Brexit: New UK-EU Trade Deal and a Chance for Serbia?

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Introduction

Following David Cameron’s resignation and establishment of the new cabinet, it has become almost certain that the United Kingdom will eventually activate the Treaty on the European Union’s Article 50 mechanism and withdraw from the EU.

Although assertions that we are on the eve of another continent-wide financial crisis might be seen as an exaggeration, one thing is certain – the UK and the EU face a period of economic uncertainty. Namely, it is clear that Brexit will affect both sides, as reaching a new trade deal is a massive and complex undertaking, which will depend not only on the prevailing economic climate, but also on numerous political issues and considerations.

New Trade Deal Options

The new Prime Minister Theresa May will have to choose between several trade agreement options and to push the government to come up with a clear plan on how to balance cuts on free movement of people and denunciation of certain aspects of the EU regulations, while at the same time protecting the interests of the British economy. In any event, the key issues of the new trade deal will concern establishment of the new framework for exporting and importing goods and the basis for continued services trade to and from the EU. There are several possible patterns for agreement on new trade arrangement.

To begin with, joining the European Economic Area (EEA) would give the UK access to the single market, without binding it by EU’s foreign affairs, judicial, agriculture or fishery policies. However, this is a less likely option, since the UK would have to pay into the EU budget, implement Brussels regulations, and accept the free movement of people, without which including services (sector that dominates the UK economy) into trade agreement would be difficult to imagine.

Alternatively, there are several free trade deals concluded between the EU and particular countries, which can potentially serve as a pattern for the UK. For instance, Canada option precludes the free movement or the EU budget contributions, but allows for a partial opening of the market. Switzerland opted for bilateral deals with the EU, giving it partial access to the single market, but not the right to provide financial services and allowing a free movement of EU citizens. This means British banks would have to set up subsidiaries in the EU countries, which could result in a financial services trade deficit. Furthermore, German finance minister Wolfgang Schaeuble indicated that Britain would not be able to benefit from the single market in the way Norway, as part of EEA, or Switzerland do.

Finally, the UK could resort to the World Trade Organization rules to govern the relationship with the EU. According to the WTO Director-General Roberto Azevado, these negotiations might take several years to complete.

To conclude, the long-term consequences of this unprecedented situation will predominately depend on the conditions of British departure and establishment of the new trade framework between the UK and the EU, making current predictions still overwhelmed with generalized theories and “ifs”. In other words, only when the heads cool down and once the new trade deal enters into force, we will be able to reasonably and realistically perceive the future of Europe’s economy.

Serbia – UK Trade Relationship in the Light of Brexit

Furthermore, the situation will also have an impact on the EU candidate countries. Primarily, their economies maintain tight bonds with the EU, making it impossible for them not to be affected by the turmoil within the EU market free zone. However, potential position of the UK outside of the single market could provide special opportunities for the non-EU countries, including Serbia as the EU candidate country.

As a candidate for the EU membership, Serbia has entered into the Stabilization and Association Agreement with the EU, which almost entirely eradicates trade barriers between Serbia and the single market. Moreover, following the adoption of the new Investment Act and the Investment Regulation, Serbia has implemented a robust mechanism for subsidizing investment projects which is now fully in line with the EU state aid law principles. This, coupled with Serbia`s free trade agreements with countries like Russia and Turkey and the most developed practice of free trade zones among its non-EU neighbors, could make Serbia a very attractive destination for UK companies wishing to import goods to the single market, should the UK fail to secure a satisfactory trade arrangement with the EU, providing them with access to the EU market along with significant government assistance and tax cuts.

By Milan Samardzic, Partner, and Branislav Radovic, Associate, SOG / Samardzic, Oreski & Grbovic