Menu

Background Briefing: Trading Relationships Between the EU and G20 Nations

The Government's aim is to negotiate a Free Trade Agreement with the EU to govern the future relationship between the UK and the EU.  However, the Prime Minister has also repeatedly said "no deal is better than a bad deal" and Ministers have confirmed that a "no deal" scenario would mean trading with the EU on the basis of WTO rules. 

“It would depend on precisely what was agreed, but if there were no agreement at all, which I think is an extremely unlikely scenario, ultimately we would be falling back on World Trade Organisation arrangements. That is nothing new. It has been made very clear previously, including by my right hon. Friend the Prime Minister.”

 

David Jones, Minister of State at the Department for Exiting the European Union, House of Commons, 7th February 2017, link

Some leading Leave campaigners have even said we should dispense with the effort of negotiating a Free Trade Agreement and opt for the WTO rules as our preferred choice.

This research shows that no major economy trades with the EU on the basis of WTO rules alone. No other G20 nation trades with the European Union entirely under World Trade Organisation rules. All have some preferential trading relationships in place, even if these fall short of a comprehensive Free Trade Agreement (FTA). 

If the UK were to walk away from the negotiations with the EU with no deal at all, therefore, the UK Government would be choosing the most extreme position of all major trading nations.

This note is in part based on House of Commons Library research commissioned by Pat McFadden MP. 

Summary

There is more than one type of trade ‘deal’. Even if countries do not have full FTAs, they can have weaker agreements, such as Mutual Recognition Agreements (bilateral agreements that aim to benefit industry by providing easier access), or Equivalence Agreements (for example, in financial services, where regulations allow for third countries outside the EU to be granted ‘equivalence’ and therefore market access). 

House of Commons Library research now shows that the EU does not trade with any member of the G20 without some sort of preferential trade arrangement in place, many of which are below the market access granted in an FTA. 

Despite having preferential agreements in place many of these countries still face significant barriers to trade, for example the US (see below). Many of these countries are therefore seeking formal FTAs with the EU in order to have superior access than they currently enjoy for example, of Australia or Japan. 

This shows how wrong the Brexiteers are when they say that if the UK leaves the EU without a deal we would trade on the same terms as other major trading nations. They are wrong. The EU does not trade with any member of the G20 without some sort of preferential trade arrangement in place. If the UK were to leave the EU without a deal in place at all we would be in an extreme position that no other major trading nation has voluntarily adopted.

This underlines the extreme risk of leaving the single market for no deal at all: whereas the UK may cut all trade ties completely, other major nations who have better trade terms than those we care considering adopting are seeking to negotiate even closer trade ties with the EU. 

The economic consequences of such a move would be deeply damaging. The Treasury has suggested it would reduce GDP by 7.5 per cent after 15 years and would shrink tax receipts by £45bn per year.[1] The National Institute for Economic and Social Research has shown that under the WTO model real wages would be projected to fall, by between 4.6 per cent and 6.3 per cent.[2] NIESR has also shown that all principal independent, expert economic studies have shown that the WTO scenario has the gravest consequences for trade, FDI and GDP.[3] In short, the relationship that gives the UK the furthest distance from the single market does the most damage. 

Types of Agreement 

The EU has, broadly, three types of agreement with trading partners that fall short of a full Free Trade Agreement. These are:

1.     Mutual Recognition Agreements

Mutual Recognition Agreements (MRAs) are bilateral agreements and aim to benefit industry by providing easier access to conformity assessment (e.g. testing or certification). They lay down the conditions under which one party will accept conformity assessment results performed by the another party's designated conformity assessment bodies to show compliance with the first party's requirements and vice-versa.[4]  The purpose of a MRA is to facilitate mutual market access by eliminating duplicative testing and certification or inspection.[5] These often cover specific sectors, which vary from agreement to agreement.  The EU-Australia Mutual Recognition Agreement for example covers automotive products, EMC (Electro-Magnetic Compatibility), Low Voltage Equipment, Machinery, Medical Devices, Pressure Equipment, TTE (Telecommunications Terminal Equipment), and GMP (Good Manufacturing Practice – this applies to medicinal products).[6]

