How difficult would it be for post-Brexit UK to replace existing EU trade agreements?
Claims have been made that post-Brexit UK would face near insurmountable, difficulties having to renegotiate the EU extra-Europe trade agreements from which it currently benefits, but the evidence suggests that the problem for post-Brexit Britain would be far more manageable than many have suggested.
The Financial Times, the CBI and many others have argued that it would be an arduous, problematic and lengthy process for the UK to conclude alternative trade deals to replace those that the EU has negotiated over 42 years with 55 countries around the world. In part this is because there are so many, in part because the UK alone does not have the ‘clout’, ‘heft’ or ‘negotiating leverage’ of the European Commission to persuade these countries to open negotiations, and also because it does not have people with appropriate skills to conduct such negotiations.
However, the task that post-Brexit, newly-independent UK would face can only be accurately assessed after documenting the number and scale of the EU trade agreements, both for goods and services, with other foreign countries which are currently in force. The FT and CBI declined to do this, but this paper will do so.
The 33 EU trade agreements in goods that the EU has negotiated with 55 foreign countries are listed in the following table, excluding those with the EEA, Switzerland and 14 Overseas Territories & Countries linked to EU members.
With these figures we can see the problems that would face post-Brexit UK goods exporters more precisely than has been attempted thus far. The table is presented in seven columns for which we provide comment. The shaded rows indicate partner countries with which the UK runs a trade deficit.
The GDP of each partner country in 2014 (Column 2)
The data shows that the majority of EU trade agreements have been with small partner countries. The EU may be a heavyweight in GDP terms, but until TTIP it has preferred to negotiate, in the main, with flyweights. The average GDP accessed by each trade agreement is $191.1bn, whereas that of Switzerland’s partners is more than four times larger (at $893.2bn), of Chile’s 15 times larger (at $2964.7bn), of Singapore’s 18 times larger at ($3597.4bn) and Korea’s partners 23 times larger than that of the EU’s partners (at $4396.46bn).
The largest economy with which the European Commission has concluded an agreement is Korea, which in 2014 had a GDP of $1.41tn, slightly less than that of Australia, slightly more than that of Spain, and around half that of the UK.
The value of UK goods exported to each partner country (Columns 3 and 4)
Column 3 shows the sum total of all UK exports to all 55 of the countries covered by the EU’s 33 agreements was $30.7 billion in 2014 which Column 4 shows accounts for only 6 per cent of the total world exports of UK goods in 2014, which had a value of $511.1bn
The percentage of non-agricultural goods admitted duty free and the average WTO tariff on non-agricultural goods that are not duty free (Columns 5 and 6)
The WTO Tariff Profiles show that the proportion of EU non-agricultural goods exported tariff-free into each of these countries is nearly always 100 per cent, as a result of its agreements, and for that reason it is not listed separately in the table. What column 5 shows is the proportion of goods for every country designated a MFN (most favoured nation), which is virtually all countries with which they trade without an agreement. A post-Brexit UK would fall into this category if it took no steps to negotiate new agreements.
If we take the first line as an example, we may see that 57 per cent of non-agricultural goods exported to Albania are duty free, but 43 percent would face a tariff of, on average, 3.1 per cent. Taking only countries to which more than one percent of UK exports go: 83 per cent of UK exports to Korea would face an average tariff of 3.7 per cent, and 75 per cent of UK exports to Turkey would face a tariff of 3.5 per cent. The weighted mean of all 33 countries is almost exactly a third (33.2%) meaning on average one third of UK exports to these countries would be tariff free, and two thirds subject to a tariff of, on average, five per cent.
The estimated value of UK exports subject to a tariff post-Brexit (Column 7)
Since Column 3 shows the total value of UK exports to each country, Column 5 shows the proportion of non-agricultural goods on which each country levies a tariff, and column 6 shows the average value of that tariff, it is not difficult to calculate the actual value of UK goods exports to each of the 55 countries that would have been be subject to a tariff. As such Column 7 provides an estimate of the value of UK exports which would be subject to a tariff, based on the hypothetical that Brexit had occurred in 2013, and the UK had not negotiated an agreement.
