Brexit changes the EU’s trade dynamics: don’t expect progress

Claudia Schmucker is Head of Globalisation and World Economy at the German Council on Foreign Relations

Once Britain leaves the European Union, there will be consequences for the EU as a trading power. Britain was, in 2015, the world’s fifth-largest economy and Europe’s second-largest. It was tenth-biggest exporter of merchandise, and second-biggest of commercial services.

The UK continues to be a member of the EU with full rights and responsibilities, including on current trade negotiations. The EU has several deals on the agenda. The negotiations for the comprehensive Economic and Trade Agreement (CETA) with Canada were finished in August 2014, and the agreement now needs to be signed and ratified. In addition, the EU is negotiating free trade agreements with Japan, India, members of the Association of Southeast Asian Nations (ASEAN), Mexico and Mercosur countries. The most important negotiations, though, relate to the Transatlantic Trade and Investment Partnership (TTIP) with the United States, which would create the largest regional free trade area in the world.

TTIP negotiations, irrespective of the Brexit vote, have been progressing very slowly. There are still fundamental differences of opinion between the EU and the US in many chapters. Several important areas, such as government procurement, services, investment protection, agricultural tariffs and geographic indicators haven’t been agreed. Both sides went into the summer
break with hope of deciding on a framework agreement by the end of the year – while President Obama is still in office. But the window of opportunity is closing fast, even without taking Brexit
into consideration.

Shortly after the British referendum, both the EU Commissioner for Trade, Cecilia Malmström, and United States Trade Representative, Michael Froman, reiterated that the rationale for TTIP remained strong even without the UK. But the situation isn’t so simple. The UK was one of the main supporters of the deal in Europe. Britain’s departure could further delay TTIP, with criticism on the rise in major EU countries like France and Germany. And once the UK triggers Article 50, EU officials in Brussels will be busy negotiating Britain’s withdrawal agreement, and will shift their priorities accordingly.

There are also critical comments coming from the other side of the Atlantic. Despite his earlier commitment to the deal, Michael Froman conceded in July that TTIP needed to be readjusted for
Brexit, as 25% of US goods exports to the EU are destined for Britain. He also stressed that the US would lose a quarter of the public procurement market without the UK – which, he warned,
would affect the US offer on government procurement. This in an area in which the EU has offensive interests and wants to gain wide access to the US. The negotiations will probably drag on in this manner for some time.

Brexit will have fewer consequences for other trade negotiations. Even with 27 countries, the EU is still an attractive trading partner, although India may reconsider its free trade negotiations with the EU – which began in June 2007 – since the UK is its closest trading partner and strongest European ally.

Britain has always been one of the closest partners of the Netherlands, Sweden and Germany in the push for open markets, so its departure from the EU will have consequences for the use of protectionism. In March the UK was leading the opposition to stronger trade defences against Chinese steel, together with Sweden and the Netherlands. It opposed limitations to the “lesser
duty rule”, which would have allowed the EU to impose higher tariffs against subsidised Chinese steel imports. With the UK out, countries supporting a more liberal trading regime will lose out.
The group that is more inclined to protect the market – broadly consisting of France, Italy and other southern countries – will gain more leverage. So the departure of the UK may change the
negotiating dynamics of EU trade policy.

Britain was also one of the leading countries pushing for more open intra-EU trade and competition in the common market. A single market for services was at the top of the British agenda, but
there are still problems in cross-border competition for services, a situation that impedes economic growth and the creation of jobs in Europe. With Britain leaving, the new push for a common services market may also lose momentum.