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Future trade with the UK: harder and more expensive

Economic Report

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  • The future trading relationship between the UK and the EU could take a number of forms
  • We foresee twee realistically possible outcomes: a bilateral free trade agreement or no agreement
  • In both of the scenarios we deem realistic, Dutch companies doing business with the UK or with branches there will face increased barriers to trade

The future trading relationship: four possibilities

The future trading relationship between the UK and the EU could take a number of forms. Broadly speaking, though, there are four possible models (see table 1): UK membership of the European Economic Area (EEA, access to the Single Market remains); full membership of the EU Customs Union; a new bilateral trade agreement or a so-called “hard” Brexit with no deal. At present, however, only the last two of these seem likely. Although the likelihood of a softer Brexit has increased after the snap elections, we believe that the existing soft models, EEA or Customs Union membership, are not realistic outcomes. This is because in these models, the British Prime Minister could not deliver upon the wishes of the British people, which are: 

  • taking back control on EU-immigration;
  • regaining the freedom to negotiate bilateral trade agreements with non-EU countries;
  • ending the jurisdiction of the European Court of Justice;
  • stopping British contributions to the EU budget and ending regulation from Brussels.

A softer Brexit could take shape through a bilateral trade agreement in which the British will make concessions, for example in the field of financial contributions, immigration or supervision by the European Court of Justice, in exchange for (partial) access to the Single Market. The election result has also increased the likelihood of a no-deal 'hard' Brexit because it will be harder for the British Prime Minister to pass Brexit-related legislation through the British parliament.

Table 1: Possible UK-EU relationships and their impact upon trade
Table 1: Possible UK-EU relationships and their impact upon tradeSource: Rabobank, Kalf en Prins (2017). Investing in Europe after Brexit, RaboResearch Economic Report

A bilateral free trade agreement between the EU and the UK

The first of the realistically possible outcomes, in our view, is that the EU and the UK reach a bilateral trade agreement. But the content of any such deal remains highly uncertain, since both the EU’s negotiating position on free trade and the extent to which the British want to make concessions to maintain free trade are not yet known. With respect to a rise in trade barriers, there is a variety of possible outcomes: tariffs on specific products, border controls, and customs procedures. The UK will try to retain wide-ranging access to the single market, but we believe it is unlikely that the EU will consent to this unless the British largely accept the terms of the single market. Otherwise, it would mean the UK could reap the benefits of free trade with the rest of Europe, but without the costs and compromises of EU membership. Were it to concede to all Britain’s wishes on this front, the Union would risk encouraging other member states wanting to withdraw on similar terms and, in the worst-case scenario, face total collapse.

A ‘hard’ Brexit

A 'hard' Brexit refers to a situation in which the UK and the EU fail to reach an agreement on free trade during the withdrawal period. We believe this too is a realistic possibility – in which case cross-Channel trading relations would probably revert to WTO (World Trade Organisation) rules. These would entail the introduction of import tariffs, as well as driving up the cost of trade due to border controls and customs procedures (such as rules-of-origin, and import and export declarations). But here, too, the precise arrangements are unclear because, before it can trade under WTO rules, the UK must reach agreement with the WTO’s other members concerning mutual market access. In doing so, it would probably try to copy the EU’s tariff and quota schedules so that it has a basis for trade with the other WTO members as soon as Brexit takes effect. Whether it can actually do this, however, is not yet clear. If it cannot, then it might well have to reach new agreements from scratch – a process which, on average, takes nine years. Find out more about UK membership of the WTO.

A no-deal Brexit is sometimes compared to a cliff edge, because there will be sudden changes to doing business with the UK on the exit-day, while the necessary adjustments are not yet implemented. This would endanger continuity for businesses.

Trade with the UK will become harder and more expensive

In both of the scenarios we deem realistic, Dutch companies doing business with the UK or with branches there will face increased barriers to trade. The cost of exporting is almost certain to rise due to for example the introduction of tariffs, border controls, customs procedures or changing product standards, while these additional charges might only partially be passed on to UK customers. Dutch exporters could also be affected indirectly if components they export to Germany, say, end up in products for the British market. Firms supplied from the UK or for which the UK is an important link in the value chain, can also expect new trade barriers to increase their costs.

Dutch companies with branches in the UK which import components or other items from the EU – or from countries with which the EU has a free-trade agreement (FTA) – are also likely to see their production costs rise. This is because the UK seems intent upon leaving the Customs Union, which will also mean withdrawing from the FTA’s the EU has with third parties[1]. And if it succeeds in limiting immigration from the EU as well, that could reduce the supply of labour and so push up wages in certain sectors, for example agriculture.

Footnote
[1] The EU has trade agreements of varying complexity with 57 countries, 46 of them WTO members.

Unlikely negotiation results: EEA and Customs Union

In the less likely case that the UK joins the EEA, relatively few barriers to trade would be created as access to the single market would remain intact. That is, with the exception of agriculture and fisheries sectors as the EEA does not participate in the common agriculture and fisheries policies (CAP and CFP). Trade in certain products of these industries could thus be subject to trade barriers. And, because EEA members are outside the Customs Union, border controls and customs procedures would be imposed. If the UK does remain a full member of the Customs Union, but not the single market, then goods travelling between the UK and the EU would not be subject to tariffs, but customs procedures could increase slightly. As already stated, however, that is not a likely outcome of the Brexit process.

Table 2: Trade effects of the different Brexit scenarios
Table 2: Trade effects of the different Brexit scenariosSource: Rabobank, Kalf en Prins (2017). Investing in Europe after Brexit, RaboResearch Economic Report
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Author(s)
Carlijn Prins
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 60033

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