Post-Brexit UK - Possible Trade Models

Dr. Maria Chetcuti Cauchi | 29 Mar 2017


In her first speech, UK Prime Minister Theresa May pledged that her government will respect the decision take by the British people and that “Brexit means Brexit”. Whilst there is no doubt that the UK government will strive to negotiate the best outcome with the EU, it is still unclear how this new relationship with the EU will pan out.  

Apart from full membership, the EU has established trade relationships with non-member states based on three main models namely bilateral trade agreements, application of World Trade Organisation (WTO) rules and membership to the European Economic Area (EEA).  

Bilateral trade agreements  

Countries such as Switzerland and Canada have over the years negotiated a number of bilateral trade agreements with the EU covering a wide range of sectors, granting limited access to the EU single market. Switzerland has over 120 agreements and is viewed as having the strongest relationship with the EU based on bilateral agreements. In return, Switzerland contributes towards the EU budget and programmes, complies with most legislation governing the single market and adheres to free movement of people.  

The Canadian free trade agreement with the EU sees most trade tariffs gone but holds certain restrictions on Canadian manufactured goods. In addition, the agreement does not give passporting rights to Canadian financial institutions to operate within the EU. The EU-Canadian agreement is yet to come into force and has been in the making for the past seven years. One distinct advantage that the Canadian model offers over the Swiss agreement is that Canada retains control over immigration policies, which is a key consideration to the UK following the Brexit vote.    

WTO rules  

As a member of the WTO, the UK could decide to trade with EU and non-EU countries under WTO rules. This model would see the UK abandon any special relationship with the EU and would, therefore, lose the current preferential access to the single market and with countries signatory to free trade agreements with the EU. Moreover, trading under WTO rules would see the UK subject to the introduction of trade tariffs which would have major negative consequences on international trade patterns and domestic prices. This option is generally regarded as the least plausible option that the UK will pursue.  

EEA model  

Norway, Iceland and Liechtenstein are all signatories to the EEA Treaty but are not full members of the EU. The UK is already a signatory to the EEA Treaty and therefore adopting such a relationship would be a relatively straightforward option. As an EEA member, the UK would have the most integrated access to the single market but would not be part of the Customs Union and will lose access to countries which have free trade agreements with the EU. In addition, the UK would still be required to contribute towards the European budget, adhere to legislation governing the single market without having the right to vote or veto, and would also be required to allow free movement of people.  

In the case of the EEA model, the rules of engagement are largely established. Given that the UK already fulfils the obligations of the EEA Treaty as an EU member state, this model is generally viewed as the preferred relationship model for the UK in order to minimise uncertainty in the short term. Nonetheless, EEA membership comes with a number of ‘unfavourable’ conditions which were amongst the strongest factors motivating the Brexit vote.  

What lies ahead?

At present all options remain a possibility and it is premature to state which relationship model would work best for the UK. The UK government itself is taking time to trigger Article 50 of the Treaty of European Union that would start the two year negotiation process towards Brexit. In the interim, it will be up to the UK government to turn this challenge into an opportunity.  

The UK is already exploring new opportunities outside the EU most notably with China which is already a major trading partner and investor to the UK. Whilst no trade agreements can be concluded before a de facto Brexit, negotiations with China and others could start alongside the Brexit negotiation process with the EU. Inevitably the UK’s ability to negotiate with the outside world strengthens its negotiating position with the EU. On its part, the EU would need to carefully balance its position to ensure that it retains maximum economic benefits from close ties with a main trading partner that is the UK, but at the same time ensure that there is no political backlash for the European project and the single market.  

One pressing consideration for the UK at this time is to contain the negative effect on business and investments arising from uncertainty. Whilst in the next two years the UK will retain its EU membership, the aftermath of the negotiation process is still unknown. This uncertainty is leading enterprises to consider establishing or increasing their presence in other EU countries to secure access to the single market. This is a major consideration for the services industry, in particular, the finance and ICT sectors. Whilst London city is expected to remain one of the biggest players in the finance world, jurisdictions such as Paris, Dublin, Luxembourg and Malta offer attractive conditions to draw investors.  

In this regard, Malta has established itself as a reputable financial services centre with a solid regulatory framework that is amongst the most advanced in the EU. Malta offers very attractive Residency and Citizenship by Investment programmes for high net worth individuals, coupled with very favourable corporate and personal tax regimes. Apart from an excellent quality of life, Malta offers a safe and stable political and economic environment which is critical to sustain economic growth.  

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