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Do you want a hard or soft-boiled Brexit?

Do you want a hard or soft-boiled Brexit?


Charles Proctor explains how the UK could declare itself a free trade zone by ceasing to impose tariffs on imports immediately after its split from the European Union

UK politicians have spent the last few months arguing over the shape of a post-Brexit deal with the EU: will it be ‘hard’ or will it be ’soft’; will the UK retain access to the single market; will financial institutions retain their ‘passports’?

There has also been much internal debate about process. Can the government deliver its article 50 departure notice of its own volition, or does it require parliamentary approval? The question is now the subject of a judicial review (SJ160/40).

These discussions have generated much heat and very little light. If British politicians cannot agree among themselves, what are the prospects for an agreement with the other 27 member states? Even if the UK government can come up with a coherent proposal, it is unlikely to survive first contact with the EU side of the negotiating table. And, if the article 50 notice is due next March, then the UK faces some two-and-a-half years of uncertainty over its trading arrangements.

As if this weren’t enough, sterling has gone into steep decline, resulting in shortages of Marmite, tea bags, and other essentials. At the same time, the government’s apparent demands for single market access, coupled with a right to exclude EU nationals, has – understandably – exasperated officials in other member states and EU institutions; they have repeatedly stated that the elements of the single market include free movement of persons and are indivisible.

The combination of these factors suggests that – irrespective of its own wishes – the UK is headed for a ‘hard’ Brexit. Thirty months of uncertainty culminating in an indifferent trade deal does not look like an alluring situation from a UK perspective. The country has traditionally been a magnet for foreign investment, and this will inevitably stall; jobs will be lost as a consequence. So what should the UK do to avert this damaging scenario?

The truth is that, within the framework of international trade law, the UK’s options are very limited. Politicians have often referred to the UK’s membership of the World Trade Organisation as a fall-back in the event of failed EU talks. It is true that the UK is a member of the WTO, an organisation comprising over 160 countries. But its membership exists as part of an EU framework, since the union now holds competences in the sphere of external trade. The UK would therefore have to renegotiate its tariff commitments with the other WTO members. This, again, is not an enticing prospect and could result in a further, extended period of uncertainty.

Nevertheless, WTO arrangements may offer a solution to this conundrum. These agreements impose maximum levels of tariffs on trade and are targeted towards a progressive lowering of those tariffs. Immediately upon Brexit, the UK could declare that it will cease to impose any tariffs on imports into this country, effectively declaring itself to be a free trade zone. There would be no need for the UK to renegotiate its tariff commitments to other countries, because the obligation on the UK is to impose tariffs no greater than its scheduled commitments, and one cannot go below zero in any event.

Given the WTO’s ‘most favoured nation’ requirement, the UK would have to extend this treatment to all members equally. Clearly, this would be a high-risk strategy in a number of respects. But there may be political advantages. The UK could make this declaration unilaterally, without the consent of the EU or anyone else – a striking demonstration of the UK’s national sovereignty. It would symbolise a nation confident in its future, and provide a basis for the UK to negotiate improved trade terms with third countries.

The possible downsides of a free trade declaration include the loss of duties otherwise payable to HMRC, a likely deterioration in the balance of payments, at least for a period, and an adverse impact on competitiveness. But if, as currently seems likely, the article 50 negotiations are conducted in a frosty atmosphere, the UK may have to adopt the unilateral approach – it will be the only game in town.

Charles Proctor is a partner in the banking and finance teamat Fladgate @fladgatellp

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