The sum total for all 55 countries is $20.51 billion, which means that almost exactly two thirds of UK goods exports to these 55 countries, which amount to 4.02 per cent of total UK goods exports, would face a tariff of, on average, 5 per cent, if the post-Brexit UK government does not negotiate any new agreements.
There are six tougher cases where it can be seen they would face a tariff of 10 per cent of more: Cameroon, CARIFORUM, Egypt, Fiji, Syria, and Tunisia. They are in bold on the table. Together they constituted, in 2014, 0.69% of total UK goods exports, though slightly less, of course, if we subtract the average proportion of their goods imports which are duty free.
Services trade agreements
A similar analysis can be conducted for UK services exports, though since the European Commission has been much less successful in concluding services trade agreements, we are dealing with only 15 agreements, covering 33 countries, this excludes the EEA countries. These agreements ease regulatory non-tariff barriers rather than tariffs.
The 15 agreements currently in force are listed in Table 47.2, as before with the GDP in 2014 of the partner country, followed by the value of UK services exports to that country in 2014, which, in the final column, is expressed as a proportion of total UK services exports in that year.
As may be seen at the bottom of the final column, all the EU service agreements currently in force cover just 1.8 per cent of all UK services exports, an even smaller coverage than that of the EU goods agreements.
Conclusion 1: On small markets and tolerable tariffs
First, the argument that post-Brexit UK would find it an arduous, decade-long task to replace the EU trade agreements from which it currently benefits is surely wildly exaggerated. These EU agreements cover only a small proportion of UK exports: 7.3 percent of all UK goods exports and 1.8 per cent of all UK services exports in 2014. Moreover, about one third of non-agricultural goods exports to these countries are tariff free. If we assume British exports to these countries do not depart from the average distribution of their imports by which the tariff is weighted, it would mean that, in 2014, $20.1bn or 4.1 per cent of UK total exports would face, on average, a 5 percent tariff in these 55 countries.
Supporters of continued membership, like the CBI and the Financial Times (FT), have for years been exaggerating the efficacy of the EU’s ‘clout’ and ‘negotiating leverage’ when negotiating trade agreements and therefore also exaggerating the difficulties of replacing the agreements it has managed to conclude. According to the CBI, the post-Brexit UK government, would face ‘uncertainty and dislocation’, ‘would first have to build up national capacity’, might find other countries ‘unwilling to negotiate’, and would lack the clout to conclude agreements.
One of its former director-generals, who is also an ex-editor of the FT, Sir Richard Lambert, emphasized what he considered ‘a vital point’ by claiming that ‘according to CBI data the EU has negotiated trade agreements that cover around 30 per cent of trade outside the EU area’, which would amount, if it were true, to exports of around $80 billion. On Feb 22nd 2016, the FT argued that post-independence ‘the UK would have to negotiate agreements with non-EU countries including the US, China, India, Japan and Australia. This would be a matter of urgency (since) ….sales to and from 60 other countries are governed by agreements struck with the (EU) bloc.’
The WTO/UN statistics presented above are more credible than those of the CBI. They indicate that it would be rather more simple to negotiate agreements than the CBI or the FT pretend, and it would hardly be devastating blow even if the post-Brexit UK government decided to do absolutely nothing. There would be an average 5 per cent tariff on 4.1 per cent of UK exports. No doubt there would be some tough cases, in particular to the six countries mentioned above. However, five of them, as may be seen from the table, happen to have a trade surplus with the UK which they would no doubt wish to preserve, and therefore would be pleased to negotiate to do so. Exporters to all the other countries would face an average tariff of less than 5 per cent. In March 2016, the value of the pound sterling fluctuated by more than 5 per cent.
Even if the UK was determined to replace all the EU goods agreements, it would only require amendments to the existing agreements with Korea, Turkey and South Africa, which together now take 3.32 percent of UK goods exports, and that new agreements be negotiated with, say, Hong Kong (2.6 percent) and United Arab Emirates (2.06 percent), and these would more than compensate for the potential loss from tariffs on 4.1 per cent of UK goods exports.
If none of these work out, there are of course numerous other options including Australia, Singapore, New Zealand and other countries with which the European Commission has been unable to strike a deal, often for reasons that have nothing whatever to do with the UK. The FT chose to mention the US, China and India, even though these are all countries with which the Commission has not yet managed to conclude an agreement, presumably so that it could exaggerate the daunting task that would face post-Brexit Britain. The reality is far less worrisome, and full of incidental opportunities to extend the coverage of freer trade given the inadequacies of so many EU trade agreements, which is the great promise of Brexit.