2.     Financial Services Equivalence Agreements 

As Open Europe explain, EU financial services equivalence agreements are available to third countries in certain areas, but tend to be narrow in scope:

“Certain EU financial regulations allow for third countries outside the EU to be granted ‘equivalence’, and consequently gain access to some of the advantages of membership of the Single Market. In some cases, gaining ‘equivalence’ can provide passport-like rights for firms based in the third-party country. A country can be granted equivalence if the Commission recognises that the legal, regulatory and/or supervisory regime of a third country is equivalent to the corresponding EU framework. Equivalence is not granted to individual firms but to countries. Crucially, it applies regulation by regulation.”[7]

3.     Veterinary Equivalence Agreements

Veterinary equivalency is the “mutual recognition by two or more countries that each party's safety and sanitation standards for animal products, even where not identical, provide an equivalent level of protection to public and animal health”.[8]

The EU and other G20 nations

The EU has a range of agreements in place with each of the 15 G20 countries outside of the EU (France, Germany, Italy and the UK are in the EU and the EU itself is in the G20). Specific agreements with each of those countries are listed below, which shows every other nation in the EU has some sort of preferential trading arrangement in place.[9]

Details of the EU’s trade policy with different countries and regions can be found on the European Commission’s website: http://ec.europa.eu/trade/policy/countries-and-regions/

Argentina

  • Governed by a Framework Trade and Economic Co-operation Agreement (1990).
  • As a member of Mercosur, Argentina is also party to the EU-Mercosur Framework Co-operation Agreement (1995), which includes provisions on trade cooperation.
  • The focus of these agreements is towards cooperation rather than specific practical measures.[10]
  • The EU has granted one type of financial services equivalence, on Credit Ratings Agencies.[11]

Australia

  • Trade and economic relations conducted under the EU-Australia Partnership Framework (2008).
  • One of the aims is to facilitate trade in industrial products between the EU and Australia by reducing technical barriers, including in relation to conformity assessment procedures.[12]
  • The EU and Australia have a Mutual Recognition Agreement.[13]
  • The EU has granted Australia equivalence in relation to certain aspects of financial services. [14]

Brazil

  • Like Argentina, Brazil is party to the EU-Mercosur Framework Co-operation Agreement (1995), which includes provisions on trade cooperation.[15]
  • The EU has granted Brazil equivalence in relation to certain aspects of financial services. [16]

Canada

  • The EU and Canada have agreed a free trade deal, the Comprehensive Economic and Trade Agreement (CETA), which is expected to come into provisional effect soon.[17]
  • The EU and Canada already have a Mutual Recognition Agreement, covering TTE (Telecommunications Terminal Equipment) and Recreational Craft.[18]
  • Canada has been granted equivalence in relation to certain aspects of financial services. [19]
  • There is a veterinary agreement.[20]

China

  • The EU has granted China equivalence in relation to certain aspects of financial services.[21]

India

  • The EU has granted India equivalence in relation to certain aspects of financial services.[22] 

Indonesia

  • The EU and Indonesia have a Partnership and Cooperation Agreement (2014), which again this focuses on cooperation.[23]
  • The EU has granted Indonesia equivalence in relation to certain aspects of financial services. [24]

Japan

  • There are four main agreements between the EU and Japan.
  • An EU-Japan Mutual Recognition Agreement (2002), which allows for conformity assessments in four product areas: telecommunications terminal equipment and radio equipment; electrical products; laboratory practices for chemicals; and manufacturing practices for pharmaceutical.
  • An Agreement on Co-operation on Anti-competitive Activities (2003), which aims to facilitate EU-Japan trade and investment by securing a level-playing field between in and outsiders.
  • A Science and Technology Agreement between the EU and Japan (2009).
  • An Agreement on Co-operation and Mutual Administrative Assistance (CCMAA), (2008).[25]
  • The EU has granted Japan equivalence in relation to certain aspects of financial services.[26]

Mexico

  • The EU and Mexico have a comprehensive Free Trade Agreement.[27] 
  • The EU has granted Mexico equivalence in relation to certain aspects of financial services.[28] 

