“Trade with the EU accounts for over 40 percent of total trade in goods and services. This emphasises the importance of the UK maintaining both open trading relations with the EU and of negotiating trade deals.”

A primary focus in the negotiations has been where the border between the UK and Eire was to be located: between NI and Eire (which would involve tariff and customs checks on trade between NI and Eire), or effectively in the Irish Sea, which would involve NI remaining in the EU customs area and customs checks on goods moving from GB to NI. The key issue was whether the UK as a whole or only NI would remain in the EU customs area. Teresa May’s deal involved the former while the deal negotiated by Boris Johnson involves the latter, with NI remaining in the EU customs area and removing the need for a hard border between NI and Eire so that trade can flow freely between them.

The complication in this arrangement was that there would be a border between NI and GB and two parts of the UK having different arrangements. If there were to be no such border there would be a potential for customs arbitrage: goods could flow freely between GB and NI and then on to Eire thereby avoiding EU custom barriers between GB and Eire (the EU). The compromise in the Withdrawal Agreement is that NI remains within the EU customs union but also in the “customs area” of the UK. This arrangement involves customs/regulatory checks on goods crossing from GB to NI with EU tariffs imposed on such trade unless the goods remain within the NI market. Furthermore, NI would impose UK tariffs on its imports from the rest of the world unless they are headed to Eire in which case EU tariffs would be applied. When imported goods stay within NI and the UK tariff is lower than the EU tariff, the UK tariff applies.

There is to be free trade and no customs checks on goods from NI to GB. This also has the potential for tariff arbitrage as if there is free trade between NI and GB and between NI and Eire, then EU goods could flow to Great Britain via Northern Ireland and escape UK tariffs.

No deal: WTO model

In the event of a no-deal (which some MPs and analysts have been strongly in favour of) the UK reverts to the default position of WTO rules and the Most Favoured Nation Clause. The UK would have the ability to set its own tariffs subject to ceilings imposed by the WTO. There would be no special access to services into the EU and exports to the EU would face the EU’s Common External Tariff (CET) and also a series of non-tariff barriers and customs checks. There would also be some regulatory barriers to free trade: firms exporting to the EU would be required to conform to some EU product standards. At the same time the UK would be able to reduce its own tariffs though in this case the Most Favoured Nation requirement would apply: any preferential tariff to any one country has to be applied to all countries. The UK would have no automatic access to EU trade deals with non-member states.

Regarding tariffs on imports from the EU, the Government would have a clear choice. If it aims at keeping prices of imports from the EU constant in the UK, it would not impose tariffs on imports from the EU. In this case, the zero-tariff regime would need to be applied to similar imports from all countries which would have the effect of lowering the prices in the UK of imports (especially some food products) from the rest of the world. This would be a competitive threat to UK producers. Conversely, if in order to avoid this potential threat to some UK industries the UK were to impose tariffs on imports from the EU, domestic prices of such imports would rise.

In effect, a choice would have to be made between the domestic sterling prices of EU imports and those from the rest of the world. Given that world food prices are generally lower than in the EU (because of the CET), this would lead to a possibly sharp rise in food imports which in turn would have a negative impact on British agriculture. The same argument applies to other imported goods (such as motor vehicles) where the CET imposes a significant tariff on imports.

Trade deals with rest of the world

Three types of trade deals will need to be negotiated: (1) with the EU itself, (2) with those countries with which the EU has negotiated trade deals, and (3) other countries. This will be a formidable task. However, some analysts have argued that the freedom to negotiate free trade agreements (FTAs) is one of the most important advantages to be derived from Brexit. A similar view has been taken by those MPs who have advocated a “no deal” Brexit.

There are several problems with this strategy not the least being that FTAs have usually taken several years to finalise. Most FTAs exclude services (which are particularly important for the UK) and in most cases only limited free trade is allowed for many agricultural products. The UK would also be negotiating alone and its bargaining position would clearly be weaker than that of the EU when negotiating trade deals. There is a global trend towards trade negotiations being conducted by trading blocs rather than single countries.

Negotiating partners are likely to impose what sometimes might be difficult conditions. For instance, the US farm lobby will press strongly for the UK to accept different standards for its imports of US farm products which are strongly resisted in the UK (eg chlorinated chickens). It is alleged that India, for example, would also press for less stringent immigration laws for their citizens wishing to live and work in the UK in return for an FTA.

The irony is that as the UK may need to adapt some regulations to satisfy negotiating countries and adherence to EU regulations (particularly product regulations) will continue to be a requirement for a trade deal with the EU, the result could be a net rise in regulation and trade being subject to divergent rules in different jurisdictions.

An important non-EU trading partner for the UK is the United States. This is likely to be a complex and contentious issue not the least because any trade deal is likely to depend in part on the nature of the deal the UK strikes with the EU. In particular, the issue of access by financial firms (notably US banks located in the financial centre of London) to EU markets will be a central issue. The US Commerce Secretary has warned that striking a deal with the EU that severely restricted UK access to EU financial markets after Brexit would weaken the chances of a successful trade agreement with the US. In general, the US is likely to prefer the UK to move away from EU regulation. In addition, the US has indicated that the UK should abandon EU food safety regulation. The US Congress (which must endorse trade treaties) will almost certainly insist on the UK accepting some agricultural products that do not conform to current UK standards. The problem of chlorinated chicken has become a symbolic cause célèbre. The US might also demand access to the UK health market.

Overall, it is impossible to envisage that any trade deal with third countries would be as free as the arrangements within the Single Market not the least because FTAs usually do not involve substantial reductions in non-tariff barriers which are generally excluded from WTO requirements. Furthermore, any advantages to be derived from independent negotiations with third countries are likely to be more than offset by the losses associated with exiting the EU Single Market and Customs Union.

It is not clear that in practice Brexit will free the UK from externally-imposed regulations: in many areas it will remain subject to EU regulation (with the difference that it will have no say in the regulatory process) and will have additional externally-imposed regulation through third party trade deals.

“Brexit involves important trade-offs between different economic and political objectives, and difficult choices will need to be made in the post-Brexit negotiations.”

Although some analysts and Members of Parliament have emphasised the importance of the UK being able to conduct its own trade negotiations with third parties, most empirical studies indicate that new FTAs add little to output. The government’s own analysis suggests that such trade deals would add only around 0.5 percent to GDP against its estimate of a substantial loss regarding the EU.

In the final analysis, Brexit involves important trade-offs between different economic and political objectives, and difficult choices will need to be made in the post-Brexit negotiations. We have emphasised that the ultimate economic impact of Brexit will depend critically upon the precise Brexit model adopted. Trade-offs will be involved most especially between the objectives of free trade and freedom for the UK to set its own regulations.