Gowling WLG Brexit Report

TRADE DEAL OR NO DEAL WHAT ARE THE IMPLICATIONS OF BREXIT ON TRANSATLANTIC TRADE?

CONTENTS 04 / Introduction

20 / What is the current direction of travel?

06 / The trans-atlantic triangle

24 / Action to take now

09 / US–EU trade

26 / Contacts

12 / Trade between the US and UK

28 / Research methods / Background

15 / Trade between the UK and EU 16 / What models will not be adopted?

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INTRODUCTION At present, the US-UK trading relationship is simple. The UK is currently part of the European Union (EU). The EU has no preferential trade agreement with the US and the UK cannot negotiate its own separate bi-lateral agreement.

This means that US businesses trade with the UK on the same terms as they trade with the rest of the EU. However, a shared language and culture also means that the UK can serve as an attractive base from which US companies can trade with other EU member states. However, the absence of a US-EU trade agreement means that many products that US companies wish to export to the EU face numerous tariffs and administrative barriers.

On Thursday June 23 2016, the UK voted to leave the EU. That departure has become known as ‘Brexit’. This was followed in November 2016 by the election of Donald Trump as US President. During his presidential campaign Mr Trump made no secret of support for taxes on imports to the US, other trade defence measures and his opposition to large scale multi-lateral trade deals like the Transatlantic Trade and Investment Partnership (TTIP), going so far as to threaten to scrap a number of existing free trade agreements including those between the US, Canada and Mexico. He has also pledged to withdraw from the Trans-Pacific Partnership (TPP) on his first day in office.

These events have triggered considerable uncertainty about the future of trade between the EU, the UK and the US. Based on our research into the concerns of US business in a range of sectors, this guide aims to tackle some of this uncertainty by; • investigating what the US, one of the UK’s biggest trading partners, wants out of a Brexit deal to keep trade flowing • helping businesses better understand and manage the potential future barriers to US and UK trade • lifting the lid on the Brexit options, their likelihood and what they could mean for trade between the UK and US • providing practical advice on what businesses, particularly those based in the US that export into the UK and Europe can be doing now to best prepare for several years of change and uncertainty

The absence of a US-EU trade agreement means that many products that US companies wish to export to the EU face numerous tariffs and administrative barriers.

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Businesses in the US are already reacting to the uncertainty created by this three-sided relationship

“ Over one third of US businesses with a base in the UK say they are considering moving it to elsewhere in the EU because of Brexit – and over half of US businesses that export to the EU claim they are more likely to bypass the UK in order to do business with the rest of the EU as a result of the Brexit vote.”

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THE TRANS-ATLANTIC TRIANGLE With the UK’s vote to leave the EU, what has traditionally been a bi-lateral trading picture – between the US on the one hand and the EU (including the UK) on the other – will become a three-sided re lationship; a ‘Trans-Atlantic Triangle’.

The UK will no longer be part of the EU and will need to have its own separate relationship with it. Also, the UK will no longer be part of the US–EU relationship and the UK will have the potential to negotiate a new US–UK bi-lateral deal. And each relationship will have the potential to affect the others.

How far will any UK/US trading deal depend on the relationship of each with the EU?

Tariff and non-tariff barriers exist as no current trade deal.

Will TTIP survive to remove these or will Donald Trump impose additional barriers?

Will increased US protectionism weaken a UK deal?

The ongoing attractiveness of the UK for US investment will depend on a number of factors. In particular, if the UK does not negotiate equivalent national treatment or otherwise have privileged access to the Single Market, the UK may be of less interest for US investment in terms of access to the rest of the EU Single Market.

At present we do not know what any of the individual relationships will be. That uncertainty is increased by the interdependence of the three relationships and is set to have a significant impact on everything from entrepreneurship and innovation to the problems for businesses in the form of tariff and non-tariff barriers to trade. For example, will the UK have a ‘soft’ Brexit in which it retains much the same level of access to the EU’s Single Market and continues to adopt similar standards? Or will it have a ‘hard’ Brexit in which it gives up its privileged access and trades with the EU on the same terms as any other third country – including, currently, the US? Alternatively, will a sector approach be adopted, whereby some sectors have a ‘soft’ Brexit and others a ‘hard’ one?

Businesses in the US are already reacting to the uncertainty created by this three-sided relationship. Our research has revealed that over one third of US businesses with a base in the UK say they are considering moving it to elsewhere in the EU because of Brexit. The greater the value of their exports to Europe, the more likely US businesses are to relocate out of the UK to mainland Europe.

Currently part of the Single Market and aligned with the EU. How will the UK strike the balance between continued privileged access to the Single Market and increased domestic sovereignty?

To what extent will non-tariff barriers increase with divergence?

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US – EU TRADE

Is uncertainty about the future regulatory environment affecting decisions you are making about trade and investment with the uk right now?

In the absence of a free trade deal between the US and the EU, US businesses are subject to the common customs tariff on entry of goods of US origin into the EU. However, with the global trend towards decreasing tariffs spearheaded by the World Trade Organisation (WTO), it is non-tariff barriers that are increasingly seen as the greatest impediment to trade.

35% Yes, it is having a negative impact on such decisions 38% Yes, it is having a positive impact on such decisions 27% No, it isn’t having any impact on such decisions

0

5

10

35%20

Yes, it is having a negative impact on such decisions

15

Our research also shows that over three quarters of US businesses that export to the EU report that uncertainty over the future of trade regulation is having a direct impact on their current investment decisions, both positive and negative.

