British Industry (CBI) estimates that 90% of UK exports of goods to the EU, by value, would face tariffs in a non-agreement scenario.
The CBI also estimates that the average tariff on UK exports to the EU would be 4.3%, while the average tariff on EU imports into the UK would be around 5.7%.
- Cîrlig C. and Puccio L., The future partnership between the European Union and the United Kingdom, EPRS, European Parliament, September 2018.
- Cîrlig C., The revised Brexit deal: what has changed and next steps, EPRS, European Parliament, October 2019.
- European Commission, Internal preparatory discussions on future relationship: free trade agreement, Task Force for Relations with the United Kingdom (UKTF), 13 January 2020.
- European Commission, Recommendation for a Council Decision authorising the opening of negotiations for a new partnership with the United Kingdom of Great Britain and Northern Ireland, COM(2020) 35, 3 February 2020.
- European Council, Guidelines adopted by the European Council (EUCO XT 20001/18), European Council (Art. 50), 23 March 2018.
- Future trade relations between the EU and the UK: options after Brexit. European Parliament Policy Department for External Relations, European Parliament, March 2018.
- Felbermayr G., Fuesr C., Gröschl J. and Stöhlker D., Economic Effects of Brexit on the European Economy, EconPol Policy Report (04), November 2017.
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