The EU will still loom large over UK trade deals

No one can deny that the past year at the UK’s Department for International Trade has been eventful. Within this time, the department’s ministers have conducted more than 90 international visits, while 10 working groups were established in 15 countries. The UK’s global trade ‘charm offensive’ remains in full swing, with no lack of positive, encouraging bilateral discussions to draw on.

Bolstered by a belief that ‘Brexiting Britain’ is top of mind among the great and good of the trading world, some champions of Brexit have even claimed that many UK trade deals could be worked out in a matter of months, rather than years. Following the election of US president Donald Trump, former UK Independence Party leader Nigel Farage predicted that a UK-US trade deal could be signed within three months. Even when it comes to the UK’s future trading relationship with the EU, there’s an optimistic belief that such matters do not need to be complex, with international trade secretary Liam Fox claiming that the UK-EU trade deal “should be one of the easiest in human history”. Straightforward, speedy deal-making seems to be one of the key offers the UK is putting on the table.

Supporters of Brexit point out, with some validity, that future bilateral trade deals with the UK should be far less onerous and complex than those developed with the EU, with 28 (soon to be 27) member states. They point to the fact that the EU-Canada Comprehensive Economic and Trade Agreement took seven years to finalise and was nearly scuppered at the last minute not by a national government, but by a regional one (Wallonia in Belgium). This is taken by Brexit supporters as a sign that the EU is a sluggish trade interlocutor, even with like-minded Western partners. 

Size matters

Yet many of the world’s economic hotspots appear to be prioritising market size and potential over any considerations of a quick, easy deal. And when it comes to market size, the EU has an undisputed advantage as the world’s largest single market with a population of more than 500 million, compared with the UK’s 60 million.

Take Indonesia as one example of a country that has adapted its priorities to this economic reality: a south-east Asia economic powerhouse, and the world’s fourth most populous country, is currently negotiating a Comprehensive Economic Partnership Agreement with the EU, and the chairman of Indonesia’s Investment Board (formerly the country's trade minister) Tom Lembong has made it clear that Indonesia intends to use its agreement with the EU as a model for any future agreement with the UK. In other words – the EU agreement will come first, and UK leaders should be following its progress very closely.

Even more traditional and long-standing partners of the UK, such as the US and Australia, have signalled that the EU is now ahead in the queue when it comes to trade deals. In April this year the Trump administration acknowledged the importance of pursuing a trade deal with the EU as a pre-requisite if US companies are to benefit from enhanced and preferential access to Germany and other major European markets, although for the moment at least it has been more upbeat about the prospects of a deal with the UK as well. Meanwhile in July, Australian prime minister Malcolm Turnbull signalled his country’s intention to secure a free-trade agreement with the EU first, after which a deal with the UK could be struck.

Outperforming the EU

Speed and pecking order should not be the only concerns, either. The terms on which the UK negotiates future deals will also matter greatly – to businesses, consumers and employees. Here again, Indonesia’s Mr Lembong has offered a revealing perspective, stating that the UK “will have to offer better terms to Indonesia than the EU, as the EU will bring in 27 member states. Indonesia will have to make more concessions for a big trophy such as the EU.”

This challenge does not just apply to new countries, such as Indonesia, where no FTA currently exists. Consider all the markets worldwide where an FTA is either in place or nearing completion with the EU (and by extension the UK at present) – important economies such as South Korea, Mexico, Vietnam – and most recently Japan (one of the largest global sources of FDI into the UK). This means that on leaving the EU, the UK will urgently need to pursue new deals with these countries if trade and investment activity between these markets are not to be impacted.

But what will these new deals with existing partners look like? And will the terms be as favourable for the UK individually as they have been when the EU negotiates as a bloc? Much will depend on the country in question. In the case of South Korea, for example, its population is only slightly smaller than the UK’s, while the gap in terms of economic size is minor when compared with the one between South Korea and the EU. Therefore, while some positive symbiotic, bilateral trade and investment provisions might indeed be identified between the two countries, there is no escaping the fact that the UK will have significantly less clout in future trade negotiations with such countries.

The mother of all deals

Deals with non-European countries will pale in insignificance compared with the UK’s future trade and investment relationship with the EU, however. While a UK-EU economic deal could theoretically be straightforward, as the UK government hopes, politics will likely make the negotiations complex, leading some Brussels-based insiders to refer to it as "the mother of all trade deals".

A deal with the EU will also matter greatly for the UK’s future FDI prospects, given many foreign companies invest in the UK to access the broader EU single market. The prospect of tariffs and disparities in standards between the UK and the EU is a daunting one for investors in an array of industries – from automotive, to food processing and other consumables.

There is one positive development for Brexit that has recently emerged: a ruling by the European Court of Justice (ECJ) in May this year that EU member state ratification will not be required for the vast majority of standard provisions in the EU’s agreements – the key exceptions being any provisions covering portfolio investments and investor-state dispute settlement (ISDS) mechanisms. The fact that the bulk (or potentially even all) of a future UK-EU trade deal might be secured without the need for ratification by the 27 member states should at least take one step out of what is likely to be a complex undertaking. Yet it will remain to be seen what investment protection and dispute resolution provisions foreign companies will be able to draw on – and any UK-EU deal covering this area will now either need approval by all EU countries (in the case of traditional ISDS mechanisms), or will need a new international investment court system.

So despite the UK’s insistence that it will no longer be subject to the rulings of the ECJ and directives coming from Brussels, it is clear that the decisions coming out of the EU institutions will still have a major bearing on the UK’s trade and investment prospects for many years to come. 

To use that well-coined Brexit phrase, Westminster may well be 'taking back control', but the UK's trade and investment fortunes will still be heavily influenced by the goings on in Brussels, Strasbourg and Luxembourg. 

Dan Nicholls is an FDI consultant and has recently been advising the EU in its ongoing negotiations with Indonesia on the Common Economic Partnership Agreement.