25

30

35

40

Ninety six per cent of US businesses say they currently face non-tariff barriers when trading into the EU. The most common of these is variation in rules of origin, followed closely by administrative delays on entry, licensing requirements, product labelling requirements and IP rights

This is particularly true of medium to large businesses, with almost three quarters of businesses with an annual turnover of more than US $500 million reporting an impact on decision-making.

What’s more, this uncertainty is having a wider impact on the EU investment strategy of US businesses in over 50% of cases.

Estimate the value (in %) that the uncertainty over the Brexit negotiations has had on your EU investment strategy

But US businesses also fear the impact that waiting for clarification will have on their bottom line. The Article 50 process, which governs the UK’s EU exit, triggers a two-year exit timetable – and current indications suggest it will take (at least) this long. A third of US businesses that export to Europe (34.5%) believe a delay of two years for the UK to leave the EU will have a negative impact on their business, with some striking variations between industry sectors. The automotive sector is particularly negative in its outlook with 45% of businesses believing that a delay would be bad for business.

However, by contrast, half of healthcare products businesses believe the delay would have a more positive outcome, possibly because the UK has such a strong reputation as a world-leading healthcare provider, which won’t change regardless of the UK’s chosen Brexit path.

Increased by

34%

Decreased by

48%

No change

18%

Do you think the delay of up to two years (or possibly longer) for the UK to negotiate an exit from the EU will have a negative impact on your business?

Please select the main non-tariff barriers that you face in trading/investing/providing services into the EU?

36% 33% 32% 32% 31% 29% 26% 25% 22% 12% 4% 0

5

10

15

20

Variation in Rules of Origin

35%

Yes, it will have a negative impact

Variation in Rules of Origin

39%

No, it will have a positive impact

Administrative delays on entry Need for licence/registration for goods or

23%

It won’t have any impact

Need for licence/registration for goods or services to be supplied

3%

0

Administrative delays on entry

I don’t know what impact the delay will have on my business

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10

15

20

30

35

40

30

35

Lack of ‘national treatment’ for provision of a service

Product labelling requirements

Lack of entry rights for indivdiuals to provide business and proefessional services

Lack of access to government procurement opportunities

40

Lack of convergence in technical standards (TBT) and sanitary and phytosanitary issues (SPS)

Import quotas

Product labelling requirements

25

25

services to be supplied

Intellectual property rights including geographic indications Intellectual property rights including geographic indications 5

including geographic indications. This picture is broadly the same across all sectors and size of company, with the exception of the largest businesses who rate rules of origin lower on their list of concerns and IP rights as more important.

We don’t fancy any non-tariff barriers in trading/ investing/providing services into the EU

Lack of access to government procurement opportunities Lack of convergence in technical standards (TBT) and sanitary and phytosanitary issues (SPS) Lack of ‘national treatment’ for provision of a service

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Which of the non-tariff barriers identified in response to question 11 do you consider to be (i) the most onerous, and (ii) the most expensive to your business?

However, the barriers perceived as most onerous are import quotas and the need to register or license goods, with registering and licensing goods also seen as the most expensive.

Most onerous

TTIP is intended both to lower tariffs and reduce regulatory barriers that make trade between the US and the EU difficult or more costly. Support for the deal from US businesses is high.

15% 15% 8% 13% 8% 6% 7% 12% 13% 3% 0

Three quarters of US businesses are aware of TTIP, rising to 85% for businesses that export over US $500 million to the EU every year. And US firms consider that TTIP will have a bigger impact on their business than either a bi-lateral deal between the US and the UK or the multi-lateral Trans-Pacific Partnership (TPP) deal that the US was considering with 11 other Pacific Rim countries.

However, despite this wide-spread support, the indications are that TTIP is not going to progress in the short term, if ever.

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Import quotas

20

Lack of ‘national treatment’ for provision of a service

Need for licence/registration for goods or 12% services to be supplied 15% Lack of convergence in technical standards (TBT) 9%and sanitary and phytosanitary issues (SPS) 9%Intellectual property rights including geographic indications 14% Product labelling requirements 9% 12% 7% 9% 4%

0

15

10

Political opposition to TTIP in the US is strong. Donald Trump has spoken out against multi-lateral trade deals, including TTIP and TPP, and has recently said that he will withdraw from the TPP on his first day as President. He believes such deals will harm US jobs, particularly in manufacturing, and allow cheap foreign goods to flood the US market.

5

Lack of access to government procurement opportunities

Administrative delays on entry

20%

Lack of entry rights for individuals to provide business and professional services

Yes, I am aware of it but not its possible implications for my business

7%

No I am not aware of it

74% Yes, I am aware of it and its possible implications for my business 10

Import quotas

15

20

3% 3%

1% 1%

20% 20%

27% 27%

24% 24%

25% 25%

The Transatlantic Trade and Investment Partnership (TTIP)

The Transatlantic Trade and Investment Partnership (TTIP) The above will have an equal effect on my business The above will have an equal effect on my business The Trans-Pacific Partnership (TPP) The Trans-Pacific Partnership (TPP) A trade deal between the UK and the US A trade deal between the UK and the US None of them will have an effect on my business None of them will have an effect on my business I am not aware of the effects they will have on my business I am not aware of the effects they will have on my business

Are you aware of the Transatlantic Trade and Investment Partnership (TTIP) and its possible implications for your business?

