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Brexit and international trade

BREXIT – the exit of the United Kingdom (UK) from the EU – may be the largest legal project in history–the moon landing of legal projects, of enormous complexity, with every question raising another question to be answered. Much of the legal aspects of BREXIT are primarily a matter of United Kingdom internal law, or the relationship to be negotiated between the United Kingdom and the European Union (EU) which, for the moment, I will not consider "international trade" (although it may turn out that way). That leaves two aspects which are clearly about international trade: the relationship of the United Kingdom to the World Trade Organization ("WTO"), and the relation of the United Kingdom to countries other than the EU.

First a few words about the current state of BREXIT, in June 2016, the UK, in a referendum, voted 52-48 to leave the EU, which it had joined in a process beginning in 1973. The governing EU law, referred to as the Treaty of Lisbon, contains a provision for a member leaving, Article 50. Under Article 50, the United Kingdom will have to formally notify the EU of its intention to leave. That notification kicks off a 2-year negotiation on the terms of departure, extendable by the agreement of all the parties (which, in practice may mean as many as 28 European governments, more if you count different regional bodies with possible veto rights, such as in Belgium).

During that 2-year period, the United Kingdom remains a full member of the EU (although that causes certain practical difficulties (the UK has already announced that it will not take its expected turn as the Presidency of the EU in 2017), and thus, according to other provisions of the Lisbon Treaty, the UK cannot negotiate or complete individual trade agreements on its own with non-EU parties.

The UK and the WTO post-BREXIT

The United Kingdom was a founding member of GATT and of WTO. But, as a member of the EU, the UK has taken on all the rights and obligations of the EU as whole. Once the UK leaves the EU, two or more years after invoking Article 50, the UK presumably remains bound by those same obligations, although that is not certain. Even if it's true, it is not that simple. For example, much of the "instant literature" about BREXIT states that it would be quite simple for the UK to take on board the EU tariff schedules. But this assumes that all the tariffs on the EU's WTO tariff schedules are ad valorem. That is not the case, and some are specific tariffs (for example, oranges, tariff item, item numbers 0851016 to 1066, varying 6 times a year). What conversion rates from Euros to pounds sterling is the correct conversion rate to maintain the balance of the negotiations that originally set the tariff (1994, pre-Euro)? Similarly, staying on the agriculture side, the EU has tariff-rate quotas on imports of numerous products. How will those TRQ's be split up between the EU and the UK? It was quite possible that there are TRQ's where the original TRQ negotiated by the EU was intended mainly–or not at all–to be consumed in the UK (Vegemite, for homesick Australians, for example, if by chance that is subject to TRQ). So, dividing up those TRQs requires quite a negotiation both for the UK and for the EU with other WTO members, and possibly each other (if trade between the UK and EU will have such TRQs). And still, within the agriculture sphere, what about the negotiated limits on permissible EU agricultural subsidies? How are those split up, and which exchange rate maintains the appropriate balance? And that does not even begin to scratch the surface of the complexity of converting the European Union's commitments on services under GATS into separate sets of commitments for the UK and the EU, and possibly between each other. And on, and on. Services, especially financial services, are the most important feature of the UK economy, of course, and that is precisely where the UK-WTO Members, UK-EU, and UK-other country negotiations will have to focus.

It must be noted, at least in theory, that any level in the EU WTO schedules–the product initially of an intense negotiation within the EU–is unlikely to be optimal for each individual EU member on that specific item

Finally, of course, is the mundane business of splitting up, such as compensation for property owned by the EU. For example, buildings leased or owned by the EU, as was very much the case with the breakup of the former Soviet Union.

UK Trade Negotiations with Other Countries

Mechanically, the UK must now renegotiate–or negotiate for the first time–its trade relations with all other countries. Of course, the UK can simply let those relationships be governed by WTO rules, as described above, but that seems highly unlikely in a word of the rapidly increasing number of regional trade agreements (RTAs). Indeed, some claim that the UK is now in a position to negotiate optimal trade agreements, since all the prior EUU agreements were, inevitably, compromises, and likely suboptimal for each individual member. Already there are claims that the United Kingdom will become a low tariff, light regulation, low tax country which will thrive for those very reasons. Logically, the U.K.'s trading partners will be quite happy to have the U.K. apply (either unilaterally or through negotiation) lower or zero tariffs and other trade barriers rather than under existing EU trade agreements. That, of course, presumably would give the U.K. some leverage for improving its market access vis-à-vis its prior situation under EU trade agreements. All of this first requires an internal UK consensus. For example, will British landowners allow the Conservative Party to eliminate all protection and support for agriculture?

As mentioned earlier there may be legal constraints on the ability of the UK to negotiate FTA's with non-EU trading partners–indeed, it is not clear legally whether the UK and EU can negotiate its own trade agreement until after the formal BREXIT more than 2 years after March 2017, when Prime Minister May intends to invoke Article 50 (assuming the Supreme Court does not require prior agreement by the Parliament to invoke Article 50–and indeed, in the true spirit of BREXIT, there are further questions about what agreements need to be made in advance with the Scottish Parliament, and the extremely tricky question of Northern Ireland.) Even beyond that possible legal constraint, in practice it is possible that it may be difficult to negotiate FTA's with other countries until the UK-WTO negotiations have been completed with those very same countries, as well as other trading partners (most FTA negotiators start with WTO to avoid paying for what they already have). All of these uncertainties do not discourage long-held dreams of, for example, a US-UK FTA, although the Obama Administration has gone out of its way to make clear that its preference would be to negotiate TTIP with the EU first. Of course, it remains to be seen what the position of the Trump Administration will be.

Finally, all of this occurs against a background of opposition to new trade agreements, symbolized in part by the BREXIT vote itself. That said, despite claims by some very respected thinkers that "the era of new trade agreements is over," that may be true for some US and E.U. politicians, but it will certainly not be true for the current Conservative government of the UK, much less the Asian countries busy negotiating FTA's among themselves without regard to what US and European observers might assume. It is wise to end here at the beginning where we started–all of this is somewhat speculative, but already the outlines of BREXIT are becoming slightly clearer, which leads almost inevitably to a new series of FTA negotiations for the UK.