Securing a new trade deal should the UK vote to leave the EU on 23 June is perhaps the most critical aspect of the upcoming referendum. Philip Clarke and Jez Fredenburgh investigate.
Throughout history, the UK has had a reputation for being a trading nation.
In agriculture especially, the import of foods we can’t produce enough of, and the export of foods we produce in surplus, have been part of everyday commercial life for centuries.
Given that trade generates wealth, it is little surprise that it is one of the issues at the heart of the debate about the impending EU referendum.
But where exactly do we stand in terms of the balance of trade – and what does it all mean?
Overall, the UK food and farming sector is a net importer. Figures compiled by consultant Andersons show we export just short of £20bn of agricultural goods (food, drink and animal feed) each year, yet import more than £40bn – twice as much.
It is also true that the bulk of our business is with the EU.
For example, 61% of all our agricultural exports go to other EU countries, with just 39% going to non-EU countries. For imports, 73% originate from EU member states, with just 27% coming from so-called third countries.
For certain key food products, the balance of trade is even more skewed.
With beef – our most important export product, worth about £400m/year – 94% of exports go to the EU, while 79% of imports are also from EU member states, (especially Ireland).
And it’s a similar story for chicken, pigmeat, cheese, wheat and oilseeds.
Looking beyond agriculture, the trade picture for all goods is slightly more balanced. Total exports are almost £300bn, compared with total imports of more than £400bn – still a significant deficit, but not as extreme as in agriculture.
The split between EU and non-EU trade is also more balanced, although we do still import more from the EU than from anywhere else in the world.
It is important, however, to remember that, while the UK is the EU’s top export destination, it still only accounts for 8% of total EU exports. Arguably, the EU is more important to us than we are to it.
Clearly there are many unanswered questions when it comes to assessing the trade implications of leaving the EU.
A balance will have to be found between striking a deal with the EU, while at the same time dealing with the fallout for non-EU trading partners. And this will all have to be done under a time constraint.
There seems to be a difference in opinion about the most likely outcome. Some economists anticipate the establishment of a free-trade area between the UK and EU, with basic WTO trade rules for the rest of the world.
But the NFU believes the UK is likely to be even more “trade liberalising”. It says: “In the past, our government has been a strong advocate for open and free trade and has called for tariff protection in all farm sectors to be reduced.”
Anything is possible, it seems, though the Country Land and Business Association probably has it right when it suggests “any deal agreed will be unprecedented and unique in its characteristics”.
What the ‘in’ campaigners say
“In” campaigners say if the UK leaves, free access to EU markets will only be achieved if we meet all the same rules as apply to EU producers, and contribute financially. Despite the trade surplus the EU has with the UK, they warn that EU negotiators in Brussels will not want to make it easy, as that would send the wrong signal to other member states that might want to leave.
They also argue that the UK will be a far less potent negotiator on its own in terms of securing trade deals with the likes of China, India or the US, as we are a market of just 65 million consumers compared with the EU’s 500 million.
The UK government says it could take more than 10 years to sort it all out, as the UK negotiates new deals with the EU and more than 50 other countries across the world. And once negotiated, the results may not be as good as those already in place.
The “ins” also warn that overseas companies, banks and institutions based in the UK would seek to move their facilities to EU countries. The Royal Institution of Chartered Surveyors says there has already been a marked drop in the number of businesses looking to invest in commercial property in the UK since the referendum was announced.
What the ‘out’ campaigners say
Those campaigning to leave say it is inconceivable the EU and other trading partners will not want to strike a deal with the UK – after all, we are the world’s fifth-largest economy and the EU’s biggest export market.
“The UK’s trade in agriculture is hugely important to the EU,” says lobby group Farmers For Britain.
“The UK imports two-and-a-half times as much beef from the EU as we export to them, so it is in their best interests to secure a free-trade deal with the UK.”
Vote Leave, another campaign group, says being in the EU actually makes the UK “leaden footed” in trade negotiations, suggesting it could do a better job on its own.
“Being in the EU means Brussels has full control of our trade policy,” it says. “EU trade representatives have to deal with an unresponsive 1950s bureaucracy and 28 sets of competing special interests. With such a broken system, it’s no surprise the EU still doesn’t have a free-trade agreement with major economies such as China and India.”
The “out” camp also encourages voters to think what the EU will look like in 10 years’ time, not just two or five years down the line. They see a scenario where the eurozone is in crisis and tensions are running high, as Brussels pushes on with its agenda of political integration.
The process of withdrawal
How would the UK negotiate trade with the EU?
Should the UK decide to leave, the first step will be for the government to notify the EU of its withdrawal. It will then have two years to prepare for exit, unless it and the European Council agree to extend this period.
The UK would need to use this time to negotiate its trade relationship with the EU, and that might prove politically difficult, says Richard Whitman, senior research fellow at the Royal Institute of International Affairs. The UK would likely want access to the EU’s free market, while the EU would probably push hard for the free movement of people to be included – a key issue for “out” voters.
Looking at the way the EU negotiates with third countries indicates the EU would be a tough negotiator on access to its market for agricultural products.
However, EU members such as Ireland, which rely on access to the UK market for beef, would be keen to secure an agreement.
What about third country dealings?
On top of this, the UK would have to secure trade deals with about 50 other non-EU countries. But does it have the negotiating capacity?
Like any other country, the UK has a ministry for trade – UK Trade and Investment (UKTI).
As an EU member state, the UK does not negotiate its own trade deals – they are handled by Brussels. So UKTI’s role is primarily to promote British goods and services abroad.
This would need to change if the UK left the EU. The UK would need to establish its own capacity and expertise to negotiate trade deals – something it currently doesn’t have, says Prof Whitman. This raises concerns about the UK’s ability to effectively negotiate to its best advantage, particularly when dealing with seasoned negotiators.
But Prof Whitman says the UK could recruit people with the relevant expertise from abroad, or some of its own nationals working in the EU Commission on trade.
What are the UK’s priorities?
To manage the workload, the UK would need to prioritise agreements with its major trading partners – the EU being the most important, says Prof Whitman.
The UK’s service sector is worth so much more than agriculture that the UK government is always likely to prioritise that in trade negotiations, he adds.
Furthermore, the UK has traditionally been more liberal on trade than most other EU countries and has not acted to protect sensitive farming products in large trade negotiations in the same way other member states have.
That does not bode well for agriculture should the UK try to secure its own trade deals with big agricultural exporters such as Brazil and Argentina.