Following Leadership Change, UK Officials Test Waters on Future Trade Deals

21 July 2016

The new government of UK Prime Minister Theresa May has begun exploring possible options for trade deals with third countries, officials say, though the process to formally launch exit negotiations with the EU has not yet been set in motion.

The UK premier took office last Wednesday, and shortly thereafter confirmed her cabinet appointments, including Liam Fox as the new Secretary of State for International Trade, as well as David Davis as the Secretary of State for Exiting the European Union.

“As we leave the European Union, we will forge a bold new positive role for ourselves in the world, and we will make Britain a country that works not for a privileged few, but for every one of us,” she said last week upon taking office.

May has said that she intends to follow through with the exit negotiations with the EU, stating that “Brexit is Brexit” and that the will of her country’s people must be respected. However, she has suggested that she will not trigger Article 50 of the Treaty of Lisbon – the formal mechanism for launching such talks – this year, partly due to ongoing discussions with Scotland given the latter’s stated interest in remaining an EU member.

Davis, who is tasked with shepherding the exit talks, has similarly confirmed that Article 50 will likely not be invoked until late this year nor early next, and that the UK would aim to reach a deal with the EU by the end of 2018.

Meanwhile, the 23 June referendum result on “Brexit” is already facing a legal challenge in front of the UK’s High Court, with hearings scheduled for this coming October.

Australia, US discussions

Should Article 50 be invoked and the exit negotiations undertaken, how the UK will handle its future external trade relationships once it is no longer an EU member will be a key question going forward, including on the timing and procedures for conducting such talks.

Meanwhile, initial suggestions of future trade deals between the UK and third countries are already being floated, with officials already holding early discussions to explore the subject.

Over the past week, May has reportedly discussed the prospect of a future UK-Australia trade deal with Australian Prime Minister Malcolm Turnbull, who was recently re-elected. The EU and Australia had already confirmed late last year their own plans to engage in trade talks, which they aim to launch in 2017. (See Bridges Weekly, 19 November 2015)

“We did discuss a free trade agreement,” said the Australian premier to reporters on 17 July, recounting his conversation with May. “Clearly our free trade arrangements with the United Kingdom of course are with the European community. So as Britain leaves the EU, what we will need to do [is] we negotiate direct arrangements with Britain.”

“We need to get moving on that quickly. Britain will not be out of the EU for several years… but we need to get working on the new trade arrangements between Britain and Australia, as indeed Britain will have to undertake that work with many other countries as well including the rest of the European community,” he added.

The Australian premier did not elaborate on how this process would go forward, in light of the expected launch of EU-Australia talks next year – at which point the UK is still expected to be a full EU member.

On a similar note, UK officials are reportedly having initial discussions with their US counterparts on the possibility of a bilateral deal further down the road. The EU is currently negotiating the Transatlantic Trade and Investment Partnership (TTIP) with the US, and European Commissioner Cecilia Malmström has confirmed that the UK will be participating in those talks for as long as it is a full EU member. (For more on the TTIP talks, see related story, this edition)

US President Barack Obama had cautioned earlier this year that the UK would be at the “back of the queue” for trade deals should it leave the EU, given Washington’s priority in negotiating agreements with country groups rather than individual nations. (See Bridges Weekly, 28 April 2016)

Talks between the UK and US since the 23 June referendum have, however, indicated that the two sides are now interested in at least exploring the subject further.

“Everybody understands that as a starting point here, folks, the UK has to work to define its new trade relationship with the EU,” said US Secretary of State John Kerry in remarks to reporters on 19 July following a meeting with UK Foreign Secretary Boris Johnson.

“That’s obvious and automatic. And the British have told us that they can’t sign any kind of new trade agreement, and I think it stands to common sense that you can’t do that, until they’re no longer a member of the EU,” he added.

The US official later clarified that this statement does not mean the two sides cannot begin holding conversations or negotiations.

“What I said is it’s impossible to sign an agreement until the EU issue is resolved, and that obviously takes a period of time. But President Obama made it very clear the other day, as did our trade representative, Michael Froman, that we are absolutely prepared to engage in conversations because it would be irresponsible not to,” said Kerry.

Johnson told reporters that entering into new trade deals would be “legally impossible” for the UK as long as it is an EU member, though it can begin to “pencil things in.”

The UK has also reportedly expressed an interest in a possible trade deal with Canada. However, Canadian International Trade Minister Chrystia Freeland has said that Ottawa’s current priority is completing the ratification process for the EU-Canada Comprehensive Economic and Trade Agreement (CETA), which is already expected to be a difficult process. (See Bridges Weekly, 7 July 2016)

IMF downgrades global growth prospects following “Brexit” vote

Meanwhile, new figures from the International Monetary Fund (IMF) released Tuesday predict that the global economy will grow at 3.1 percent this year and 3.4 percent in 2017. In an update to its semi-annual World Economic Outlook (WEO), the Washington-based institution framed this downward revision in the context of the global uncertainty following the Brexit vote. (See Bridges Weekly, 30 June 2016)

The Fund had previously predicted in its April WEO that growth this year would reach 3.2 percent in 2016 and 3.5 percent in 2017. (See Bridges Weekly, 14 April 2016)

“Before the June 23 vote in the United Kingdom in favour of leaving the European Union, economic data and financial market developments suggested that the global economy was evolving broadly as forecast in the April 2016 World Economic Outlook,” said the IMF.

The vote in favour of the European Union, the document says, means that a key downside risk for the global economy has now come into being – meaning that “the global outlook for 2016-17 has worsened, despite the better-than-expected performance in early 2016.”

“Brexit has thrown a spanner in the works,” said Maurice Obtsfeld, the organisation’s chief economist and economic counsellor, in comments to reporters explaining the downward revision.

The IMF puts forward two possible sets of predictions for the global economy, both with some negative aspects. However, the Fund suggests that these outcomes are becoming increasingly “less likely” given that financial markets are beginning to adjust to the post-Brexit vote context.

While both of these alternatives predict some negative impacts for areas such as investment and consumption, the harsher option – which would see the UK and EU’s exit talks falter, leaving their trade terms to be governed solely by WTO rules – has been flagged as “less probable.”

ICTSD reporting; “October court date for Brexit challenge,” BBC, 19 July 2016; “Britain’s new PM May gives Johnson big job, says needs time before Brexit talks,” REUTERS, 14 July 2016; “UK’s May Keen on Australian Trade Deal Soonest After Brexit,” BLOOMBERG, 17 July 2016; “Canada Focusing on EU Trade Pact Before UK Deal, Minister Says,” BLOOMBERG, 17 July 2016; “UK will not invoke EU Article 50 this year, government lawyer says,” REUTERS, 19 July 2016; “Theresa May: Article 50 will not be brought forward,” ITV, 15 July 2016; “David Davis: Trigger Brexit by start of 2017,” BBC NEWS, 15 July 2016.

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