This section looks at trade barriers and the different types of trade arrangement that can reduce them.
Trade barriers
There are two types of trade barrier: tariff barriers and non-tariff barriers.
- Tariffs only apply to goods and may be related to quota thresholds.
- Goods are also subject to non-tariff barriers (for example, customs checks).
- Services carry no tariffs but are usually subject to extensive non-tariff barriers (such as regulatory approval to provide services, restricted mobility of people, requirements for local commercial presence etc.)
Trade liberalisation over second half of the last century has led to low tariffs. For example, the Institute for Fiscal Studies estimates the UK paid an average tariff on goods imports of only 2.8% as an EU member. The average includes the benefit of extensive zero-tariff trade agreements. Tariffs tend to be much higher on agricultural and food products than other goods at an average of, say, around 20% (without a trade agreement).
Non-tariff barriers (NTBs) apply to both goods and services, cost more and impede trade more than tariffs. The UK government estimated that the cost of NTBs was comparable to a tariff ranging from below 5% to over 20% depending on industry sector (for details, please see the description of impacts on trade under ’no deal’).
There are three main types of NTB:
- Customs barriers (such as certificates of origin and rules of origin) that apply to goods;
- Border controls that apply to goods and services (as well as people, data etc.);
- Regulatory barriers (technical standards, regulatory standards etc) that apply to goods and services.
To reduce trade barriers, countries enter into preferential trade arrangement. Figure 5.8 contrasts the level of trade barriers under the main types of trade agreement.
- The most basic trade arrangement is ‘WTO terms’ which means trade barriers are at their highest.
- A Free Trade Agreement (FTA) sounds attractive but it’s a misnomer, because an FTA only frees up tariffs and quotas for goods, leaving most NTBs in place.
- The most sophisticated global trade arrangement is EU membership:
- minimises, but does not eliminate trade barriers for goods and services;
- but, Draghi report of 2024 found that the US internal market was more competitive.
- EU trade arrangements with third countries eliminate most tariffs for goods but only partially reduce NTBs.
- None eliminates NTBs for goods to the extent that EU membership does. For services, the arrangements, apart from EEA membership, do little to reduce trade barriers.
- For example, the Comprehensive Economic and Trade Agreement with Canada is the most advanced EU FTA. However, even it includes limited liberalisation of services trade.
- Even within the Single Market, the EU recognises that there is further work to do to remove trade frictions, mainly in services.
Figure 5.8: Trade barriers in trade arrangements
Source: RBAS analysis (updated 4 April 2022)
Institute for Fiscal Studies, The EU Single Market: The Value of Membership versus Access to the UK, August 2016
WTO terms
The World Trade Organisation sets minimal, common-denominator rules among 164 countries in the world accounting for 98% of world trade (25 more countries are applying for membership). All members conduct some of their trade through preferential trade agreements with other members.
Trading under WTO terms with the EU has no preferential features. However, bilateral agreements relating to specific sectors or product standards may enhance trade. For example, the EU has bilateral agreements with the US and China. For a more detailed discussion of UK trade, the WTO and the main Brexit options please see the 2018 briefing for non-experts: UK Trade and the Word Trade Organisation.
The UK is a member of the WTO in its own right, but, as a member state, the EU acted on its behalf.
Each member has its own ‘schedules’, WTO-speak for the list of tariffs and quotas that it applies to imports from other countries. The schedules also include ceilings on agricultural subsidies and commitments on opening markets for services. For some members, there can also be commitments on opening government procurement markets. For a helpful summary of what’s in WTO schedules, please see Peter Ungphakorn’s blog: 12 years on, EU’s certified WTO goods commitments now up to date to 2004.
The UK now has its own schedule for tariffs and quotas to WTO members and a schedule for services. The scheduled tariffs are called ‘bound tariffs’. These are ceilings on the tariffs that the UK can levy on imports. Applied tariff rates are often lower than the bound rates. In May 2020, the UK published its applied tariffs, the UK Global Tariff (UKGT), which have applied since the transition period finished on 31 January 2020.
