Boris Johnson and his ministers are contemplating the increasing likelihood of failure to negotiate a free trade deal with the EU and speaking of establishing an “Australian-style” relationship with the bloc from next year.
As an EU member state, the UK was part of its trading system – the customs union and the single market. This meant there were no tariffs (or taxes) on goods traded between the two, and minimal border checks.
The UK is still in this system, but the Brexit transition period ends on 31 December. After that the UK will no longer be under EU laws, meaning new rules for businesses and some individuals.
Both sides have until then to reach a new free-trade agreement, which would get rid of tariffs and quotas but not new border bureaucracy. On 10 December, the European Commission proposed targeted contingency measures to prepare for possible “no-deal” scenario after no progress had been made in the ongoing EU-UK talks.
Without a deal, Britain will do business with the EU on World Trade Organisation (WTO) terms, which set baseline tariffs for global trade. By trading on WTO terms, the EU and UK will be required to levy minimum tariffs on each other’s goods as for other countries without a free trade agreement. That could mean tariffs of 10 per cent on cars and 37.5 per cent on dairy products. In addition, more customs checks will need to be carried out at borders.
On Thursday, Prime Minister Boris Johnson said: “There is now a strong possibility that we will have a solution that is more like an Australian relationship with the EU than a Canadian relationship with the EU”. On Monday, British minister Penny Mordaunt said: “While an agreement is preferable, we are prepared to leave on so-called Australian-style terms if we can’t find compromises.”
Although Australia doesn’t have an overall free trade deal with the EU, it does have a series of agreements on things like wine and product standards, which make trade easier. An ‘Australia-style’ EU trade deal would allow “mini-deals” to be reached with the EU to avoid trade and transport seizing up next year.
Mr Johnson has already spoken of his willingness to discuss the “practicalities” on how aviation, road haulage and nuclear co-operation would work from 2021 if negotiations fail. However, no such agreements have been reached so far between the UK and the bloc.
With no deal, the UK would be facing an even more limited trading relationship with the EU than Australia has (although Northern Ireland would be treated slightly differently), although the UK, in contrast to Australia, is more reliant on trade with the EU for the operation of just-in-time supply chains in sectors such as cars, pharmaceuticals and food.
The EU is the UK’s biggest single trading partner. In 2019, it accounted for 43% of UK exports and 51% of UK imports.
It has to be noted that many other countries trade with the EU on WTO terms. For example, the USA and China have not signed a free-trade deal with the EU. But like Australia those big economies don’t just rely on basic WTO rules – they have all done other deals with the EU to help facilitate trade. The USA, for instance, has at least 20 agreements with the EU that help regulate specific sectors, covering everything from wine and bananas to insurance and energy-efficiency labelling.
If there’s no trade deal between the UK and the EU by the end of the transition period, the UK will have to trade with the EU on WTO rules. The EU will impose its tariffs on imported UK goods, and the UK will do the same – it has already released details of the tariffs it will charge from January 2021 to countries with which it does not have a free trade deal.