Russia

  • The EU and Russia have had a Partnership and Cooperation Agreement since 1997, which provides for political dialogue, bilateral trade and investment liberalisation.[29]
  • The EU has granted Russia equivalence in relation one aspect of financial services.[30]

Saudi Arabia

  • Saudi Arabia is one of the six member countries of the Gulf Cooperation Council.
  • There is a cooperation agreement between the EU and the Gulf Cooperation Council countries, from 1988, the trade aspects of which focus on cooperation.[31] 
  • The EU has granted Saudi Arabia equivalence in relation to certain aspects of financial services.[32]

South Africa

  • South Africa's trade relations and development co-operation with the European Union are currently governed by the Trade, Development and Co-operation Agreement, which established a free trade area that covers 90% of bilateral trade between the EU and South Africa.[33]
  • The EU has granted South Africa equivalence in relation to certain aspects of financial services.[34]

South Korea

  • The EU and South Korea have a comprehensive Free Trade Agreement.[35]
  • The EU has granted South Korea equivalence in relation to certain aspects of financial services.[36]

Turkey

  • The EU and Turkey are in a Customs Union.[37]
  • The EU has granted Turkey equivalence in relation to certain aspects of financial services.[38]

United States of America

  • The United States and the EU were negotiating a Free Trade Agreement (TTIP) until recently, although the status of this is currently unclear after the election of President Trump.
  • The EU and the US have a Mutual Recognition Agreement, covering EMC (Electro-Magnetic Compatibility) and Telecommunication Equipment.[39]
  • The US has been granted equivalence in relation to certain aspects of financial services.[40]
  • There is a veterinary agreement.[41]

The EU and other significant trading nations

Israel

  • The EU and Israel have an Association Agreement, which includes provisions on freedom of establishment and liberalisation of services; the free movement of capital and competition rules; and the strengthening of economic cooperation, as well as reinforcing the arrangements for free trade in industrial products, which had been in force since the late 1970s.
  • There is also an EU-Israel agreement on agriculture.[42]
  • The EU and Israel have a Mutual Recognition Agreement, covering Good Laboratory Practice for chemicals for cosmetics; industrial chemicals; medicinal products/pharmaceuticals; food additives; animal feed additives; and pesticides.[43]

New Zealand

  • The EU and New Zealand have concluded the negotiations for a political framework agreement which contains several economic and trade cooperation provisions.[44]
  • There is a Mutual Recognition Agreement covering a selection of sectors.[45]
  • There is a veterinary agreement.[46]
  • New Zealand has been granted equivalence in relation to one aspect of financial services. [47] 

Switzerland

  • The EU and Switzerland have a deep and complex relationship through a range of agreements, including a Free Trade Agreement and around 100 bilateral agreements.[48]
  • There is a Mutual Recognition Agreement covering a wide set of sectors.[49]
  • Switzerland has been granted equivalence in relation to certain aspects of financial services. [50] 

EU-US trade barriers

Despite having some preferential arrangements in place, the United States still faces significant barriers to trade in both goods and services.[51] 

Tariffs

  • Tariffs on trade in goods between the US and EU are on average low, at around 2%.
  • Half of EU-US trade is not subject to tariffs at all.[52]
  • However, the average conceals considerable variation and US tariffs are much higher on certain goods. A 2013 report by the European Commission said that US tariffs were particularly high on processed agricultural goods (e.g. 350% on tobacco), on textiles (40%), and leather and footwear (56%).
  • The report notes that these high tariffs account for only a very small proportion (less than 1%) of US imports.[53]

Other Trade Barriers

-        Government procurement. Various “Buy American” provisions favour domestic suppliers or even exclude EU companies entirely.

-        Intellectual property rights. Inadequate protection of geographic indications.

-        Aviation. Ownership restrictions on US carriers.

-        Dairy Products. Struct rules on the import of them into the US.

-        Maritime industry. Under the Jones Act, only US owned and operated ships are allowed to transport goods between US ports.

