WTO Rules: Utopia or Pandemonium?
By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland? – Adam Smith, The Wealth of Nations
In the event of a ‘no-deal’ Brexit, it is generally accepted that the UK would leave the EU single market and the customs union and fall back on WTO (World Trade Organization) trade rules, an outcome which is simultaneously being portrayed as a disaster (by the Remain camp) and the promised land (by the more hard-line Brexiteers). As any self-respecting economics student knows, trade creates prosperity: on that, we can all agree. Yet trade is being used by protagonists on both sides of the Brexit debate as a rod with which to beat their opponents’ backs. But what would trade under WTO rules really mean for the UK economy?
First, let us examine the facts. According to the Office for National Statistics (ONS), in 2016 the EU accounted for 48% of UK goods exports, worth £145 billion (7.4% of GDP). Whilst this makes the EU the UK’s largest trade partner by some margin, it is also true that the share of total UK exports (goods and services) going to the EU has fallen from 54% in 2000 to 43% in 2016. This is because UK trade with the rest of the world has grown at a quicker rate than trade with the EU in recent years.
From these limited statistics we can begin to understand how politicians and commentators on both sides of the debate are using the same data to underpin entirely different arguments. So, for example, while it is true that the EU is the UK’s largest single export market, it is also true that the UK’s trade with non-EU countries is growing at a faster rate and that the UK now does more trade with non-EU countries than it does with the EU 27. Those who put greater emphasis on the UK’s future trading relationship with the former tend to like (or at least not fear) the idea of moving to WTO rules, while those who emphasise the latter do not. (As we shall see, however, nothing is ever this simple in the byzantine labyrinth that is Brexit.)
The case for WTO rules
The Brexiteer mantra has always been to “take back control”, which in this case means making our own trade deals with countries around the world – something which the UK currently delegates to the EU. Brexiteers will be quick to point out that the EU has a somewhat mixed record when it comes to agreeing free trade deals with non-EU countries – for example, it has yet to agree one with the world’s largest economy, the United States – and argue that we’d do a much better job on our own.
Upon exiting the EU’s customs union, the UK would be free to conduct trade deals with countries around the globe, offering preferential trading relationships with countries where a Free Trade Deal (FTA) can be negotiated. Although the speed at which the UK would be able to secure such deals is unclear (especially given the fact that the Department for International Trade is in its infancy), advocates of the WTO route point out that the UK should initially be able to roll over many of the EU’s c. 60 FTAs with third-party countries, and that any such treaties would no longer be held up by the necessity of securing the acquiescence of 27 separate member states. The UK will also be able to reduce tariffs on goods imported from outside the EU where EU tariffs are currently high – agricultural products, for example – which would, to some extent, help to offset the inflationary impact of greater tariffs on UK-EU trade.
As for the latter, under the WTO General Agreement on Tariffs and Trade (GATT), tariffs on most manufactured goods traded between the EU and the UK would average around 3% – far from a disaster for the UK consumer and exporter. In addition, non-tariff barriers such as rules and regulations come under the remit of the WTO’s Trade Facilitation Agreement, which requires that WTO members (including the EU) maintain borders that are as frictionless as possible. Given that UK regulations are currently harmonised with the EU, any arbitrary action undertaken by the latter to prevent the expeditious movement of goods across the border would be certain to attract the attention of the WTO’s international tribunal, whose decisions cannot be overruled by the European Court of Justice (ECJ).
The case against WTO rules
Whilst the average tariff levied on UK-EU trade in goods may very well be in the region of 3%, the UK will find some of its key industries exposed to much higher exactions. For example, the tariff on food and beverages imported from outside the EU is 21%, whilst dairy products are subject to a whopping 35%. The totemic UK automotive industry is another key sector in the firing line, likely to attract tariffs of 10%.
But tariffs are only part of the story. Upon exiting the customs union and single market, the UK would find itself exposed to an array of regulations and compliance scrutiny that could prove very costly to adhere to, especially for smaller firms with less resources at their disposal. Whilst it is true that the UK could appeal to the WTO’s international tribunal for unfair treatment, history shows that redress can be slow, and even then, many countries – including the US and UK – have chosen simply to ignore these rulings in the past when it does not suit them.
But surely the opportunities presented by the rest of the world will offset the difficulties in trading with the EU? Well, unfortunately it isn’t as simple as that. Given the very limited timeframe under the current specifications of Article 50, there is no guarantee that the UK will be able to secure agreements to roll over the existing FTAs and PTAs (Preferential Trade Agreements) it enjoys via its membership of the EU. Should the UK have to revert to WTO rules with South Korea, for example, tariffs on scotch whiskey – the UK’s biggest export there – would immediately jump from zero to 20%. Of course, the UK would be free to negotiate its own FTAs with non-EU countries, but it would do so on its own, and arguably with less clout than it did as part of one of the largest trading blocs in the world.
Of course, whichever way the UK turns from here will precipitate a flood of counter-history of the “What if?” variety. But here is my humble attempt at a balanced summary of the debate:
It all hinges on whether or not you believe – the key word in this debate – the potential long-term benefits accruing to the UK from taking control of its international trade policy will be worth the short-term pain of leaving the EU single market and customs union.
What do YOU believe?