Variation in Rules of Origin

Which of the following do you think will have the biggest effect on your business?

There are also popular concerns in the EU regarding investment protection provisions which are regarded as undemocratic. The impact of TTIP on agriculture and the possible dilution of environmental, consumer protection and health standards are also of concern. French Prime Minister, Manuel Valls, has announced “a clear halt” and the German economy minister, Sigmar Gabriel, said in September 2016 that “the talks with the United States have de facto failed”.

So what does this mean for the future of US-EU and US-UK trade?

With the imminent collapse of TTIP, it seems that in the short to medium term there will be little change in the US’s trading relationship with the EU. Therefore, the degree to which the US will trade directly with the EU post-Brexit, or will opt to make further investment in the UK as a gateway to the EU, becomes a live and open question. The answer will depend on the UK’s ongoing relationship with the EU, both of which are in fact dependent on the other.

Need for licence/registration for goods or services to be supplied Lack of convergence in technical standards (TBT) and sanitary and phytosanitary issues (SPS) Intellectual property rights including geographic indications

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Product labelling requirements

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TRADE BETWEEN THE US AND UK

Other than a change to tariffs, what factors would encourage you to continue trading and/or investing/providing services into the UK following Brexit?

Considering goods only, from January to September 2016 the UK was the US’s 7th largest trading partner, with the US exporting $42.1 billion of goods to the UK, in return importing $39.8 billion from the UK. The US and the UK currently share the world’s largest bi-lateral foreign direct investment partnership.

Despite these close ties, the UK has no specific trade deal with the US as it cannot currently sign such deals while it remains part of the EU. The impact of uncertainty is clear to see. Over one third of US businesses with a base in the UK say they are considering moving it to elsewhere in the EU because of Brexit – and over half of US businesses that export to the EU claim that they are more likely to bypass the UK in order to do business with other EU countries as a result of the Brexit vote.

33% 32% 30% 26% 23% 22% 21% 21% 20% 20% 15% 11% 1% 0%

Are you more likely to bypass the UK in order to do business with the rest of the EU as a result of the Brexit vote?

Yes

No

54%

44%

If you have a base in the UK, are you considering moving it to elsewhere in the EU as a result of Brexit?

17% We don’t have a base in the UK

No

44%

0

Yes

39%

Additionally, the UK domestic market alone may not be sufficiently attractive to retain the current level of trading links between the US and the UK post-Brexit. Only a third (33%) of US businesses say that the size, composition and preferences of the UK market would encourage them to continue trading with the UK. This is possibly because many US businesses use the UK as a gateway to the wider EU market.

5

10

15

20

25

30

35

Size, composition and preferences of the UK market Size, composition and preferences of the UK market

Lack of opportunities in the US domestic market

Regulatorystability stability Regulatory

UK workforce (where relevant)

A trusted legal and insituitional framework Mobility of labour A trusted legal and institutional framework (e.g for the enforcement of contracts) (e.g for the enforcement of contracts) US government subsidies to facilitate production The £/$ echange rate or export financing The £/$ echange rate Commoin language Common language Mobility of capital Mobility capital Ease andof cost of establishment in the UK (where relevant) Ease and cost of establishment in the UK (where relevant) Access to capital

Nothing would encourage me to continue trading and/or investing/providing services into the UK following Brexit Other than a change to tariffs, nothing would encourage me to continue trading and/or investing/ providing services into the UK following Brexit

Access to capital Lack of opportunities in the US domestic market UK workforce (where relevant) Mobility of labour

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US government subsidies to facilitate production or export financing

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Nothing would encourage me to continue trading and/or investing/providing services into the UK following Brexit

However, without its own privileged relationship with the EU, there is a higher chance that US investment will continue to see the UK as an attractive gateway to the EU’s Single Market if the UK can retain important elements of its current access. The possible collapse of TTIP could therefore present an opportunity for the US and the UK to conclude a strong bilateral agreement that could facilitate US investment into the UK which may continue to have free access to the EU market.

And such a deal is a possibility. Speaker the U.S House of Representatives, Paul Ryan, is backing a US-UK free trade deal, describing the UK as an “indispensable ally”.

It is therefore not surprising that most US businesses favour both a soft Brexit (66.6%), where the UK retains privileged access to the Single Market, and a direct trade deal (81.8%) between the UK and the US. There is therefore a close link between the nature of the UK’s deal with the EU and its attractiveness to the US. However, the UK’s post-Brexit relationship with the EU is unlikely to become clear in the immediate future. The process by which the UK will leave the EU will take some years to complete and is unlikely to begin until some way into 2017 because of a combination of politics and legal wrangling.

Even should the UK achieve a soft Brexit and retain a high degree of integration with the Single Market, the fact that it is no longer part of the EU will have important effects which may increase trading friction between the two. For example, following Brexit, EU law will no longer automatically be part of the UK’s domestic legal framework and individuals will no longer be able to directly invoke EU law to ensure that the government respects its EU Treaty obligations. Even where the UK adopts certain EU standards and requirements to reduce non-tariff barriers to trade, there will be a time lag

in implementing any updates to those EU laws in the UK and there will be no redress if the UK government delays.

The fact that the UK will no longer be involved in developing and influencing EU legislation also means that the EU could implement rules that the UK cannot, or does not wish to, adopt.

