European Union: Free Trade Agreements: What Do They Mean For Corporates?

Last Updated: 10 June 2019
Article by Emma Bufton and Sean Giles

Businesses that can successfully leverage the global network of trade agreements can unlock lower landed cost for their products, market access for their services and fewer barriers to trade. We will examine the current trade agreement landscape in the UK and what a business should do to maximise the potential opportunities thereunder.

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Emma Bufton: Hello, my name is Emma Bufton and I am a Senior Associate at Gowling WLG and I also co-chair ThinkHouse Foundations, a network for in-house lawyers at the start of their careers where we provide training, development and resources exclusively for paralegals, trainees and lawyers of up to 5 years PQE.

At our most recent ThinkHouse Foundations event, Associate Sean Giles from our EU Trade & Competition team, spoke about the current free trade agreement landscape in the UK and what it means for corporates.

We have obviously heard lots about WTO, free trade agreements and custom unions so, what is this all about Sean?

Sean Giles: Thanks for that. It's an interesting question and I wish I could give you a one word answer to what this all means. Essentially, Brexit is changing the UK's trade relationship with the EU and by extension the rest of the world because the EU is responsible for negotiating free trade agreements for its members and, as an EU member, the UK is subject to all of those free trade agreements. When, and if, the UK does eventually leave the EU, it remains to be seen what that UK/EU relationship will be. That could be something very deep and integrated like a customs union in the same way that the EU has a customs union with Turkey for example, or it could be a looser relationship like a trade agreement in similar to what the EU has with Japan or Canada.

Emma: What are the main challenges facing the WTO?

Sean: The WTO is the World Trade Organisation and its one of these terms that has kind of entered the lexicon via Brexit chat basically. For the last two years it has been taken as read that everybody knows what the WTO is and what it does. And that is probably not true by and large. Its primary role is to alleviate barriers to trade between its members and that is 164 countries, every major economy in the world is part of the WTO.

In terms of challenges, it has issues with its current dispute settlement mechanism. That dispute settlement regime is currently under fire because it has a kind of two-pronged structure. At the lower end, it has panels and panels are appointed by WTO members and they kind of adjudicate on any disputes that WTO members may have. Panel decisions are appealable to the appellate body and the appellate body for the past ten years has been slowly degraded. By that I mean the appellate body is supposed to be comprised of seven members. There are currently only three members of the appellate body, the minimum it needs to function. Those three appellate body members' terms all expire within the next 18 months. It remains to be seen whether that appellate body can continue to exist and be the final arbitrator of international trade disputes. It may be that that this results in a one system or we may revert to some kind of consultation or discussion as the only mechanism to resolve it. The spirit of the WTO is very much that it does not tell its members what to do, especially members coming together and agreeing a way forwards.

Emma: Thanks Sean, that is really interesting. Do you think this is going to affect international trade?

Sean: It may well do. It is hard to say what will actually happen. But what we can see is, geo-politically at least on a global scale, is there is a turn towards protectionism. You have Brexit itself as an example of a country rejecting being part of the free trade agreement, a big international trading block, and then on the other side of the Atlantic you have Donald Trump who is tearing up trade agreements like NAFTA, re-negotiating it with the trading partners Mexico and Canada. The UK could end up caught in the crossfire between protectionism on the one hand and a goal of becoming a free trading national that the government so longs to be after Brexit.

Emma: How do we think this is going to fit in when, I guess we should say if the UK leaves, the EU?

Sean: Yes, it's hard to say. In part that depends on the relationship that the UK has with the EU because, the closer the UK's relationship is to the EU, the more likely we are to be in some form of customs union. And with the EU customs union, the EU is responsible for negotiating those trade agreements with third countries i.e. not any EU countries. The closer the UK is to the EU, the potential of more limitations arising for the UK to negotiate free trade agreements with countries elsewhere such as the US or Australia or New Zealand.

Emma: What do you think the role is then for an in-house lawyer and how is this all going to affect them?

Sean: I think a really important point to understand about trade agreements or even just WTO rules in themselves is, every time you import or export, when goods cross borders, they are subject to financial controls and regulatory controls. The terms of a free trade agreement is to determine what those are. It is very important for lawyers to understand in terms of business planning what this means for them. If you are currently importing goods from the EU, the UK's departure from the EU will inevitably result in some extra documentation when goods cross the border. That documentation frequently requires a demonstration of origin for example and to do that involves a lot of paperwork and a lot of manpower and lawyers as people that are generally quite good at dealing with documents, may be looked to to assist in trade compliance.

Emma: Do you have one key take away message, if you can distil it that easily, from today's session?

Sean: I think the key take away for me would be, understand currently what free trade agreements you are relying on so that you know if you lose access to these where you may face an increase to exposure for tariffs for example and also understand what is coming down the track. If the UK announces a free trade agreement after Brexit with Australia for example, understand whether you will be able to benefit from that by demonstrating the requisite origin requirements of any such UK/Australia free trade agreement.

Emma: Thanks Sean for those insights which I hope everyone listening has found useful.

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