Business and Trade Committee
Oral evidence: The 2026 review of the UK-EU Trade and Co‑operation Agreement, HC 1569
Tuesday 18 July 2023
Ordered by the House of Commons to be published on 18 July 2023.
Members present: Darren Jones (Chair); Alan Brown; Jonathan Gullis; Antony Higginbotham; Jane Hunt; Ian Lavery; Andy McDonald; Mark Pawsey.
Questions 1 - 27
Witnesses
I: David Henig, Director, UK Trade Policy Project, European Centre for International Political Economy; Catherine McBride, Senior Fellow, Centre for Brexit Policy; John Springford, Deputy Director, Centre for European Reform; Professor Simon Usherwood, Professor of Politics and International Studies, The Open University Panel.
Witnesses: David Henig, Catherine McBride, John Springford and Professor Simon Usherwood.
Q1 Chair: Welcome to this morning’s session of the Business and Trade Committee for what I think is the first look by the House of Commons at the pending update or review of the EU-UK trade and co‑operation agreement in 2025-26. We have two panels today to talk about that, both in respect of process and potential priorities for when we get to that stage.
For our first panel, we are delighted to welcome Catherine McBride, who is a senior fellow at the Centre for Brexit Policy, John Springford, who is the deputy director at the Centre for European Reform, David Henig, who is the director of UK trade policy at the European Centre for International Political Economy, and Professor Simon Usherwood, who is a professor of politics and international studies at the Open University. Welcome and thank you for coming to give evidence to us today.
Before we dive into the detail, I want to ask a general opener—it will give you an opportunity to warm up your vocal cords—about the current status of trade between the UK and EU, specifically the current status of the implementation of the existing trade and co-operation agreement. Where are we now? What more is there left to do?
I am going to go from left to right. By the time we get to you, Professor Usherwood, there will probably be nothing left to say, but we will give you all a go. Catherine McBride, do you want to start?
Catherine McBride: I have done an industry-by-industry review, which I will send to the Committee, analysing whether there was any difference in UK-to-EU trade and UK-to-non-EU trade. In general, each industry followed the same pattern. Both dived during Covid, and in both cases they have come back up. Sometimes EU trade has increased more than non-EU trade and sometimes it is the other way round.
This is very clear in goods exports. Three areas where this has not been the case are clothing, footwear and textiles, all of which are affected by rules of origin in the TCA. This is happening in both exports and imports. For a long time, our clothing manufacturers have made clothes in south-east Asia. They now do not meet the criteria to be classed as UK goods when they are exported to the EU.
The bulk of what we export—it is not clothing; we are exporting cars, plane engines, machinery, JCBs and other big industrial stuff, which is the big value trade for goods—has gone to EU and non-EU countries just as it always did. Those exporters are large companies that have a department that does all their trade compliance. This is nothing new for them. If they send something to the US or to Germany, it is the same process.
Q2 Chair: In that review, did you look at whether the cost of trading has gone up?
Catherine McBride: It is about who pays the cost. The cost of trading has probably gone up for an individual company. Depending on how much they trade, it might be an incremental cost. For jet engines, Rolls-Royce might need to have an extra person on a desk in its trade department.
We always paid for EU membership. It was never free. The cost used to be borne by the taxpayer and now that cost is borne by the individual company that is exporting. For big companies, it is nothing. They probably do not notice it. For small companies—many SMEs exported just to the EU because it was easy—it is a whole new expense. If they had exported to other countries, it was not such a big deal. It is swings and roundabouts.
John Springford: If you are comparing the UK’s trade with the EU to the UK’s trade with non-EU countries, you end up with some misleading results. If we think about what the Office for Budget Responsibility has been talking about, for example, it has noted that the trade intensity of the UK economy has fallen significantly since we left the single market and the customs union.
The reason for that is that exports are down to the EU and to the rest of the world, if you compare our exports to the exports of other countries. They have been going through a goods trade boom partly on the back of increasing demand for manufactured goods as a result of the end of lockdown and Covid. A lot of people had savings. They thought, “Let us upgrade our washing machine” and so forth. A lot of countries have been going through a manufactured goods trade boom, which the UK has not participated in.
To formalise that into some statistics, how has UK trade performance compared to other countries, whether that is the EU or the OECD in general? You can also take more sophisticated approaches. The impact on UK goods trade overall, including imports, is that there is a shortfall of 10% to 15% compared to other countries.
In services, the story is a bit better. That is a little bit of a puzzle. We thought services would be harder hit by the trade and co-operation agreement, but our exports are holding up reasonably well. That could be because demand for the types of exports that we excel in has improved: financial services, accountancy law and so forth.
It could be that the single market in services was not as complete as we thought so the costs of leaving are not as large. It could be that it is going to be a bit of a slow burn and our services exports are going to suffer over time as national Governments enforce the provisions of the trade and co-operation agreement more stringently.
