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Autumn 2016

Where next for trade policy?

Policy challenges Trade changed from being an exclusive competence of the EU to being one of the most demanding tasks facing the UK Government overnight with the referendum result. There will be three sets of trade negotiations:

Negotiations which aim to broadly maintain existing free trade with the EU.

Negotiations which aim to create new free trade deals.

The good news here is that the status quo is free trade, meaning fewer technical and vested interest obstacles to a deal. The bad news is that the negotiations will be wrapped up in the wider politics of Brexit (and affected by the debate around immigration control).

The good news here is that a number of countries have expressed a keenness to strike a deal since the referendum result, the political will is quite strong. The bad news is that new free trade deals have generally proceeded slowly recently and the UK’s future relationship with the EU creates some uncertainty over the scope for doing a deal quickly.

Negotiations which aim to recreate institutional relationships that exist between the EU customs union and the wider world. The most vivid example of this is the need for a new UK relationship with the WTO independent of the EU. In theory, this should be relatively easy, in practice agricultural interests and the cumbersome WTO process might create difficulties.

Politics and personalities There are four ministers with a direct role in trade policy: Theresa May in No. 10; Boris Johnson at the Foreign and Commonwealth Office; David Davis at the Department for Existing the EU; and Liam Fox at the Department for International Trade.

chief of staff) supported Brexit and are forceful personalities who will be keen to make rapid progress on ambitious deals. To make that possible, initially modest numbers of officials will need to strengthen an atrophied trade function.

Both David Davis (with the support of special adviser James Chapman, former Daily Mail journalist and adviser to George Osborne) and Liam Fox (with David Goss, special adviser who was his parliamentary

Beyond that, almost every department has some kind of stake in different chapters of each trade deal:

Philip Hammond and the Treasury will want to assume its traditional leadership role on financial services and (along with BEIS) infrastructure

Michael Fallon and the Ministry of Defence and other departments will have a stake in procurement chapters

Greg Clark and BEIS seem most likely to focus on the implications for a stillforming industrial strategy and the energy chapter (the Internal Energy Market at the EU level and trade in fuels with the wider world)

Chris Grayling and the Department for Transport will be involved in any policy change resulting from a transport chapter

Andrea Leadsom and DEFRA will have a keen interest in the impact on agriculture (a sector likely to be affected even by the WTO talks, where the UK share of the EU’s entitlement to support agriculture will need to be negotiated)

Jeremy Hunt and the Department of Health will be keen to ensure any deal does not create restrictions on freedom of action for the NHS.

Karen Bradley and DCMS will have a keen interest in the impact on creative industries (IP and cultural exemptions are a common bone of contention in trade deals, Baroness Neville-Rolfe at BEIS could also be involved through her IP role)

Politics and personalities (continued) The devolved administrations will also be keen to protect the interests of their own industries (e.g. Scotland and the Scotch Whisky industry, though Scottish Ministers insisting Brexit is not going to happen will not maximise their influence).

Other Departments will provide the policy support those new departments need to decide priorities. The exception may be the Treasury and financial services, where its institutional weight (and Philip Hammond’s strong links to the Prime Minister) mean it can take a leading role.

It all adds up to the potential for almost endless bickering over roles.

Theresa May will act quickly to impose order, however, and it seems likely that the Brexit Department with respect to the EU and the International Trade department with respect to the rest of the world will end up taking overall responsibility for trade deals (i.e. they are where a negotiator would sit). The Foreign Office will have its hands full renewing diplomatic and security relationships and will provide diplomatic support with its larger network, despite initial tussles with International Trade. Boris Johnson will be supported by Will Walden and Ben Gascoigne, both of whom worked with him at City Hall.