This time lag and potential ‘cherry picking’ of EU legislation makes it highly likely that, over time, there will be some divergence of standards and requirements between the UK and the EU. Although existing EU standards can be troublesome, harmonisation across such a large trading bloc simplifies design, production and imports / exports.

In the event of a hard Brexit, the UK’s attractiveness to the US for investment as a gateway to the EU is likely to fall dramatically. This may impact the UK domestic market to the extent that divergence from EU standards and requirements means that the same US products cannot be sold in both the UK and the EU. So where does this leave the UK and the US? US businesses are far from seeing Brexit as a bad thing for US-UK trade – with only a quarter predicting that it will have a negative effect. Around a quarter believe that it will have no impact and just over half consider that it will have a positive impact on trade between the two countries in the short and long term. In addition, over a third of US businesses told us that they were increasing investment in the UK as against 35% who said that regulatory uncertainty was having a negative effect on investment.

At this point we know three things.

Firstly, in the immediate to short term, while the UK remains part of the EU, the three relationships in the Trans-Atlantic Triangle will remain the same.

Secondly, we know that the future for TTIP is very uncertain.

This, combined with Donald Trump’s apparent affection for Britain and his current preference for bi-lateral rather than multi-lateral deals, could be good for US-UK trade.

However, a more protectionist stance from the US in any trade negotiations with the UK may decrease the UK’s enthusiasm if it considers that the benefits of such a deal flow only in one direction.

Thirdly, what happens between the US and UK following Brexit is highly dependent on the EU-UK relationship – and while the ultimate outcome is unknown, we do know that some of the models regularly discussed in the media are not viable for a number of reasons discussed in the next section.

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TRADE BETWEEN THE UK AND EU Once it leaves the EU, the UK will still retain access to the EU’s Single Market in the same way as every other country in the world – including the US – also has access. What it will seek to negotiate is the particular terms of that access.

The greater the degree to which it can retain privileged access to the Single Market the ‘softer’ the Brexit will be; the further it moves away from the access it currently enjoys, the ‘harder’ the Brexit.

Traditionally the EU has taken the position that greater ease of access to its Single Market must be accompanied by both acceptance of many EU laws and partaking in the so-called ‘flanking’ policies which are aimed at facilitating the cohesion of the EU, such as regional development funds, that parts of the UK have also benefitted from. This also means contributing to the EU budget. In addition, the greatest degree of access is enjoyed by countries that sign up to the EU’s four freedoms of movement (of goods, services, people and capital).

This position is not surprising. The EU has been successful in reducing non-tariff barriers within the Single Market, setting out a minimum level of harmonisation in limited areas such as health and safety and establishing the principle that goods or services that meet those base levels can be freely sold in any member state. It makes sense that it will expect a non-EU country with privileged access to the Single Market to adopt the same standards so that it can be sure, for example, that the certification of a product for sale in that country is on the same terms as a certification in an EU country so that no additional certification is required for sale in the EU. However, although it may be economically desirable for the UK to aspire to a soft Brexit, the fact that this is likely to require the continued adoption of EU laws means that such a position could be politically untenable in the context of the call to repatriate UK decision-making on important issues which found resonance with those that voted to leave. In its negotiations with the EU, the UK will therefore need to balance the degree of integration with the Single Market against the political need to repatriate sovereignty, particularly on issues such as immigration and the degree to which the UK is subject to decisions made in EU courts.

Equally, in return, the EU may want to make an example of the UK to discourage other member countries from leaving the Union.

So what are the options?

Unfortunately, the most popular and well-known options are, at this point, the most unlikely.

Half of US businesses favour the Swiss or Norway models.

While these two models are often the most talked about, it is extremely unlikely that either will be adopted. But there are other soft Brexit options that remain feasible.

What kind of relationship would you most like to see between the UK and the EU?

11%

2%

27%

17% 21%

23%

The Swiss model – A series of bespoke bi-lateral agreements

The Swiss model - A series of bespoke bi-lateral agreements

The Norway model – Retaining access to The model - Retaining access to the Single Market theNorway Single Market

The Canada model – CETA free trade deal

The Canada model - CETA free trade deal

The Turkey model – Customs Union The Turkey model - Customs Union

Revert to World Trade Organisation rules (MosttoFavoured Nation) Revert World Trade Organisation rules (Most Favoured Nation)

I don’t know enough about the legal and

I don’t know enough about the legal and regulatory regulatory issues to have an opinion issues to have an opinion

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WHAT MODELS WILL NOT BE ADOPTED? MODEL: SWISS LIKELIHOOD OF ADOPTION: ZERO REASON…

MODEL: NORWAY LIKELIHOOD OF ADOPTION: ZERO REASON…

What is it?

What is it?

Switzerland currently has a set of over 120 individual bilateral agreements with the EU. These agreements cover access to the Single Market in individual sectors and require Swiss law to mirror EU law in certain areas. The agreements are static, however, and require renegotiation by a series of joint committees each time EU law changes. Additionally, there is no specific court set up to enforce Swiss adherence to these bi-lateral agreements and instead adherence is governed by the Swiss domestic Courts.

Norway, together with Liechtenstein and Iceland, is part of the European Economic Area (EEA) agreement. This allows it full access to the Single Market across most sectors without tariffs and with greatly reduced non-tariff barriers. In return, EEA states make budget contributions to the EU and accept EU laws.

Would it work for the UK and EU?

