No Deal: Utopia or Pandemonium?

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James Faulkner

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.

Who’s right? 

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?

13 COMMENTS

  1. A well balanced article at last. For me it is the medium to long term that counts, particularly given the prospects of the obvious acceleration for ‘ever closer political union’ enshrined in the Lisbon Treaty.
    Take a bit of pain, reinvigorate our nation, lift our sights and energise the people. The UK is a natural force for good and this should not be allowed to be diluted!

  2. The Political Elite have purposely lied and betrayed the people of the UK. They have done so since we entered the so called ‘Common Market’ in 1973. It was never a ‘Common Market’ it was always intended to be a Political & Monetary Union where power was transferred from individual Countries to a Central Powerbase, the EU as is today.

    To unravel the complexity of the Withdrawal Deal and understand our real negotiating power you only have to look at the trading deficit/surplus figures we have with the EU.

    Overall we Export £235.82bn to the EU Countries, we Import £318.02bn. That means we buy £82.20bn more from the EU than they sell to us.

    Let’s say we went to WTO rules and tariffs were applied across the board, what they charge us, we charge them. Let’s say on average that worked out to be 5% across the board. The fact that they sell £82.20bn more to us means we would collect £4.11bn more from them. We currently pay them £13bn for the privilege of a so called ‘Free Trade Agreement’, that doesn’t seem very free to me and actually works out at 5.51% against our Exports, perhaps slightly more than under the WTO Rules would be?

    We actually get back £4bn in payments/grants etc., so that leaves £9bn as a real nett figure we pay them.

    So let’s say we would collect more tariffs from them than they do from us, whatever the additional cost to our Exporters we subsidise them so they can effectively sell at the same cost without effect to their trading figures, this would leave us with a £4.11bn surplus. We currently pay the EU £9bn nett, which we no longer have to pay. This gives us a total £13.11bn surplus.

    The Consumer will have to pay an additional £15.90bn for the tariffs we charge, but we still have £13.11bn surplus so we offset this and subsidise the goods to the consumer. This leaves us with £2.79bn additional cost the consumer would have to pay.

    For the privilege of the Withdrawal Agreement they want us to pay £39bn, we have no obligation to do this and no legal reason, we just tell them to do one!

    The £39bn we don’t have to pay would offset the cost of the additional £2.79bn for 13.97 years.

    This is all without any benefit from Trade Deals we can negotiate freely with the rest of the WORLD.

    DO THE MATHS, IT’S WORTH THE RISK!!!

    WE HAVE £318.02BN OF NEGOTIATING POWER!

    • It’s not even a risk, when compared to the pain and misery the EU will be inflicting on the people of Europe over the next 20 years. The elite care not one jot for the people of Europe but only about maximising the profits of the companies and industries they own and run, plus meaningless jobs for the boys and fat pensions for themselves, all paid for by us.

    • Thank you so much for putting into word of one syllable exactly what it means in financial terms. I hope you don’t mind but I have stolen most of it and shared it. I’m dismayed that people think we can’t benefit from telling the EU where to get off. Bring on no deal!

  3. Considering the 17.4million who voted leave technically won the vote unfortunately the remainers have had more than 2 years to derail the result. Add in the other 450 million EU citizens and the majority of our MPs who want us to remain what chance had Brexit really got?

  4. We must leave and trade under WTO rules. I’m old enough to remember wine lakes and butter mountains in the Common Market as was and VAT fiddles at border crossings, corruption is endemic.
    A rich man’s club, exists to push political ideals and believers won’t let go easily, there is money and prestige in being on the inside.

  5. We gotta have no deal. That is the people’s decision. The majority hopefully. We as a nation have the guts whereas the politicians are a load of self serving pricks. Take a leaf out of France’s book. Don’t let The bastards grind us down. David Davis for Prime Minister.

  6. My concern is the back stop arrangement. We have agreed to pay £39 billion to the EU. So, the next stage would be to talk about a trade agreement with the EU. For their part the EU would want fishing rights in our waters, Spain would want Gibraltar and Eire would want Northern Ireland to stay the in the EU.
    Do we agree to their DEMANDS as the back stop seems to fails us on all circumstances.?

  7. All the technical & no doubt important stuff I’m reading constantly, the why’s & wherefor’s & the pundits opinions all lack one thing? The vast majority of Brits simply want our Country back! We want to trade with whoever wishes to trade with us! We want our judiciary (after thorough purging!) to regain control of our laws & our government to govern, once again! (after the biggest purge of politicians in history) In other words, we want to take charge of our own destiny’s & futures.
    Britain didn’t become the Worlds most successful trading Nation on the Planet for nothing & we are more than capable of recovering a great deal of this once free of the EU.
    If there is to be a little pain, then so be it. Britain will very quickly re-establish itself on the Worlds markets & the EU? Oh dear!
    John Wright.

  8. Helpful article but how comprehensive is it?
    1.What percentage of our GDP is currently made up of exports?
    2. What is the balance of trade in goods between UK and EU?
    3 Should the consequences of the Pound finding a more realistic level be considered in the context of tariffs on both imports and exports
    3. ,Will this have any knock on effect on UK production, in terms of reduced imports, exports affected less and more UK production for home consumption?
    4. Who will receive the duties charged on imports from EU and the Rest of the World?
    5.The article mentions exports by small companies, but to what extent are such exports to EU currently inhibited by bureaucratic procedures and complex regulatory standards?

  9. Leaving with WTO terms will not be easy, but staying in the EU is absolutely frightening! The EU is not intending to stay as it is currently, they want sovereignty over all EU countries, they want control of our military, they want control of our borders, meaning we have no control of the standard of people we will be forced to take in. They want their own army, which could be turned against anyone including those countries in the EU who resist the commissioners demands. These plus many more are good reasons to be very afraid of remaining attached to the EU!!!

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