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White cliffs
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Can the UK secure a better trade arrangement when it leaves the EU?

The UK government's stated position is that when the UK leaves the European Union, it also leaves the world’s largest single market. Membership of this market has provided the UK with free movement of goods, services and capital across Europe as well as preferential trading terms with other non–EU countries and territories.

So, could anything replace – or even improve on – this arrangement? Below, we assess which alternative trade scenarios could be viable for the UK, post–Brexit. 

 

Market forces: What trade access does the EU provide?

27 European countries

Free movement of goods, services, capital and people across 27 other European countries.

 

free movement of goods

The European Economic Area extends the free movement of goods, services, capital and people to Iceland, Liechtenstein and Norway.

Level playing field

A 'level playing field' of rules ensuring fairness and mutual recognition of Member state regulation.

The EU has signed preferential trading terms with other 60 countries

Preferential trading terms with other 60 countries, covering more than 65% of UK global trade.

What impact will leaving the EU have on the UK's three most important powerhouse sectors?

Today, the European Union (EU) buys half of all UK exports. Conversely, the UK’s role as a trading partner to the Rest of World (RoW) has been in decline for decades. The UK now accounts for less than 3% of global trade, half the level of 20 years ago. Replacing lost EU trade with RoW trade will be a key task on leaving the EU.

Europe buys almost half of UK exported goods and services
Europe buys almost half of UK exported goods and services

Source: ONS, Barclays Research, 2016

Trade outside Europe has been in decline since the 1950s
Trade outside Europe has been in decline since the 1950s

Source: Barclays Research, Haver.

Learning from Canada

Leaving the EU Single Market doesn’t necessarily mean disaster for EU-UK trade. A number of non-EU countries have secured trade relationships with the EU that work well for both parties.

The Canadian model could provide a template for the UK post-Brexit. Having sought to reduce its dependence on US trade, it has spent two decades building global trading partnerships. As a result...

  • Despite representing just 2% of global GDP, Canada is the second-largest export nation in the G7 after Germany
  • Canada has 14 Free Trade Agreements in force, including with all G7 nations except Japan
  • If Canada were to conclude FTAs with all Trans Pacific Partnership members, its trade agreements would cover 60% of the global economy 

Post-Brexit: How six trade scenarios measure up

The UK’s current trade position against six potential outcomes when it leaves the EU. 

What’s the optimal trade scenario?

If the UK elects to leave the single market and the Customs Union (CU), and does not petition to join the European Economic Area (EEA) as a non-EU member, its only alternative is to negotiate bilateral and multilateral free trade agreements with the EU and the rest of the world.

Theoretically, cutting ties with the EU, CU and EEA gives the UK the greatest freedom to negotiate its own trade agreements. But the challenges of negotiating individual FTAs are substantial:

Trade agreements - the four challenges

1: Agreements focus on goods not services

Trade agreements are heavily geared towards trade in goods. However, services account for 78% of UK total value added, 45% of UK exports, and the UK boasts a £100bn trade surplus in services. Conversely, the trade balance on goods is -£135bn.

2: UK has limited negotiating leverage

Alongside having limited resources to negotiate trade agreements while also negotiating departure from the EU, the UK may find it has limited negotiating power with major regions, given its potential lack of relevant and coherent trade policies.

3: UK macro policy needs to be supportive

Even if the UK secures a trade agreement, UK macro policy needs to be supportive to be competitive and win market share, e.g. managing currency and wage strength and investing in skills and trade infrastructure.

4: FTA negotiations may deliver only modest output

For example, the ambitious Trans Pacific Partnership (TPP) has run into many problems such as the withdrawal of the US. But even if it goes ahead, TPP may represent only 8% of total UK trade.

In short...

If the UK leaves the single market, Customs Union and European Economic Area, it will face significant challenges in terms of negotiating trade agreements superior to those it currently enjoys as a member of those institutions. A potential model for success is Canada, which has forged successful global relationships. Regardless of which model the UK chooses to pursue, it will need to undertake extensive and concerted work at the macroeconomic, political and corporate levels.

Secured trade
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Related content

Three trade models worth exploring 

A number of non-EU countries have secured trade relationships with the EU that work well for both parties. But only one – the Canada model – aligns with all the UK’s conditions for leaving the EU.

Brexit: Safeguarding the UK’s powerhouse sectors 

Post-Brexit, the most important sectors of the UK economy will require more than just a free trade agreement with the EU to maintain their level of activity.

Investor Brexit concerns are growing 

Our monthly survey on how investors view progress on Brexit shows that the deadlock over the Irish border is weighing on market sentiment.

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About the analysts

Fabrice Montagné is chief UK economist at Barclays. Previously, he was a senior European economist responsible for French, Greek and euro area macroeconomics. Mr. Montagné joined Barclays in January 2012 from the Dutch Central Bank where he was responsible for balance sheet, asset/liability management and strategic asset allocation decisions in the Financial Market division.

Prior to that, he worked at the French Treasury and Fonds de Reserves pour les Retraites. Mr. Montagné graduated from Ecole Polytechnique, has an MSc in Economics and Statistics from ENSAE, and also holds an MSc in Economic Analysis and Policy from the Paris School of Economics.

Sree Kochugovindan is Senior UK Economist at Barclays, based in London. Prior to this role, Dr. Kochugovindan was an International Economist and a Global Asset Allocation Strategist at Barclays, responsible for identifying tactical and strategic investing opportunities across all asset classes and regions. She is also co-author of Barclays Equity Gilt Study. Sree previously worked at State Street Bank and Trust in the Foreign Exchange Research department. She received her Ph.D. in Economics from the University of London. Whilst completing her thesis, she also worked as a lecturer teaching Economics.

Read the full reports

Authorised clients of Barclays Investment Bank can log in to read the full reports in the Brexit trade trade-offs series and subscribe to #brexit on Barclays Live.

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