The EU likes the Norway model but it may be less palatable to both the UK and Norway. Norway’s payments to the EU are on a par with those of EU members and it is required to accept large chunks of EU law, including in areas not related to the Single Market such as social policy, consumer protection and environmental standards. It is also subject to the EFTA Court which includes judges from the three participating ETFA countries and is required to follow previous rulings of the Court of Justice of the EU (CJEU) and adopt fresh rulings using similar principles of the CJEU. As with the Swiss model, this would be a hard sell to those within the UK that voted for Brexit.

The Swiss model is, after the Norway model, the ‘softest’ form of Brexit. It is, however, an historical anomaly. It is cumbersome and complex. Switzerland is in default of its commitment in relation to free movement of workers and the EU wishes to replace the model with a framework agreement akin to that which it has with Norway.

Even if the Swiss model was open to the UK, the fact that it involves signing up to a large tranche of EU law over which Switzerland has no real influence may make this option a hard sell to the UK population and domestic politicians who wish to strengthen domestic sovereignty.

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Would it work for the UK and the EU? The Norway model is the ‘softest’ form of Brexit.

Finally, this option would need the unanimous consent of the 27 remaining member states of the EU, plus the agreement of Norway, Liechtenstein and Iceland. Norway, however, has its own interests to protect as the most influential EEA country. Its European Affairs Minister has recently been quoted as saying that it might not be in Norway’s interest to allow the UK to join EFTA, which it would need to do to join the EEA agreement, because “it would shift the balance [within that trading bloc] which is not necessarily in Norway’s interests”.

Additionally, Norway does not have a customs union with the EU. This means that Norwegian exporters must comply with rules of origin to prove that their products are made inside the EEA.

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MODEL: CANADIAN – A FREE TRADE DEAL LIKLIHOOD OF ADOPTION: UNLIKELY REASON…

MODEL: WORLD TRADE ORGANISATION (WTO) LIKLIHOOD OF ADOPTION: UNLIKELY (BUT THE DEFAULT POSITION IF NO UK-EU DEAL IS REACHED) REASON…

What is it?

Implications for our relationship with the US

What is it?

Following seven years of negotiations, Canada and the EU signed the Comprehensive Economic and Trade Agreement (CETA). This free trade agreement abolishes 98% of all tariffs on its entry into force and puts in place measures to reduce a series of non-tariff barriers through harmonising standards between Canada and the EU.

A free trade agreement could be a hard or soft form of Brexit depending on the extent to which it replicates the privileged access to the Single Market enjoyed by Norway, for example.

Because an FTA is unlikely to ever be able to fully replicate the EEA agreement that Norway enjoys, it will always be a harder form of Brexit.

Should the UK fail to secure any deal with the EU after Brexit for preferential access to the Single Market, it would revert to trading with the EU on WTO terms as the US currently does in the absence of any special relationship.

Would it work for the UK and EU?

Free trade agreements such as CETA impose fewer obligations on a country in return for less access to the Single Market. For example, the EU has recognised Canadian assessments of product standards and requirements in only a minority of cases, meaning that other products are subject to approval by EU authorities before they can be sold in the Single Market.

Free Trade Agreements take on average four to nine years of negotiation, a timeline that could potentially force the UK into a hard Brexit in the interim unless a transitional arrangement is agreed. Additionally, CETA has not been universally supported in the EU and is opposed for many of the same reasons as TTIP. Because aspects of the deal have to be ratified by each EU member state, it was almost derailed at the eleventh hour when the Walloon Parliament, a regional parliament of Belgium, initially refused to allow the Belgian federal Parliament to consent to the deal.

Aspects of a UK-EU agreement would face similar hurdles depending on its content, although the fact that the UK is currently aligned with EU standards may serve to defuse some tensions.

Free trade agreements traditionally cover trade in goods rather than services which could be problematic for the UK given the importance of the EU to its service industry.

The WTO provides a global framework for trade between member countries, primarily through the negotiation by each country of schedules of tariffs that it will apply to imports from other members and by establishing the basic principle of most favoured nation treatment.

Would it work for the UK and EU? Other than the UK imposing no tariffs on all imports, working to WTO rules is the ‘hardest’ form of Brexit and will impose tariff and non-tariff barriers on all trading relationships.

The EU has a tariff schedule that is applied by all of its members, including currently the UK, to imports from third countries that do not have a trade deal with the EU. These are the tariffs which TTIP seeks to remove. Upon Brexit the remaining EU countries would apply those tariffs to imports from the UK. The UK would, in turn, apply its own set of tariffs to imports from the EU. However, as the UK currently adopts the EU’s tariff schedules, it would need to negotiate its own set of schedules with other WTO countries following Brexit. Those other countries currently have their own schedules meaning that the UK could not secure any concessions on other countries’ tariffs in return for adopting low tariffs itself. This is because, under the WTO’s ‘most favoured nation’ principle, where two countries do not have a free trade agreement (for substantially all trade), each must not grant any preferential treatment to the other that it does not also extend to every other WTO member.

Under WTO rules there is also likely to be a timing gap, postBrexit, before the UK can impose UK-specific anti-dumping measures. This could leave a number of British industries largely defenceless to dumped imports.

