One of the main impacts of the UK exiting the European Union is that the country is no longer part of any trade agreements negotiated by the bloc on behalf of its members.
Ferret Fact Service looked at what that means for UK trade and how it may impact on businesses and consumers.
What is a trade agreement?
Trade agreements are deals put in place between countries or groups of countries, so that mainly goods, but also services, can be sold across their borders more cheaply.
This is achieved by eliminating tariffs – the taxes that governments impose when goods are imported into their country – and removing quotas that limit the amount of any particular item that can be brought in for commercial purposes.
The EU has four main types of trade agreements:
- Economic Partnership Agreements support the development of trade between the EU and African, Caribbean and Pacific countries. They are reciprocal but asymmetrical, with the benefits weighted towards the less-developed nations.
- Free Trade Agreements eradicate trade restrictions on a fully reciprocal basis. While some exceptions can apply, the aim is to remove as many trade barriers as possible.
- Association Agreements create privileged links between the EU and non-EU countries that focus on areas of specific mutual interest such as defence or environmental protection.
- Partnership and Cooperation Agreements see the EU provide support to non-EU countries that are attempting to build free-market economies.
How have the UK’s trading arrangements with the EU changed?
After protracted negotiations involving European Commission President, Ursula von der Leyen, and UK Prime Minister, Boris Johnson, the EU-UK Trade and Cooperation Agreement was signed on Christmas Eve 2020. A free trade agreement was signed as part of that.
Under the terms of the free trade agreement no tariffs or quotas will be applied to goods moving between the UK and the EU, as was the case when the UK was a member of the bloc.
However, as a formal border now exists between the UK and the European bloc, customs declarations must be completed for goods entering the EU from the UK and vice-versa.
Are we going to have to pay more for certain goods?
Although the free trade agreement stipulates that no tariffs will be applied on goods moving between the UK and the EU, the fact the UK now has a border with the EU means there will be other charges such as VAT and import taxes.
Anyone buying directly from European retailers – or receiving a gift from someone living in Europe – could be liable for these charges, which couriers such as Royal Mail are required to collect before handing over the relevant parcel. On its website, Royal Mail says the charges become due on gifts worth over £39 and goods valued at over £135.
UK customers have already been hit with charges and delivery companies are starting to introduce additional handling fees to cover the extra costs they are now incurring at the border. Royal Mail, for example, is charging an £8 fee.
European customers buying from UK retailers have also reported receiving unexpected VAT and customs bills when receiving their goods.
The wording on zero tariffs in the free trade agreement is also qualified with the statement that the goods must “comply with the appropriate rules of origin”. According to the European Commission, ‘origin’ relates to the ‘economic nationality’ of goods – in other words, where they were produced or manufactured and not where they were shipped from.
UK retailers with stores in the EU have complained that this is causing confusion over whether tariffs will actually apply. Clothes manufactured in Bangladesh, for example, can enter the UK tariff-free through an existing preferential-trade agreement, but if they are re-exported to the EU a tariff is likely to apply.
The same rule applies for goods coming to the UK from the EU.
The same rules also apply to foodstuffs. Anything shipped to the UK from the EU then back to the EU – for example, French cheese shipped to a UK supermarket’s distribution centre before being transported on to its stores in Ireland – would incur tariffs.
One potential solution could be for UK businesses to establish bonded warehouses in the EU or EU businesses to do the same here.
At this stage it is unclear what the implications of any of this could be for UK consumers, though it is possible that any increased costs incurred by retailers will be passed on to customers at some point.
How many trade agreements has the UK signed off?
Former international trade secretary Liam Fox promised in 2017 that the UK would seal 40 free trade deals with other non-EU countries the minute it formally left the union in 2019. He also said that the UK’s post-Brexit trade deal with the EU would be “one of the easiest in human history” to strike.
Prior to the Brexit transition period ending on December 30 last year, the UK government signed roll-over trade agreements with 60 countries. These replicate the deals already agreed with the EU so there should be no difference in trading relations with these countries.
The UK signed a free trade agreement with Japan in October last year – its first as an independent trading nation and the first not to replicate an agreement already struck by the EU.
Japan has pledged to support the UK in applying to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam that came into force in 2018.
In December, the government sealed a further deal with Turkey. It said the relationship had been worth £18.6bn the previous year.
What about trade with countries the UK has not done a deal with?
Had the UK not agreed a trade deal with the EU, the trading relationship between the two would have been conducted on World Trade Organization (WTO) terms, the default rules for countries with no other agreement in place.
Under WTO rules trade tariffs automatically apply. These vary from country to country and depending on the type of goods they are being applied to. But the rules state that WTO members must charge all other members with which they do not have a free trade agreement the exact same tariff.
It is possible to negotiate mini-deals that focus on specific areas of trade, such as certain foodstuffs or banking services. But, as with all other trade arrangements, these can take a significant amount of time to work out.
The UK has agreed deals with Canada, Jordan and Mexico, although these have not yet come into effect.
For Canada and Mexico preferential terms are being applied in the meantime, while imports from Jordan are being dealt with under the UK’s newly launched Generalised Scheme of Preferences (GSK) scheme, a framework based on the EU’s own GSK that gives preferential treatment to developing nations.
UK exports to Jordan are being dealt with under WTO terms.
Further deals are currently under discussion with Albania, Algeria, Bosnia and Herzegovina, Ghana, Montenegro and Serbia. As these were not agreed prior to the transition period coming to an end, barriers including trade tariffs will apply in the meantime.
Will the UK now have to accept poorer quality goods?
Probably not. The vast majority of the deals already done are on the exact same terms as those negotiated by the EU, so there will be no change to the way goods are traded between the UK and those countries.
For those countries where the UK has not yet sealed a deal trade barriers remain, making it unlikely that their products will enter the UK market at any kind of scale.
What about the mooted UK-US trade deal?
In terms of the US, the UK currently trades with the superpower under WTO rules, as was the case when the country was still part of the EU.
The EU and US have a number of bilateral trade agreements in place, which reduce or eliminate tariffs on products such as frozen lobsters and cigarette lighters.
While these no longer apply to the UK, the UK and US have signed a number of mutual recognition agreements that mirror those already agreed with the EU.
A UK-US Free Trade Agreement has been under negotiation for some time, with the US pushing for the inclusion of products such as chlorinated chicken, antibiotic meat and genetically modified foods that are banned from entering the EU.
That deal has not been agreed, however, meaning existing tariffs and other trade barriers will continue to prevent American products from flooding the UK market.
Former US President Donald Trump’s administration had reportedly begun negotiating a mini-trade deal with the UK at the end of last year in a bid to solve a trade war that has severely impacted on exports of Scotch whisky to the US and American whiskey to the UK.
That deal was not ultimately struck ahead of Trump’s departure from the White House in January 2021.
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