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A public policy blog from AEI
The United States, Canada, Australia, New Zealand, and many other countries have a real stake in the final outcome of the current negotiations over Britain’s exit from the European Union. One area of considerable interest is the potential structure of subsequent bilateral and multilateral trade relationships for agricultural and processed food commodities. Since the UK joined the European Economic Community in 1973, Britain has continued to import over 50% of the food that its citizens consume. Where those imports will come from depends on the UK’s post-Brexit trade relationships with the rest of the world.
As we discuss in our new research paper, the UK effectively has five major options for post-Brexit trade relationships with other countries. These include trade agreements based on the EU’s current arrangements with Norway, Switzerland, Turkey, and Canada, which differ from each other in important ways. Alternatively, the UK could simply opt to trade with other countries under existing World Trade Organization (WTO) rules and develop bilateral or multilateral agreements with countries like the United States, Canada, New Zealand, and Australia within the WTO framework.
Recently, several British politicians, including Prime Minister Theresa May and Brexit Secretary David Davis, have sought to rule out membership in the EU single market, the Norwegian approach, and a customs union arrangement along the lines of Turkey’s current agreement with the EU. Vetoing either of these options could create significant challenges for Britain’s agricultural and food processing sectors as the EU is a major market for many agricultural and processed food and beverage commodities produced in the UK (after all, scotch whiskey is an important UK export).
However, were the UK to access the EU single market through a Turkey-style customs union agreement, the UK would not be able to sign independent trade agreements with other potential trading partners, which are lower cost sources for many agricultural commodities. The UK would also have to accept EU regulations and directives for all commodities traded within the single market and apply EU common external tariffs to UK imports from other countries. Further, although countries covered under trade agreements with the EU would enjoy preferential access to UK markets, the UK would have to sign separate trade agreements to gain preferential access to those markets.
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Like Norway, if the UK leaves the EU but remains part of the European Economic Area, the UK would be free to negotiate separate trade agreements, which could potentially lower trade barriers for non-EU countries. However, the UK would likely have to permit free movement of labor between the EU member countries and the UK and contribute to the EU budget. Currently, on a per capita basis, Norway is required to contribute 83% of the current UK payments to the EU budget. Switzerland, which has more limited access to the EU single market, also contributes 40% of the current UK per capita contributions.
If the UK decides to terminate its current EU customs union and single market membership, a strategy will be needed to establish new relationships with EU and non-EU trading partners. Under the current transition agreement, the UK is free to negotiate trade agreements with non-EU countries that could take effect as early as January 1, 2021.
Carrying such a broad array of negotiations represents a potentially Herculean task since the UK trades goods and services with more than 160 countries. However, in addition to the EU, the United States, Canada, Australia, and New Zealand have already expressed interest in signing bilateral or multilateral trade agreements with the UK. Agreements with these four countries and the EU would cover more than three-fourths of the UK’s current agricultural trade.
Finally, the UK has the additional option of signing trade agreements with several trade blocs, including ASEAN and Mercosur, and joining the Trans-Pacific Partnership. These relationships would enable the UK to find cheaper sources of agricultural and food imports and new export markets for British agricultural commodities, processed food, and beverages.
The UK faces a classic dilemma, effectively the same dilemma that the country faced when deciding whether or not to join the European Economic Community in the late 1960s and early 1970s. Leaving the EU single market is likely to lower food and beverage prices for British consumers. However, UK farmers and food processors would likely face substantial adjustment costs, and potentially lose access to important EU export markets. Establishing effective trade agreements with non-EU countries would mitigate some of the adverse effects of leaving the EU but, ideally, the UK government would negotiate those agreements as soon as possible.
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