As the date of Brexit approaches, Britain and various European Union trading partners are multiplying contacts with London to gauge what their future trade relationship will be once the UK leaves the bloc. As conversations with these countries deepen, the task appears increasingly complex. Current contacts with Australia and Switzerland reveal some of the challenges ahead.
The Department for International Trade has set up more than a dozen working groups with individual countries to scope a future bilateral trading relationship.
On Monday 4 December, Vietnam’s new trade minister, Tran Tuan Anh, will be in London to discuss the start of consultations on replicating the EU-Vietnam free trade agreement – now awaiting ratification in Brussels – with Britain post-Brexit.
London’s general aim is to ‘grandfather’ existing EU free trade agreements with third countries and to make the EU’s commitments in the World Trade Organization its own.
The times when Liam Fox, the pro-Brexit international trade secretary, had high hopes of a swift trade agreement with the US, China, Australia and New Zealand are over. These countries were part of the Brexiter’s top free trade agreement wish list. The US is setting out draconian conditions for Britain – namely, calls to drop certain EU regulations. As a result, the prospect of a swift deal with Washington has faded. Britain also quickly realised that a deal with China isn’t feasible in the foreseeable future.
The DIT’s immediate priority is to roll over existing agreements with South Korea and Switzerland.
Switzerland is one of Britain’s most important trading partners outside the EU. The Helvetic republic absorbs 3.1% of UK goods exports and ranks as the No. 3 British export destination outside the EU, after the United States and China. Trade in services between the UK and Switzerland is also buoyant.
Whether the new British strategy will be successful isn’t clear.
Alphabet soup complications
Initial consultations between the UK and the rest of the WTO have shown that some members – not least precisely the UK’s staunchest friends and allies, New Zealand, Australia and the US – are making things difficult, as the EU and the UK need to split up sensitive tariff rate quotas – TRQs – on a variety of agricultural products.
The matter is complicating the UK’s planned bid to join the plurilateral Government Procurement Agreement as a standalone member.
This TRQ issue is bound to complicate talks, however informal, with Wellington, Canberra and Washington. This is despite the fact that they have said they would be ready to swiftly conclude new trade agreements with Britain post-Brexit.
Britain is the destination of more than half of many non-EU partner exports under existing TRQs. Many partners fear they will lose market share in Britain after Brexit if they fail to secure a good tariff rate deal with London.
TRQs will also complicate the task of rolling over existing EU FTAs. Rules of origin for goods to qualify for duty-free treatment also need to be redesigned.
Samuel Lowe, a trade expert at the organization Friends of the Earth attending a meeting in London, reported that trade officials remained silent after questions from the auto industry on this precise matter:
Australian priority shift
Fox is in Australia this week to promote UK-Australian trade relations. What exactly he will be told isn’t entirely clear.
An Australian official explained to Borderlex that Britain’s departure from the EU is making a planned EU-Australia free trade agreement an even greater priority for Canberra.
Australian business is gradually setting up shop in other member states in order not to lose market access, the official said.
Australian industrial exports – mainly high-tech components in the auto and aerospace sectors – go to UK industries that will be negatively affected by expected Brexit-induced disruptions to existing pan EU supply chains in these sectors.
Also, “an FTA with the EU will deepen ties with Frankfurt, Dublin, et cetera”, the Australian official said.
Friendly advice from Switzerland
The Swiss and the British didn’t establish a formal working group. But contacts have been ongoing since early 2017. Both sides want to keep these under the political radar. “Our goal is continuity,” a Swiss official told Borderlex.
The task of rolling over existing trading arrangements between the UK and Switzerland will differ from many others.
The EU and Switzerland have a 1972 FTA on goods in place which largely excludes agriculture. A series of bilateral agreements that came into force in 2002 and 2005 complemented the deal. There are also more recent accords on trade in agricultural goods and processed foods.
There is no EU-Switzerland agreement on trade in services, though services trade is covered through a procurement agreement, free movement of services providers and agreements on a variety of sectors such as air and road transport. Financial services were excluded from the scope of these agreements.
Since Switzerland dropped banking secrecy, the country has become more interested in a finance deal with the EU. But since 2010, Brussels has refused to grant Switzerland greater access to the EU’s single market if there is no overarching institutional framework agreement and a proper dispute settlement mechanism. Bern refuses to engage in such negotiations.
The result is a stalemate.
Swiss banks operate via direct investments in the EU – including London – without appropriate guarantees against their investments being treated in a nondiscriminatory way. Since the Brexit vote, Swiss banks have shifted part of their activities from London to the EU27.
Switzerland applies the single market’s four freedoms, including the freedom of movement of people which London wants to upend.
Despite a 2014 referendum vote in favour of introducing quotas on immigration from the EU, Switzerland ultimately refrained from going down that path.
This is partly the result of the EU playing hardball with Switzerland. The ‘guillotine’ clauses included in the bilateral agreements between the EU and Switzerland mean that if one party reneges on one agreement, all agreements are terminated. The EU used that leverage.
There was also plain national self-interest. Philippe Nell, a Swiss minister and scholar at SECO, the Swiss economic analysis body, explained that the possibility of losing access to the European single market led the Swiss parliament not to enact immigration quotas. The Swiss realised “that if we restrain immigration, we lose just too much”, said Nell. “So we found a solution that would be compatible with the EU.”
The Swiss decision not to follow through with immigration quotas was also due to the realisation that free movement had contributed to the Swiss economy’s solid economic growth since 2002 (barring the crisis in 2009).
A study by the Swiss observatory of free movement, a government research centre, showed that leaving the single market would cost the country about a quarter of its annual gross domestic product growth. Forty percent of that loss alone would be attributable to the end of free EU migration.
So, if the Swiss are seeking “continuity” with Britain, are they insisting on the UK staying in the single market?
Nell has some advice for Britain: “Analyses of Swiss and UK integration processes show that integration benefits both sides,” he writes in a research paper on what the UK can learn from Switzerland.
“The EU has red lines,” Nell writes. “The UK knows them very well, not least because of having applied them to Switzerland.”