Following the completion of the UK’s Withdrawal Agreement in January 2020, there was an understandable expectation in many quarters that the government had (to use its election slogan) “Got Brexit Done” and that everything had been agreed.  The fact that negotiations had only just then started for a free trade agreement and that a deal was not a foregone conclusion has come as a surprise to many. 

In this vein, the publication of a report by the European Parliament in which it was noted that the EU has no legal obligation to offer any trade preferences to the UK came as a surprise to some observers.  The report was drafted in response to a letter from the UK’s chief negotiator, David Frost, in which the UK had complained that it was not been offered arrangements offered to some of the EU’s other trading partners.  Indeed, some on the right of the Conservative Party have even claimed that, if the EU does not grant the UK what it wants from a trade deal, it is in breach of its obligations under the Withdrawal Agreement, such that the UK could then refuse its own obligations under the agreement (most notably the multi-billion euro financial settlement to which the UK agreed to settle its liabilities). 

So, what is the position, and what does it mean for the UK and its trading partners?

In short, the legal position is a simple one and the European Parliament report is entirely correct.  The EU has no legal obligation, either under the UK’s Withdrawal Agreement or under international trade law more generally, to offer the UK any preferential treatment (and, for completeness, it is worth saying that the UK has no such corresponding obligation towards the EU). 

The UK’s Withdrawal Agreement requires both the EU and the UK to use their “best endeavours … in good faith to … take the necessary steps to negotiate expeditiously the agreements governing their future relationship” as set out in the Political Declaration agreed between them at the time of the Withdrawal Agreement.  This falls well short of any legal requirement that either party must offer the other any particular trading preferences.  There is not even a legal obligation to stick to what the parties agreed in high-level, non-binding terms in the Political Declaration.  (And, if anything, the EU probably has the bigger complaint here, given that the Political Declaration contains statements that the parties will seek a level playing field between them, something that recent comments from UK government ministers have cast into doubt.) 

Similarly, WTO rules are silent on how deeply countries must go in free trade agreements.  The WTO agreements do require FTAs to have significant breadth (so, for example, if an FTA covers goods, it must cover substantially all goods, and not limit itself to a select few).  However, there is nothing to suggest that a country such as the UK must be offered the same trading benefits as other countries. 

In fact, the EU’s existing FTAs themselves indirectly restrict the benefits that the EU can offer to the UK.  Several of the EU’s FTAs (for example, with Canada, Japan, South Korea and Mexico) contain what are known as “Most Favoured Nation” or MFN clauses.  These are essentially clauses meaning that, if one party to the FTA offers better terms to another country in respect of certain things (e.g. access to financial service markets), they must also offer those terms to their counterparty in the existing FTA.  (Think of it like when a supermarket offers to “price match” a deal from another store.)  Therefore, although there is no legal obligation on the EU to offer the UK particular trade preferences, there are obligations on it not to do so unless it also wants to offer those same terms to Canada, South Korea, Japan etc.

Interview: CEO Exclusive – How UKEF Is Supporting UK Businesses With Export Finance Throughout The Pandemic

Read now

So, where does all of this leave the UK and the EU if they do not reach an agreement? 

If no agreement is reached, we will start to hear the words “No Deal Brexit” a lot, and all over again.  The default position is that, immediately after the end of the current transition period (which is due to end on 31 December 2020), the UK and EU will trade with each other on WTO terms.  This means that goods traded between the two will be subject to tariffs and customs checks, and there would be no preferential access to each other’s services markets.  This would put the UK on the same terms as any other country with whom the EU does not have an FTA (which includes many smaller countries, but also some global powerhouses like the United States and China). 

From the point-of-view of other countries around the world, it is likely to lead to the UK government placing a heavy focus on securing trade deals elsewhere, as there will be much political clamour to offset (or at least give the impression of trying to offset) the inevitable losses arising from the change to the UK-EU trading relationship.  Governments around the world would be naïve not to see this as an opportunity to effectively “name their price” and it is clear from comments made by US politicians and officials that the US Trade Representative’s office sees itself in a strong negotiating position vis-à-vis the UK.  If this occurs, we will likely see a raft of trade agreements struck with the UK in relatively quick succession, with many opportunities for non-UK businesses and their governments to set out their demands.