Brexit means a free trade agreement

Of course, Brexit will involve more than just an FTA.  Detaching the UK from the EU will be a messy and complicated affair that Prime Minister Teresa May just acknowledged will take more than two years, and will be done in “phases.”

But from our perspective, one key outcome of her speech is the announcement that the UK will seek to replace its current situation with an FTA and not with some sort of association or associate membership status.

Many are likely to cheer this news—not least because it brings some clarity after months of uncertainty over objectives.  But, frankly, from the perspective of companies operating in or out of the UK, it should be viewed with some alarm.

Why?  Because it means the UK will have to negotiate the most amazing FTA that has ever been negotiated with a very green, untested team up against one of the very best, most seasoned team of officials with the deepest bench of staff members on the planet. 

May seems to think she will be getting something akin to CETA+++ which would be the EU-Canada agreement with lots of extra goodies.  She might do.

Or she might get something much closer to ASEAN-India.  Or worse.  An FTA is a negotiated agreement and the final outcome is not pre-determined. 

But when you tell the European Union that you are working on an FTA, they know exactly what this looks like.  They have lots of experience with FTAs and many different internal templates to choose from. 

If you had told the EU they were negotiating something different entirely, they would not so easily fall back on past experience.  But when you tell them they are doing an FTA with the UK, this just made their jobs so very much easier.

The EU FTA teams are coming off some excellent practice with the US in TTIP and even better experience—given the importance of services for the UK—in the services talks in TiSA.  These are officials who really know their briefs.  They know the topics, the rules, the schedules, and the difference between WTO commitments and FTA options.

Just as important, the EU has the luxury of knowing their industry groups very, very well.  Their economic footing is not changing—or not changing very much as a result of Brexit.

Contrast this situation with the UK side.

For the UK, negotiating Brexit and trade agreements remains split across departments.  Now that Brexit means an FTA, the trade aspects really ought to be moved over into the Department for International Trade.  The Brexit team will surely have enough to handle without trying to tackle the FTA portion as well and clearly specialist trade knowledge is going to be needed.

Brexit also means that the UK will have to sort out its arrangements with the World Trade Organization (WTO).  As we reported earlier, this is not as straightforward as it looks either.  Simply copying and pasting the EU commitments is not likely to work.  Or, at a minimum, will not work across the board. 

Hence, some UK attention will need to be diverted to dealing with the WTO since this will form a critical foundation for future trade agreements. 

May’s speech made quite clear her intention to start signing trade deals with other states as soon as possible, once the UK is disentangled from EU commitments.  While this date is likely to be some time off, getting the WTO sorted and doing this job well is vital to the longer-term goal.

The trade team, which has been hiring staff at a record rate, is busy training them to just understand how trade agreements and trade law works.  Remember that the UK has not had independent responsibility for trade for decades.

Many of the key staff members who had knowledge have left since the Brexit vote.  Getting the very best deals sounds good, but it will be devilishly hard to deliver.

So, while the team is getting hired and trained, they are also now tasked with negotiating with the EU and 162 other WTO members.

To add another complication, trade officials have to do all this with constantly shifting economic ground under their feet.  

Smart firms will quickly realize that an FTA with the EU is going to mean the re-imposition of tariffs on products going into Europe.  New paperwork and customs checks with additional border delays and costs are also on the way.

The split is likely to result in different product standards, divergent regulatory regimes and so forth over time.  (If tariffs, standards and regulations were unchanged, there would be no need to leave the EU.)

Some of the new provisions and rules may be more favorable to firms but firms dislike risk and uncertainty and May’s decision to go down the FTA path has delivered both quite clearly.

Hence firms are going to be thinking about their location decisions quite quickly.  As they do so, UK officials will have a tougher time working through sensible negotiating positions.   For example, which sectors need to be fought for at all costs?  Which do not?  Which are likely to grow in the future and which will not?  Why?  What changes in trade agreements would make a significant difference to firms?

Answering these questions requires officials to know the industry and talk to firms.  For UK trade officials frantically trying to get up to speed on trade, work with the EU and WTO, there is not a lot of time left over for canvassing companies. 

Firms with UK interests should be clearly delivering their messages to the government now on what they would like to see (and what they would like to avoid) in an FTA with the EU. 

The clock is ticking and the game plan is set.  Hopefully May is right and her teams can deliver a “bold and ambitious free trade agreement.”  Otherwise, she says she will just walk away.