Brexiteer arguments on free trade are riddled with basic misunderstandingsby Guy de Jonquières / June 28, 2018 / Leave a comment
As the faltering progress of the UK’s negotiations with Brussels increases the risk of a disorderly “no deal” Brexit next March, Leave politicians such as Jacob Rees-Mogg, Peter Lilley and Nigel Lawson insist there is no need to worry. If Britain crashes out of the European Union, they say, it can trade perfectly well by falling back on the World Trade Organisation.
Their argument was summed up recently by John Longworth, Co-Chairman of Leave Means Leave and former head of the British Chambers of Commerce. He told the BBC: “Don’t forget, World Trade Organisation rules are the rules upon which most British exports take place and most trade around the world with the EU takes place.”
Remarkably, most of this sentence—like much else that Brexiteers say about trade—is misleading or plain wrong. While Britain does trade under “WTO rules,” these are the basic laws governing the rights and obligations of membership, to which all the WTO’s 164 members have to sign up in order to belong to the organisation. They do not, on their own, determine how much or how little access countries provide to exporters elsewhere.
What Brexiteers apparently mean is “WTO terms,” which are rather different. These stipulate exactly how far and in what ways each member guarantees to keep its market open to trade with all the others. The arrangements, rather confusingly called Most Favoured Nation commitments, cover everything from national tariffs on imports to government procurement tendering and their provisions differ widely between countries.
In reality, Least Favoured Nation would be a more accurate name because no country trades just on WTO terms. All belong to least one, and in some cases many, free trade agreements (FTAs) or preferential trade arrangements (PTAs) with others that reduce trade barriers below the level set in the WTO. If Britain traded solely on WTO terms, it would deprive its exporters of advantages that foreign competitors enjoy.
It is equally wrong to say that most British exports are on WTO terms: 60 per cent of UK exports are to the EU and to the more than 60 countries with which the EU has FTAs. Some FTAs are with small economies and free relatively little trade. But others, particularly the one with South Korea and those signed recently with Japan, Canada and Singapore, provide for much deeper and wider liberalisation. Pulling out of them would hit some British trade hard. For instance, South Korea’s tariff on scotch whiskey, Britain’s biggest export there, would jump immediately from zero to 20 per cent.
The EU has no FTA with the United States and is unlikely to have one soon. But the two have about 20 other bilateral agreements, a number of which affect trade, most importantly civil aviation. A no-deal Brexit would strip UK airlines of their rights to fly to the US and could ground them overnight, leaving tens of thousands of passengers stranded.
Of course, the UK can always seek to negotiate its own aviation deal with the US. However, with only nine months to go until Brexit Day, that looks a tall order, all the more so as Britain could cease to benefit after 29th March from more than 750 other EU treaties and agreements, which will also need to be renegotiated.
But by far the harshest impact of a no-deal Brexit would be on Britain’s trade with the EU which—ironically—Brexiteers regularly accuse of being a protectionist fortress. Their accusations are overdone. The EU’s 5.2 per cent simple average external tariff, though above the 3.5 per cent US average, is among the lowest in the world.
However, EU tariffs on some imports are far higher: 22 per cent on trucks, 17 per cent on footwear, 14 per cent on audiovisual products, 12 per cent on clothing and 10 per cent on cars. British food and drink exports, 70 per cent of which go to the EU, would be hit harder still by a combination of tariffs and import quotas on many agricultural products.
If these circumstances prevailed after Brexit, the prices of many products from the EU—source of more than half of Britain’s imports—would rise sharply. But if tariffs were abolished altogether, as some Brexiteers want, parts of manufacturing and agriculture could face a flood of competition from around the world.
But tariffs are only half the story. A no-deal Brexit would also require UK exporters to struggle with a vast and complex new bureaucratic array of regulations and inspections to ensure that they meet EU standards. For many, the cost of compliance would be far higher than the cost of tariffs.
Brexiteers who say reliance on WTO rules would safeguard Britain’s trade either do not know any of this, or else they do know it and are not telling the truth. The next time they appear on the BBC—which too often allows their false assertions about trade to pass unchallenged—perhaps interviewers might press them to say which explanation is correct.