David Henig: I will not carry on with the comparison of numbers. If we look at it just from the point of view of the number of barriers that businesses face now as compared to the number 10 years ago—particularly picking up on the point Catherine made about small companies versus large companies because small companies will be less used to these—there are now numerous barriers in place that companies face, whether they are in services or goods.
In the past, if you wanted to supply a service, you would just get on a plane and supply it. Now you may have to apply for a work visa, for example. It may not be granted. Your professional qualification may not be recognised to deliver the service. There are all manner of things on the services side.
On the goods side, you cannot just send something to another country. There are rather large amounts of paperwork to go with that. You need to use the services of freight forwarders and customs agents; you need to make sure your goods meet the requisite EU regulations and have the requisite CE marking, if they did not before.
There are many more effects. A typical trade agreement is a collection of numerous fixes to little problems like that, and the single market even more so. The presumption was that you could trade unless specifically disallowed. A trade agreement takes any barrier you can think of and tries to do something about some of them, but there are still huge numbers even since we have had the trade and co-operation agreement.
As for the net effect, I will finish with one figure. Typically, small and medium enterprises account for about 30% of total trade between countries. Within the single market it is 40% because it is just easier. Inevitably, therefore, if you follow that logic, fewer UK small companies are likely to export. That is exactly what we see.
Q3 Chair: Professor Usherwood, in terms of the implementation of the trade and co-operation agreement, the European Commission will be the first to say, “We have not fully implemented it yet”, before we get to the stage of reviewing it. Why is that the case? How much more do we have to do?
Professor Usherwood: As you will remember, the TCA was negotiated not in a rush but in a very short window of time during 2020. Even more so than typically with an FTA, there are a lot of provisional arrangements, commitments to do things further down the line and transitional arrangements.
Broadly, that process has so far unfolded on the timescale anticipated. A couple of things have slipped, most obviously on energy interconnectors, which was supposed to be agreed in the middle of last year and is really only getting going now. The mutual recognition of qualifications is also likely to be a very indefinite timetable. There is no specified schedule for that and no immediate hurry in terms of what is happening.
The Commission is right: this is a living framework of arrangements and there still is quite a lot to come down the line. Broadly, the system is working, but that is going to require adaptation. We have to remember—we have touched on this already—there are domestic adaptations, particularly on the UK side, that require a bit of lead time to come through.
As far as it goes, we are where we should be as far as people had anticipated that at end of 2020. We will pick this up further when we are thinking about the general review clause.
Chair: I should say that we have quite a lot of questions. We are going to try to wrap up this panel within an hour. Colleagues will probably direct questions at individual witnesses, but, if you have anything burning in added value, try to catch my eye, but keep an eye on the time, if possible.
Q4 Andy McDonald: With that direction in mind, can I direct my question to you, Professor Usherwood? You talked about a living framework, but under article 776 of the TCA there is provision for the agreement to be reviewed in five years’ time. That is 2026. What does it actually say in the clause? What is it going to look like when we get to the review itself?
Professor Usherwood: Article 776 provides for a review of the implementation of the agreement. It is not a review of the agreement as a whole but the specific implementation. That is important.
The language in that provision is cut and pasted from other agreements the EU has had with New Zealand and the US on various aspects. It does not specify a process; it does not specify any need for a particular agreement. Even the timetable has been somewhat debated. The Commission is very much of the view that it is 2026. On a literal reading you could take it as 2025, but 2026 seems more likely, being five full years after implementation started.
We are going to see one of three options. The minimalist model, which would be in line with other agreements, is a very technical exercise where you just have pretty much a technocratic review—“Are the systems working? Are there any things we need to do?”—and an acknowledgement of that through the management bodies of the TCA.
At the other end, you might argue that there is the possibility for a full-scale renegotiation of the treaty. For that you need both parties to agree. The Commission has been very clear that it does not foresee anything like that and it wants to make the most of the existing provisions.
More modestly, this review could become a moment to have a wider set of discussions, not necessarily a renegotiation but a review of the relationship. Particularly if we think about this coming after the next general election and the European elections, when there will be a new European Commission and European Parliament, it might be that there is some appetite to do more, but, realistically, you should be expecting less from this rather than more.
Q5 Andy McDonald: Article 126 refers specifically to reviewing provisions on non-financial services as part of the five-yearly review. That is not just implementation, is it? It is about other services. What is the significance of that?
Professor Usherwood: Similarly, you could look at fisheries. Article 510 provides for a specific review of provisions. Where the negotiators foresaw specific issues, things they had not had time to get to, or where they recognised that there would be dynamic effects, as with 126, they have put in place provision to look at things specifically. Again, there is no commitment to renegotiate provisions; rather, they are flagging things.
