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Talking Trade blog

Special edition: The European Union in the post-brexit period


Published 26 July 2016

In the period since the UK’s dramatic vote to detach from the European Union (EU), most of the focus has been on what might happen next with the UK. However, the vote for Brexit also has implications for the EU that will need to be considered over the coming weeks and months.

Trade policymaking in the EU was not exactly smooth sailing prior to the UK vote.  While the EU has steadily increased the number, scope and depth of various trade arrangements with non-EU members, more recent trade agreements have been unusually challenging to conclude.

As an example, negotiations were launched with Singapore in 2009 and not concluded until 2012. The investment chapter was not wrapped up until 2014.  The agreement has still not entered into force because it remains stuck with the European Court of Justice (ECJ) pending a decision about which institutional bodies within the EU have jurisdiction (or EU competence) to make investment chapter decisions.  

In the meantime, other agreements, like the more recently concluded EU FTA deal with Vietnam, are also on hold, waiting for the same court ruling.  

In the post-Brexit period, a new precedent appears to have been set within the EU that requires FTAs to be sent not just to the EU Parliament for approval, but also to each EU member state and even some sub-national legislative bodies.  The Canadian agreement is going to the first test of this new set of procedures, but it is highly likely that once the ECJ returns a verdict on the Singapore and Vietnam agreements, both will also face the same gauntlet for approval. 

Last week Canada’s Trade Minister, Chrystia Freeland, lamented: “If the EU cannot do a deal with Canada, I think it is legitimate to say who the heck can it do a deal with?”

The EU has ratified only 11 economic agreements this century. With the exception of South Korea, these have been typically with smaller, middle-income countries of limited economic complexity posing fewer export threats to the EU’s main competitive industries.  

For the most part these approved agreements (shown in the table below) have been with Balkan and former Soviet countries looking to integrate into the EU’s model of capitalism through reforming their institutions. Generally, economic integration has been limited, and the agreements were designed as stepping stones to fuller European integration. Of primary importance to most of these countries is meeting EU standards for products.

EU Trade Agreements 2000-2016

[*Economic Complexity is an Index formulated by Harvard’s Centre for International Development. It is a measure of how 'complex' the goods are that a country produces, as well as the variety of goods. 0 is the international mean value. Japan has the most complex economy with a value of 2.21. Other data in chart drawn from World Bank.] 

This is not to say that the EU has not been generous in opening the door to trade deals. Many agreements are currently under negotiation.  Some are concluded, but waiting for ratification, as the map below indicates.

However, in the post-Brexit period, some of the agreements currently in the pipeline may be delayed as both sides reconsider the gains and costs of an agreement that does not contain the UK.

It is not only FTAs where EU policymaking has been fraught.  Getting common positions within the EU for various other trade fora has also been challenging.  For example, repeated rounds of negotiations in the Trade in Services Agreement (TiSA) have revealed splits between member states and some difficulties in maintaining a common position.  The EU-US talks for the Trans-Atlantic Trade and Investment Partnership (TTIP) faces similar obstacles.

Even if the EU had been able to create and maintain a common trade position prior to Brexit, the loss/partial loss of the UK within the Union will make it difficult for the EU to continue with business as usual for at least a short period of time.  

The uncertainties surrounding the departure of the second largest market within the EU means that EU negotiators have to reconsider their own market positions in nearly every single sector. 

As an example, consider the TiSA negotiations in a sector like construction and engineering services.  Prior to Brexit, officials from the EU should have drawn up a comprehensive analysis of the sector and subsectors.  They would have known as much as possible about their own markets for construction services, about the market size and potential in other TiSA members, about the strengths and weaknesses of their own firms and done a similar calculation of their counterparts. 

Some of the assessment of their negotiating positions and strategy, therefore, was predicated on the inclusion of UK construction and engineering services—both for exporting these services and for importing them.  If this assumption of UK markets no longer holds true post-Brexit, EU officials will have to quickly recalculate their own negotiating positions.  

It may be that British construction companies were seen as especially competitive (or persuasive) and therefore EU officials were particularly aggressive in asking TiSA counterparts for market access.  With UK companies now not taking part in TiSA talks, the EU might instead drop the focus on construction and highlight some other service areas instead.

This in itself opens a new phase of re-appraisal, lobbying and internal positioning which won’t expedite decision-making, at least in the short run. 

While it is true that fewer members means a group can reach consensus sooner, it may also weaken the overall bargaining power of the EU with other parties. The UK leaving the EU means the EU’s GDP is 17% less, and therefor the world’s largest market may have become less appealing to partners, and relatively less powerful in bargaining terms than it had been. 

The vote for Brexit does not just stay in the UK—it also affects trade and trade negotiations for the EU.  

This, in turn, has knock-on effects for other trade arenas.  But that is the subject of a different blog post for another day.  It does, however, highlight once again the deeply interconnected nature of today's global economy.

 

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Dr. Deborah Elms is Head of Trade Policy at the Hinrich Foundation in Singapore.  Prior to joining the Foundation, she was the Executive Director and Founder of the Asian Trade Centre (ATC). She was also President of the Asia Business Trade Association (ABTA) and the Board Director of the Asian Trade Centre Foundation (ATCF).

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