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Free Trade Agreements

What is a free trade agreement?

In short a free trade agreement is a bilateral trade agreement between two parties. It governs the terms of trade in goods between two parties and usually focuses on elimination of tariffs and barriers to trade. More recent trade agreements concluded by the EU also extend to other areas, including competition, protecting intellectual property rights, customs cooperation, regulation. Services are not typically dealt with as comprehensively in FTA’s as goods.

Will a free trade agreement eliminate tariffs on all goods moving from Ireland to Great Britain (and vice versa)?

It depends on the terms of the free trade agreement and what is agreed between the parties.

A free trade agreement will usually remove or significantly reduce the imposition of tariffs on most goods traded between signatory countries but may have a quota for sensitive goods. The recent free trade agreement the EU has concluded with Canada has been mooted as a model the UK may wish to follow. As an example it eliminated tariffs on up to 99% of goods traded between Canada and the EU including on up to 92% of agricultural products.

Note the tariff elimination applies only to goods which originate in a signatory state i.e. which are of origin to the parties to the agreement.

What does origin mean?

It is important to note that the origin of goods is not determined by where goods are shipped from. Rather there are complex rules for determining the origin of goods which will be agreed and documented in a free trade agreement.

For example, in free trade agreements entered into by the EU, as a general rule goods are regarded as of origin to a particular country where;

  • They have been wholly obtained in that country (e.g., plants grown and harvested there, animals born and raised there, raw materials, etc.).
  • They have been produced exclusively from originating materials (e.g. yoghurt produced from EU milk and fruits). There can be different levels of tolerance for non-originating goods.
  • The goods have been produced from materials which do not originate in the country but which were sufficiently processed in that country to attribute origin.

Will a free trade agreement allow for frictionless trade between Ireland and Great Britain?

A free trade agreement does not offer the same potential for frictionless trade as the single market or indeed a customs union.

While a free trade agreement may allow for the reduction or elimination of many tariffs it would not eliminate the other potential barriers to frictionless trade such as import and export customs declarations, VAT reporting, regulatory divergence and hence non customs checks. Many of the issues faced in preparing for trading under a hard Brexit will also apply in terms of trading under a free trade agreement.

Are import and export declarations needed under a free trade agreement?

As a general rule yes.

How does VAT work under a free trade agreement?

A free trade agreement does not apply to VAT so the normal VAT rules will continue to apply.

Likely issues to come up in negotiating a free trade agreement

One of the key issues affecting the ability of the UK and the EU to agree a comprehensive FTA in a short timeframe will be the level of divergence that the UK will want from EU regulations – referred to as level playing field conditions.

The allocation of tariff-rate quotas, especially for some Agri products, between the EU and the UK will require negotiations with third countries.

GATT, GATS and GATT 24 explained

What is GATT & GATS?

The General Agreement on Tariffs and Trade (GATT) came into force in 1947 and now forms part of the World Trade Organisation (WTO) Agreement. WTO tariffs are the default import/export duty rates which apply to international trade in goods, unless two territories are part of a Customs Union, or have a Free Trade Agreement (FTA) in place which reduces or removes tariffs.

If the UK and the EU do not manage to agree an FTA, the WTO’s GATT will apply to trade in goods. Similarly, if the UK and the EU do not agree an FTA, the WTO’s General Agreement on Trade in Services (GATS) will apply to trade in services.

Under WTO rules, a territory MUST apply the same rules to all territories with whom it does not have an FTA. This is referred to as the Most Favoured Nation (MFN) clause. Hence if the UK unilaterally decided not to impose tariffs on some or all imports from the EU (as some politicians in the UK have previously indicated they might do), they would have to similarly remove tariffs on imports from all WTO Members. There would be no requirement for the EU to reciprocate. Concerns have been expressed by some UK sectors that this could make them uncompetitive in their own market. It would seem from comments by the new UK government that there are no longer any plans to take such unilateral actions.

What is GATT 24?

Article 24 of GATT provides the basis for two or more territories to form a customs union or establish an FTA. It also makes provision for an interim agreement necessary for the formation of a customs union or a free trade area.

Some UK politicians have said (when a No Deal Brexit was on the table) that GATT 24 could allow for the UK to continue to trade with the EU with zero tariffs on both sides whilst a FTA is negotiated under an interim agreement.

Many trade law experts were sceptical in 2019 that GATT 24 would allow for such an outcome. Some of the reasons for this scepticism were:

  • All agreements under Article 24, including interim agreements, must be agreed by both parties.
  • Interim agreements must include a plan and schedule for the formation of a free trade area within a reasonable time.
  • All interim agreements must be referred for review to all other WTO parties who have the possibility to recommend changes to the agreement.

While not specifically mentioned in Article 24, its provisions do not appear to prevent the possibility of a temporary agreement being reached between the EU and UK to allow some or all tariffs to be set at zero as a short-term measure. It should be borne in mind that such an agreement would only cover tariffs on goods and would not deal with regulatory issues or mitigate other non-tariff issues such as the need for customs declarations.

It is conceivable that the EU and the UK could consider the application of GATT 24 as being mutually beneficial if an FTA cannot be finalised by the end of 2020.

Further information