Talks between the EU and the UK are under way, in an attempt to secure a post-Brexit free trade deal before the end of the year.
If no agreement is reached by 31 December, charges will be introduced on many imports and exports, which could push up prices for firms and consumers.
What is a free-trade deal?
A free trade deal aims to encourage trade – usually in goods but sometimes in services too – by making it cheaper. This is often achieved by reducing or eliminating what are known as tariffs – taxes or charges by governments for trading across borders.
Trade agreements also aim to remove quotas – limits on the amount of goods which can be traded.
Trade can also be made simpler if countries have the same rules, such as the colour of wires in plugs. The closer the rules are, the less likely that goods need to be checked.
Why have tariffs and quotas at all?
While free trade agreements aim to boost trade, too many cheap imports could threaten a country’s manufacturers, which could affect jobs.
For that reason a country might choose to put tariffs on car imports, for example, in order to protect local car makers.
What about a UK-EU trade deal?
The UK and the EU are negotiating a trade agreement to start on 1 January 2021 – the date the new UK-EU relationship starts.
Any trade agreement will aim to eliminate tariffs and reduce other trade barriers coming into force. It will also aim to cover both goods and services.
The UK has now left the EU, but its trading relationship remains the same until the end of the year. That’s because it’s in an 11-month transition – designed to give both sides some time to negotiate a new trade deal.
No new trade deals can start until the transition ends.
How easy has it been to negotiate a UK-EU trade deal?
Despite UK Prime Minister Boris Johnson’s insistence that a deal be done by 15 October, an agreement has not been reached.
Both sides say there are still significant differences.
Right now, the UK and the EU share the same rules in areas like workers’ rights, competition and environmental policy. These are known as level playing field rules.
The EU insists the UK must stick pretty closely to these rules – so UK businesses don’t gain an advantage – but the UK government says it wants the freedom to move away.
Access to fishing waters has also proved to be a major sticking point.
Even if a trade deal is agreed, it will not eliminate all new checks, because the EU requires certain goods (such as food) from non-EU countries to be checked. So businesses need to prepare.
What happens if UK-EU trade talks fail?
If a deal is not reached, the UK faces the prospect of trading with the EU under basic rules set by the World Trade Organization (WTO).
If the UK has to trade under WTO rules, tariffs would be applied to most goods which UK businesses send to the EU. This would make UK goods more expensive and harder to sell in Europe. The UK could also do this to EU goods, if it chose to.
Having WTO terms would also mean full border checks for goods, which could cause traffic bottlenecks at ports and lead to significant delays. There are concerns about some border delays even if a deal is reached, because it won’t be as close as current arrangements.
The UK service industry could also be about to lose its guaranteed access to European markets. This would affect everyone from bankers and lawyers, to musicians and chefs.
What about other trade deals?
While it was an EU member, the UK was automatically part of around 40 trade deals which the EU had with more than 70 countries. In 2018, these deals represented about 11% of total UK trade.
So far, more than 20 of these existing deals, covering 50 countries or territories, have been rolled over and will start on 1 January 2021. This represents about 8% of total UK trade, based on 2018 figures. But it is clear that new deals with some countries will not be ready in time.
On 23 October the UK government signed a new trade agreement with Japan, which means that 99% of UK exports there will be free of tariffs.
The total value of UK-Japan (imports and exports) was £29.1bn in 2018, according to the Department for International Trade.
Trade with Japan accounts for just 2% of the UK’s total, so the government expects the deal to contribute 0.07% of GDP over the long term.
Any existing EU agreement that is not rolled over will end on 31 December and future trade will take place on WTO terms until a deal is reached.
The UK government is also holding trade talks with countries that do not currently have EU trade deals, such as the US, Australia and New Zealand.