“Jumping from league one to league three”: WTO insiders’ scathing assessments of a WTO Brexit

Plus: the director general contradicts claims that “Gatt 24” would kick in to help

July 08, 2019
Photo: Xinhua/SIPA USA/PA Images
Photo: Xinhua/SIPA USA/PA Images

The debate over the impact of a no-deal, WTO Brexit is one of the most fraught in British politics. It is now reaching a crescendo. In the run-up to the new Brexit deadline of 31st October hardline Leavers insist ever louder that Britain could simply walk away from the EU with no adverse consequences. They say the World Trade Organisation provides a perfectly good alternative framework and there is nothing to worry about. Boris Johnson, the frontrunner to be prime minister, has sided with them.

Mainstream economists, however, have spent years debunking these claims. They explain that WTO terms would in fact be a dramatic downgrade on the preferential deal we have with Europe. Crashing out would trigger serious economic disruption.

The question arises, what does the WTO itself think about all this? Few are better placed to assess the impact than those from the organisation itself. Having contacted current and former leaders, including Director General Roberto Azevêdo, it is clear to me that a WTO Brexit would present a very serious challenge indeed. These figures took it in turn to voice serious warnings. As 31st October fast approaches it is regrettable, to say the least, that they are still required to spell out essential facts.

Based in Geneva, the WTO has 164 members, of which Britain is already one. It establishes a “base level” trading framework across the world, which countries build on with their own preferential free trade deals (like the EU internal market). It has rules and a court system which member states can use to enforce them. But relative to the single market, and the deals with third countries we enjoy in virtue of membership, a WTO Brexit would not offer very liberal trade terms at all.

Azevêdo, arguably the most important trade official in the world, said “in simple factual terms in this scenario, you could expect to see the application of tariffs between the UK and EU where currently there are none.” He was at pains to remain neutral, and stressed the lack of detailed WTO forecasting, but those tariffs “would clearly have an effect.” Tariffs are by definition a hindrance to open and free trade.

For Pascal Lamy, Director General of the WTO from 2005 to 2013, “Jumping brutally from trade league one (the internal market without borders) to trade league three (a WTO, multilaterally committed trade regime for goods and services) would certainly hurt.” That conveys the risk of Britain simply walking away from talks, especially when the EU accounts for almost half of UK exports.

Yet this reading is by no means universal. In particular, some Leavers have claimed that the WTO provides for continued tariff-free trade in the event of no-deal. In a recent BBC leadership debate Johnson referred to the now-infamous “Gatt 24, or whatever it happens to be,” a clause from WTO forerunner the General Agreement on Tariffs and Trade, that would allegedly preserve low tariffs in the event of a crash out.

What is the truth of the matter? Alarmingly, when I put this question to Azevêdo, he said Gatt 24 would simply not apply with a no-deal outcome. “Article XXIV of the GATT is simply the provision of global trade law under which free trade agreements and customs unions are concluded,” he explained. The problem is that it only kicks in in the event of such a deal being struck. “If there is no agreement, then Article XXIV would not apply, and the standard WTO terms would.”

These “standard WTO terms” would include increased tariffs on British goods imported into the continent, 10 per cent on cars and rising to more than 35 per cent for dairy products. In addition there would be extra bureaucratic hurdles for businesses to leap over on things like product standards and sanitary checks. The rules do little for services, which make up 80 per cent of the British economy and close to half of exports.

As Lamy explained, under WTO rules, Britain could not just lower tariffs specifically for EU trade because without the formal framework of a deal that would count as granting unfair, privileged access. The “WTO regime implies tariffs which have to apply to all [the UK’s] trade partners,” he said. There is no simple way around this and the EU is bound by the same rules.

The question, then, is not whether there would be additional trade barriers, but the extent of the damage. And for Stuart Harbinson, former Chairman of the WTO’s General Council, there is serious cause for concern. “The effect of increased costs [to trade] would be to make UK businesses less competitive, with the risk that EU importers of goods and services might look elsewhere,” he said. “Potential investors would also have to take these increased costs into account when deciding where to locate investments.”

The sudden adjustment would be particularly severe in certain individual sectors, which are less well equipped to deal with a downgrade in their access to important markets. One example is agriculture. “UK agricultural exporters are certainly at risk, because barriers to trade in agriculture tend to be much higher than average,” said Harbinson. There was strong support for Brexit among UK farmers. Whether they have been prepared for the consequences of WTO terms is doubtful. The shift could pose a challenge to the viability of the sector—and many others.

“Processed food and drink suppliers based in the UK would also be affected,” Harbinson warned. “Experience elsewhere tends to suggest that big businesses, with economies of scale, may sometimes be able to cope with increased trade barriers, but small enterprises will often struggle.”

For Lamy, the former director general, no-deal could cause disruption in “all sectors; manufactures and agriculture, of course… but also, and more importantly given existing trade flows, in services, where the EU degree of openness as per the WTO is way below the internal market regime” of the European Union. Relegated to his “league three,” they would face significant new barriers.

Yet for some Leavers, a WTO Brexit remains preferable to the current Withdrawal Agreement, and certainly to remaining. For Nigel Lawson, an architect of the Leave campaign, “I think this is the only acceptable outcome.”

How can WTO terms persist as an option when the people in the know issue such categorical warnings about them? One final argument made by Brexiteers is that because the WTO has 164 members, that proves its terms are reliable. In walking out Britain would simply become like every other country. Or so the theory runs.

For in reality other countries, like those in the EU, have built on the WTO “base level” substantially with their own extra free trade deals. A no-deal Britain could be relying near-exclusively on the WTO. That is something very different.

“Affirmations such as ‘WTO terms would be painless, after all many countries do that’ are one of the many Brexit unicorns flying around,” said Lamy. “If that were the case, why would all developed countries (and many emerging countries) have negotiated free trade agreements, which provide a higher bilateral level of openness than the multilateral WTO regime?” The question answers itself.

Although not everyone associated with the WTO can speak for it, their comments make clear the reality. No-deal would trigger an abrupt recalibration of Britain’s trading relationships, and though it is beyond the scope of this article, likely do great damage in other spheres.

It may be that this reality does not become accepted until it is too late, and Britain has already left without a deal. In that circumstance we would be surrendering our place in the global trading hierarchy, built up over many decades, for no good reason. The economic consequences would be profound, and therefore the damage to confidence in British politics—already low—would be even more severe. What would happen then is an unknown. The technicalities of trade policy have never mattered so much.