Brexit will fundamentally change the UK’s conditions of trade with the other 27 EU Member States, and with over 60 countries with which the EU has preferential trade agreements. Goods make up the bulk of the UK’s global trade, and accounted for around 60% of all UK exports to the EU, and almost 77% of total UK imports from the EU in 2015. The manufacturing and primary commodities sectors are important employers across the UK. The production of goods is also often closely intertwined with the provision of services, multiplying the importance of these sectors to the UK economy. Minimising disruption to trade between the UK and the EU-27 after Brexit is crucial to the UK’s future prosperity.
The Prime Minister, the Rt Hon Theresa May MP, set out her intention for the UK to leave the Single Market and the EU customs union in her speech on 17 January 2017. We acknowledge that the UK is in a unique position, as an EU Member State which is fully integrated into the Single Market. The Prime Minister’s approach may result in the introduction of both tariff and non-tariff barriers to trade in goods between the UK and the EU. This report considers the impact of trade under World Trade Organisation (WTO) terms, and under a potential free trade agreement (FTA), on six major manufacturing and primary commodities sectors: chemicals and pharmaceuticals, capital goods and machinery, food and beverages, oil and petroleum, automotive, and aerospace and defence.
In the absence of a FTA with the EU after Brexit, tariffs would apply. These would incur additional costs for many UK businesses. Their significance varies considerably between sectors: while tariffs are zero on civil aerospace parts (under WTO agreements), EU tariffs set at the WTO are 10% on cars and can be more than 200% on some agricultural products. Tariffs would be particularly damaging for sectors with a highly integrated EU supply chain, such as the automotive sector—tariffs could be levied multiple times in the production process. It is therefore of considerable importance that the Government seeks to eliminate tariff barriers in its planned “ambitious and comprehensive free trade agreement” with the EU.
Non-tariff barriers—such as rules of origin—would be more difficult to resolve. The Government’s stated intention to leave the Single Market and the EU customs union would mean that additional non-tariff barriers would apply to all the sectors considered in this report, whether the UK and EU negotiate a FTA after Brexit or trade on WTO terms. We conclude that compliance with rules of origin requirements would introduce a significant additional administrative burden, with a particularly negative impact on sectors with a highly integrated EU supply chain. Companies in these sectors might be unable to comply with the local content requirements contained in the EU’s preferential rules of origin.
We welcome the Government’s decision to preserve current EU regulations through the Great Repeal Bill. Divergence from the current common standards and regulations between the UK and the EU would also act as a significant non-tariff barrier to trade. A FTA that went some way to mitigating this non-tariff barrier would require a trade-off between the UK’s desire to make domestic laws, and its wish to pursue close trade relations with the EU. It would be likely to entail a legal obligation to maintain a high level of harmonisation or mutual recognition of standards with the EU, and might also require the UK to agree an oversight or arbitration mechanism with the EU.
There may be significant benefits in continuing UK participation in EU agencies, such as the European Medicines Agency (EMA) and the European Aviation Safety Agency (EASA). However, such participation could require some form of oversight and dispute resolution in the specific areas covered by these agencies. We recommend that the Government should clarify at an early stage its intentions towards future membership or co-operation with these agencies.
The UK’s proposed relationship with the EU, outside the customs union and Single Market, will also result in the introduction of a customs border between the UK and the EU-27. Customs procedures would result in delays and increased administration, which in turn would incur costs for businesses, and extra work for HM Revenue and Customs. The Prime Minister has proposed a new “customs agreement” to mitigate these costs. To our knowledge, no precedent exists for an agreement outside a customs union that entirely eliminates the need for customs checks and the additional burden of associated administration and costs. We are also concerned that the introduction of a new IT system for customs—planned for the year the UK leaves the EU—may further complicate the change of trading conditions for businesses around Brexit.
We remain of the view that the UK is unlikely to be able to maintain access to the EU’s preferential trade agreements with third countries, such as Switzerland and South Korea, after Brexit. The cessation of these preferential trade conditions is likely to result in significant tariff costs after Brexit, until such a time as the UK is able to conclude new FTAs. We welcome the Department for International Trade’s commitment to delivering continuity in this regard, and recommend that it should focus its efforts on those countries with which the EU already has preferential trade agreements.
The timetable for withdrawal negotiations under Article 50 is very tight, and we remain of the view that concluding a UK-EU FTA in that period is extremely ambitious. If the UK and the EU fail to agree a FTA within the two years set out by Article 50—and unless this period is extended by the unanimous agreement of the EU-27—WTO rules would apply to trade between the UK and the EU. This can only be avoided by negotiating a transitional agreement with the EU. It is unclear whether the Prime Minister’s proposed “phased process of implementation” of the new deal would fulfil this purpose. A transitional arrangement will be crucial for UK businesses, the decisions of foreign investors, and the stability of the sterling exchange rate. We urge the Government to give serious consideration to a transitional agreement, as it begins its negotiations.
1 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, p 35: [accessed 13 February 2017]
3 Theresa May MP, Speech on the government’s negotiating objectives for exiting the EU, 17 January 2017: [accessed 13 February 2017]