EU preferential trade arrangements
Non-members (‘third countries’ in EU parlance) may have preferential trade arrangements with the EU. There are four main types with different purposes:
- Customs unions: follow EU trade policy, eliminate customs duties in bilateral trade and establish common import tariffs (like Turkey);
- Association Agreements, Stabilisation Agreements, Free Trade Agreements and Economic Partnership Agreements: remove or reduce customs tariffs and some NTBs (like Canada or Japan);
- Partnership and Cooperation Agreements: provide a general framework for bilateral economic relations but leave customs tariffs as they are (like Ukraine). Often partnership and cooperation agreements precede a deeper trade agreement.
- Mutual Recognition Agreements (MRAs) or be granted Equivalence by the EU to reduce specific, limited trade barriers.
Table 5.3 summarises the five main models that were potentially open to the UK after leaving the EU. The UK initially sought a bespoke deal which would be different to the existing models. However, it settled for a basic FTA (model 3).
Model 2 is now out of date. On 2 March 2026, Switzerland entered into five new agreements with the EU, which are not reflected in Table 5.3. They replace the many bilateral agreements that were in force at the time of Brexit. The agreements give Switzerland partial integration with the single market for sectors where it commits to follow EU rules. The agreements also allow Swiss input to upcoming EU regulation (like the EEA arrangement for Norway). Switzerland contributes into the EU budget.
Without a customs union between the UK and the EU, border controls are required between Great Britain and the EU, including between Northern Ireland (which remains in the EU CU) and Great Britain. This led to the creation of the Windsor Framework.
See the EU website for details of EU trade agreements in place with other countries and those being negotiated.
Sources:
Chamber of Commerce Switzerland, New Agreement between Switzerland and the EU: A Turning Point in Bilateral Relations
European Council, Council Greenlights Signing of Package of Agreements with Switzerland, 24 February 2026
Table 5.3: Main options for non-EU member trade models
Source: RBAS analysis
UK red lines
The UK government’s self-imposed ‘red lines’ restricted the UK’s future trading relationship with the EU. The red lines, which the May government defined after the referendum, were to leave the Single Market, the Customs Union, jurisdiction of the ECJ, and end freedom of movement of people. The red lines were incompatible with invisible borders in Ireland and between GB and Northern Ireland.
Remarkably, Theresa May announced the red lines in her Lancaster House speech in January 2017 without wider consultation, without cabinet discussion and without parliamentary debate. She also announced them before negotiations with the EU had begun.
Within the red lines, there were only two Brexit trade options: an FTA (like Canada or South Korea) or ‘no deal’ (WTO terms) – see Figure 5.10, the famous ‘Barnier staircase’, which the European Commission used to show how the red lines closed down options. The EEA option, which would have had the lowest trade barriers for a non-EU member, would have required the government to relax its red lines.
The current Labour government has continued with May’s red lines, but is working with the EU on refining the UK’s post-Brexit FTA-based trading relationship with its ‘reset’.
Figure 5.10: UK red lines and future EU-UK trading relationship
Source:
European Commission to EU27, published 19 December 2017
Brexit Unfolded, Professor Chris Grey, pp60-63, 2021
EEA-EFTA
The European Free Trade Association (EFTA) is an intergovernmental organisation set up for the promotion of free trade and economic integration to the benefit of its four Member States (Iceland, Norway, Liechtenstein and Switzerland). Note that EFTA does not act on behalf of its members like the EU. Instead, the EFTA members themselves negotiate and sign the agreements.
The European Economic Area (EEA) provides for the free movement of persons, goods, services and capital within the Single Market of the EU between its 27 member states, as well as three member states of EFTA: Iceland, Liechtenstein and Norway (see Figure 5.9). The context for the four freedoms for the EFTA states is slightly different than for EU members. The EEA Agreement makes it clear that they are means to achieve trade goals rather than political ends in themselves.
EEA-EFTA members may contribute to the EU programmes in which they choose to participate, but do not contribute to general EU budget.
The EEA agreement is limited compared to EU membership. For example, it does not include:
- EU Customs Union
- EU Common Trade Policy (and EU trade agreements with third countries)
- Common Agricultural Policy
- Common Fisheries Policy.
To ensure unified application of EEA rules, the three EEA-EFTA States established the EFTA Surveillance Authority and the EFTA Court, which mirror the surveillance functions of the European Commission and the competences of the ECJ.
