The True Cost of Free Trade

As part of the Phase I Brexit Agreement reached on 8 December, the government has increased its offer of a financial settlement for Brexit. This should now open the door to trade negotiations with the EU. However, it will need to offer far more than £40-50 billion to secure a genuine free trade deal.

When the UK and the EU open “phase II” of the Brexit negotiations in the New Year one might assume that a trade deal, on goods at least, will simply involve an agreement from each side not to apply tariffs to the other’s trade. Indeed, WTO rules, to which both sides are committed, would allow that kind of arrangement. But such a straightforward, transactional deal is unlikely to be acceptable to the EU. The EU will demand that other conditions are met and all the evidence suggests that it will not agree free access to its markets unless the UK continues to adhere to a wide range of the EU’s other policies. Nowhere will this be more true than in trade in agriculture, food and drink.

Look at the evidence from the EU’s “closest” economic partnership, the European Economic Area (EEA) Agreement with Norway. This agreement famously allows Norway to participate in the Single Market and enjoy free trade with the EU. However, less famously, the agreement excludes entirely trade in agriculture, fisheries, food and drink where trade is subject to tariff barriers in both directions. The agreement does not explain this omission explicitly but it is because Norway operates a significantly different system of domestic support for its farmers and in the eyes of the EU this distorts competition with EU farmers. EU agriculture needs to be protected from these distortions (so the theory goes) and a “level playing field” is achieved through the application of customs duties on trade.

Another example. The EU has a customs union with Turkey which is supposed to guarantee the “free circulation” of goods between the two, delivering two-way duty-free trade. Except the customs union agreement with Turkey also excludes agricultural products, where duties continue to apply. The EU/Turkey Agreement leaves the door open to extending the Customs Union to trade in agricultural produce but only if and when Turkey aligns its rules with the EU’s Common Agricultural Policy.

The recently agreed free trade deal between the EU and Canada has been hailed as the EU’s most comprehensive and ambitious trade deal ever. Nevertheless, it too maintains restrictions on trade in some agriculture products, most notably poultry and pork. 

Indeed, with the exception of preferential access granted to the world’ s poorest economies, every single one of the EU’s existing free trade agreements includes some form of tariff restriction on trade in food and drink.

So much for the evidence from the EU’s existing trade deals. To this must be added Michel Barnier’s comments in his speech to the Centre for Economic Reform on 20 November:

There will be no ambitious partnership [with the UK] without common ground in fair competition, state aid, tax dumping, food safety, social and environmental standards.

By “common ground” Barnier of course means that the UK will be required to follow the EU rule book.

Finally, the text of the Phase I Brexit agreement of 8 December stresses repeatedly the link between free/frictionless trade and “regulatory alignment”.

For the EU the equation is straightforward. The UK will only achieve a free trading relationship with the EU if the UK continues to follow EU rules on a wide range of non-trade issues. The further the UK deviates from those rules, the higher trade barriers will be.  The government still holds the view that it will be able to negotiate an outcome where it enjoys relatively free trade with the EU and also has substantial freedom to set its own regulation. However, the “have cake and eat it” theory has not held up too well so far in the negotiations and it may, therefore, be prudent to prepare for a Brexit outcome where openness to trade depends upon the UK continuing to observe EU rules.

Retail Economics Brexit Advisory Service

Retail Economics works with a diverse range of companies helping them to successfully manage the Brexit process. It fundamentally answers the question:what does Brexit mean for me? 

Our holistic analysis delivers crucial insight into Brexit's multi-staged policy implications. While focusing on key issues that affect you, we also understand the peripheral issues that impact the market as a whole. 

For retailers - risk levels are maximised for EU trade. Our service helps safeguard you against oversights in new costs arising from policy developments. We scenario plan and model for what the new trade deal could mean and highlight cost implications from customs duties on different products (e.g. 'sensitive products'). 

For companies selling services into the retail industry - keeping abreast of how Brexit affects your core customer base is essential for sharpening your business strategy and recognising how best to foster key relationships during turbulent times ahead. Our service gives you this insight. 

The Brexit Advisory Service simplifies policy terminology, allowing you to confidently strive towards key objectives. Using simple language, it clearly explains: (1) cost changes from customs duties; (2) any 'transitional arrangements' or changes to existing practice; (3) whether a transitional EU-UK customs union will require customs declarations; (4) Turkey's possible involvement in the union and its customs duties; (5) implications for your overseas sourcing costs and much more… For those aspiring to take an active role in influencing policy, it also provides guidance on making representations to government on aspects of the trade policy agenda that most affects you. 

Our service is tailored to your needs. It focuses on the products, your clients or the countries that matter to you most. Understand the issues. Implement the changes. The Retail Economics Brexit Advisory Service can create greater visibility in an increasingly volatile time. 

For more details, please contact Ray Symons, Special Advisor on Brexit and Trade, at [email protected]