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The lowdown on trade agreements

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Trade agreements are a hot topic as the UK adjusts to life outside the EU, but why are they important, what is the potential impact of negotiations and why does it matter for your business?

As the protracted discussions between the UK and the EU clearly demonstrate, trade negotiations take time and patience. Whilst much of the focus has been on the shape of the relationship between the UK and the EU beyond the end of the Brexit transition period, the UK has been able to roll over more than 20 of the deals that it was party to as an EU member, including those with Japan, South Korea, Switzerland, Singapore, and Vietnam. Meanwhile trade talks are continuing with countries where no agreement with the EU currently exists, such as Australia, the US and New Zealand, as well as those countries where EU agreements weren’t rolled over.

Whether you trade overseas or have customers or suppliers who do, the preferential terms negotiated as part of a trade agreement can make a significant difference. That could take the form of reducing tariffs for exports or imports or streamlining regulatory requirements and the flow of goods. However they evolve, businesses stand to gain. Keeping a close eye on negotiations with countries where you have a commercial interest or reviewing opportunities for business growth with those countries where agreements already exist can make good business sense.

Allowing foreign competitors greater access to domestic markets should, in theory, induce local suppliers to become more competitive while offering greater choice and cheaper prices for businesses and consumers

Mark Berrisford-Smith | Head of Economics, Commercial Banking, HSBC UK

Trade agreements – a good deal for business

Trade agreements have been around for centuries, offering countries the opportunity to foster closer commercial ties, either by reducing or eliminating taxes and levies or by simplifying border processes. They are, as Mark Berrisford-Smith, Head of Economics, Commercial Banking, HSBC UK, points out, a key mechanism for economic growth, which is why open economies tend to fare better than those adopting a more isolationist or protectionist stance.

“Allowing foreign competitors greater access to domestic markets should, in theory, induce local suppliers to become more competitive while offering greater choice and cheaper prices for businesses and consumers,” he says.

Free Trade Agreements (FTAs), therefore form an important part of economic policy and the creation of the World Trade Organization (WTO) in 1995 was designed to encourage this and provide a mechanism for resolving any disputes. One of the key features of the WTO’s rulebook is that countries are not permitted to discriminate but must apply the same rules to everyone. Preferential trade agreements allow a workaround, however. Providing they cover the vast majority of goods, they allow countries to apply more favourable terms to some partners.

“It is the WTO’s non-discrimination rules that make any talk of the UK concluding sector agreements with some trading partners after the Brexit transition period nothing more than wishful thinking,” says Mark. Businesses in the affected sectors would do well to remember that.

Covering trade in goods and services

For a trade agreement to be reached, there has to be something in it for both parties. There is little point, for example, in pursuing a deal if there is little trade and the countries are thousands of miles apart. “That’s why, when we peruse a list of FTAs, the same names come up time and again,” says Mark. “The list includes Australia, New Zealand, Chile, Israel, Switzerland, Norway, Columbia and South Korea. Those countries that take a more protectionist approach, such as India, are unlikely to be keen.”

Modern FTAs are much deeper and more complex than older agreements that largely focused on trade in goods. Perhaps in response to the WTOs failure to progress multilateral agreements with any speed, countries keen to pursue liberalisation have focused on their own regional or bilateral FTAs. Often running to several thousand pages and more than 30 chapters, these agreements now cover aspects of services, such as air and maritime transport, telecoms, data localisation, visa requirements for business travellers and employees and the recognition of professional qualifications.

Modern deals may also get into promoting investment flows, including mechanisms for resolving disputes. The EU struggles with these so called ‘mixed agreements’ and has recently taken a somewhat different approach of separating the trade and investment elements. This means that FTAs (trade element) can be ratified by decisions of the European Council (heads of state) and the European Parliament, but once an agreement strays into investment areas, it must also be ratified by every national parliament and some regional assemblies.

If an agreement can be struck between the UK and the US it’s likely to be a deep one that will encompass financial and digital services, as well as investment activities. Ratification will require only the consent of the UK Parliament and the US Congress but might still not be straightforward.

The process of reaching agreement

These deeper agreements, unsurprisingly, can take many years and rounds of negotiations and, even once completed, the ratification of the agreement may add months or even years to the timetable. If we consider the UK/US negotiations, we have already had five rounds of talks. These negotiations similarly highlight, what Mark states, is one of the most important aspects of any trade negotiation – the extent of preferential access for imports of agricultural products. “Many countries are acutely sensitive in this area and often provide protection for domestic producers,” explains Mark. “But it’s also an area where meaningful progress can be made on account of tariffs generally being much higher than on other goods. In the context of a UK/US FTA, it is hard to imagine any deal being approved by Congress unless it provides meaningful improvements to access for American farmers and food producers.”

Even once a trade agreement is concluded and ratified, it can be many years before its provisions come fully into operation, known as the run-in period.

Understanding the impact

Businesses that trade overseas should carefully review the provisions within any trade agreement concerning the country they trade with, to understand the potential effect on their terms of business. Even businesses who don’t directly trade overseas may have customers or suppliers who do, and this could impact on operations in terms of timings or costs. A potentially complex issue to be aware of is “rules of origin”. In order to qualify for relief from import tariffs many FTAs specify a minimum percentage of a product’s materials, components, or ingredients, which must be sourced domestically.

Up to date information on the progress of trade negotiations and the terms of any agreements are available through the Department for International Trade, whilst specific guidance relevant at a sector or business level is often provided by appropriate trade bodies.

More support can be found on our Brexit hub or by speaking to your Relationship Manager.

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