Do “Realms of Gold” Await Global Britain in South America? Prospects for a UK-Mercosur Trade Deal

Michael Mindorff and Louise Bekkers (Leiden University College The Hague)

Last May, then-Foreign Secretary Boris Johnson wrote rhapsodically of the “realms of gold” awaiting the UK in South America  after the UK’s withdrawal from the EU. The UK and Latin American states, including those of Mercosur, have expressed interest in a trade deal after Brexit. However, two and a half years after the referendum, how is this shaping up? The short answer is that new trade deals, as well as the “rolling over” of existing ones, have yet to materialize to a large extent, and their pathway is no clearer than it was during the campaign. Under the Draft Withdrawal Agreement, the fate of which remains uncertain after the crushing defeat of the “meaningful vote” in the House of Commons on 15 January, real negotiations could begin after March 2019 with interested countries. A withdrawal agreement,  which ensures a transition period and thus avoids a chaotic “no-deal” scenario, and the Political Declaration on the Future Relationship between the EU and UK are key to understanding if these deals are conceivable.

The form and content of future trade deals of the UK with third non-EU countries will to a great extent be shaped by the British relationship with the EU. A Brexit deal that puts the UK outside the EU’s customs union grants the UK more flexibility to negotiate aspects that have been a problem for the EU as a whole – a freedom to not adjust its position to come to an overall EU compromise. Yet a certain degree of regulatory alignment between the UK and its largest trade partner should be expected, even if this has the effect of limiting the negotiating space of “Global Britain”.

Mercosur Negotiations

Maintaining a distinct trade policy and negotiating freely around the world under a “Global Britain” strategy conflicts with the logical necessity of a degree of alignment between the UK and the EU, site of 44percent of its exports and 53 percent of imports. Brexiteers asserted stories of liberalised international trade policy while still maintaining the same level of European internal market access. While still Foreign Secretary, Boris Johnson spoke of trade opportunities which the UK was missing out on by virtue of the EU’s Common Commercial Policy, which does not allow for autonomous Member State trade policies. The opportunity presented by Brexit was supposed to allow the UK to tap potential new trade opportunities with the wider world.

Negotiations on a Mercosur-EU free trade agreement have been on and off for two decades. They have been in a pitched battle, with Mercosur countries fighting for greater market access, particularly with regard to beef. Moreover, EU leaders have clashed with Brazilian leader Bolsonaro politically, with French president Macron threatening to sink a trade deal over Bolsonaro’s climate rhetoric. Jumping in the game, Prime Minister May and her government have expressed their interest in trade agreements in the region. May, who was in Argentina at the G20-meeting in December 2018, is the first British leader since the Falklands War to visit the country, and expressed her desire to deepen British trade ties. The sentiment was apparently shared by Argentine President Macri. In particular, meat producing nations in South America have repeatedly expressed interest in a post-Brexit deal with the UK.  It is perhaps ironic that both Brazil and Argentina, in principle, are equally constrained from independently entering into trade agreements due to their Mercosur membership.

Consequences of the Draft Withdrawal Agreement

If it is eventually adopted, the Withdrawal Agreement could lead to the continued suspension of the UK’s access to “realms of gold” or more generally potential independent trade opportunities with other countries. During the transition period envisaged by the Withdrawal Agreement, EU law shall remain applicable in the UK (Art. 127) and the UK will remain bound to the obligations stemming from international agreements to which the EU is a party (Art. 129, para. 1). However, the UK is empowered to “take steps to prepare and establish new international arrangements on its own, including in areas of Union exclusive competence”. This includes the competence to negotiate, sign and ratify international agreements, provided those agreements do not enter into force or apply during the transition period, unless so authorized by the Union (Art. 129, para.4).

Consequently, access to Boris Johnson’s “realms of gold” is postponed until at least after the UK has left this transitional arrangement. Under the Withdrawal Agreement and the Political Declaration, an extension of the transition period or a common customs territory both remain distinct possibilities for the long-term British relationship with the EU. The ECJ’s ruling in Wightmanadds another option, however unlikely, leaving the door open for a unilateral revocation of Article 50 TEU, which would mean the UK could remain within the EU after all. These solutions avert disrupting the supply chains throughout the continent; they are in line with the goals of the long-term Political Declaration, in particular as regards avoiding a hard border in Ireland. Yet these solutions will be hard to swallow for the British government and Brexiteers as close political and trade alignment to the EU puts an indefinite pause to the narrative of an independent “Global Brexit” trade policy.

The UK currently accounts for roughly 1 percent of all imports and exports in Latin America.The UK’s trade with the European continent is vast by comparison. While EU-bound exports have declined slightly in the last 10 years, imports have not. Approximately half of the UK’s trade is currently with the EU. The notion that this trade can easily be replaced within any reasonable timescale in the event of a no-deal Brexit is questionable.

There are countries outside the EU, such as Norway and Switzerland, that are closely integrated into the EU’s Internal Market without their trade policy being managed by the EU. Nonetheless, their domestic standards cannot stray far from the EU’s in order to retain such privileged access. Any arrangements to protect the UK’s trade with the EU – in particular the UK-wide backstop introduced in the Withdrawal Agreement – have the potential to indefinitely prevent the UK from completing new trade deals though which the UK would take advantage of its newfound flexibility in negotiations.

Speculations after the “Meaningful Vote”

Ultimately the future ability of the UK to make trade concessions – be it with Mercosur or other nations – remains dependent on its future relationship to the EU. Would it be bound to apply an external tariff, or could it set its own? Would it be outside the customs union, like Norway or Switzerland? What degree of regulatory alignment would it be bound by? What institutions would supervise such alignment? What will the replacement of the EU’s agricultural and fisheries policies with autonomous British ones look like? When would any new trade agreements come into effect? Any speculation on what “realms of gold” Britain will have access to, “unshackled” from EU trade policy, will have to wait until we understand more about what shape, if any, Brexit will ultimately take. With the resounding rejection of the Withdrawal Agreement in the House of Commons by both proponents of remaining in the EU and those favouring a hard Brexit, and with only two months until the Brexit deadline, “Brexiting” has so far raised myriad questions but failed to provide answers about “Global Britain’s” trade policy.

Michael Mindorff and Louise Bekkers (Leiden University College The Hague) are Research Assistants for the project “Global Brexit”: The Future of Relations between Europe and “Global South” at Leiden University, directed by Dr. Joris Larik.