Losing Preferential Access to Third Countries after Brexit - What is at stake?

A pending question concerns the UK’s future status of TAs that have been negotiated between the EU and third countries. Legally those contracts are only valid for EU members and leaving the EU while retaining the status quo enshrined in the TAs would contradict with the MFN principle. In order to retain TAs, the UK will have to re-negotiate these trade deals - a difficult task given that the EU has negotiated 36 TAs with 58 different countries. In this regard, it is likely that UK and third countries would just apply MFN tariffs on each other’s imports to comply with WTO rules. In this paper we are taking a closer look into the economic consequences of this scenario. This is important since we lack an understanding of how significant these effects might be relative to the changing trade environment vis-à-vis the EU. The results indicate that the effects with third countries are indeed quite large and add up to one fourth of the total (trade policy induced) loss in GDP in the UK, whereas three fourth of the loss is induced by imposing tariffs with the EU. Additionally, there are interesting trade diversion effects. For example, it would be beneficial for the United States (no TA with EU) if the UK and Canada (TA with EU) impose MFN tariffs on each other’s imports as a consequence of the Brexit.