The difference in language between those two specific provisions, on fisheries and non-financial services trade, and the general article 776 model, which is very vague, is telling. That points to how we should be managing expectations around this rather than seeing this as, “We should revisit everything all over again”.
Q6 Andy McDonald: Mr Henig, how does the five-yearly review clause compare with the equivalents in other treaties? Is this sort of thing pretty common practice or does it differ in any way?
David Henig: It is not universal practice to have a review clause in trade agreements, but it is becoming increasingly commonplace. They do differ. The European Parliamentary Research Service issues a report periodically—I think it is every year—outlining the international agreements to which the EU is a party that contain review clauses and what those clauses say. You will find a number of similar agreements, as Professor Usherwood has mentioned.
On a slightly different note, the US-Mexico-Canada agreement, the successor to NAFTA, contains a review clause every six years, but lays down a lot more closely what is entailed within that review clause. It specifically says, “The parties will at that point decide whether they want to carry on and what changes they want to make”. That language is not within this clause.
There are two points that I want to make in general about the review. From my experience, having sat a few times in the UK chair in Brussels committees to consider relations with third countries, pretty much every month there are some meetings with third countries that are either committee meetings or reviews of existing agreements. At all of these, it is generally assumed that, while member states will give their opinions, no mandate will be sought. If no mandate is sought by the Commission from member states, no major renegotiation can take place.
In general, that would place this review in that space, where it is expected that you might look at smaller questions of implementation. How is the agreement going? How are the border processes working? Are the tariff preferences being utilised? There would be no actual renegotiation because the Commission would require a mandate to do that.
With that being said, there is another scenario I would add to the three that were mentioned. Let us say there is a new Government. There will be a new Government of some sort by 2026, although it may be the same Prime Minister. Say the Government decided to seek a political process, some summits for example, or a new approach to EU relations. We are not talking about rejoining; we are talking about a regular process of summits. The review could become part of a process where you thought about the relationship as a whole and made recommendations for how it could be improved.
That can happen outside of a review. Indeed, I would argue that it will happen outside of a review, whether it is in 2025, 2026 or 2035. To have a fundamental look again at the trade and co-operation agreement will require a separate political-level process.
Q7 Jane Hunt: Moving on from that, David, several other review mechanisms exist under the TCA. Can you briefly summarise these? Catherine, I would be interested in your view afterwards as well, please.
David Henig: I will try my best. I suspect Professor Usherwood might be closer to the details. He has already mentioned the fishing process, which I was aware of. There is one for data because the process for dataflow sits outside of this relationship. That is really important in terms of whether the UK has data adequacy.
On fishing, it is important to note that there is an annual negotiation and then there is a five-yearly negotiation as well. Basically, the fishing negotiations never stop. That is also the case for energy.
Jane Hunt: They did it before, didn’t they?
David Henig: A financial services regulatory dialogue has been agreed recently. It was in the trade and co-operation agreement, but was not finalised. There are many EU programmes to which we are acceding. The Horizon negotiation is going on at the moment as well. Inevitably, I am going to have forgotten some. Simon and others will probably remember what they are.
It never really stops. There are other EU regulatory files ongoing that will affect the UK. The one that is being talked about most is the carbon border adjustment mechanism, whereby particular goods are going to be charged unless you have a carbon pricing scheme, which we may or may not be exempt from.
There are going to be all these ongoing negotiations anyway. In a way, one of the questions is, “How do we best organise those? Are we best organising them as we are at the moment, or are there other ways to organise them?” I will pause at that point.
Q8 Jane Hunt: That is very kind of you. Thank you. Catherine, talking with the EU never stops. Discuss.
Catherine McBride: It is important to keep talking to them because they are still our biggest trading partner in a collective way, not individually. The US is our biggest export market and China is our biggest supplier of imports.
Before you can go into a large renegotiation of this, you need to have alternative suppliers. Unfortunately, though the Trade Department is doing fantastic things and has signed a lot of deals, a lot of those deals have only just started. The CPTPP will not be in operation for another year at least after it goes through ratification, etc.
In many respects—we still import 25% of our food from the EU—we do not really have an alternative supplier. We will get alternative suppliers, which puts you in a much stronger position to renegotiate a contract, but, over the 40 or 50 years the UK was in the EU, everyone ended up doing what they were best at. That meant some industries in the UK disappeared completely.
We will have to either rebuild our industries or rebuild our connections with other countries. I have just read today that we are going to do a new agreement with Turkey. Turkey could supply us with a lot of things we presently get from the Mediterranean countries in the EU.
It will happen. There are some things where we have to look at our own regulations. For instance, there are a lot of problems with the car situation at the moment. This has a lot to do with the TCA’s requirement for batteries to be made in the UK or the EU.