To replace the services agreements would be simpler still. Switzerland currently takes 5.74 per cent of all UK services exports, so an agreement with Switzerland alone would mean that post-Brexit Britain would more than double the coverage of all the service trade agreements that the EU has been able to obtain over the past forty-two years. Given the very limited coverage of EU services trade agreements, there are once again considerable opportunities for post-Brexit Britain to extend the very poor coverage of EU agreements that facilitate services exports.
Conclusion 2: On negotiators and partners
The idea that the UK currently lacks the negotiating expertise to do this seems to be another example of EU enthusiasts thinking that to make a case for EU membership they have to belittle Britain’s resources and capabilities.
First, one might ask how it is that Chile, Korea, Singapore and Switzerland have been able, to find the skills that the UK lacks to secure far more trade agreement partners, in both goods and services, than the EU, and partners with far larger economies.
Second, one might first ask how a country, like the UK, that trades globally in both goods and services, largely with countries with which the EU has no trade agreement, could conduct that trade, especially the services trade, without having a considerable cadre of experts in negotiating terms and conditions, and anticipating and handling problems. Moreover, when the Commission is negotiating agreements it normally makes use of external consultants, some of which are UK based, such as LSE, and the University of Manchester. There is no reason why post-Brexit UK trade negotiators, should not, if need be, use consultants in the same manner whether from the UK or elsewhere.
Third, the tables above show that with most of the partner countries the UK runs a trade deficit in goods. Is it likely that countries running a surplus in their trade with the UK would decline to negotiate with post-Brexit UK to enable that trade to continue without interruption. Mexico has already indicated that it would not.
Conclusion 3: On ‘clout’ and ‘negotiating muscle’ important?
Overall, the claim that ‘the negotiating muscle’ of the EU (to use Mr Cameron’s phrase) has brought substantial gains for the UK exporters in trade agreements which the UK could not replicate is not supported by this, or any other, data. Over the past 42 years EC negotiators have mainly concluded agreements with small countries, which have therefore affected only a small proportion of UK exports. Any benefits they may have brought to UK exporters must have been correspondingly small.
It is a pity that neither the Commission, nor the UK government, nor the CBI and the Financial Times, have ever sought to measure these benefits before talking about them. What the UK currently lacks is not experts to conduct negotiations, nor clout to conclude them, but research to inform policy-making and public opinion on trade issues.
Note: HM Treasury’s take on the EU trade agreements analysed above
In 2016 a Treasury report on the economic impact of EU membership outlined what the UK government sees as the benefits of EU membership in negotiating trade deals with the rest of the world.
Membership of the EU also facilitates trade through the EU’s negotiation of trade deals with the rest of the world. With an economic weight 5 times the size of the UK, the EU is able to negotiate access to global markets through multilateral trade agreements and, increasingly, bilateral agreements with other countries.
Through these trade agreements, the UK currently has preferential access to markets covering around a third of the world economy.
If the UK left the EU it would no longer have the right to benefit from the EU’s Free Trade Agreements (FTAs) with third countries. While these FTAs fall short of the Single Market in terms of breadth and depth, they are some of the most advanced in the world. Just to maintain what the UK enjoys through the EU, would mean renegotiating new trade arrangements with the EU and over 50 other countries around the world, while commencing trade negotiations with a further 67. There is significant uncertainty about how long this would take and how much access the UK could achieve, as the UK’s ability to negotiate beneficial deals as part of a large bloc would no longer exist.
 Sir Richard Lambert ‘The UK and the new face of Europe’ Gresham College lecture, 6 June 2013
 There are not quite as many UK deficits as the table suggests since 9 of the 14 Cariforum countries, 2 of the 6 Central American countries, and 1 of the 4 Eastern and Southern African states had deficits on their UK trade. In the services agreements, and the UK ran a trade surplus with 7 of the 14 Cariforum countries.
 pp.44, 45, 85, HM Treasury analysis: the long-term economic impact of EU membership and the alternatives, HM Government, April 2016