A WTO Brexit would be wrenching, costly and fraught with uncertaintyby / October 11, 2018 / Leave a comment
Irreconcilable political passions and the clock may yet conspire to force the UK out of the EU without a deal on 29th March 2019. These days Ladbrokes is putting even money on that eventuality.
In descending order of likelihood, three possible pathways to save the UK from crashing out of the EU are a time-bound extension of the status quo,a cobbled-together deal at the last minute, and a “people’s vote” to reverse Brexit.
Failing any of these, the only place the UK can go to define its global trade relationship with the EU post-Brexit is the World Trade Organisation.
Despite protestations to the contrary from some optimistic Brexiters, the WTO fallback scenario is problematic. It would be wrenching and costly, fraught with uncertainty and not as temporary as some pretend.
The WTO, of course, is a lot better than a void but much less advantageous than today’s situation in trade terms. Around 45 per cent of the UK’s exports go to the EU and it receives over 50 per cent of its imports from that source. These are high levels of dependency. EU countries in aggregate only sell 8 per cent of their total exports to the UK—a considerably lower reliance level.
All intra-EU trade is free from import duties and crosses frontiers in a frictionless manner. Under a crash-out scenario both those conditions cease to exist. As a WTO trade partner of the EU, the UK would be guaranteed non-discriminatory trade (except where preferential trade agreements are in place), a set of clear trading rules, and access to a dispute settlement mechanism.
But tariffs on UK-EU goods would not be zero. Far from it. The average EU tariff is 5.3 per cent and variance is high in some product areas. The UK’s greatest vulnerabilities in terms of post-Brexit access fall on agriculture, food and beverages, the automotive sector, and chemicals and plastics.
Tariffs in these sectors can range as high as 20-30 per cent plus and most are in double figures. Paying these tariffs and other positive rates on imports would not be a small trade shock. Only 30 per cent of EU trade is free to non-preferential partners.
On top of this, the EU has over 30 preferential trade agreements and several others in the making. Can the UK expect preferential trade with these countries to continue as before under a no deal scenario? This is doubtful, at the very least without a delay.
The idea that the UK can quickly replace EU trade flows with new preferential partners of its own is fanciful. These agreements usually take years to complete. Moreover, the UK’s non-EU trade pattern is spread widely. The United States is the next largest partner, with some 15 per cent of total trade. Rapid trade expansion with new friends would start from a low base.
Much has been written about the added costs of administering borders—customs procedures, product standards, compliance controls. Some say these could exceed tariff costs. There will doubtless be added costs, but their seriousness will depend on how prepared for the change each side is, and on how much goodwill is left after a Brexit crash-out.
As for services—more than half the UK’s economy—finance and insurance are particularly vulnerable on account of access rights, and a multitude of regulations affect most services. There is much uncertainty here.
One aspect of trade between the UK and the EU hard to pin down precisely concerns “vertically integrated” production. This is where components or inputs flow to and fro across EU member state jurisdictions, sometimes more than once, in the process of making final goods. Undoing these relationships adds another whole layer of complexity and cost, putting investment as well as trade directly at risk.
The practicalities of WTO membership post-Brexit have to be dealt with anyway but are much more serious with a no-deal scenario. The UK already belongs to the WTO but will have to extricate its status from that of the EU and its member states.
The process is underway but will not all be straightforward. Fifteen trading partners have expressed reservations about aspects of the UK’s proposals for setting its post-Brexit tariffs. A similar challenge arises in relation to the 46-country government procurement market worth US$1.7 trillion. The UK has to negotiate its way back in.
Sugarcoating the risk-laden and costly WTO option as a painless landing zone post-Brexit is irresponsible and dishonest. Of course, the reflex reaction of the complacent band of no-deal Brexiters to reality will be to blame others—perhaps not the Soviet-like EU this time, but the WTO membership instead.
Patrick Low is an Adjunct Professor at the University of Hong Kong. Previously he was Chief Economist at the WTO (1997-2013)