Here is another situation. We are going to stop production of petrol and diesel cars in 2030, but the EU is not going to stop until 2035. Right now, 60% of our car exports go outside the EU. A lot of those countries are not in the process of turning off petrol and diesel and going electric.
If you want to be successful at exporting, you have to make what your customers want to buy. Unfortunately, if we close down things here, we will not be making things our customers want to buy. The big companies that make those things will probably move their production out of the UK. We have to look at how we are hampering our ability to trade with our own regulation, which has nothing to do with the TCA.
There are several cases of this. In the last year, we ended up being a land bridge for gas coming from the US. We have our own gas in the North Sea, but we do not exploit it as much as Norway does for its own. Oil and gas is still one of our top six exports, yet we treat it like something we do not want to talk about, the skeleton in the family closet. When you look at what our big exports are, we have to nurture those industries, if we want to trade more. Unfortunately, domestic regulation is giving us more trouble than the TCA.
Q9 Jane Hunt: What you say about batteries is interesting. There is a story in The Times this morning about Germany being hurt by what is going on in China. Forgive me; I do have to be brief now.
Professor Usherwood, the TCA also includes provisions allowing the parties to agree to adjust the agreement through the Partnership Council under the TCA by signing supplementing agreements. Can you give us a summary of that and some quick thoughts on that one, please?
Professor Usherwood: It is an analogous process to the Windsor framework. When we had that earlier this year, it made minor adjustments to the protocol in the withdrawal agreements for Northern Ireland. You can do that.
It is a time-limited provision. Again, it reflects the speed of putting together these two documents. You expect that in something of that size and complexity there will be points of precision. It is meant more for points of clarification and error than a more generic, “Here is a problem that has emerged”.
Again, we have flexibility in the system, but it is designed as a whole to have an accommodating nature and to allow for a range of activities to come in. The framework arrangement of the TCA precisely allows you to keep the basic structure, but, if you need to slot more things in, such as Horizon or participation in other EU programmes, you can do that without having to rewrite the whole thing.
Q10 Jonathan Gullis: Professor Usherwood, this is for you again. We see that Mr Šefčovič has commented on the fact that the TCA has been in force for only two years and has not yet achieved its full potential in his eyes. Stefan Fuehring, who is head of the European Commission’s trade and co-operation agreement unit, has reportedly said that he is “at pains to repeat that the five-year review of the TCA starting in 2026 was an ‘implementation’ review and not a moment for ‘revising, revisiting or renewing, let alone amending’ the deal”, which ties in with what you were saying earlier.
Those are leading figures within the European Commission and European Union. What is your view on how EU institutions and member states perceive the current five-year review and any preparations they are making for it?
Professor Usherwood: As you say, the Commission’s line has been solid that this is a minor technical exercise rather than anything else and that there is still a lot to do within the provisions as they stand. In other institutions and in some member states you see a bit more appetite possibly to come back to some more ambitious discussions, but that will very much depend on where they see the UK moving.
One of the big challenges is that Government policy has been very focused on the withdrawal agreement and the Northern Ireland protocol. That has taken up a lot of bandwidth in this area. TCA provisions have not really been the centre of attention. We have got as far as the Horizon question but not really beyond that.
When there is more of a sense of direction from the British Government, either this one or the one that comes after the general election—again, as David said, it does not matter what the result is—you will see more clarity about whether member states are willing to try to get the Commission to open up a bit more. If you had some momentum from those member states, you would potentially have the capacity to start getting into questions of mandates. We are not yet nearly at that point.
There is a sense that the TCA was very much a baseline agreement. It was very minimal and very limited in scope. There are areas where new discussions could be had, but where those might go depends on the UK much more than on member states.
Q11 Jonathan Gullis: You said that some member states might be interested. Are there any in particular that you could think of as an example?
Professor Usherwood: If you think about France, defence and security co-operation is an obvious area. The NATO alliance relationship is going to be a part of that. There are some trade aspects.
David Henig: There are two points I would make. First, when the EU gives the kind of messaging you quoted there, it is often saying very deliberately in a UK context that it wants MPs of all sides, not just yourselves, to know it is being tough. It has domestic constituencies as well. It wants to give the message that we do not get any freebies.
Having said that, I get to speak to people in Brussels. My think tank is based there so I go there fairly frequently. As an expert adviser to the UK Trade and Business Commission, I have also been talking a little bit to folk over there. They are open to changes, if it is a reasonable negotiation. We do not expect there to be cherry picking.
Lord Frost, our former negotiator, said that he felt like there was more we could have done on mobility at that time. Certainly, one or two EU member states—France being one, I think—have expressed interest in mobility arrangements. There have been one or two suggestions that Germany would like to deepen some of the trade arrangements, although that sounds a little too suspiciously like “the German car makers are coming” to be entirely comfortable with that, but generally it is open to the UK doing more in trade.
