Trade, Brexit and the European Union

READING TIME 15 mins
Trade, Brexit and the European Union

Overview: the importance of UK-EU trade

The most important trading relationship for the UK post-Brexit, and the trade agreement with furthest reaching implications for UK public policy, will be that with the EU. This page summarises the processes and the risks for trade justice as the UK exits from and seeks to form a new trading relationship with the EU. For information about new UK trade deals with non-EU industrialised countries, see here. For information about trade and development post-Brexit, see here

The EU is by far the UK’s most important trading partner. At the beginning of 2017, 51% of UK imports came from the EU (with China in second place at 10%), and 45% of UK exports went to the EU (with Switzerland and the US in joint second at 12%). 

The UK is currently part of the single market, which means that tariff and non-tariff barriers are eliminated on the trade in goods and services between the UK and other EU countries. The UK is also currently part of the customs union, which means it sets the same tariffs as other EU countries on goods imported into the UK from non-EU countries.

As part of its membership of the single market, the UK commits to follow a common set of rules (the EU treaty articles, regulations and directives) and to abide by the decisions of the body that deals with disputes relating to these rules (the Court of Justice of the European Union - CJEU). These rules extend into many areas of public policy, including social and human rights, labour laws and environmental protection.  

The UK government has indicated that after Brexit, the UK will leave both the single market and the jurisdiction of the CJEU. Beyond the economic risks, this raises two key questions: after Brexit, what will happen in the UK to the rights and standards currently based on by EU rules; and will the UK’s new trading relationship with the EU create strong guarantees on rights and standards to avoid a race to the bottom between the two?    

In depth: process and risks

A two-stage Brexit

There are two key stages to the Brexit process. The first is reaching a withdrawal agreement on the terms of the UK’s exit from the EU. This is likely to include the thorny issue of the UK's financial settlement, or so-called ‘Brexit bill’. The second stage is to agree the terms of the UK’s new trading relationship with Europe. 

There is uncertainty as to whether these two stages will take place in parallel or sequentially. The UK government favours parallel negotiations so that a new deal is in place by the time the UK leaves the EU (avoiding the ‘cliff-edge’, or need for a protracted transitional period). Different views have been expressed across the EU, though the EU Commission, the French Prime Minister and senior German diplomats have called for sequential negotiations.

Stage 1: Withdrawing from the EU

The withdrawal process is summarised in six steps below. The withdrawal agreement may or may not include details of a transitional arrangement between the UK and the EU before a subsequent UK-EU deal comes into effect, though the UK Chancellor, Philip Hammond, has expressed support for this. 

1. The UK Parliament provides the UK Government with authority to invoke Article 50 of the Treaty on European Union, informing the EU Council of its intention to leave the UK.

2. The EU Council draws up a negotiating mandate, and then the EU Commission negotiates the terms of withdrawal with the UK.

3. The UK Government has indicated it will introduce a ‘Great Repeal Bill’, which will a) repeal the European Communities Act 1972 which gives effect to EU law in the UK and b) convert existing EU law ‘where ever practical and appropriate’ into UK law. This will be designed to come into force as soon as the UK leaves the EU.

4. Once negotiations between the UK and EU are concluded, the EU Parliament must consent to the agreement (by majority vote), in order for it to be concluded by the EU Council by qualified majority (at least 72% of the members of the Council representing Member States comprising at least 65% of the population).  

5. The UK Government has made verbal commitments to put the terms of the withdrawal agreement before the UK Parliament for approval, but this is not a legal requirement under the European Union (Notice of Withdrawal) Bill. It is unclear what would happen in the event the UK Parliament voted down the agreement.

6. Withdrawal will take place within a 2 years unless the EU Council and EU Member States decide to extend this period. It is worth noting that actual negotiating time will be less than two years, as the period must include time for the EU-27 to convene a summit to agree negotiating guidelines (which could take weeks) and consent discussions by the EU and UK Parliaments (which could take months).   

Withdrawal risks

Analysis of the specific risks to the UK’s social, environmental and labour rights and standards on withdrawal from the EU have been discussed at length, including herehere and here. These risks can be be grouped under the following headings:

Non-transferal: The proposed Great Repeal Bill will only transfer EU law to UK law ‘where practicable’. This could exclude huge swathes of EU legislation that is not individually implemented through UK law (i.e. treaty articles and regulations that only take effect in the UK through the European Communities Act). Andrea Leadsom, Secretary of State Department for Environment, Food and Rural Affairs, has suggested that one third of EU environmental legislation will not be transferred to UK law.

Non-equivalence: Where EU law is transferred to UK law, this may be in the form of secondary legislation. This would place rights and standards on a less secure footing, as they could be altered or removed by the government without consulting Parliament.

Impermanence: Where EU law is transferred to UK primary legislation, or where UK law currently offers greater protections than EU law (e.g., on holiday entitlements), leaving the EU means these rights are no longer backstopped at the EU level, where legislative processes move more slowly and rights are arguably more entrenched. 

