Alicia García-Herrero and Jianwei Xu (Bruegel)
Brexit will enable the United Kingdom to negotiate its own free trade agreement with China. To what extent would it affect trade between the EU Member States and China? Would it allow Chinese goods to use Britain as a gateway to the EU market? Would this agreement be an unequivocal benefit for the United Kingdom?
If Britain managed to negotiate a free trade agreement with China as well as an access to the EU single market, which would be a very difficult and time-consuming process, there would be a possibility of a penetration of Chinese goods to the European market via the UK. However, it must be noted that the Union would likely prevent this penetration by applying the so-called ‘rules of origin’ on imports from Britain. Even more important factor is the fact that it would take longer for Chinese goods to get to Europe, hence transport costs would be higher. This would substantially reduce the benefits of overcoming the customs barriers and render this detour less attractive.
In terms of benefits for the Kingdom, it is appropriate to evaluate the impacts of British exports to China on imports from China. In the area of exports, Britain could theoretically earn the most and gain a significant competitive advantage in the automobile industry, which constitutes 35.2 percent of British exports to China. The current customs tariff amounts to 25 percent. In other sectors, there is no such leeway, so the agreement would not bring any significant change. Imports, where consumer goods constitute the biggest part, would not get much cheaper for Britain. The duties are in fact at a low level already today and the agreement would have a very modest impact.
The Union would be negatively affected by the agreement mainly in the before-mentioned automobile industry, where German and Slovak exports could be badly hit. The German exports account for more than 50 percent of the total EU exports in this category and its competitiveness would decrease following an eventual agreement. Overall, however, the composition of the Kingdom’s and EU’s imports and exports vary so much that the impact on EU trade with China would be minimal.
Finally, it should be noted that the EU is the UK‘s most important trade partner. It is likely that the better the deal the United Kingdom would reach with China, the more difficult London’s negotiations with the Union would be. The logical conclusion is that Britain should postpone negotiations with China and the EU should not be excessively concerned about their potential negative effects.