There is also the pan-Euro-Mediterranean convention on rules of origin. Apologies, that is a long-winded way of saying that there is something on rules of origin that supports industrial supply chains. Some UK companies, some countries in the EU and even some non-EU countries like Morocco and Turkey have expressed interest in the UK joining that. There is interest there, but it would have to be put together in a proper process. It will not happen on its own.
John Springford: Just very briefly, I thought it might be helpful to think about the process and how the EU organises negotiations. It is important to remember that member states might say something about how it would be quite interesting if we were to go further in this area, but the Commission is then going to co-ordinate the member states broadly into a political position, which will then form a mandate if there is to be any form of renegotiation.
I would not necessarily take as read what member states are saying now as what the overall Commission stance in any renegotiation will be. That process will be an extremely political one. It will depend on the Government of the day in the UK, on the Commission and, to a certain extent, on the European Parliament that is elected next year.
Q12 Jonathan Gullis: Mr Springford, at the next general election, do you expect to see all political parties having quite a clear outline of how they see the future relationship with the TCA going forward, in order to help any future relationships with any future European Commission, bearing in mind that they have elections over there as well?
John Springford: You are the politicians. You know better than I do, but my sense is no. Brexit is a tricky subject politically for the two major parties. We have a fairly clear line from the Labour Party now, some of which is possible and some of which is not, but it is signalling something that is relatively incremental rather than a step change in the relationship.
That probably does signal to the Commission that, if there were a Labour Government, maybe they would be looking at an ask that is more expansive than under the Conservatives. In terms of what the Commission would think about how big the Labour ask would be, it would not necessarily take as read what the Labour Party is saying now in a pre-election context in the UK.
Q13 Andy McDonald: This is the very point I wanted to explore with Mr Henig in particular. In the two years coming up we have elections here, but we also have European elections and a new Commission. That feeds into 2025 and 2026 for the review. We have had a comment about UK domestic possibilities. What is your sense of the likely make-up of the European Parliament and the Commission? How is that going to impact upon the review?
David Henig: That is quite a tough question.
Andy McDonald: That is why you are here.
David Henig: There is quite a lot of speculation in that. First of all, starting at the top of the Commission, there is every indication that Commission President von der Leyen is favourite to have a second term. That is a good thing for UK-EU relations because she is broadly quite positive towards the UK. She spent a year here as a student and she has been reasonably sympathetic, but many things could change in that.
In terms of the European Parliament, from the latest I have seen, we are not expecting huge changes. There is always going to be tension between groups. Relations with the UK are not a big deal in the European Parliament. It is nothing like as important to them as the green deal, to name but one, the response to the US Inflation Reduction Act and industrial policy. They have some huge challenges.
They have a big debate going on at the moment about the extent to which they are, as I would call it, regulating for the world in terms of the net zero transition and the extent to which they are open to trade. Clearly, we are affected by that, but we are not really near the top of that list. With that being said, there will be plenty of MEPs—there always are—who have sympathies with the UK and who want closer ties.
It is not clear what the priorities will be on the EU side. This may be to the UK’s advantage. This term of the Commission has been very much about regulation. It has been finishing up some trade agreements. New Zealand has finished; Australia may finish; for Chile and Mexico, the renegotiations are coming to a conclusion.
It is therefore not clear what the programme is for the next Commission. That could give the UK an opportunity. There may be a gap in its schedule. It has a large trade team. Maybe negotiations with the UK could come at a useful time.
Just to be clear, all of this is Government-neutral. A Government of any stripe in the UK can do and will be doing business with the EU, and the EU will treat this in the same way. It is the Commission that will run it, taking some soundings from Members of the European Parliament and member states, but essentially this is going to be, first and foremost, about the Commission.
Q14 Alan Brown: Mr Springford, you mentioned that the Labour party was saying some things that were possible and some that were not. What kind of comments has it made that are not going to be possible to get agreement on?
John Springford: “Possible” and “impossible” is probably too binary. One thing that has characterised the debate about the renegotiation of the TCA is the general sense that there might be a win-win from a trade perspective. This is the theory of comparative advantage: “It would be great if we could have your imports because they will be cheaper and you could take ours because they will be better quality”. That is not necessarily how it is going to go. Most trade negotiations are about trading off competing producer interests, not consumer interests.
Thinking about the arrangement as a whole for the EU, the TCA provides for zero tariffs in goods. The EU has a comparative advantage in goods, which is stronger than ours. It is less comprehensive in services, which is our comparative advantage. As the EU is a larger market, it can bear the cost of any trade barriers between the UK and the EU better than the UK can.
