The UK'’s decision to withdraw from the EU raises two fundamental trade relationship issues for GCC investors. First, companies registered in the UK whose shareholders include GCC investors will find all issues around the UK'’s access to the EU single market, which guarantees the free circulation of goods, services, workers and capital, to be relevant. GCC investors in the EU who wish to have preferential access to the UK market will have similar concerns.

Second, the future trading relationships between GCC states and the UK on the one hand and the EU on the other hand will be affected, as the UK will no longer benefit from third-party trade deals entered into with the EU.

At present, despite years of negotiations, there is no trade agreement between the EU and the GCC. The UK'’s withdrawal from the EU could be seen as an opportunity to strike a new trade deal between the GCC and the UK. This could facilitate the conclusion of an agreement with the EU.

Why this is an issue for the GCC

In 2015, the GCC was ranked as the EU'’s fifth top trading partner. In particular, GCC investors have used the UK as a means of entry into the EU’s single market. The list of sectors is lengthy, but the petrochemicals and banking sectors stand out.

GCC governments and investors should pay close attention to the UK’'s process of withdrawal from the EU and the establishment of future relationships with the EU and third countries, to decide on the new trading relationships that must now be forged.

Withdrawal and Article 50 process

After the UK notifies the European Council of its decision to withdraw using Article 50 of the Treaty on European Union, the UK and the remaining 27 member states will have up to two years to negotiate a withdrawal agreement. After two years, the UK will leave the EU, even if a withdrawal agreement has not been concluded. During the negotiation period, the UK will remain a member of the EU, bound by EU law and its international trade agreements. The majority of EU leaders and the European Parliament have indicated they expect negotiations on the UK’s withdrawal to be initiated as soon as possible to minimise uncertainty, potentially by the end of 2016.

EU-UK trade after withdrawal

The challenge for the UK is not just the terms of its departure from the EU, but negotiating the terms of its future trade relationship with the EU. There is no fixed time limit or framework for these discussions. These terms could be negotiated in parallel with the Article 50 withdrawal negotiations, although senior EU trade officials have indicated talks could only begin after the UK has withdrawn from the EU.

The following are some of the options open to the UK. All of the options but the last will require the approval of the EU:

The European Economic Area: The UK could join the European Economic Area (EEA), comprising Iceland, Lichtenstein and Norway as well as the EU. This would guarantee GCC investors in the UK access to the single market and those with operations in the EU access to the UK market. If the UK were to join the EEA, it could impose different tariffs than those maintained by the EU on imports from GCC states and other countries.

Free Trade Agreements: The UK could enter into a free trade agreement (FTA) with the EU, similar to FTAs with Switzerland and Canada. An FTA would generally maintain tariff-free trade between the UK and the EU, free trade in services, and some form of regulatory convergence, but without full access to the EU single market. This option would guarantee GCC investors on both sides of the Channel continued access to the EU and UK markets, but probably less extensively than under the EEA. It would also allow the UK to impose tariffs different from those of the EU. The UK government has indicated that this is its preferred option and that the Canadian/EU Comprehensive Economic and Trade Agreement (CETA) could be used as a blue print for a UK/EU trade deal.

Customs Union: The EU and the UK could negotiate a customs union, drawing on the terms of the customs union between the EU and Turkey. A customs union would result in the free movement of goods between the EU and the UK and maintain a common external tariff without all the normal customs formalities, as well as extensive regulatory convergence. This option would ensure GCC investors in the UK and the EU can continue to freely trade goods in both regions, but may not cover trade in services.

World Trade Organization (WTO): If the EU and the UK are unable to reach a trade deal before the withdrawal of the UK from the EU, the rules of the WTO will apply because the EU and the UK are WTO members in their own right. Trade in goods and services between the EU and the UK would then be covered by the disciplines applicable to WTO members, including the payment of duties on imports, subject to UK adoption, or renegotiation of the EU schedules currently setting tariffs, services commitments, government procurement and other aspects of WTO commitments with WTO members, including GCC states.

Trade agreements

The EU trade agreements with third parties are likely to remain largely unchanged after the UK’s withdrawal, but the UK would no longer be party to them. This will have an impact on GCC investors, in the UK, the EU or the EU’s preferential trading partners. For example, investors in Egypt or Morocco, which enjoy preferential access to the EU market, could lose such access to the UK after withdrawal.

To continue to have preferential access to third country markets, the UK could attempt to negotiate accession to the European Free Trade Association (EFTA), which includes Iceland, Liechtenstein, Norway and Switzerland. The UK could secure access to the markets of the EFTA members and also the existing network of trade agreements with third countries negotiated by EFTA, which includes the countries of the GCC.

During EFTA negotiations or if no EFTA agreement is ever reached, the GCC and the UK could decide to treat their membership of the WTO as the basis for ongoing trade, in line with current EU-GCC relationships. However, this may not be straightforward as the UK’s WTO commitments are covered by schedules applicable to the EU and not specifically to the UK. Some commitments may have to be renegotiated with members of the WTO. This may be an opportunity for GCC States to attempt to obtain more preferable concessions from the UK and the EU.

If no EFTA agreement is ever reached, GCC countries and the UK could seize the opportunity to negotiate an FTA guaranteeing bilateral preferential market access. The EU and GCC countries have been unable to successfully negotiate a trade deal since the late 1980s. However, with just the UK at the negotiating table, a deal is more likely now than ever before.

The conclusion of an FTA with the UK could then result in the conclusion of the GCC-EU FTA negotiations, as the UK and the EU would be competing and access to the GCC market is economically important for both. The real issue is the willingness of the UK to prioritise the negotiation of a GCC deal.

Reshaping trade relationships

Although the vote to leave the EU has taken many by surprise, a number of viable options are open to the UK to reshape its trading relationship with the EU and non-EU countries, including GCC States.

GCC entities with direct or indirect investments or operations in the UK or trading with the UK should ensure they make the most of the UK’s continuing membership of the EU over the next two years. They need to be ready to effectively adapt to the evolving shape and form of the UK’s new trading relationships as trade negotiations proceed over the coming months and years.