Theresa May Prime Minister

Boris Johnson Foreign Secretary

David Davis Liam Fox Secretary of State Secretary of State for Exiting the for International European Union Trade

Policy risks The key policy risks are Hostility from EU Member States resulting from the referendum result Increasing protectionism in the EU and the US Cumbersome decision-making processes that could cause an unnecessary delay Emotions in the EU were mixed after the referendum results. In some Member States the result was treated as almost an opportunity. Some in France, for example, see an opportunity to benefit at the UK’s expense. In others there was a sense of abandonment, with the UK walking away from common European challenges (many Germans feel this way). Finally, some (e.g. many policymakers in Sweden, the Netherlands and Poland) worried that, without the UK as a champion for their views they were left exposed to the EU taking an unwelcome direction. In that context, there might simply be a shortage of the political goodwill that often eases the path to a trade deal. During the NAFTA negotiations, for example, meetings between the US and Mexican Presidents and the Canadian Prime Minister often helped break deadlocks in the negotiations.

At the same time, there has been a clear protectionist turn in both the EU and the US. In the EU that has been manifested in last-minute obstacles to even the free trade deal with Canada (perhaps the least controversial trade deal possible). That deal is being sent to votes in individual Member States on ratification which creates a very real risk of failure. In the US it is manifested in the unpleasant figures of Donald Trump and Bernie Sanders. While Hillary Clinton is expected to win, she will respond to a congress and a public less convinced of the merits of free trade. Finally, there are institutional rigidities which can make a deal hard even when the political will is present. The EU might need to ratify a deal in every Member State, meaning parochial concerns in a small Member State could hold up a deal. The European Parliament might resist a deal even if the heads of government want one to go ahead. The WTO proceeds by consensus and there is a possibility that a hostile state might use that to try and extract some wider concession. All of these policy risks can be navigated, but that navigation will need to be done by a brand new UK trade function. Many organisations are having to learn how to do trade policy from scratch, or rebadge vaguely relevant capabilities. Fortunately, attitudes among the UK public to trade are (at least for now) positive. The UK is therefore likely to remain relatively supportive of free trade.

Where next? The Government has now clarified when Article 50 will be triggered. It will not be done in 2016 but before the end of March 2017. Negotiations may begin slowly given the elections in France and Germany next year (and political instability in Italy and Spain). In the meantime, both sides will elaborate their position (expect some stark initial differences). Frequent international Ministerial meetings will be taking place before then. Theresa May, in particular, has been meeting her peers since becoming Prime Minister. The other relevant Ministers have also been travelling. There is active disagreement among trade experts over the extent to which the UK can or should begin discussions with other countries before an EU deal takes shape. There are practical concerns that trade deals are not possible before the terms of the EU deal (and the latitude it gives the UK to alter policy to satisfy other trading partners) is clear. There are also legal concerns it may intrude on an exclusive EU competence while the UK remains a member.

Our expectation is therefore that talks will develop quickly. While formal negotiations may have to wait and EU partners might somewhat resent the UK moving ahead with such deals early, any sense that the UK has other options will improve its negotiating position in that central EU-UK deal. Indeed, the Department for International Trade has already made impressive progress in some sectors defining its priorities. It has to work out which sectors it needs on board to “sell� a deal: which industries it wants to improve market access for (offensive interests); and which it wants to protect (defensive interests). Then it needs to calibrate those priorities with the sensitivities of potential trade partners. It is a delicate and deeply political exercise. Businesses which sense a threat or an opportunity will need to get a move on developing their strategy. It will not be possible to attempt a deal with every country at once. Every sector needs to develop: A)

An understanding of which countries to prioritise, which reflects the countries in which i) there are the fewest obstacles to a deal; and ii) there is the greatest market opportunity.


Clear guidance on its priorities for any negotiation, which are realistic and can fit with the Government’s economic objectives.

However, the Government will be keen to have some good news to show voters and business post-Brexit. Ministers will be impatient to get underway.

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Westbourne team

James Bethell Managing Director Jennifer Powers Partner, Head of Advocacy Matthew Sinclair Head of Economics Anouchka Burton Associate Partner

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Westbourne - Where Next for Trade Policy Paper