The UK has to give up something quite significant in order for there to be big changes. Take the proposal by Labour to go for a sanitary and phytosanitary agreement. Is the UK willing to shadow EU laws? That is one question. On the EU side, it would mean more competition for French farmers. They are perhaps in a stronger position in terms of their exports to the rest of the EU right now, so maybe they are not going to be super happy about that. It is the same with the mutual recognition of qualifications. Having UK accountants, lawyers and consultants entering the EU and being able to do more work there might challenge German or Nordic companies.
We have to bear in mind that this is as much about producer interest as consumer interest. It may well be possible that Labour’s asks are renegotiated, but it is not going to be something where they say, “Yes, that is a win-win for both sides”, from a consumer or economist perspective.
Q15 Alan Brown: Similarly in terms of trade-offs, is there any potential significance to the fact that the TCA provisions in fisheries and energy are to expire in 2026, which is the same time as the five-year review falls?
John Springford: On fisheries, as David said, there is a provision for either annual or multiannual agreements about catch, quotas, access to each other’s waters and so forth. I do not know how that will go. We did not get a great deal under the TCA. The UK’s access to more of the EU’s pre-existing quota has been phased in over those five and a half years. It is an increase of 25% overall.
It could be possible for the UK in that negotiation to take a maximalist approach. “We are going to reserve our waters for UK fishers”. The question then is how that feeds into the negotiating positions in other chapters. It was deliberate, on the part of the EU, to make the renegotiation on fish happen at the same time as the review of implementation. It likes to have a broad range of files to be able to negotiate and trade off between one another.
On energy, we have the North Sea co-operation on building new wind farms and interconnectors largely between countries that border the North Sea. That will continue because it is a shared resource.
In terms of reducing some of the costs of electricity trading that have been imposed by the trade and co-operation agreement, there are questions about whether, in order to have access to instantaneous pricing, which allows energy trade to be done basically on an instantaneous basis, the UK would be willing to sign up and dynamically align with some of the rules of the single electricity market and potentially submit to European Court of Justice oversight. It is possible.
Q16 Alan Brown: Energy UK has estimated that the current electricity trading arrangements are adding £1 billion a year to our energy bills. Is that a trade-off the UK Government are going to have to do to get rid of these overheads?
John Springford: Yes, that is right. That is the estimate. I have not looked into how accurate that is. It is potentially plausible. Electricity trading, with the North Sea as a resource, is going to become more important as a way to balance supply and demand between the UK and other European countries. The more the UK can reduce the cost of that trading, the cheaper the electricity will be. I cannot say by exactly how much. The current estimate is about £1 billion.
Q17 Alan Brown: Catherine, earlier on, if I can paraphrase, you said that big companies like Rolls-Royce can carry these relatively small additional overheads, but there are barriers for small and medium-sized companies trading with the EU. I was looking at the UK Government’s own statistics on this. They say that 99.9% of the business population works or is employed in small and medium-sized enterprises. By your words, are we saying that 99.9% of the business population now have trade barriers in terms of the line of work to the EU?
Catherine McBride: No, not even vaguely. Only about 10% of UK companies and businesses trade anywhere at all. That was a statistic that Liam Fox mentioned when he was first made DIT Minister in 2017. It has not changed. In fact, it has gone down slightly.
Alan Brown: If it has gone down, there is less trade.
Catherine McBride: We have a very big domestic market. A lot of people like to talk about trade intensity. That is not really a big problem for the UK. We are basically a domestic market. Our trade is quite a small part of what we do.
This is very different from, say, Germany, where trade is a higher proportion of GDP. The trade intensity of countries like America or in Japan is only 25%. If people are worried about trade intensity, they are missing the point. The UK is basically a domestic market. We have some very big multinationals that trade out of the UK.
Q18 Alan Brown: If we are a domestic market, we do not have to worry about exports. We can just be protectionist.
Catherine McBride: One of the reasons people like to sell things to the UK is that we have a very wealthy consumer base here. We have a very affluent population, if you compare it to world populations.
Alan Brown: Tell my constituents that.
Catherine McBride: This is why the German car manufacturers like selling things to us rather than buying things from us. If you run a successful business in the UK and you are selling things to the UK, you are generally doing okay. You do not have to export.
It would be nice if more companies did. I am not anti-export. I am just saying that—yes, you are right—the economy relies on small and medium-sized enterprises. They employ most people. When it comes to our trade figures, our trade is the exact opposite. Most of our trade is done by large multinationals.
Q19 Alan Brown: We need to move on. Very quickly, Mr Henig, how far is the possible scope of changes to the TCA constrained by the EU’s red lines? Can the UK cherry-pick particular aspects of the single market rather than the whole package?