Non-EU EEA members are required to adopt relevant EU legislation. Although they do not formally participate in the EU’s decision-making, they can still influence legislation until it is adopted. They participate in the Commission’s committees, working groups and expert groups, and submit comments on relevant upcoming legislation. However, they have no vote on EU legislation.
For more detail on EFTA and differences with EEA and EU, see https://www.efta.int
Figure 5.9: EEA and EFTA members (before UK departure from EEA)
EU membership
Economic cooperation between member states is a core objective of the EU and the Single Market, which is much more than a preferential trade arrangement, is a core part of the EU’s long-term political strategy. As a result, one of the major economic benefits of EU membership is near-frictionless trade of goods and services within the EU. Some trade barriers, such as transport costs, culture and language will always remain.
Four EU frameworks remove trade barriers between member states in a powerful combination that eliminates tariffs (border taxes) and customs checks. They also reduce (but do not eliminate) regulatory NTBs, which are particularly important for services trade.
- Single Market
- Union Customs Code
- Customs Union (see above)
- EU VAT area
Single Market
Membership of the Single Market reduces NTBs for goods and services in a way that no other existing trade deal or free trade area does. It means that goods and many services can be freely traded with other member states. A car manufactured in Madrid or Bavaria can be sold anywhere in the EU.
All non-EU countries have ‘access’ to the EU Single Market as an export destination, so ‘access’ means little.
In September 2024, the European Commission published the wide-ranging Draghi Report on improving EU competitiveness, which included concrete recommendations to reduce the frictions that still exist within the Single Market.
Draghi’s report followed the related Letta Report of April 2024 which articulated a high-level view of the future direction of the Single Market, including a new fifth freedom of innovation and capital markets union.
In response to both reports, in January 2025, the Commission laid out its Competitiveness Compass, which is its roadmap to improve EU competitiveness which includes modernising the Single Market and reducing red tape.
Union Customs Code
The Union Customs Code sets out the framework for strong customs cooperation between member states. It also defines the formalities for the movement of goods between EU member states and third countries, including:
- Import–export procedures
- Data requirements
- Tariff classifications
- Common risk criteria
Common interpretation of these rules is necessary to avoid, for example, differences in tariffs charged as a result of different tariff classifications of the same goods. The Union Customs Code also mandates greater use of information technology between member states’ customs authorities to allow real-time information sharing. Many of these features are included in the recent WTO Trade Facilitation Agreement.
EU VAT area
The EU VAT area is separate from the EU Customs Union and Single Market. It is a key enabler of trade between member states. The UK’s departure from the EU VAT area has had important consequences. As tax is a complex area, please note that the comments below aim to highlight the main considerations and are not comprehensive.
The UK introduced VAT as a condition of joining the EEC in 1973. As a member state, the UK became part of the EU VAT area designed to facilitate trade between its members. When the UK left the EU, it left the EU VAT area.
For EU members, being registered for VAT in one member state is sufficient to trade in all. VAT is generally not charged on the supply of goods, nor certain services, between businesses from another EU country. VAT only becomes chargeable when sold to the final customer.
Under the EU rules, the minimum standard rate of VAT is 15% and the maximum 25%. The current UK standard rate is 20%. Member states cannot levy a rate of VAT higher than their standard rate. There is a prescribed list of goods and services to which EU member states can apply reduced rates of VAT. These are set at a minimum of 5% with only two reduced rates allowed.
The UK enjoyed an opt-out to maintain zero rates on items such as food, children’s shoes, clothes and books. The UK could not create new zero-rated items (for example for tampons or child seats) and, if it moved an item out of the zero-rate band, it could not move it back.
The EU had recently issued proposals for more flexible VAT rates, but these still constrained members. The EU was concerned that intra-EU VAT-free trade had become a major source of fraud. This led to a big shortfall in VAT receipts – the so-called ‘VAT gap’. As a result, the EU planned to move to a single EU VAT area.
This results in a fundamental shift to VAT being payable in the country where goods and services are consumed. The seller in the country of origin needs to register, account and pay VAT – unless the customer in the destination country is certified to be a ‘reliable taxpayer’ (allowing deferred VAT accounting to continue).
There were serious implications for trade in leaving the EU VAT area. Please see the section on Brexit impact for details.