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.
Free movement of goods, services, capital and people across 27 other European countries.
The European Economic Area extends the free movement of goods, services, capital and people to Iceland, Liechtenstein and Norway.
A 'level playing field' of rules ensuring fairness and mutual recognition of Member state regulation.
Preferential trading terms with other 60 countries, covering more than 65% of UK global trade.
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.
Source: ONS, Barclays Research, 2016
Source: Barclays Research, Haver.
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...
The UK’s current trade position against six potential outcomes when it leaves the EU.
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 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.
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.
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.
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.
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.