This is particularly true in industries with long value chains where companies import a large proportion of their components. Box 1 provides an example which illustrates the distortionary effect of rules of origin. Further assume that this company is a price taker because it operates in a competitive market.
Selling its product at allows the company to just break even. In our particular case, the product in question can indeed be considered as domestic. If the final consumer price remains , the company gains by making a profit of However, there is a problem. The value added labour of As a consequence, the company cannot sell anything.
However, in a customs union that includes the two countries, the total cost of that product is only The company would have been able to make a profit of But in our case, the rules of origin that regulate trade within free trade areas force the company to move production inside the free trade area, find alternative inputs or locate in a country whose exports to the free trade area are not subject to tariffs.
Thus, rules of origin affect location decisions not according to real costs but according to how tariffs are levied. Third, the Rotterdam-Antwerp effect mentioned earlier will come into play in a negative way. If, as Brexiters argue, the UK is less dependent on the EU because a significant proportion of its trade with the EU is accounted for by transhipments that pass through major ports, it also means that in the future, an equal amount of trade will be subject to customs formalities.
The lower the dependence on the EU, the larger the transhipments — and thus the amount of trade subject to those formalities will also be larger. In addition, at present, UK traded goods pass through the major European ports because it is more efficient for them to be transported first on very large vessels and then transhipped after they arrive in continental Europe. The same is true for exports: they are first sent to the big European ports before they are exported outside the EU.
It follows that diverting that trade from those big ports and directly receiving goods from or sending goods to third countries will become more costly, regardless of customs formalities. Brexiters thus clearly underestimate the costs that businesses will have to incur if the UK leaves the EU customs union. But the implications which are typically drawn are quite off the mark. Trade agreements at present are hardly about tariffs and border restrictions. In most industrial countries, tariffs have long been lowered to the insignificant levels of a few percentage points.
Brexit: What are the options?
It is pages long not because it defines lengthy lists of customs duties but because it covers mostly domestic regulations and procedures. This is also the reason why its signing had been delayed by the Walloon parliament. But these two agreements are just part of a growing trend in which customs duties are the least significant issue in trade agreements. For example, of the more than pages of the recently agreed EU-Singapore Free Trade Agreement, only ten are devoted to the elimination of customs duties. The very limited space, and therefore the very limited importance, devoted to customs duties is reflected in all the main trade agreements that the EU has been negotiating in the past five years — both finalised and ongoing — without exception.
These issues are covered by agreements with both developed and developing countries, regardless of the geographic or cultural proximity of the countries. A case in point is the increasing importance of trade in services.
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In terms of value added, the UK trades more in services than in goods. The reason for these very large reductions is that the rules of the single market cover and prohibit non-tariff barriers such as internal taxes, divergent health and safety rules, incompatible technical standards, and non-recognition of professional certificates.
Brexit trade deal: What do WTO rules or an Australia-style relationship mean?
Internal market rules also cover services. Trade agreements that focus on tariffs necessarily limit themselves to trade in goods, leaving out services. Ironically, it is in service sectors, such as finance, that the UK has a strong comparative advantage. When trade agreements were mostly concerned with the reduction of tariffs, it made sense, within the logic of reciprocal liberalisation, to negotiate bilateral tariff reduction schedules.
A country would reduce its customs duties in response to the reduction of the duties of another country. When it comes to domestic regulation, the object of bilateral agreements is either mutual recognition or harmonisation of the rules enforced within the jurisdictions i. Mutual recognition can indeed be subject to a reciprocal arrangement, and different reciprocal agreements can be agreed sequentially.
Further, all of them can coexist. But harmonisation can proceed in a sequential manner only if trade partners converge one-by-one to the standard of one country, which in this case would be the UK. It is simply not possible to harmonise regulations with different partners in a way that all such agreements can coexist. How likely is it that all potential partners will want to adopt UK rules? The answer is that it is very unlikely.
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In fact, recent research has shown that most countries in the global trade system are converging to EU standards and regulations. A customs union is a kind of free trade area with a common external tariff. And the U. Negotiations started in and were officially concluded in September But CETA has not been signed yet due to disagreements over the so-called investor-state dispute settlement mechanism — although major progress on this front has been made in recent days.
He said official negotiations were preceded by several years of preparatory work, while months of toil still lie ahead to complete translations and obtain formal approval on each side before the agreement can be signed, ratified, and enter into force. It is very complex and very complicated.
An option that no one seems to consider seriously, not even the Euroskeptics, is simply to trade with the EU within the framework of the WTO. However, if the U. Currently, the EU ambassador to the WTO speaks on behalf of all 28 member countries and, by being part of a greater bloc, the EU member countries have more leverage over other WTO members. Log in to access content and manage your profile. If you do not have a login you can register here.
Forgot your password? Click here. By Hortense Goulard. March 8, am. The first option would be for the U. At the same time, the EEA is outside the customs union, so Britain could enter into trade deals with non-EU countries. The arrangement is hardly a win-win, however: the U. In Sept. David Davis expressed interest in the Norway model in response to a question he received at the U. Chamber of Commerce in Washington.
Switzerland's relationship to the EU, which is governed by around 20 major bilateral pacts with the bloc, is broadly similar to the EEA arrangement. Switzerland helped set up the EEA, but its people rejected membership in a referendum. The country allows free movement of people and is a member of the passport-free Schengen Area. It is subject to many single market rules, without having much say in making them. It is outside the customs union, allowing it to negotiate free trade agreements with third countries; usually, but not always, it has negotiated alongside the EEA countries.
Switzerland has access to the single market for goods with the exception of agriculture , but not services with the exception of insurance. It pays a modest amount into the EU's budget. Brexit supporters who want to "take back control" would be unlikely to embrace the concessions the Swiss have made on immigration, budget payments, and single market rules.
The most obvious problem with this approach is that the U. The EU has refused to discuss a future trading relationship until December at the earliest.
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To give a sense of how tight that timetable is, CETA negotiations began in and were concluded in Three years later, a small minority of the EU's 28 national parliaments have ratified the deal. Persuading the rest could take years. Even subnational legislatures can stand in the way of a deal: the Walloon regional parliament, which represents fewer than 4 million mainly French-speaking Belgians, single-handedly blocked CETA for a few days in In order to extend the two-year deadline for leaving the EU, Britain would need unanimous approval from the EU Several U.
In some ways, comparing Britain's situation to Canada's is misleading. Speaking in Florence in Sept. She did not elaborate on what "much better" would look like, besides calling on both parties to be "creative as well as practical.
Trading models after Brexit | ICAEW
Monique Ebell, formerly of the National Institute of Economic and Social Research stresses that even with an agreement in place, non-tariff barriers are likely to be a significant drag Britain's trade with the EU: she expects total U. She reasons that free-trade deals do not generally handle services trade well.
Services are a major component of Britain's international trade; the country enjoys a trade surplus in that segment, which is not the case for goods. Free trade deals also struggle to rein in non-tariff barriers. Admittedly Britain and the EU are starting from a unified regulatory scheme, but divergences will only multiply post-Brexit. You want out? You're out. Even this default would not be entirely straightforward, however. Since Britain is currently a WTO member through the EU, it will have to split tariff schedules with the bloc and divvy out liabilities arising from ongoing trade disputes.
This work has already begun. Trading with the EU on WTO terms is the "no-deal" scenario the Conservative government has presented as an acceptable fallback—though most observers see this as a negotiating tactic.