U.K. Faces Hurdles on Path to a Free-Trade Era

By Jason Douglas Features Dow Jones Newswires

British leaders envision a free-trade bonanza from Brexit. But they face some thorny challenges in just keeping the global trade benefits Britain already enjoys as a European Union member.

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The EU has dozens of regional or bilateral free-trade agreements covering more than 60 countries. These stretch from broad, stand-alone deals with large economies like South Korea to looser partnerships with smaller neighbors, including Tunisia and Algeria.

Keeping most of these pacts alive after Britain leaves the EU in March 2019 is a strategic goal for the U.K., which has put expanding global trade at the center of its post-EU economic plan.

It is also important economically. Around 13% of U.K. trade is with countries covered by an EU trade deal, including 10 of the U.K.'s top 50 export markets. More than 40% is with the EU. Other big partners such as Canada and Japan are subject to accords with the EU that Brussels is implementing or finishing.

U.K. Trade Secretary Liam Fox has struck an upbeat note about the prospects of smoothly replicating many of these deals as Brexit approaches. The U.K is seeking to persuade countries with an EU trade agreement to keep trading with Britain on the same terms immediately after Brexit, and later negotiate bespoke deals.

Testifying to lawmakers this month, Mr. Fox said that after preliminary discussions with the 60-odd countries involved, the U.K. has "not had any indication from any of them that they did not want to get bilateral market access" and that he is confident firm agreements will be forthcoming. The U.K. can't formally ink its own trade deals until after it leaves the EU.

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Trade experts are skeptical that this "grandfathering" process will be easy. They cite three principal reasons: Quotas, rules of origin in international trade, and uncertainty over the U.K.'s future economic ties to the EU.

A strong sign of the potential trouble with quotas came when seven countries, including the U.S., wrote to British and EU representatives at the World Trade Organization in September to express opposition to proposals that would give the U.K. its share of the EU's quotas.

Quotas set a limit on how much of a particular good a country will import -- such as tons of beef -- before slapping on a tariff. They are among the most hotly contested parts of a trade deal, and the U.S. and others argued that apportioning part of the EU's quotas to the U.K. based on past trade flows would upset the "delicate balance of concessions and entitlements" that underpin global trade. The U.K. and the EU pledged to discuss the issue further with WTO members.

The episode underscored how hard it is to tinker with existing trade arrangements without attracting objections, said Monique Ebell, associate research director for international trade at the U.K.'s National Institute for Economic and Social Research, a nonpartisan think tank.

Ms. Ebell said that when the U.K. gets to the hard bargaining with countries about replicating their EU agreements, it may find that the countries will be less willing to make concessions on quotas and other issues for a market of only 65 million consumers than they were for the EU market of 500 million.

Another potential obstacle is rules of origin. The EU's pact with South Korea, for example, specifies that no more than 45% of the value of a car can be accounted for by components originating from outside either territory if the car is to avoid a tariff. Mirroring those arrangements for the U.K. could be problematic, as a big chunk of U.K. car components originate in the EU, which wouldn't be party to the new arrangement between the U.K. and South Korea. Smoothing over such wrinkles would require careful negotiation with both Seoul and Brussels.

Similarly, some countries may wish to see what sort of access the U.K. retains to the EU market before agreeing to a rollover, to see whether exports that arrive in the U.K. can be sold on tariff-free across EU member states.

Resolving such issues in the short time before Brexit will require a major diplomatic push from London, which hasn't pursued an independent trade policy for more than 40 years. The U.K. has hired a seasoned New Zealand trade expert, Crawford Falconer, to spearhead the effort and prepare the ground for new trade deals after Brexit.

Write to Jason Douglas at jason.douglas@wsj.com

(END) Dow Jones Newswires

November 16, 2017 20:30 ET (01:30 GMT)