WTO members take decisions by consensus, supported by the WTO Secretariat, which has no executive power. For the UK’s proposed schedules to be certified, there had to be no objection by any of the other 163 WTO members. The UK traded under its proposed schedules while the certification process proceeded.
WTO members do not delegate decision-making power. This means that the WTO processes for negotiating schedules require careful navigation. As an example, on 5th October 2017, the US and other countries, including Argentina, Brazil and New Zealand objected to a proposed deal between the UK and EU to divide agricultural import quotas between themselves.
Customs unions
A customs union is only relevant for trade in goods. Its purpose is to eliminate customs duties in bilateral trade and establish common import tariffs. Although CUs relate only to goods, some countries have parallel economic partnership agreements that cover some services.
All members of a CU apply the same set of tariffs, which vary by sector, to goods imported from outside the union. A common external tariff (CET) means that:
- Imported goods from third countries are subject to the same tariffs irrespective of which member country imports them.
- Once inside the CU, goods move tariff-free between members without costly checks on the origin of goods (this is a major benefit for manufacturing sectors, such as automotive, with integrated supply chains that import components from within the CU).
- Members must have border checks with countries outside the CU. Imports from countries outside the CU are still subject to rules of origin checks – even with an FTA. For example, there are border checks between Canada and the US, and Mexico and the US, even though they are all members of NAFTA.
- Members are usually prevented from pursuing bilateral FTAs with other countries (because these affect tariffs and quotas).
- As a member of the EU Customs Union, the UK could not negotiate and sign independent trade deals that affect import tariffs.
- However, the UK would be free to agree bilateral trade deals with third countries that facilitate market access for UK goods and services.
Not all CUs prevent members from conducting individual trade negotiations. For example, although Turkey is in a customs union with the EU it can agree trade deals with other countries for some sectors. This is because the Turkey-EU CU is not as comprehensive as the EU CU. However, Turkey is not consulted on EU trade negotiations.
A CU has a limited impact on customs controls. It removes a few checks but does not remove the need for checks for compliance with regulatory and technical standards. If the UK were a member of an EU customs union, further agreements (and contributions) would be necessary to remove the other trade barriers, notably membership of the Single Market but also, for example, membership of the EU VAT area.
The European Commission published Table 5.2 to demonstrate that a CU with the EU removes just two checks on imports from third countries to the EU.
There are 15 other CUs around the world, including:
- Gulf Cooperation Council (GCC)
- West African Economic and Monetary Union (WAEMU)
- Central American Common Market (CACM)
- Caribbean Community (CARICOM)
- Andean Community (CAN)
- Southern Cone Common Market (Mercosur).
Table 5.2: Limited impact of a customs union on EU customs controls
Sources:
House of Lords, Library Note: Leaving the European Union: Customs Unions—An Introduction, 27 January 2017
Centre for European Reform, Is Labour selling the UK a Turkey?, April 2018
European Commission, 22 May 2018
Free trade agreements
A free trade agreement (FTA) is a reciprocal agreement between at least two parties, which aims to liberalise trade by significantly reducing or eliminating tariffs and quotas on goods trade between its members. WTO rules govern FTAs.
These preferential agreements must be between at least two countries but may involve more – for example regional deals. Unlike a customs union, an FTA does not require its members to set the same tariffs on trade with countries outside the FTA. Modern FTAs try to remove a few NTBs but most remain in place. Modern FTAs may also address some services trade (for example, the FTA between Canada and the EU) but in a limited way.
FTAs that deal only with tariffs, quotas and customs arrangements, are called “shallow” agreements. Those that include rules on other relevant domestic policies that affect trade are referred to as “deep” agreements. These might include policies on, for example, competition, intellectual property rights, investment and movement of capital. Some FTAs go further and cover issues such as environmental laws, labour market regulations and measures on visa and asylum. There is a trend towards deeper FTAs.
