2 November 2016

There is an on-going discussion over whether and to what extent the UK’s divorce from the EU (i.e. the Article 50 talks) and its future trading relationship with it can be negotiated in parallel. Indeed, the on-off-on again EU-Canada trade agreement has focused minds about how to best ensure that any deal that is done is then deliverable.

The UK Government would certainly like to pursue parallel negotiations, but some EU member states (Italy, for instance) are sceptical, and the European Commission has previously sounded absolutely convinced that the two negotiations should be kept separate – see what EU Trade Commissioner Cecilia Malmström told the BBC at the end of June.

The Guardian today publishes an interview with Polish MEP Danuta Hübner, who chairs the European Parliament’s Constitutional Affairs Committee. She is quoted as saying on this very topic,

Formally you cannot conclude or even negotiate the agreement that belongs to a third-country situation while you are still a member. Article 50 is only about withdrawal and only when you are out can you negotiate another agreement.

As a result, transitional arrangements of some kind are being increasingly cited as one option to bridge the UK’s formal exit from the EU with the moment new trade arrangements between the UK and the EU-27 enter into force. Incidentally, this is something we suggested as an option to consider in our recent report on the EU financial services passport.

Some concerns have arisen about going down this road. Firstly, a transitional arrangement might be seen by some in the business community merely as a way of kicking the can down the road, which would not address the underlying uncertainty over the future terms of trade between the UK and the EU-27. Secondly, some Brexiteers see it as an unnecessary delay in making a clean break with the EU.

Under WTO rules, any bridge has to lead somewhere

However, under WTO rules, any such interim deal would have to come with a timetable and the outline of the final destination envisaged.

Article XXIV(5) of the General Agreement on Trade and Tariffs (GATT), which covers trade in goods, establishes that,

The provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-trade area […] Any interim agreement […] shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time.

In other words, if the UK and the EU-27 wanted to have a number of ‘bridging measures’ for trade in place, in order for the latter to be WTO-compliant the two sides would need to make it clear that these measures are the antechamber of a broader Free Trade Agreement (FTA) between them and, crucially, lay out a roadmap for when they plan to have this FTA wrapped up. Absent such a roadmap, any liberalising measure would have to be extended to all WTO members by virtue of the Most Favoured Nation (MFN) clause.

To give a practical example: if the UK and the EU-27 wanted to maintain tariff-free trade in goods between them after Brexit without having a fully-fledged FTA in place and without a timetable for concluding one they would both have to scrap tariffs on goods imported from all their WTO counterparts.

Article V of the General Agreement on Trade in Services (GATS) includes a similar exemption from the MFN clause for regional trade deals – although it offers less clarity on the specific issue of transitional arrangements leading to a future FTA on services.

The political implication of all this is that, if some form of preferential trade arrangement between the UK and the EU-27 is indeed the preferred outcome for everyone involved (not yet a given) and both sides want to avoid an unnecessary reversion to WTO MFN tariffs in the interim, at least some preparatory groundwork and a timetable towards this aim will have to be carried out already during the Article 50 negotiations.