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From an economic point of view, there are a large number of disadvantages for the UK in trading with the EU purely on the basis of WTO rules. However, the fact that the UK would not be required to adopt any EU laws, pay any contributions to the EU budget or be subject to the jurisdiction of an EU court mean that, politically, this option addresses many of the concerns that arguably gave rise to the vote to leave the EU. However, the UK government’s recent assurances to Nissan that it would seek to secure continued tariff free access to the Single Market implies the WTO model is not likely. The imposition of tariff and non-tariff barriers on exports to the UK from the EU may also prove unpalatable for some sectors in EU countries that have a high number of such exports – one example being German car manufacturing.

Implications for our relationship with the US Trading with the EU on WTO rules would place the UK in the same position as the US is currently. But, if TTIP were to be revived and concluded, the US would end up in a more favourable trading position than the UK potentially extinguishing any incentive to invest in the UK as a gateway to Europe.

In terms of US imports to the UK domestic market, until a bi-lateral deal was reached between the two countries, the US would trade into the UK on the basis of the tariff schedules negotiated by the UK. A hard Brexit of this type is likely to result in a divergence of standards between the UK and the EU and a significant increase in other non-tariff barriers. This means that US businesses could face different non-tariff barriers in trading into each of the UK and EU markets, and may need to tailor products differently for each market, whereas currently the same standards and requirements apply in both. Any bilateral agreement between the US and UK may require convergence with EU regulatory standards in order to facilitate access for US goods to the EU.

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WHAT IS THE CURRENT DIRECTION OF TRAVEL? MODEL: TURKISH OPTION – A CUSTOMS UNION DEAL LIKLIHOOD OF ADOPTION: MAYBE (IN SOME FORM) REASON…

MODEL: CONTINENTAL PARTNERSHIP LIKLIHOOD OF ADOPTION: MAYBE REASON…

What is it?

Implications for our relationship with the US

What is it?

A customs union prohibits the imposition of customs duties on the import and export of goods between its members and requires the imposition of common tariffs on third countries.

It is this latter requirement which means that the UK cannot negotiate its own deals with other countries while it remains a member of the EU.

Imports to the UK would be exported on to the EU without incurring additional tariffs. However, other non-tariff barriers could remain.

The Bruegel Institute (a European think tank) has developed an alternative model called the Continental Partnership (CP) which involves a two-tier structure:

In addition, the UK could also be prevented from concluding its own set of tariffs with the US. This would mean that US businesses trading with the UK would incur the same tariffs as in trading with the EU but could face hurdles to onward export from the UK to the EU.

• an inner circle comprising EU members with political aims and shared supranational constitutional structures, and

The EU is also in a bi-lateral customs union with Turkey.

This was originally intended to be a staging post to Turkey’s eventual membership of the EU and as part of the arrangement it is required to align its laws with the EU in areas such as IP, public procurement and consumer protection.

Would it work for the UK and the EU? There would be no tariffs between the UK and EU states and this model would reduce some non-tariff trade barriers in relation to goods. However, the UK would continue to be unable to negotiate its own free trade agreements with other countries. The freedom to do so is widely seen within the UK as a key advantage of Brexit and will not be easily sacrificed.

There have been intriguing hints that the UK government is considering some adapted or partial form of customs union with Prime Minister, Theresa May, claiming that our relationship with the customs union is “not a binary choice”.

It may therefore be that we end up with an adapted form of customs union together with elements of one or both of the other two options below.

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• an outer circle of others, including the UK. The outer circle would have full access to the Single Market, would participate in EU budget and could restrict freedom of movement, but would be required to adopt many EU rules and regulations Countries in the outer circle would have some opportunity to influence EU rules and regulations by proposing amendments to draft legislation in a CP Council that would contain delegates from both the inner and outer circle. However, there would be no legal obligation for the EU to amend any draft law to follow the CP Council’s recommendations.

The Bruegel Institute suggests that non-EU countries in the CP would participate in external EU trade policy, giving up their ability to negotiate their own free trade agreements.

This is unlikely to be palatable to the UK. The EU may feel that the CP grants too much privileged access to the Single Market without acceptance of one of its founding tenets – the free movement of people. In doing so, it could encourage other member-states to leave.

While the debate might be seen as heading in this direction, the CP is a novel idea and has yet to secure buy-in from either the UK or the rest of the EU.

Implications for our relationship with the US The CP would be a soft Brexit option. It would secure the UK’s continuing attraction for investment as a gateway to the EU and, in ensuring that UK standards were linked to those of the EU, mean that the same products could continue to be sold in both markets.

Would it work for the UK and EU? The UK would still be required to pool sovereignty on many important aspects but, depending on the way in which the CP Council was constituted, could potentially exert more influence on EU legislation than EEA members or Switzerland. It would also allow the UK control over its immigration policy – an important aspect of the campaign to leave the EU and something that could not be achieved under the Norway and Swiss models.

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MODEL: UKRAINE MODEL – DCFTA LIKLIHOOD OF ADOPTION: MAYBE REASON… What is it?

Implications for our relationship with the US

The Deep and Comprehensive Free Trade Area (DCFTA) has been established through an association agreement between the EU and Ukraine. The EU has established similar DCFTAs with Georgia and Moldova.

Unlike the CP, the UK would retain its own external trade policy with third countries and so could conclude deals with third countries. The UK would therefore be free to sign a bilateral deal with the US.

The DCFTA allows Ukraine full access to the Single Market in specific sectors and, unlike a free trade agreement, goes further in also providing for the freedom of establishment of certain service sectors. It allows for the free movement of goods, services and capital – but not people – by the elimination of most tariffs and the reduction of non-tariff barriers through the adoption by Ukraine of many EU standards.

