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Other trade models

In her 5 October 2016 speech to the Conservative party conference, Theresa May set out her vision for Britain which many commentators read as signalling that the government was leaning towards the UK leaving the EU single market rather than retaining some form of membership of the single market in return for a degree of free movement. These two outcomes are often referred to as a ‘hard/clean’ Brexit and a ‘soft’ Brexit – terms that provide a convenient shorthand for commentators, but have the potential to mislead by overlooking possible developments that do not fit neatly under either label.

This direction (i.e. a ‘hard/clean’ Brexit) was confirmed in Mrs May’s 29 March 2017 Article 50 letter and her earlier 17 January 2017 Lancaster House speech where she set out a vision for a ‘Global Britain’ whereby the UK would: (i) seek ‘a new, comprehensive, bold and ambitious free trade agreement with the European Union’; and (ii) have the freedom to strike trade agreements with countries from outside the EU as well. The former reflects the UK government’s wish to ‘seek the greatest possible access’ to the EU without seeking access to the EU’s single market (as this would require accepting the EU’s four freedoms and the rules and regulations that implement them), and the latter requires that the UK no longer be bound by the EU Customs Union, which is defined by the EU’s Common Commercial Policy and the Common External Tariff.

In the remainder of this section we take a closer look at the two trade models that appear to be left on the table – a comprehensive agreement like the one the EU has struck with Canada, and the WTO (these and other trade models have been frequently referred to in the press, law firm briefings and government documents) – as well as possible future trade agreements the UK has been discussing with non-EU countries (but which cannot be formally agreed until after the UK leaves the EU).

Canada-EU Comprehensive Economic and Trade Agreement (CETA): To date, CETA is the most comprehensive trade agreement reached by the EU. It runs to over 2,000 pages and has taken several years to negotiate. The agreement was signed at the EU-Canada Summit on 30 October 2016 after nearly being derailed by the Belgian regional government of Wallonia. It is expected that from Spring 2017, most (but not all) parts of the agreement will apply provisionally following approval by the European Parliament, but before it is ratified by all 28 member states (including the UK) and regional governments through the relevant national ratification procedures.

Recognition that CETA could serve as a good starting point for discussions with the EU dates back to February 2016, if not before. And in December 2016, Michel Barnier indicated that a ‘political agreement’ between the UK and EU could be settled during the two-year period specified in Article 50, and could then be followed by negotiations for a CETA-style deal.

World Trade Organization (WTO) framework: This is a global multilateral agreement on the trade in goods and certain services between member countries. It is based on two foundation principles – ‘national treatment’ and ‘most favoured nation’ (MFN) – and is most known for two primary agreements – the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS). A helpful summary of this framework has been produced by Slaughter and May.

Under both GATT and GATS the MFN principle applies, and there is, therefore, a general prohibition on charging a lower tariff on goods originating in one WTO member than is applied to goods originating in another WTO member. Under the GATT there is an exception for custom unions and free trade agreements (and under the GATS for economic integration agreements).

National treatment applies under the GATT which means that once any relevant tariffs have been paid on goods from overseas, these goods must be treated in the same manner as goods originating domestically. Under the GATS this principle only applies if a particular WTO member has agreed to it.

Singapore and Hong Kong are two jurisdictions that rely solely on the WTO’s framework and have adopted a unilateral free trade policy (i.e. they do not apply import or export tariffs).

The significance of the WTO framework cannot be overstated in the context of the Brexit negotiations. A point which the House of Lords EU Committee (para 259) acknowledged in its remarks concerning sequencing the UK’s negotiations with the WTO, EU and third countries, and the need for the UK to prioritise its relationship with the EU and the WTO.

The Economists for Free Trade have published a detailed research paper by Patrick Minford and Edgar Miller who discuss the various policy options the government might pursue under the WTO framework and quantify their estimated impact. They arrive at the recommendation that the optimal strategy is for the UK to adopt WTO rules with zero import tariffs and at the same time embark on establishing free trade agreements with countries that wish to eliminate non-tariff barriers and other distortions. In relation to the City, they suggest that if EU protectionism extends to the City, it should not retaliate and should instead, pursue the agenda suggested in A Blueprint for Brexit: The Future of Global Financial Services and Markets in the UK by Barnabas Reynolds for Politeia.

Mrs May reiterated her vision of a Britain that is both a European country and a country which looks to the wider world in speeches in Davos (19 January 2017) and Philadelphia (26 January 2017). In relation to the UK’s plans for a ‘comprehensive, bold and ambitious free trade agreement’ with a ‘divorce’ phase, Germany’s finance minister, Wolfgang Schäuble, has remarked that these can be made to work and has also stated that Britain should be offered a reasonable deal given that the financial services offered by the City of London benefit Europe as a whole. His comments align with a previously reported appetite among some German politicians to take account of the UK’s size, significance and its long membership of the European Union, and may potentially translate into a special status for the UK which bears only limited comparison to that of countries that have never belonged to the European Union.

