EU-negotiated agreements with third countries: the Brexit problem

At 11 pm on 31 January 2020, the UK is set to leave the EU. The transition period means that, for most purposes, relatively little will change immediately. However, the UK may lose the benefit of certain agreements that the EU has negotiated with third countries, notably on trade. In this briefing, we explain which territories are affected and how significant the impact is likely to be.

This article was amended on 4 February 2020 to reflect changes in the position regarding trade with Canada (see further below).

To roll over or not to roll over, that is the question

The Withdrawal Agreement requires the UK to honour its obligations under international agreements negotiated by the EU. However, the non-EU parties to those agreements may not be obliged to reciprocate. This means that, with effect from 1 February, Canada, for example, may raise tariffs on UK exports to the levels it normally applies to other WTO member countries – whereas exports from the remaining EU member states to Canada will continue to benefit from the preferential rates in the Canada-EU Free Trade Agreement (CETA).

We have chosen Canada as the example here because the UK has not managed to persuade Canada to formally "roll over" its trade agreement with the EU into the transition period – although it has managed to negotiate "roll overs" with a significant number of other countries with which the EU also has trade agreements (see below). It is possible that Canada - and other countries where no formal "roll over" has been agreed - could still agree to a request from the EU to continue to treat the UK as if it were a Member State of the EU during the transition. But it is not clear that they could be obliged to do so.

AVIATION AGREEMENTS

EU-negotiated aviation agreements had the potential to raise similar issues but over the course of 2018-2019, the UK has managed to put bilateral agreements in place with almost all the countries where it stood to lose rights as a result of leaving the EU (these included the US, Canada, Switzerland and Norway).

Which territories are affected?

In relation to trade agreements, the UK has managed to agree "roll overs" with countries including South Korea, Norway, Switzerland, Chile, Georgia, Colombia, Peru, Ecuador, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Israel, Jordan, Morocco, South Africa, Mozambique, Namibia, Botswana and Tunisia. But at the time of writing, the UK did not appear to have concluded "roll overs" with the countries listed below – which means that UK exports to those countries may face increased tariffs or other barriers to trade:

No "roll over" agreed

According to the UK government, as at December 2019, no "roll over" of EU-negotiated trade agreements had been agreed with: Albania, Algeria, Andorra, San Marino, Bosnia & Herzegovina, Cameroon, Canada, Cote d'Ivoire, Egypt, Ghana, Japan, Kenya, Mexico, Moldova, Montenegro, North Macedonia, Serbia, Turkey and Ukraine.

In addition to trade agreements, the UK currently benefits from a number of EU-negotiated customs/trade facilitation agreements. According to the UK government, as at December 2019, no "roll over" had been agreed with: Canada, India, South Korea and the US.

In all these cases, discussions are described as "ongoing".

How big is the impact?

The first point to note is that the problem only affects UK exports to the affected territory. UK businesses that import from any of the countries listed above will continue to benefit from preferential terms negotiated by the EU during the transition (whether or not a "roll over" has been agreed). For example, even though UK exports to Canada may face higher tariffs (owing to the lack of a "roll over"), Canadian goods imported into the UK will continue to benefit from the lower tariffs in CETA and from the terms of any preferential customs treatment. This is because the UK is obliged by the Withdrawal Agreement to honour the terms of CETA and any other EU-negotiated agreements during the transition (even though Canada does not appear to have reciprocated by formally agreeing to roll over the terms of CETA for the benefit of the UK into the transition).

The second point to note is that, according to the UK Department for International Trade, the countries listed in the first paragraph of the "No roll over agreed" box above only accounted for about 6.3% of total UK trade in 2018. Just because the terms of the relevant EU-negotiated trade agreement will not apply during the transition, that doesn't mean all UK exports to those countries will suddenly stop. Indeed, in some cases, factors like the fall in the value of the pound may effectively cancel out the impact of any increase in tariffs or other adverse consequences. In addition, where the relevant free trade agreement is relatively new, such as those relating to Canada or Japan, businesses may not yet be taking full advantage of the preferential terms (so the proportion of trade affected will be lower). All this means that the overall loss to "UK plc" from the failure to roll over these agreements is likely to be a fraction of that 6.3%.

Similarly, a failure to roll over customs/trade facilitation agreements does not mean that trade with those territories will grind to a halt – although it may mean that more onerous procedures apply, potentially leading to extra cost and delays for UK exporters.

Impact on individual businesses

However, for businesses that have significant customers in some of the affected territories, the probable lack of a significant "big picture" impact may not provide much comfort. Less developed countries in particular tend to have quite high tariffs for certain products. In such cases, the loss of the benefit of EU-negotiated trade agreements is likely to be much more keenly felt, as UK exports will become substantially less competitive, especially vis-à-vis any EU-based competitors. Similarly, in the case of Japan and Canada, UK businesses hoping to make inroads in those markets will find that they are at a disadvantage vis-à-vis their EU-based competitors, who will face fewer barriers to trade.

It is also worth noting that even where a "roll over" has been agreed, this does not necessarily mean that everything will stay exactly the same. Take the example of a UK business which supplies components to an EU customer. That EU business then exports the finished product to South Korea. In order to benefit from lower tariffs under the EU-South Korea trade agreement, the EU business must demonstrate that a certain percentage of its product originates from the EU. Once the UK is no longer in the EU, UK components cannot count towards that percentage – which may prompt the EU business to switch to an alternative component supplier based in the EU.

I'm not directly affected: why should I care?

Many businesses will not be directly affected by these issues. But if you regularly deal with businesses which export to some of the territories listed above in the "No roll over agreed" box, you could find that they decide to buy less from you – or decide to put new initiatives on hold because of uncertainty over overseas orders. More generally, these issues may just be a foretaste of the problems to come if the UK fails to preserve much of the preferential access it currently enjoys to markets which are a great deal closer to home – in the EU.

UPDATE: On 31 January 2020, Canada confirmed that it would accede to the EU's request to continue to treat the UK as if it were still an EU Member State during the transition. This means that UK exports can continue to benefit from CETA during the transition. However, the following points are of note:

It remains the case that no "roll over" of CETA has been agreed, which means that UK exports to Canada will no longer be able to benefit from preferential treatment at the end of the transition. This may cause some Canadian customers to decide that it is preferable to contract with EU suppliers, as there is greater certainty that those exporters will continue to benefit from CETA's provisions over the longer term.
The last minute nature of Canada's confirmation may be a foretaste of the position that businesses will be in towards the end of the negotiations over the UK-EU future relationship. The timetable for those talks is extremely tight, which means that businesses may not have certainty over their future trading terms until very late in the day. As noted in the previous bullet point, this puts UK exporters at a disadvantage vis-à-vis their competitors.

Finally, at the time of updating, we had not been able to find a comprehensive list of other countries which have publicly confirmed their agreement to the EU's request to continue to treat the UK as if were still an EU Member State for the purposes of EU-negotiated trade agreements during the transition. The UK government's advice is that public confirmation (as in the case of Canada) is "not a precondition for continuity provided a third country intends the UK to be covered and acts accordingly".

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