What the Brexiteers promise on the WTO option

  • Michael Gove, Theresa Villiers, John Whittingdale and 57 other Tory MPs: “The UK can offer either to carry forward current tariff free trade with service sector passports, or to fall back on the World Trade Organisation standard tariff trade. The UK would recommend the former, but could live with the latter.”

Road to Brexit, October 2016, link. 

  • Nigel Lawson: “Far from jumping off a non-existent cliff into the unknown, trading under WTO rules is the very satisfactory basis of most of the trade that we do throughout the world today”

Hansard, 07 March 2017, link. 

  • Nigel Lawson: “WTO status is a perfectly acceptable [relationship],” he said. “I think it is likely we would be able to negotiate something better, [but] even the baseline is far from a disaster.”

Financial Times, 22 March 2016, link.

  • Peter Lilley: “Trading with the EU on Most Favoured Nation terms would still mean the UK is better off than we are at present.”

BrexitCentral, 15 January 2017, link. 

  • John Redwood: “When it comes to trade we know trading under the most favoured nation status at the WTO works just fine, as that is what we do for the rest of the world at the moment.”

John Redwood’s website, 12 January 2017, link. 

  • Iain Duncan Smith: “Bearing in mind that we will anyway have access to the marketplace under WTO rules, so the question really is – do we want more preferential arrangements than that?” Asked if he would be happy with WTO rules, he said: “I’m saying that’s the extent of where you could be and you’d still get access to the marketplace.”

The Sun, 26 August 2017, link.

  • Economists for Brexit: “Economists for Free Trade (EFT) is a group of leading economists, formerly known as Economists for Brexit (EfB), who believe the UK’s optimal Brexit path is outside the Single Market and Customs Union, moving towards an ultimate position of global free trade as a full member of the World Trade Organisation.”

Economists for Free Trade website, viewed 08 March 2017, link.

  • Department for International Trade: “If the UK does exit the European Single Market, it will be governed by World Trade Organization (WTO) rules until any new trade deals are negotiated. We’ll remain a competitive player on the global stage because all major economies and most minor ones are members of the WTO. The WTO requires each member to charge the others the same tariffs and grant them ‘most favoured nation’ market access.”

Political Scrapbook, 13 August 2016, link.

  • Norman Lamont: “The non-EU members that have no particular trade agreements with the EU such as Australia, Japan and the US, have benefited from the single market more than those like Switzerland, Norway and Iceland, who have negotiated special trade agreements.”

Daily Telegraph, 13 June 2016, link.


[4] European Commission, Mutual Recognition Agreements

[6] European Commission, Mutual Recognition Agreements

[8] Congressional Research Service, Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Edition

[9] This may not be an exhaustive list.

[10] European Commission, Trade: Argentina

[12] European Commission, Trade: Australia

[13] European Commission, Mutual Recognition Agreements

[14] European Commission, Mutual Recognition Agreements

[15] European Commission, Trade: Brazil

[17] European Commission, Trade: Canada

[18] European Commission, Mutual Recognition Agreements

[19] European Commission, Mutual Recognition Agreements

[23] European Commission, Trade: Indonesia

[25] European Commission, Trade: Japan

[27] European Commission, Trade: Mexico

[29] European Commission, The EU-Russia Partnership – basic facts and figures, February 2011.

[31] European Commission, Trade: Gulf Region

[33] European Commission, Trade: South Africa

[35] European Commission, Trade: South Korea

[37] European Commission, Trade: Turkey

[39] European Commission, Mutual Recognition Agreements

[42] Delegation of the European Union to Israel, Agreements

[43] European Commission, Mutual Recognition Agreements

[44] European Commission, Trade: New Zealand

[45] European Commission, Mutual Recognition Agreements

[46] European Commission, Trade: New Zealand

[48] European Commission, Trade: Switzerland

[49] European Commission, Mutual Recognition Agreements

[51] European Commission, Trade: United States

[52] European Commission, TTIP Factsheet

[53] European Commission, US-EU Trade Impact Assessment




Donate Volunteer Campaign News
Promoted by James McGrory on behalf of Open Britain Ltd, both of Tenter House, 45 Moorfields, London, EC2Y 9AE.