The remainder of this section looks at some of the bilateral trade agreements that the UK will be seeking to quickly agree and ratify once it leaves the EU, and provides an initial view of where the UK’s trade strategy potentially intersects with its plans to become the leading European, if not global, fintech hub via the UK Financial Conduct Authority’s Project Innovate which includes its sandbox for fintech firms.

In September 2016, Australia and the UK announced that they will establish a bilateral trade working group that will meet twice a year from early 2017, so that the two countries will be ready to fast-track trade negotiations once the UK leaves the EU. Australia’s foreign minister, Mathias Cormann, confirmed this on 19 January 2017. On the fintech side, in early 2016 the FCA signed a cooperation agreement with the Australian Securities and Investments Commission (ASIC), marking the first time that two financial regulators had agreed to provide information to one another specifically in order to make it potentially easier for fintech firms to access new markets.

During the 6 to 8 November 2016 trade mission to India, Theresa May reached an agreement with the Indian government to work on the UK–India trade relationship. This agreement reflected a view that a bilateral free trade agreement between the UK and India would be easier to conclude than the one India has been discussing with the European Union for nine years. Nonetheless, it is clear that India will be seeking a looser approach to UK work and student visas. A further trade mission, led by Philip Hammond, took place in the first week of April 2017, having as its motto ‘Make in India, Finance in the UK’. The delegation included the Governer of the Bank of England (Mark Carney), the CEO of the FCA (Andrew Bailey) and over a dozen representatives from the fintech sector.

On 13 January 2017, New Zealand’s prime minister stated that New Zealand will seek to agree a free trade deal with the UK as soon as possible after Brexit. Moreover, in recognition of the fact that the UK has insufficient trade negotiators, New Zealand has offered to loan staff that are expert trade negotiators to the British Civil Service, and the UK is reportedly also looking for help from Canada with which it has had ‘technical exchanges’. It is perhaps worth noting that in February 2017 the Ontario Securities Commission (OSC) and the UK’s FCA also signed a cooperation agreement to provide support to innovative fintech firms seeking entry into either market.

The election of Donald Trump as 45th president of the US, combined with the Republican Party retaining their majorities in the US Senate and House of Representatives, suggests that the president has the potential to make his policies laws. While in the run-up to the election key Republicans were critical of his campaign, he and Paul Ryan (Speaker of the US House of Representatives) now appear to be working together although President Trump’s executive order on immigration is an example of where a possible red line was nearly crossed.

On trade, his election means a move away from multilateral trade agreements as reflected by the US’s withdrawal from the Trans-Pacific Partnership (TPP) and its plans to renegotiate the North American Free Trade Agreement (NAFTA). EU-US negotiations on the Transatlantic Trade and Investment Partnership (TTIP) also appear to be on hold.

Consistent with earlier statements that the UK would not be at the back of the trade queue, at a joint news conference held during the 27 January 2017 summit between the prime minister and President Trump, the president promised a free trade deal with the UK. In advance of this meeting, it was suggested in the UK press that such a deal would look to cut tariffs and make it easier for workers to move between the two countries. It has also been observed that such a deal would give the UK leverage with Europe – particularly if it included a deal to reduce barriers between US and UK banks through a new ‘passporting’ system. While the 27 January 2017 summit appeared to mark a new chapter in the ‘special relationship’ and some experts believe the trade deal could be agreed within a two-year time frame, the prime minister will need to balance this relationship against the accepted cultural norms in the UK as well as its national interests in other arenas. Moreover, the UK will need to evaluate the possible impact of President Trump’s administration’s apparent appetite for rolling back financial regulation – an issue discussed in the Oliver Wyman paper Implications of the Trump Administration for Financial Regulation by Douglas J Elliot – and whether the US takes a step back from the international forums setting standards for financial services – as suggested by a letter to Federal Reserve Chair Janet Yellen, which she rebuffed.

China is another country with which the UK is holding talks on trade, investment, financial services and energy.

Finally, the government of Japan has also expressed its concerns regarding the uncertainty that Brexit will bring. In a letter issued in advance of the G20 Summit, it asked for the negotiations to be conducted in a transparent fashion and set out a series of detailed requests. Nonetheless, Brexit and the US withdrawal from TTIP seems to have helped to jump-start an EU/Japan trade deal which is similar in scope to CETA but, from the EU’s perspective would be seen as more significant, given the relative size of Japan’s economy.

It is clear that trade agreements are complex and include a significant range of possibilities (such as limited agreements on the reduction of tariffs, ones that cover services and capital, and others promoting economic integration). This complexity increases where the trade agreements cover financial services. However, as highlighted by the International Organization of Securities Commissions (IOSCO) Task Force on Cross-Border Regulation, the regulatory toolkit to achieve effective cross-border regulation (in securities markets) includes more than one approach that countries can tailor to fit the specific circumstances of the agreement being negotiated.


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