David Henig: Any negotiation is constrained by the red lines, and we will have our own red lines, but there is a lot that can be done. As I say, I was working with a Cross-Bench group of MPs and businesses in the UK Trade and Business Commission. We came up with over 100 recommendations, many of which were with the EU, for things that can practically be done that are not cherry picking. I fear that John Springford may say that many of them would not make a huge difference economically, but there are things that can be done for businesses in all of your constituencies that will make a difference at least to them, if not fundamentally to the big picture of UK exports.
There are many things in this trade relationship that are worth doing and that we can do, short of challenging those red lines or fundamentally changing our relationship with the EU.
Q20 Mark Pawsey: I wonder if I could follow that up. What is the economic benefit of this—it is not a renegotiation—review? What could we get out of it, potentially? I will ask each of our witnesses. Catherine, you were pretty negative about the extent to which businesses in this country have in their DNA the idea of overseas trading. Is there any part of this review that is really going to make a difference to our economy?
Catherine McBride: It probably will not make a difference to our economy as a whole, but it will be important for individual businesses. Capitalism relies on new businesses coming up, so we have to foster that. Any tweaking where you can lower red tape for small businesses is good.
John talked earlier about the OBR’s prediction. That prediction is based on an assumption that there has been lower investment in the UK due to Brexit uncertainty. I would not suggest that you go back into a serious big negotiation and create more Brexit uncertainty. One thing that has happened in the last few years is that everyone has calmed down and people have seen that there was no major problem. We continued to trade; they continued to buy our goods; we continued to buy their goods. When they needed gas, we found a way to get it to them. When we needed electricity, they supplied us.
Everything is getting back to normal. I would definitely recommend tweaking it. The obvious areas are fisheries and Ireland. We really have to sort that out. Some areas of our services trade, such as business services, telecommunications and intellectual property, have grown more to the EU since we left than to non-EU. Other things like financial services have grown less than to non-EU.
If you look at it over the long term, our financial services trade with the EU has been quite flat for the last six or seven years, whereas it has grown by 33% to non-EU countries. It is not so much that Brexit is hurting trade with the EU. It is just that the rest of the world is expanding at such a massive rate. It is very hard to compare them like for like.
Q21 Mark Pawsey: Mr Springford, put those changes to one side. Just in terms of the changes to the agreement, could the tweaks that Catherine has spoken about have any significant impact on GDP?
John Springford: I agree with Catherine. It will not have a significant impact on GDP. There is more progress in terms of reducing the barriers imposed between the UK and EU in the sectors covered by the agreements and that therefore leading to greater trade intensity, which is important, and higher GDP, simply because, as we have discussed, the likelihood that we end up, through this review process in particular, with any big advancements is quite small.
However, I also agree with Catherine that the certainty the review might provide, if the TCA endures and neither party backs out of the agreement, is important. We know from the economics literature that one of the main benefits of free trade agreements is that they provide certainty for investors. If the markets maintain the level of openness within the agreement, it makes it harder for Governments to say, “We are going to protect our own industries here”.
Having a review that leads to some changes that will improve implementation is good, but it will also be a signal to investors that the arrangements are going to endure, which should help with investment.
Q22 Mark Pawsey: It is a signal that it is not going to change anything significantly but will provide perhaps a bit more stability, which might give investors an incentive to invest. Do you agree with that?
John Springford: Yes, exactly.
Mark Pawsey: David, do you follow that line?
David Henig: No, I am slightly more optimistic. On the investment side we have clearly seen a drop-off in investment. There has been a lack of predictability in our arrangements. If we get a more stable approach and we see this as the basis on which we can build where particular issues arise, there is some investment waiting to be unlocked.
It does require some UK decisions as well. The big one is in the regulatory space. We have to decide, not just in areas like the carbon border adjustment but across the whole range of industrial goods particularly, whether we are aligning with the EU, which means a single set of costs for business, or looking to do our own thing.
Where I am coming from is that on industrial goods, where standards are more global than regional, it makes sense for us to say up front, “We are in alignment”. That is less the case in services where we perhaps also have more power to set the regulation. That alignment by default approach is one I would see.
I am hearing a lot from manufacturing companies that they are struggling to find new customers at the moment. They have kept their existing customers, but they are struggling to find new ones. They are worried that manufacturing could continue to tail off.
To go back to cumulation and rules of origin, sorry, it is pretty techy trade speak, but it does matter. Can we ensure that parts that come from Morocco or Turkey can qualify for tariff-free export to the EU or, indeed, the other way round, that our components can be put into a vehicle in Morocco and exported to the EU? If that can all happen without tariffs, which it cannot at the moment, that will make a difference to them as well.
There are some clear things we can do that will make a difference. Again, this is not just as part of the review. It is a political process to signal that this is the kind of approach we want to take. We need to be clearer politically. It should be the politics driving the review, not the review driving the politics.