The retention of privileged access to the Single Market would also see the UK retain its attractiveness to US investment as a gateway to the EU with respect to the sectors covered by the agreement.

Would it work for the UK and EU? The EU is comfortable with DCFTAs and is currently negotiating similar agreements with Morocco and Tunisia.

A DCFTA would provide the UK with more privileged access to the Single Market than Canada enjoys under CETA, but less than Norway and Switzerland. In return, the UK would need to retain many EU laws but would also gain greater power over immigration. The UK could also continue to use the European Central Bank and could sign up to EU research and development programmes and the Open Skies Agreement.

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ACTION TO TAKE NOW The future is looking bright for UK-US trade. US businesses are positive about the opportunities for trade with, and investment in, the UK. The collapse of the TTP, the potential collapse of TTIP, Donald Trump’s preference for bi-lateral rather than multi-lateral free trade deals, the US’s apparent continued ‘special relationship’ with the UK and signs that the UK government will aim for a softer form of Brexit all point towards continued and prosperous trade between the US and the UK.

95% of US firms told us that they will need third party support

with the EU. Where a company has to provide different labels,

before you take any decision to close operations or make large

and advice in order to successfully deal with Brexit. The type of

use alternative materials, or adhere to differing size or safety

(20+) reductions in force, with penalties of roughly 25% of

support needed will vary both by sector and over time as the

requirements to sell the same product into different markets can

payroll if you fail to comply. Moreover, there is no ‘at-will’

future shape of trading relations in the Trans-Atlantic Triangle

lead to increased administration and cost. We know that if the

employment in the UK and an array of EU laws (national

begin to crystallise. At this point, US (and UK) businesses

UK follows a path to a hard Brexit, regulatory requirements as

and supranational) come into play in assessing EU locations.

will need to ensure that they position themselves not only to

between the UK and the EU may start to diverge. We also know

All employees have a contract and most may have statutory

weather the uncertainties ahead but also to take advantage of

that even with a soft Brexit there may be a time lag between the

protection against termination. Take legal advice at the

the opportunities that may arise.

UK aligning with new EU standards.

concept stage.

There are six key steps businesses can take now to prepare for the future:

Assess the realistic degree of variance that you can sustain and

If you want to relocate your workforce, you will need to start

the potential cost impact of any such divergence between the

reviewing contracts to check they have the power to require

two jurisdictions. This will include assessing the value of the

employees to relocate. Even if they have that power, look at

UK domestic market for your products, and that in the EU, to

incentive arrangements, such as relocation packages, so that

understand whether it will remain desirable to sell into both

employees are encouraged and not just forced to move.

1

even with increased costs. It will also include understanding

Conduct a supply chain audit

Audit your supply chain (upwards and downwards) to be sure that you understand how the commercial effects of Brexit may affect your relationships and how any future change may impact you. Areas such as currency risk, territorial scope, customs duties, parallel importation (use of IP), regulatory standards and legal compliance may all be different. Are there long-term arrangements to which you are tied and might want to exit?

Can you secure flexibility to manage the risk of change?

In addition, ensure that your internal systems are geared up to handle potential increased administration and divergence.

2

Assess the impact of regulatory divergence

With respect to trade in goods, many US businesses told us that regulatory requirements – such as labelling, technical standards and sanitary and phytosanitary requirements – were among the main non-tariff barriers that they face in trading

24 | GOWLING WLG (UK)

your flexibility to cope with shorter periods of regulatory misalignment between the EU and the UK as greater adaptability will provide an advantage over slower moving competitors.

3

Keep close to your contracting partners

Market conditions will fluctuate over the next few years which will impact pricing and availability of goods, in particular.

Keep close to your contracting partners to better weather the storm by anticipating any changes. In addition, review major

When it comes to safeguarding talent we don’t yet know what the rules might be post Brexit to allow EU nationals to live and work here, but it is certainly not going to get any easier and there is already a move by many to apply for UK Citizenship. Again, consider offering incentives to employees to remain post Brexit, otherwise there is a real danger that they may already be looking for jobs in other EU countries which they know they can stay in.

Those incentives require careful drafting if you are not to find yourself committed to making payments to employees UK law no longer allows you to hire.

supply chain contracts now to ensure that your route to market

Finally, technology has always meant that some industries

will survive Brexit and any upheaval caused by the change in

require fewer workers, others more. Lay-offs impact more on

administration in the US. Implement required changes and secure

the old, the sick and the pregnant – but these are the categories

the key stakeholder relationships.

(and others) which are specifically protected under equalities legislation. Companies with new, sophisticated technology to

4

Treat relocation carefully

Treat relocation carefully. There are likely to be a number of

make their products may find themselves, in the short term, in need of some sophisticated HR and legal processes in order to implement them smoothly.

5

Develop your trade association and lobbying relationships

Brexit, and now Donald Trump’s stance on international trade, has made the future of global trade uncertain and complex and the accuracy of reporting on the issues is variable.

Governments, their representatives and some media are not always communicating accurate or helpful information. Trade associations have a crucial role to play in promoting best practice to ensure the ongoing competitiveness of their members and their industry as a whole. As a result they are at the forefront of policy making and lobbying and constantly assess the impact of policy on member companies. Specialist blogs can also be a source of thinking, analysis and debate.

