The Department for International Trade announced on 10 June that the UK had signed a joint statement for trade continuity with South Korea, allowing the UK and South Korea to continue to trade on equivalent terms to the current EU/South Korea Free Trade Agreement. Despite International Trade Secretary, Liam Fox, claiming back in 2017 that the UK would be able to “copy and paste” all 40 of the EU’s external trade deals “the second after midnight” once the UK exited the EU, the reality has not been so straightforward. Until recently Dr Fox’s department was struggling to agree any new trade agreement, other than with smaller countries like the Faroe Islands and Liechtenstein. However, the South Korea announcement, the first deal secured with an Asian country, follows other significant deals, including Switzerland and Norway, and has been welcomed by many industry stakeholders.
As well as looking at the deal agreed with South Korea, this article provides an overview of free trade agreements and the WTO rules that govern trade with countries with whom the UK has not agreed a deal, or those readers who are less familiar with the world of international trade.
Tariffs, the WTO and Free Trade Agreements
When an exporter sells their goods or services in a foreign country, the importing country may charge a tariff on the goods or services. Tariffs are used to protect domestic businesses from being undercut by cheap foreign imports. For example, you may have seen stories in the news about the “tariff wars” currently ongoing between China and the US, with President Trump imposing heavy tariffs on imported Chinese goods in order to reduce the US’ reliance on imported Chinese goods and China retaliating with tariffs on US goods. Although tariffs can have a positive effect on domestic businesses, they also lead to higher prices on imported goods being passed on to domestic consumers. This can be especially detrimental when the good in question is something that cannot be produced domestically and so necessarily needs to be imported.
Countries therefore sign free trade agreements, which set low tariffs for imports and exports between the signatory parties in order to encourage trade. The EU has around 40 free trade agreement currently in place with around 70 countries, and the UK benefits from these agreements while it continues to be a member of the EU. However, when/if Brexit occurs, the UK will lose the benefit of these agreements unless it has signed a continuity agreement, such as the one agreed with South Korea.
Countries who have no free trade agreement in place must trade under World Trade Organization (WTO) rules. Under the WTO rules, every country must create a schedule of tariffs for different categories of goods that it will apply to all imports from countries with which it does not have a trade agreement in place. The UK has said it will aim to replicate the EU’s current schedule of tariffs post-Brexit, which could have a devastating effect on certain sectors. For example, the EU currently sets a 10% tariff on car parts, which would greatly drive up costs for the already struggling UK car-manufacturing industry, which relies heavily on imported parts.
Trade with South Korea
Trade between the UK and South Korea has doubled since the EU and South Korea agreed a free trade agreement in 2011, with trades between the two nation worth £14.6 billion in 2018, showing the effect that reducing tariffs can have on trade: 99% of British exports to South Korea (including cars and whisky) were tariff-free in 2018. Cars are also one of the key imports from South Korea to the UK, which as explained above, would have be one of the key imports affected if the UK reverts to WTO rules.
Among those stakeholders who welcomed the development was Grant Hughes, the Regional Managing Partner of Clifford Chance, who said:
“We are pleased to hear the news of a trade deal which will allow for firms such as ours to maintain our local presence, supporting our longstanding Korean clients on international law matters and disputes.
Korea is home to some of the world’s most dynamic and important international companies. This agreement will not only benefit those companies but also international companies and organisations doing business in the country.”
Indeed, without this deal, there was speculation that the five UK firms currently operating in Seoul would have to close their offices, since UK firms are only currently permitted to operate in South Korea as a result of the EU/South Korea trade agreement.
The Department for International Trade’s announcement stated that once the agreement with South Korea is signed, “the UK will have secured agreements with countries that account for 63% of trade currently covered by EU agreements for which the UK is seeking continuity. That has moved from 28% three months ago.” While it is clear that progress is being made, significant uncertainty remains, most notably on the UK’s future trading relationship with the USA and the rest of the EU.