Brexit was supposed to be an opportunity for the UK to strike trade deals outside the EU, but the going is tough
Before the controversial 2016 referendum, pro-Brexiteers waxed lyrical about the trade deals the UK could strike outside the European Union. China, the US and India in particular were cited as examples of lucrative markets where the EU has so far failed to secure agreement, leaving an opportunity for the more agile UK to go it alone. Yet with Brexit day once again approaching, at the end of October, progress on non-EU agreements (as well as a Brexit deal) has proved far slower than originally expected.
For the pharmaceutical industry in particular, this is worrying. The EU itself accounts for around 47% of the UK’s pharmaceutical exports (or around $14.2 billion in 2018) – and a Brexit deal seems as far off as ever. The other 53% is scattered among nearly 200 countries, led by the US and China. Although tariff barriers are not an issue with many of these countries, because they impose zero tariffs on pharmaceuticals under World Trade Organisation (WTO) rules, the non-tariff barriers can be considerable. Differences over drug registration processes, trial data needs, manufacturing standards and intellectual property rights (IPR) all need to be ironed out.
By leaving the EU, the UK will immediately have to change its trade terms not only with the bloc itself, but also with the 40 or so countries that have EU free-trade agreements (FTAs), economic partnership agreements (EPAs) or mutual recognition agreements (MRAs) in place. Back in 2017 the then-trade minister, Mark Price, claimed that all of these deals would roll over to a post-Brexit UK, before admitting that it is not as simple as that.
All these deals in effect have to be officially confirmed, and in some cases this process is complicated. Some of the deals, for example, involve ‘rule of origin’ clauses that stipulate a percentage of local content that the UK cannot meet on its own. Others have ‘most favoured nation’ clauses that mean that, if another country later secures better trade terms, the original deal has to be upgraded to match. That makes the timing of the agreements crucial. Moreover, given the pressure the UK is under over Brexit, some trade partners are taking the opportunity to bargain harder than expected.
Progress so far
As of June 9, the UK had agreed 12 ‘continuity deals’ to replace EU FTAs. These include deals with Switzerland and Israel, which accounted for over $500 million and $200 million of UK pharma exports respectively in 2018, according to UN Comtrade. The most recent was with South Korea in June; it accounts for another $210 million in pharma exports.
In total, the government claims that the 12 continuity deals cover around 63% of the total that needs to be reconfirmed, although that leaves a lot of deals still to be done in the next three months.
Then there are the three EU mutual recognition deals, with Australia, New Zealand and, most importantly, the US. The UK has reconfirmed all three, but it also wants to go a step further and secure FTAs with these partners. The US already accounts for $6.6 billion in UK pharmaceutical exports in 2018, but a tighter relationship may be hard to secure. Despite his enthusiasm for a deal in theory, Donald Trump is likely to strike a hard bargain. He has hinted at, and then retracted, a desire to secure commercial access to National Health Service business for US companies, which will be politically difficult for the UK government.
As for China, it already accounts for $1.4 billion in pharmaceutical exports, and opportunities are opening up as the government tries to secure access to more advanced medicines – particularly cancer medicines – for the country’s 1.4 billion people. However, talks about a trade deal, once promising, have hit a stumbling block amid the democracy protests in Hong Kong. The Chinese government has taken offence at the UK’s support for the protesters, while the UK has been forced to threaten legal action if China ignores the 50-year deal that was supposed to secure Hong Kong’s freedom when it was handed back in 1997. Pharmaceuticals have slipped down the list of priorities.
Relations with India are friendlier, but India also has a bigger indigenous pharmaceutical industry to protect. While India is keen to boost its drug exports to the UK, IPR will be a key battleground. Although the government of Narendra Modi, re-elected in May, has assured UK officials that such rights will be respected, its priority is still to improve access to medicines at home. Moreover, India last year took just $100 million in UK pharmaceutical exports, according to UN Comtrade, although prospects are promising.
While UK officials scramble to negotiate these post-Brexit deals, the goalposts are moving. The EU is sealing yet more deals on its own behalf, including the EU-Japan EPA that took effect in February and the recent EU-Mercosur and EU-Vietnam FTAs. This has raised fears that the EU bloc is better placed to strike trade deals than a solitary UK will ever be.
A more optimistic scenario is that each new deal lays the groundwork for faster post-Brexit trade negotiations for the UK. If so, that would certainly be welcome. The Mercosur-EU FTA took almost 20 years from the beginning of negotiations. The agreement aims to eliminate nearly 100% of EU tariffs and 90% of Mercosur tariffs (including the 14% tariff on pharmaceuticals). However, it still needs to be ratified by the 30 governments involved, meaning that it will not take effect until 2021.
The EU-Japan EPA, which covers nearly a third of the world’s GDP, took around 16 years, although there were some interim deals along the way. Some of the technical barriers to pharmaceutical trade, including duplicate notification systems, had already been removed back in January 2016, but the EPA removes most of the rest. It also confirms details of how IPR will be handled.
The EU has hailed these agreements as a victory against Mr Trump’s well-publicised moves towards trade protectionism. For the UK, however, such EU successes simply add to the tally of trade deals that still need to be reconfirmed come Brexit day. Given there is still precious little clarity on Brexit itself, the going is tough.
Ana Nicholls is director, industry operations, at the Economist Intelligence Unit