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15th February 2018

BREXIT - Free Trade: A reality check

Uncertainties surrounding the scheme that will govern the UK’s cross-border trading outside the EU will be with us for a while yet, so businesses need to consider building flexibility into their commercial agreements for the foreseeable future.  

Will we be in the Customs Union (the Government says, not); in a Customs Union with the EU (whatever that means); or simply working under WTO rules? At the moment, nobody can say. Whatever our post-Brexit relationship with the EU might be, the understandable political imperative for the UK Government is to vaunt the opportunities for the UK to reach ‘Free Trade Agreements’ (FTAs) with non-EU States – agreements by which tariff and other barriers affecting trade are reduced or eliminated. We hear that such opportunities are to be a focal point of the Commonwealth Business Forum in April 2018, for example.

The public rhetoric of those espousing Brexit has of course been dominated by the alignment of ideas of ‘independence’ and ‘freedom’ – a bright new sovereign world outside the EU. ‘Free Trade’ sounds really good, doesn’t it?  Moreover, it is implicit in the rhetoric that reaching a FTA is easy to achieve. Simply find two States who think ‘Free Trade’ is the way to go, then just sign on the dotted line and a rosy world beckons. To suggest otherwise is just being negative.

Whilst positivity is undeniably a good thing – not to say, important, as the UK searches out a new future for itself - the reality still needs checking. Businesses cannot manage their affairs by dancing to the tune of political soundbites. A critical eye needs casting over the rhetoric.

Reality check: FTA’s are detailed and hugely complex legal agreements – a bargain between States; a tortuous exercise in ‘give and take’. They involve an investment of an enormous amount of work and take time (invariably, a considerable amount of time) to conclude. Years. This is unsurprising as the bargain reached has to recognise a complex web of international relationships and interests as well as the vast panoply of goods and services being transacted across the borders concerned.

FTA’s tend to be aspirational, not absolute. Trade protection measures will not all disappear at the stroke of a pen. The FTA will simply aim to strike a new balance of tariff and non-tariff barriers to trade (the latter of which will include quotas and regulatory conditions) with the object of opening up markets.

Take a rather elementary and obvious illustration: If a product is freed from a tariff, that act might increase the volume of that product passing into a State (fulfilling the intended purpose of the FTA). Unmanaged however, that could damage an economy. In response, amongst other measures, a State may wish to control the increase in imports of the product by introducing a quota – setting the tariff free volume of the product permissible within a set period.  In turn, what the value of that quota might be will depend on a wide range of factors. Those factors could include quotas for the import of products of that class which the State has agreed under a trading agreement with another State or trading block.

The application of the law of unintended consequences has to be mitigated as well (it can never be avoided), so in reaching a FTA, the State parties have to examine every sector of their respective economies and the collateral impact of a movement in one tariff or non-tariff barrier on another. Non-tariff barriers can be an especially tricky aspect. The extent of regulatory divergence between States affecting a specific import or export can be highly material to what can be agreed. A State will also want to ensure that there is no ‘dumping’ of products at knock down prices that will damage its own industry producing that type of product. So, measures to prevent this will be included as well.

In short, FTAs are a ‘Rubik’s Cube’ of an exercise. Have a look at the acclaimed agreement reached between Canada and the EU in 2014 for example – 1598 pages of it (868 pages of which describe trade protection measures reserved by the parties).

Where does this take us? Well, like it or not, it is ineluctably the case that sorting out new trading relationships outside the EU will not happen overnight. For business, that means continued uncertainty surrounding the cost and availability of imports and the price of and market for exports – and where there is uncertainty, building flexibility into the terms on which goods and services are bought and sold can be essential, especially around pricing and periods of supply. 

Dominic Hopkins is head of Disputes and Litigation at Hewitsons and an Associate Member of the UK Constitutional Law Association. For more information please contact Dominic on 01604 233233 or click here to email Dominic

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