Four examples of well-known regional FTAs and their members:
- EFTA FTA – Norway, Iceland, Switzerland and Liechtenstein
- NAFTA – US, Canada, Mexico
- ASEAN FTA – Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, Thailand plus Cambodia, Laos, Myanmar, Viet Nam
- Dominican Republic-Central America Free Trade Area (CAFTA-DR) – US, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Dominican Republic.
Mutual recognition agreements
Mutual recognition agreements (MRAs) are agreements between two trading partners to reduce technical barriers to trade. Without an MRA, local regulatory bodies cannot certify goods for sale in the other country.
Post-Brexit, UK goods for export to the EU have to be made to EU standards. They also need to be tested and certified to show that they comply. Checks might include inspection, testing, certification, and licensing according to technical regulations and standards which are aimed, for example, at preventing safety, environmental and health risks.
There are two main types of MRAs: ‘traditional’ and ‘enhanced’.
A traditional MRA:
- is an agreement limited to the mutual recognition of ‘conformity assessment’ (i.e. recognition of the competence of the partner’s testing bodies to conduct product safety testing);
- means a designated testing body in the export country can perform testing on the basis of technical requirements of the importing country and vice versa. The product can be exported without undergoing further testing;
- may cover a single sector, such as the 2004 EU-US MRA on marine equipment, or several sectors, such as the CETA between Canada and the EU, which has very broad sectoral coverage; and,
- does not require states to harmonise rules (i.e. to create common technical standards and regulations); and,
- does not require that parties to an MRA recognise each other’s requirements as equivalent.
An enhanced MRA:
- automatically recognises the relevant rules of the other country;
- is based on broad and deep regulatory alignment (eg the EU single market, or between Australia and New Zealand) or common international regulatory standards, such as those for marine equipment;
- may relate to services:
- UK and Swiss authorities signed the “Berne Financial Services Agreement” on 21 December 2023 to provide enhanced market access for UK and Swiss firms to each other’s markets in specific financial services sectors);
- UK and Swiss authorities also agreed an MRA for professional services in February 2024.
Source: Mutual recognition agreements (MRAs): all you need to know, 18 May 2020, Professor Catherine Barnard
Equivalence
Equivalence is an autonomous, unilateral, non-reciprocal, designation by one country that another country has a sufficiently similar level of regulation for particular activities or services to permit cross-border trading in those specific activities.
In the EU’s case, its laws may allow market access for firms based outside the European Economic Area (EEA). Each such law allows, within its specific area, the European Commission to decide whether the regulatory regime of a country achieves outcomes “equivalent” to its own. To facilitate trade with third countries, the EU has equivalence provisions in many regulations, ranging from financial markets to data adequacy. But these do not cover many other areas, including important sectors such as chemicals.
For example, EU financial services law includes around 40 areas for equivalence decisions. However, these do not cover most core banking and financial activities, like accepting deposits or providing investment services to retail investors. The EU has granted the UK regulatory equivalence in one specific area of financial services: central counterparties. The EU has renewed this and it expires on 30 June 2028.
For its part, the UK has granted the EEA member states 22 areas of equivalence in financial services. However, in financial services, the EU has granted less equivalence to the UK than it has to the US, Switzerland, and Singapore. The European Commission argues that concerns around the UK’s “possible divergence from EU rules” justify withholding further equivalence decisions.
The EU has the power to remove its permissions at short notice, within 30 days, which gives it significant leverage that it may use to achieve other trade goals. For example, in 2019, the EU withdrew permission for EU stocks to trade on Swiss exchanges, to put pressure on Switzerland to formalise an overarching trade framework deal.
In 2021, the Commission also adopted two adequacy decisions for the United Kingdom – one under the General Data Protection Regulation (GDPR) and the other for the Law Enforcement Directive. These mean that personal data can flow freely from the EU to the UK where it benefits from an equivalent level of protection to that guaranteed under EU law. Both adequacy decisions were renewed in 2025 and will be reviewed again in 2029. The decisions are currently set to last until 27 December 2031.