Following the 2016 referendum vote in favor of the United Kingdom leaving the European Union, the future trade relationship between the UK, the EU, and the rest of the world remains uncertain. Article 50 of the Treaty of the European Union, which has never been used before, governs the legal process for a nation’s withdrawal from the EU. Because there is no precedent for the use of this Article, the UK and the EU face the distinct challenge of crafting a new trade deal as they navigate the preservation and alteration of their relationship.
With a vote against globalization, Brexit could potentially remove the UK from the forefront of the economic world. Brexit is a break from the free trade environment that characterizes the EU, and it entails significant changes to both the UK’s domestic economy and to the EU. No longer bound to the EU in an interdependent relationship, the UK will likely face tariffs on its imports. In the context of the UK’s economy, this outcome would hurt domestic industries. Brexit would also eliminate the UK’s tariff-free trade status with the other EU members. This status previously protected the UK’s domestic economy from high import prices. Raised import prices can contribute to a lowered standard of living for UK citizens. In addition to these costs imposed on the UK economy, an estimated thirty-three billion euro divorce bill acts as a significant blow to the UK economy. Due to the timing of Brexit being within a seven year framework of the EU budget, the UK is liable to pay this amount for the remaining portion of the seven year time span. Furthermore, in the context of the EU, the Brexit vote strengthens anti-immigration parties throughout Europe. If these parties gain enough ground in other EU member states, anti-EU votes could result, leading the EU to lose its most robust economies.
Breaching the legal framework outlining the previous relationship between the UK and EU, Brexit implies many changes for existing legal agreements. The European Economic Area Agreement is one such legal agreement that could evolve in the near future. Signed by the EU member states, this agreement aims to “contribute, on the basis of market economy, to worldwide trade liberalization and cooperation, in particular accordance with the provisions of the General Agreement on Tariffs and Trade.” Imposing a specific set of trade-related restrictions upon member states, the Agreement severely limits states’ autonomy over their domestic economies. The Agreement permits only those member states that implement its specifications entry into the internal market. No longer bound by this agreement, the UK has greater autonomy over its decision-making related to trade.
Although it seems likely that the UK and EU will reach a trade deal, it is possible that they may fail to do so. This outcome would prove significantly more damaging to the UK’s economy than to the EU. The UK’s future GDP would decrease “by around five percent ten years after Brexit, or $140 billion, compared with EU membership.” Less injurious to the EU, this outcome would create an economic loss of “about 0.7 percent of its overall GDP ten years after Brexit.” If the EU and UK fail to reach a deal, many businesses within the UK will be challenged with restructuring their dealings. In particular, those businesses which rely on importing and exporting products will face significant hurdles in this scenario. Through the EU Withdrawal Act, pre-existing EU legislation will be dissolved, and new UK legislation will be enacted. In many industries, UK exporters are bound by strict regulations that guide the sale of products in the European Economic Area. Due to the transition from EU legislation to UK legislation, UK exporters could potentially lose access to trade within the EEA. If the new UK legislation does not address the same criteria as the EU legislation, the EEA could obstruct the UK from participation. As a result, the UK economy would suffer.
Another policy option that the UK could pursue is creating a trilateral agreement with the US and the EU. A case study of the trilateral trade agreement between Japan, the US, and the EU elucidates how this policy option could play out. This case is specifically applicable because Japan, like the UK, is not part of an EU-like entity. The agreement provided significant benefits to Japan such as “certain forgiveness of debt” and subsidies to those enterprises which failed to gain long-term financing. The UK, by crafting a similar trilateral agreement, could enjoy these benefits. Another major component of the agreement emphasizes maintaining “market oriented conditions for a free, fair, and mutually advantageous trading system.” By maintaining interdependent relations with the US and EU, Japan secured its place within a beneficial trade network. If the UK follows the same path as Japan and enters a trilateral trade agreement with the US and the EU, it could continue to enjoy similar economic benefits to those it held as a member of the EU’s free trade environment. Compared to the no deal scenario, this policy option is much more conducive to the growth of the UK’s GDP. Despite the numerous benefits of entering a trilateral trade agreement with the US and EU, the process for attaining this option is lengthy and slow. Particularly because it involves the interests of three different actors, the process of negotiating and drafting legislation would be relatively complicated.
Brexit gives a new sense of autonomy and identity to the UK, but it does so at the expense of an interdependent relationship between the UK and EU. Surrendering the benefits it once enjoyed as part of this international economic community, the UK is now tasked with re-establishing itself in the global economy. As the UK explores potential roles it could assume in the post-Brexit international community, it could either preserve existing conditions to a limited extent or it could fail to reach an agreement. Pursuing a trilateral agreement with the EU and US is a policy option that promotes the UK’s economic interests, but it confines its autonomy to a certain extent. Failing to reach an agreement would conserve the UK’s autonomy, but this outcome would reduce its influence in the international economy. Having officially left the EU in January 2020, the UK is actively negotiating a trade deal with the EU that safeguards its autonomy as well as its domestic industries. Through stages of renegotiation and cooperation, the legal framework outlining the trade relationship between the UK and the EU stands to be transformed.