Non-implementation: The EU institutions that monitor and enforce compliance with the EU’s rights and standards may no longer have jurisdiction over the UK. Unless similar institutions are created at the UK level a large implementation gap could open up even where EU law is transferred to UK primary legislation.

Underfunding: EU funding and technical assistance that is currently channeled to support the implementation of rights and standards could be lost. 

Obsolescence: EU rights and standards are not static, but evolve and expand as new policy frameworks and legislation emerges, and through decisions of the Court of Justice of the European Union. Where EU law is transferred to UK primary legislation, the UK’s policy framework could soon fall behind the EU as regards rights and standards.

Uprooting: There is no UK equivalent to the principles that underlie EU treaties, for example, the commitments to enhanced democracy and better protection of fundamental rights, or the ‘polluter pays’ and ‘precautionary principle’ in environmental protection.

Downsizing: The UK and the EU will have diminished capacity to regulate at scale to address transborder issues, and cooperative EU-wide measures to address to address issues such as climate change (e.g. ‘effort sharing’ on greenhouse gas reductions) could be jeopardised. 

Stage 2: A new UK-EU agreement

The process for establishing UK-EU trade relations post-Brexit will depend on the type of relationship sought. If the UK seeks to join the European Economic Area (EEA) it would first have to join the European Free Trade Association (EFTA - whose members are Iceland, Liechtenstein, Norway and Switzerland), the EFTA Surveillance Authority (which functions like the EU Commission) and the EFTA Court (which functions like the Court of Justice of the European Union). This is the option most favoured by business groups as it would regain full access for the UK to the EU’s single market. Politically however, it is unlikely given the stated intentions and priorities of the UK Government. 

It is more likely that the UK will pursue a free trade agreement (FTA) with the EU. The steps taken on the EU’s side to negotiate and conclude a free trade agreement are set out here. On the UK’s side, treaty negotiations are conducted by the Government, though must be put before Parliament for 21 days before ratification. If the House of Commons or Lords object, the Government must give reasons why it wants to ratify before it can proceed, but only the Commons can block ratification. There is no statutory requirement for a debate or vote, and Parliament cannot amend treaties. It is likely that this process (codified in the Constitutional Reform and Governance Act 2010 but dating from the early 20th Century) will be reformed by the time the UK finalises any FTA negotiations with the EU. The UK government has made verbal commitments to put any new agreement before Parliament for its consent, but again, it is not legally bound to do so.

A third option is that the UK trades with the EU under World Trade Organisation (WTO) rules. This is what will occur if a free trade agreement or other preferential arrangement is not agreed between the UK and the EU. Under WTO rules, goods imported to the UK from the EU would be subject to the same tariffs as goods imported to the UK from other countries with which it does not have a preferential arrangement. Goods exported from the UK to the EU would be subject to the same tariffs as goods exported to the EU from countries with which the EU does not have a preferential agreement (this known as the Most Favoured Nation principle). The UK would need to determine the level at which it would set these tariffs, though has indicated it intends to replicate the existing EU tariff structure in the short term. Under this scenario, the UK’s trade in services with the EU would be governed by the WTO General Agreement on Trade in Services (GATS). The UK and the EU will seek to avoid trading under WTO rules due to the costs and disruption it would impose on trade.

UK-EU agreement risks

With negotiations yet to get underway, it is difficult to anticipate the exact nature of intended and unintended risks posed by a UK-EU deal. But assuming that a deal will take the form of a free trade agreement, it is already possible to identify the following headline risks.

Competitive deregulation: Key figures in the EU have stressed that the UK will not get full access to the single market. For those sectors in the UK that export to the EU, whose exports become subject to tariff or non-tariff barriers, there may be domestic pressure in the UK to deregulate (cutting standards) in order to remain competitive within the EU market. Indeed, slashing regulations is the vision outlined by Theresa May in the scenario that the UK does not reach a satisfactory agreement with the EU.  

Weak public interest protections: A key question is whether a UK-EU agreement will contain specific, binding and ambitious language on rights and standards, backed up by an enforcement mechanism that is at least as strong as the mechanisms to enforce other aspects of the agreement. The evidence of the TTIP and CETA negotiations suggests that the EU is willing to negotiate away strong environmental and labour protections.

Poor enforcement of public interest protections: The trade and sustainable development chapters in ‘new generation’ trade agreements are undermined by the fact that their provisions are almost never enforced. This is largely due to lack of political will to bring a challenge based on a failure to implement an environmental or labour standard. It is unclear that this political will would be present to enforce binding provisions in a UK-EU deal. Further, any enforcement mechanism in a trade agreement would be limited to trade relevant measures, and would be unlikely to rival the enforcement powers of the EU Commission to which the UK is currently subject.

Stronger protections for private investors: EU companies in the UK and UK companies in the EU currently rely on domestic court systems, with recourse to the European courts, to enforce their EU treaty rights. However, if a UK-EU deal follows the current model for trade and investment deals, then companies will have the option to use private investment courts to sue governments using ISDS or a similar dispute settlement mechanism. This would undermine the ability of both UK and EU governments to act and regulate in the public interest.