EU trade

A barrier-free relationship with our largest, closest and most important trading partner

Our consultation shows that the UK's new relationship with the EU needs to be tariff-free, with minimal non-tariff barriers across every sector. There are some companies for whom avoiding high tariffs on their goods trade is critical and others who prioritise avoiding non-tariff barriers to trade, particularly around services. Critically, it is clear that, for the UK's modern, interdependent economy, additional barriers to any sector's trade will be detrimental to other sectors. A new arrangement with the EU must therefore be open and comprehensive, covering goods and services, tariffs and non-tariff barriers.

The EU is the most important single trading partner for every major sector of the UK economy

The UK's new trading relationship with the EU must appreciate the current importance of the EU market to every sector, the level of integration between the UK and EU economies, and its future significance as a market. These factors set the EU apart from other markets for business.

For every major sector of the UK economy, the EU is currently more important than any other international market. There are, of course, many individual businesses, product and sub-sectors where trade with another market is more important: for example, Norway's role in the UK's supply of crude oil and the USA's dominance in platform technology. However, around 44% of UK products are exported to the EU and 53% of UK imports are from the EU [1] . For many companies, that means major suppliers, customers, contractors and components are based in the EU – and makes a barrier-free UK-EU relationship economically crucial.

Many UK companies have business models predicated on integration with the EU, as a result of deliberate government policy actions over the past 40 years. For example, many manufacturing businesses have integrated supply chains, criss-crossing the UK and EU borders. There are many prominent examples of these in aerospace, automotive and life sciences. This integration is even more significant for companies set up to treat the UK
and Republic of Ireland as a seamless market. The Republic of Ireland will continue to be a member of the EU, and businesses in sectors such as agriculture, energy and consumer goods gave strong all-Ireland networks. Additionally, many international investors in professional and business services, financial services and technology use the UK as a European headquarters. This existing integration may make a new relationship with the EU easier to negotiate. However, it also makes disruption more critical to avoid.

The EU is the largest market in close proximity to the UK and will continue to be so for the foreseeable future. The significance of trade with nearby nations is particularly pronounced for industries that deal in heavy goods – such as chemicals or machinery – or perishable products. 72% of UK agricultural exports are destined for the EU [2] , as they are less likely to expire or be damaged before they reach customers' shopping baskets. These practical considerations means the UK's long-term interest lies with a barrier-free relationship with the EU.

Keeping the cost of trade low requires zero tariffs and minimal non-tariff barriers to all UK-EU goods trade

The new UK-EU trading relationship must be tariff-free across all categories of goods. Without a preferential trade arrangement with the UK, the EU would be legally obliged to apply the same tariff rate to UK goods as it does to those from any other third country. This would threaten the competitiveness of exporting businesses on which the EU imposes high tariffs. For example, the EU imposes a 12% tariff on clothing [3] imported from third countries and an average 22% tariff on food and drink products [4] .

Average EU MFN tariffs [5]

Category

Approximate tariff rate

Dairy products

36%

Sugars and confectionery

Nearly 30%

Beverages and tobacco

Over 20%

Clothing

Over 10%

Cars

10%

Textiles

Over 5%

Chemicals

Nearly 5%

Coffee and tea

Over 5%

Electrical machinery

Over 3%

However, tariff-free UK-EU trade is important beyond these high-tariff sectors. There are numerous sectors, such as the technology and life sciences industries, where end products are zero-rated, but who highlight tariff-free UK-EU trade as important. These sectors have concerns that input costs – already rising as a result of currency depreciation – would increase if UK imports from the EU attracted tariffs. This view is echoed by companies providing domestic services such as energy, utilities and environmental services. These industries want to avoid vehicles, machinery and other supply chain costs increasing. Businesses in every sector of the UK economy therefore want UK-EU trade to be tariff-free across all goods.

There is agreement across sectors that non-tariff barriers to UK-EU goods trade must also be kept as low as possible. Technical barriers to trade such as rules of origin declarations, quotas, labelling and packaging requirements create costs and delays, and require skilled employees to navigate. The many manufacturing and retail businesses that require just-in-time deliveries particularly prioritise minimal non-tariff barriers: delays in these carefully calibrated supply chains are extremely costly. Avoiding additional non-tariff barriers to UK-EU trade is also crucial for small businesses with limited resource. It is likely that SMEs will increasingly turn to large companies to facilitate EU trade rather than develop expertise internally if it is made more complex. Indeed, the only sectors which benefit from additional non-tariff barriers are those employed to help other businesses navigate these burdens. It is therefore crucial that the new UK-EU relationship keeps the cost of trade as low as possible, and the ease of trade as high as possible, by minimising non-tariff barriers.

The whole economy benefits from minimal barriers to trade in services between the UK and the EU

A new UK-EU relationship should encompass liberal trade in services. UK companies benefit from the ability to sell into and receive services from the EU. International service companies create competition and drive innovation in the UK, and the UK is a global leader in services. To avoid barriers to UK-EU trade in services, the new relationship should include the rights to simply establish and provide services across borders.

However, the EU single market in services is still developing and as such a long-term view to liberalisation is important. This is particularly important for financial services, professional and business services and the creative industries. There are also specific areas of regulation that help facilitate easy trade in services. Continued regulatory equivalence with the EU in these areas should be explored. This includes the mutual recognition of professional qualifications in hospitality, leisure, tourism, and professional and business services.

The relationship between goods sectors and services sectors is inextricable, and one cannot be considered without the other. A competitive goods company in any sector is supported by a range of services: architects and engineering services design office space; professional and business services advise on legal issues and help to hire staff; financial services provide capital, insurance and manage for pensions; creative industries, travel and technology companies help design and sell goods across the globe. A thriving, competitive services sector is dependent on a thriving, competitive goods sector, and vice-versa. The most beneficial new relationship between the UK and EU will be on that considers goodsand services and the relationship between them.

Recommendations: EU Trade

The UK government's plan for negotiations should include a barrier-free relationship with our largest, closest and most important trading partner:

1. The EU's place as the UK's most important trading partner should be the cornerstone of these negotiations

2. The new UK-EU trading relationship should be as comprehensive as possible, covering both goods and services across the economy

3. The new UK-EU trading relationship should be as open as possible, covering tariff and non-tariff barriers across every sector


References

[1] ONS, UK Perspectives 2016: Trade with the EU and beyond

[2] FDF, UK Food and Drink export statistics for 2015

[3] WTO, World Tariff Profiles 2013

[4] Open Reason//Liberal Democrats, Food, Drink and Brexit

[5] WTO, EU MFN Tariff Rates

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