Q23 Mark Pawsey: Professor Usherwood, do you agree with David that there is perhaps an opportunity to tidy things up and make things better or are you a little more cautious?
Professor Usherwood: I agree with what David has been saying. The one additional point I would make is that this is not yet a normal relationship. The disagreements over the Northern Ireland protocol and the words and actions of the British Government about maintaining treaty obligations under the withdrawal agreement still cast a shadow. As much as the Windsor framework has started to repair that relationship and the question of trust and good faith, on the European side there is understandably caution about where this process leads.
It is not just about the next Government of a different political complexion but the one after that. If we are thinking about the question of stability and the business environment that creates, we need to think medium to long term rather than just about an alternation of power.
Mark Pawsey: So there are going to be only very modest changes.
Professor Usherwood: Again, it is a rounding error in macro terms, but you might have some significant localised effects.
Q24 Jonathan Gullis: Professor Usherwood, you talked to us about the UK side of the relationship and where the EU may have felt aggrieved by UK actions. If I put it the other way round, would you accept that the EU, in terms of the implementation of the protocol, particularly when it came to Northern Ireland, has built up a lot of mistrust and caused a lot of damage to the trade between GB and NI? It is a two-way relationship. It cannot just be constantly put, as we read in our newspapers, on the UK side. The EU has to step up and act in good faith.
When I speak to exporters, they say they are taking stuff into ports in different member states and they are meeting different charges on goods, for example ceramics. I am sorry to plug Stoke-on-Trent, Chair. When they are exporting into different member states, whether that be Italy or Spain, they are saying they have different forms to fill in and at times different payments to make because the member states are playing games with trade.
Professor Usherwood: That highlights the need for dialogue. The question of trust is a subjective one as much as it is objective. If you do not trust another party, it does not matter whether you should trust them. You have to feel it.
There is a need for ongoing close negotiation, co-operation and dialogue to address those kinds of issues. Where that is against the provisions of the TCA, for example, you then take action to address it. You have extensive dispute settlement mechanisms, if you want to make use of those. Again, two parties come to this. That is maybe the key message of all of this. It is not just about what the UK wants; it is about what the EU wants as well and what they together can agree to do.
Q25 Jonathan Gullis: Would you agree that the TCA review is better off being more, like you say, a bringing together of people who have been banging their heads against the wall rather than friends coming together once again? It can be used to make technical changes and to show investors that there is stability, that the TCA still holds a lot of strength, that relationships are repairing or repaired in most cases and that there is now a forward-looking approach. Is that what the review should be, rather than anything big and bold, following on from what Mr Pawsey was saying earlier?
Professor Usherwood: Being friendly does not stop you being big and bold. A constructive atmosphere is certainly much more productive than an antagonistic approach.
Q26 Jonathan Gullis: Mr Henig, you talked about dynamic alignment. You will understand that there will be concerns that leaving the European Union but continuing to have a lot of dynamic alignment with its rules and regulations is technically Brexit in name only.
David Henig: In terms of alignment, I would argue that it is about making the right decisions for the UK. As part of that, where there are in effect global standards, we should be in line with those. We should be in line with the best standards wherever they are because we need to export.
Trade is not easy. The UK is not going to be undercutting others. People need to be able to trust our products, whether they are ceramics from Stoke-on-Trent, which they do trust, or, indeed, breweries in Stoke-on-Trent, one of which I am advertising through my cufflinks. They need to trust that we produce fine beer as well as ceramics.
Trade is difficult, and there are many things to consider. We need to provide some form of predictability and some stable platform, however we do it. I would try to move away from ideas about Brexit in name only towards what is best for the UK.
Jonathan Gullis: Chair, I just want to make sure it is on the record that the brewer from Stoke-on-Trent is Titanic Brewery.
Q27 Chair: Thank you very much. We are just coming up to time so I am very grateful to colleagues for sticking to the hour. I just have one question, which you probably will not be able to answer substantively.
In respect of CPTPP, this week I was conscious that someone said it would be great because UK car manufacturers could buy parts from Vietnam and sell cars to Mexico, which sounds great, but of course we currently sell a lot of cars to the EU. The rules of origin requirements in CPTPP and the TCA, in my mind, potentially seem to conflict for a person who runs a car factory. Is anyone doing a review about the potential conflicts or opportunities between CPTPP and the TCA?
David Henig: These are quite complex things. I am sure you can ask the question in the next session to Professor Holmes, who is an expert on trade analysis. I am sorry, Peter. I am setting that up for him.
These are complex issues, but, yes, these are the things we need to be looking at. How do our trade agreements mesh with each other? What provides us with the best opportunities? We are right at the start of our independent trade policy journey. We need to be thinking about having those kinds of conversations.
Chair: Thank you very much to all four of you.