How would post-Brexit trade deals actually work?

If the cap fits…. Brexiters pin hopes on Free Trade Agreements. REUTERS/Peter Nicholls

Let’s consider a scenario. On leaving the European Union, Britain will make a Free Trade Agreement with the EU, or trade with it under World Trade Organisation most-favoured-nation (MFN) rules. It will also regain its WTO seat and make trade deals with other countries to replace those it enjoys via the EU, with a particular focus on the Commonwealth. In this way sovereignty will be regained.

Of the various ways of leaving the EU, something like this “complete Brexit” is the preferred option of many campaigners, including Leave.EU and the UK Independence Party (UKIP). So, how realistic is it?

It might well be possible to enter into a Free Trade Agreement (FTA) with the EU. By definition this would not be single-market membership (now out of favour with those advocating Brexit because it entails free movement of labour). The terms of such an FTA are unknowable: they are not all the same and the posture the EU would take in negotiations is highly unpredictable.

Certainly it would require a qualified majority of the European Council and assent by the European parliament – precisely the bodies which those wanting to leave say are impossible to negotiate with satisfactorily even while belonging to them.

Thumbs up at the European Parliament. European Parliament, CC BY-NC-ND

Moreover, such deals take time. The EU-Singapore FTA was seven years in the making, while that with South Korea took four years. The deal with Canada, recently touted by leading Eurosceptic, David Davis, as a model for the UK, took five years. In the meantime, the highly uncertain environment would inevitably affect company investment and headquartering decisions. Why risk making an investment in the UK when you don’t know what its trading arrangements are going to be?

You get similar time frames for deals that don’t involve the EU; the Switzerland-China FTA took five years as well. It seems unlikely that the UK on its own could secure better terms than those negotiated by the EU collectively. But would they be signed at all? At the end of last year the leaders of both China and India visited the UK. As regards trade, these visits were predicated largely upon UK membership of the EU.

Glass half full? Xi Jinping and David Cameron share an awkward pint. Number 10/Flickr, CC BY-NC-ND

Chinese president, Xi Jinping – in a highly unusual intervention – made it clear that his country saw trade relations with the UK in terms of the EU, and urged against Brexit. Indian prime minister, Narendra Modi, was unambiguous in saying that he saw the UK as India’s “entry point into the EU”. How such countries would actually respond to Brexit remains to be seen, but it would be idle to assume that these comments were mere posturing. Modi’s statement also serves as a reminder that the notion that the Commonwealth would be the locus of a new trade bloc appears unrealistic (and, anyway, the benefits are unclear).

US and them

The biggest consumer of UK exports apart from the EU is the US – and one senior trade official, Michael Froman, has already indicated that the US has no interest in signing an FTA. He also raised an important concern that international trade deals are increasingly based not upon bilateral agreements between countries (sometimes called, disparagingly, the “spaghetti bowl” approach), but upon regional platforms and blocs such as the EU.

Michael Froman speaks at a World Bank event. World Bank Photo Collection/Flickr, CC BY-NC-ND

The most recent example is the completion of the Trans-Pacific Partnership (TPP) between the US, Japan, Australia and nine other Pacific Rim nations, signed this month. This shows that regional platforms are the name of the game, and the fact that five TPP signatories are Commonwealth members again suggests that such countries are no longer geared towards Britain. TTP has other implications for Brexit too.

First, TTP’s most controversial aspects relate not simply to free trade but to what are ineluctably political agreements about such things as labour rights, state ownership of industry and environmental standards. These agreements, made in secret negotiations, undermine the idea that by making trade deals outside the EU, British sovereignty is regained. In fact, their secrecy means that they lie outside of democratic scrutiny.

Of course the same criticisms have been made of the ongoing Transatlantic Trade and Investment Partnership (TTIP) negotiations between the US and the EU. It’s a fair criticism, but the point is that such things are not just an artefact of the EU and are not escaped by Brexit.

The second implication is that the growing dominance of regional platform deals doesn’t just reflect the fading out of the spaghetti bowl approach but also the inability of the WTO to function as a global rule maker, as the stalled Doha round shows. Anyway, it’s unlikely that, among 160 members, the UK could have more influence than the EU, as the WTO itself has said.

As for WTO most-favoured-nation status, its rules would mean that the UK’s trade with the EU would face tariffs on 90% of exports by value, including tariffs of, for example, 32% on wine imports and 9.8% on car imports. The MFN format does not mean free trade, which is why countries create FTAs rather than simply trading within the generic WTO framework.

It is hard to predict how full Brexit would play out, because this scale of multiple simultaneous renegotiations of global trade agreements is unprecedented – and no country has ever left the EU. It certainly can’t be assumed that Britain is bound to get quick and good deals because it is a large economy. Whether such an unpredictable outcome is worth risking will be a key debate in the UK’s EU referendum.