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Talking Trade blog

Where does Brexit go from here?


Published 17 January 2019

Teresa May’s stunning defeat of the Brexit package by 230 votes clearly shows the difficulties attached to her slogan “Brexit Means Brexit.” Such a vaguely worded statement could mean—and obviously has meant—different things to different people. Faced with the reality of the nearly 600 page exiting document, however, nearly two-thirds of the UK Parliament chose to reject the option on the table.

As most commentators have noted, the problem now is that most of these MPs still have different views on what alternative ought to be pursued.  At the moment, the exit date still looms on March 29.

A substantial problem that continues to plague the government on the trade side seems to be a lack of understanding of what a “cliff edge” Brexit looks like and what a customs union would (or would not allow) for future trade access across both MPs and members of the general public. 

Unfortunately, the level of trust in the government has deteriorated to such an extent that most information seems to be dismissed as part of “Project Fear.”

Start with the actual difficulties of crashing out of the EU without any plan at all in place. 

Ignore, for the moment, all the issues attached to anything other than trade.  On the trade side alone, the lack of a deal with the EU to handle trade amounts to more than just “additional paperwork.”  Yet this seems to be the view of many.

Because the UK has been part of the EU for so long, with seamless trading in place with zero tariffs, no customs checks, no paperwork, limited services barriers, ease of moment of people and so forth, this situation feels normal.  In a hard Brexit scenario, none of these conditions will apply.

As many firms outside the EU would be happy to describe, doing business with the EU can be a complicated and costly process.  Tariffs into the EU for non-member firms can be high.  The customs and compliance formalities are tricky.  Most UK companies currently meet EU standards for products, but should expect significantly greater inspections at the border.

The BBC reported that two thirds of the firms in the UK that trade internationally do so only with the EU.  This makes sense, as research shows that the majority of trade is typically with neighbors and 500 million customers can be found on the continent.  This pattern of trade is unlikely to shift much in the wake of Brexit, even as costs and delays escalate, no matter what alternative trade arrangements can be made with third parties.

Many of the firms in the UK are likely to be much more closely tied to trade with the EU than they currently realize.  All imported items will also be subject to higher costs and delays.  Many EU companies that currently source parts and components from UK firms are likely to shift to new continental suppliers, unless the UK companies are extraordinarily competitive. 

Even services suppliers may discover that trade with the EU is harder in the future.  Absent a specific agreement, there is no particular reason to favor UK companies.  New licensing or qualification requirements could easily be drafted or applied to UK firms that currently do not capture UK businesses today. 

This goes well beyond the so-called “passporting” rights of the financial services industry to include engineering and construction firms, health care professionals, education service providers and so forth.  Most of these companies and individuals have also grown accustomed to free movement that is likely to be sharply curtailed.

While many advocates of the hard Brexit option continue to insist that it is possible to “fall back” on the WTO, it is also important to note that the UK does not have (as we have warned from the beginning) its own independent schedules at the WTO in place.  Negotiating these schedules has been more complicated than UK officials anticipated.  Certainly, WTO schedules will not be in place by March 29, leaving the UK in a very odd sort of limbo in a hard Brexit.

No other country will be ready to negotiate any independent trade deal with the UK until the terms of Brexit are finalized and the WTO schedules are completed. 

If the UK ends up in a customs union with the EU, there is also an unclear understanding, it seems, of what sort of trade options exist for the UK.  It is not the case that the UK cannot do any trade deals as part of a customs union.  It could still negotiate with others.

The situation is complicated, as the UK would be constrained on what it could offer counterparties for tariffs on goods.  Membership in a customs union means that the EU effectively sets the external tariff for the UK. 

However, most modern free trade agreements go well beyond tariff cuts for goods.  As long as the counterparty is willing to negotiate on other areas, the UK would be free—in principle at least—to craft trade agreements for services, investment, e-commerce, digital trade and other areas that are not included in the customs union commitments.

The UK, however, would also find itself required to open its goods markets to any third parties where the EU has completed a new trade agreement while not receiving any automatic reciprocal benefits. In other words, if the EU completed an FTA with Indonesia, the UK would also offer the same tariff cuts to Indonesian firms as all other EU member states, but would not be automatically granted better access to Indonesian markets.

 With the limited time remaining before the March 29 deadline, it is critically important that MPs start to grapple seriously with the implications of the hard Brexit and customs union options for companies and consumers.  It is one thing to argue that “Brexit means Brexit.”  It is another thing entirely to define what it means in the least damaging way.

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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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