The Great British trade-off: Why the path to Brexit might be painful

So when can the UK start negotiating its own trade agreements? Throughout the campaign and thereafter, Brexiters have made passionate pleas for liberating the UK from the EU so it can pursue trade deals of its own. Daniel Hannan, a senior campaigner for Leave, quipped that every continent was growing except Europe and Antarctica, and that Britain after Brexit should strike deals with emerging economies quickly. Boris Johnson suggested that countries like Australia and India were already lined up to begin talks. But before the UK can enter this glorious new era of bilateral trade deals, the new Prime Minister must negotiate the divorce terms with the EU. He or she must also avoid damaging Britain’s existing trade relations with Europe. Welcome to the Great British trade-off.

All eyes are on Article 50. This clause in the EU’s Lisbon Treaty regulates how a country can withdraw from the EU. Until a country has formally left the union, it cannot conclude bilateral trade negotiations of its own. International trade policy, after all, is an exclusive EU competence.

The negotiations under Article 50 are technical and deal with issues like pensions for British EU officials, repayment of EU grants, guarantees for EU migrants in Britain and reciprocal rights of medical care. There is a two-year deadline to negotiate it – though it can be extended if all agree. But Article 50 only settles the divorce terms, not the future trading relationship with the EU. Those terms would have to be negotiated separately. So there will be two negotiations. The new Prime Minister needs to get the sequence of these negotiations right.

It is tempting to negotiate Article 50 first. Once agreed, say after two years, the UK could get on signing bilateral deals with other countries. But without an EU trade deal in place at the same time, this divorce could harm Britain’s trade with the continent.

Immediately after it secured its European divorce, and with an EU trade deal still pending, the UK would seek to trade on the basis of WTO rules. But the WTO’s chief recently said that because the UK joined the organisation as part of the EU, London would have to negotiate the terms of its WTO membership as a fully independent member first.

If the UK trades on the basis of WTO rules, some UK exports to the EU might become uncompetitive; British business would face the EU’s common customs tariff. This is not trivial, for as Daniel Hannan reminds us, 45 per cent of all UK exports still go to the EU. While Britain’s share of trade with emerging economies is rising, for many years the EU will remain Britain’s single largest trading partner. London should not be keen to see trade barriers with the EU resurrected, even if only temporarily.

Negotiating Article 50 first, and an EU trade deal second, also gives the upper hand to Brussels in the talks. After all, the UK would at first give up all access to the single market, and then seek to negotiate its way back into parts of it. Sure, the UK could prepare trade talks with others in the meantime. But many governments with whom the UK would seek to sign a trade deal would first wait for the outcome of Britain’s talks with the EU. For instance, it matters greatly to third countries if the UK joins the European Economic Area (EEA) or not.

The UK would be in a stronger position if its two tricky trade talks took place in parallel. This way, once the separation and the new terms of trade are agreed, Britain could seamlessly move from one trading model to the next. Though don’t expect this to be done quickly. Two years will not be enough time to agree both its European divorce and its new terms of doing business with the EU; as the Leave campaign has so often pointed out during the campaign, EU trade negotiations take many years. During this period, which could take between five and seven years, the UK could not sign trade agreements with others, and uncertainty over the future terms of business would come at a price, primarily in the form of deferred or delayed investment. The path to exit the EU will not be painless. Tread carefully.

Rem Korteweg is a senior research fellow at the Centre for European Reform.