29 March 2019

Nicolo Tamberi is Research Assistant in Economics for the UK Trade Policy Observatory and L. Alan Winters CB is Professor of Economics and Director of the Observatory.

The eight EU Trade Agreements that the UK has rolled-over replicate current trading conditions with their respective partners to a substantial extent. However, conditions could still deteriorate for at least two reasons:

• A bilateral negotiation that excludes the EU can only partially overcome possible problems with rules of origin;
• UK regulation and/or certification can be recognised only where partners have not tied themselves to EU regulations. Where they have, recognition of UK regulation and certification must wait until the UK also aligns with the EU.

The UK Government is currently devoting considerable resources trying to replicate the EU’s trade agreements with third countries, because the UK will have to leave them on the day of Brexit. To date, eight of these so-called continuity trade agreements have been signed,[1] and one with Norway is said to be imminent.[2] Of these eight, the most relevant in terms of trade value are the ones with Switzerland, Israel and Chile.

In order to save time and to avoid the replication of hundreds of pages of text, the continuity agreements incorporate by reference the provisions of the relevant EU agreement, mutatis mutandis, listing only the required amendments. Most of the changes are purely formal, and could be considered innocuous – for example, replacing ‘European Union’ with ‘United Kingdom’, or adjusting tariff quotas – both inward and outward – to reflect the size of the UK market.[3]

Although the Government has arguably done everything it could to prevent disruption in trade, the job is incomplete. One issue that might arise concerns Rules of Origin (ROOs). ROOs define the economic nationality of a good to see whether it is eligible for preferential tariffs. Most commonly, ROOs require that X% of the value of inputs into a good are themselves produced in the exporting country. To facilitate continuity in trade, in the UK-Switzerland, UK-Israel and UK-Chile agreements, the parties agree that EU materials and EU processing can be ‘cumulated’. That is, if a good produced in the UK uses EU originating inputs, these will be considered as originating in the UK when the good is exported to Switzerland and vice versa. [4] Problems could arise, however, if the good is subsequently exported from Switzerland to the EU, because if the EU does not recognise UK materials and/or processing as originating in Switzerland, the good might be considered ‘not originating’ and thus subject to EU tariffs. To date, the EU has made no such commitment.

A second potential issue concerns Mutual Recognition Agreements (MRA). These define the areas in which the parties recognise testing, inspection or certifications carried out by the other party. The current EU-Switzerland MRA covers twenty chapters. However, the UK and Switzerland agreed on the continuation of only three of these (Motor Vehicles; Good Laboratory Practice; Medical products, Good Manufacturing Practice inspection and batch inspection). The other seventeen chapters – e.g.  Medical Devices or Construction Materials – remain uncovered “due to interdependencies with EU laws and systems” (Switzerland Agreement, paragraph 96). That is, because Switzerland is committed to legislative equivalence with the EU, it cannot simultaneously commit to mutual recognition of UK practices, unless the latter also conform to the EU norm. Although the three included chapters cover a substantial part of UK-Switzerland trade and a memorandum of understanding states the intention to make progress on the remaining 17, at present some 24% of UK exports and 16% of imports of this bilateral trade will not be covered. This implies additional testing and certification (i.e. cost) for exporters, although the UK could recognise Swiss certification unilaterally if it wished.

A similar difficulty prevents rolling over the Customs Security Agreement. Until the UK adopts a scheme deemed equivalent by the EU to its own scheme, Switzerland’s equivalence to the latter precludes their mutually recognising equivalence with the UK. As a result, UK Authorised Economic Operators will no longer qualify for expedited treatment on the Swiss border.

The Norway agreement, which has yet to be released, is believed to refer only to goods, as the country has separate agreements with the EU on goods and services. It will presumably entail the removal of tariffs, but is likely to pose the same challenges on things like mutual recognition as did that with Switzerland. An agreement on services, if it ever materialises, will have nothing to offer on tariffs (which do not apply to services trade) and will offer little scope for regulatory convergence because of Norway’s participation to the EU Single Market.

It appears that the UK has been able to get a pretty complete replication for the rolled-over agreements. However, bilateral negotiation cannot help when the issues are trilateral. Hence, the new agreements cannot guarantee 100% continuity of trade for the UK post-Brexit. In the end, the degree of alignment with the EU that the UK achieves (or concedes) will affect not only trade with the EU but also that with certain FTA partners.

None of this should be a surprise. Both these problems were discussed by the UKTPO in December 2017.

This analysis was stimulated by Ben Chu of the BBC’s Newsnight programme, featured on 28 March 2019.

Watch our animated video, Grandfathering the EU’s Free Trade Agreements, which explains why rolling over these agreements is likely to be highly complicated, and will necessarily impact on trade.

Footnotes

[1] The partner countries are: Chile, Faroe Islands, Eastern and South Africa (ESA), Switzerland, Israel, Palestinian Authority, Pacific states and CARIFORUM. See: https://www.gov.uk/guidance/signed-uk-trade-agreements-transitioned-from-the-eu

[2] UK and Norway agreed on the deal but this has to be signed. See: https://news.sky.com/story/rollover-of-trade-deals-with-norway-and-iceland-secured-11669710

[3] Dividing the existing single quota into two parts without increasing its overall size reduces the value of the quota to partner country exporters (they potentially lose the ability to switch sales between the UK and the EU27), and so it may hinder negotiations. However, once the partner has agreed a quota for the UK, it is uncontroversial.

[4] This commitment is scheduled to end after three years.

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