Reflect and consult on the stance that serves your business and its likely impact and develop arguments and contracts to help influence the desired outcome.

6

Be flexible and do not over-commit

Businesses need to live with the uncertainty. The UK, the US and the EU are large economies and nothing will be finalised quickly.

In the short term, existing arrangements may continue but in the medium term businesses will be reflecting on the likely options.

Where possible, avoid long-term commitments and enter short to medium term arrangements that will allow for flexible reassessment and negotiation as more certainty develops around trade deals. With necessary long-term deals, e.g. vital capital investment or infrastructure investment, consider milestones as break / review points or events for both sides. Be prepared to challenge existing practice and consider new options.

employment/labour law bear-traps waiting for you. There can be strict rules about consulting with employee representatives

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CONTACTS Automotive

Employment

Pensions

Canada

Stuart Young +44 (0)20 3636 7968 stuart.young@gowlingwlg.com

Jonathan Chamberlain +44 (0)370 733 0581 jonathan.chamberlain@gowlingwlg.com

Glyn Ryland +44 (0)121 393 0604 glyn.ryland@gowlingwlg.com

Scott Foster Tel +1 604-891-2294 scott.foster@gowlingwlg.com

Aviation, Aerospace & Defence

Energy

Clark Sargent +44 (0)121 393 0610 clark.sargent@gowlingwlg.com

Derek Goodban +44 (0)370 903 1000 derek.goodban@gowlingwlg.com

Ian Chapman-Curry +44 (0)20 3636 7870 ian.chapman-curry@gowlingwlg.com

Mark Ledwell Tel +1 416-862-4652 mark.ledwell@gowlingwlg.com

Public law and regulation

Patrick Stewart Smith Tel +1 403-298-1850 patrick.smith@gowlingwlg.com

Commercial contracts

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Robert Breedon +44 (0)370 730 2862 robert.breedon@gowlingwlg.com

Banking and finance

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Kirsty Barnes +44 (0)20 3636 7917 kirsty.barnes@gowlingwlg.com

Andrew Litchfield +44 (0)121 393 0400 andrew.litchfield@gowlingwlg.com

Chris Brierley +44 (0)370 733 0596 chris.brierley@gowlingwlg.com

Infrastructure

Competition and EU trade/regulation Bernardine Adkins +44 (0)370 733 0649 bernardine.adkins@gowlingwlg.com

Corporate Sunil Kakkad +44 (0)20 7759 6584 sunil.kakkad@gowlingwlg.com

Data protection Peter Hall +44 (0)121 393 0282 peter.hall@gowlingwlg.com

Disputes

Stephen Kenny +44 (0)370 733 0667 stephen.kenny@gowlingwlg.com

IP Gordon Harris +44 (0)20 3636 8063 gordon.harris@gowlingwlg.com

IT outsourcing Peter Hall +44 (0)121 393 0282 peter.hall@gowlingwlg.com

John Cooper +44 (0)121 393 0161 john.cooper@gowlingwlg.com Kieran Laird +44 (0)121 393 0384 kieran.laird@gowlingwlg.com

Public sector and outsourcing Sarah Sasse +44 (0)370 733 0618 sarah.sasse@gowlingwlg.com

Real estate Richard Bate +44 (0)121 393 0038 richard.bate@gowlingwlg.com

Tax Lee Nuttall +44 (0)370 733 0584 lee.nuttall@gowlingwlg.com

Technology Alexandra Brodie +44 (0)20 3636 7818 alexandra.brodie@gowlingwlg.com

Wendy Wagner Tel +1 613-786-0213 wendy.wagner@gowlingwlg.com Rafal Wrzesien Tel + 1 514-392-9539 rafal.wrzesien@gowlingwlg.com

China Jamie Rowlands +86 (0)188 189 12645 jamie.rowlands@gowlingwlg.com

Dubai Tim Casben +971 4 437 5111 tim.casben@gowlingwlg.com

France JĂŠrĂ´me Patenotte +33 (0)1 42 99 35 54 jerome.patenotte@gowlingwlg.com Simon Lowe +33 (0)1 42 99 35 75 simon.lowe@gowlingwlg.com

Life sciences

Germany

Pat Duxbury +44 (0)121 393 0212 patrick.duxbury@gowlingwlg.com

Andreas Woelfle +49 (0)89 540 4120 75 andreas.woelfle@gowlingwlg.com

Tom Price +44 (0)121 393 0558 tom.price@gowlingwlg.com

26 | GOWLING WLG (UK)

GOWLING WLG (UK) | 27

RESEARCH METHODS / BACKGROUND

The content of this report is based on research with 533 C-suite executives of companies based in the United States with an annual turnover of $13m or above that export to Europe in the following sectors: 68 Aerospace; 71 Automotive; 74 Financial Services; 81 Food and Beverage; 76 Health products; 75 Life Sciences; 88 Tech.

The annual turnover of participants is as follows: 137 $13m – $49.99m; 184 $50m – $99.99m; 159 $100m – $499.99m; 53 $500m and over.

The overall sample size, the sample sizes by sector and the sample sizes by turnover are all statistically significant.

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GOWLING WLG (UK) LLP T +44 (0)370 903 1000 gowlingwlg.com

Gowling WLG (UK) LLP is a member of Gowling WLG, an international law firm which consists of independent and autonomous entities providing services around the world. Our structure is explained in more detail at www.gowlingwlg.com/legal

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