The “Most Favoured Nation” rule makes Britain’s exit from the EU a dangerous endeavorby Ian Dunt / January 15, 2018 / Leave a comment
Whenever they imagine life outside the European Union, Brexiters often speak dreamily about the Most Favoured Nation rule. It sounds privileged and gold-plated, like an executive lounge at the airport. In reality, it is nothing of the sort.
This is what it really means and why it makes Brexit such a dangerous endeavour.
Most Favoured Nation is a World Trade Organisation rule that says that you cannot discriminate in your tariff arrangements outside of a free trade agreement. If you want to have tariffs of ten per cent for oranges from Brazil, say, then you have to have them at the same level for the United States. Essentially, it bans favouritism. It should really be called No Most Favoured Nation.
The only way out of the straightjacket is to sign a formal free trade agreement, either with another country or a group of other countries. The European Economic Area (EEA) agreement, which the UK is currently a signatory to, is one such agreement. The EU also has (more traditional) agreements with other states, like Canada and South Korea, and will probably have one soon with Japan.
Once two partners have got a free trade agreement they can adopt whatever tariffs towards each other they like, or even eliminate them altogether. And they can do that without having to replicate them for everyone else. It’s like creating a firewall around your trading arrangement.
Some trade deals also have a Most Favoured Nation clause in them. This is another anti-discrimination initiative. It promises your partner that if you sign another trade deal with someone else on better terms, this one will be upgraded to meet it. It’s the bilateral trade equivalent of John Lewis’ price promise.
Far from being an executive lounge advantage for Brexiters, Most Favoured Nation is actually a massive problem for them. For a start, if the EU offers a deal to the UK which is better than that agreed with South Korea and Canada, it has to find a way out of its Most Favoured Nation clause with those countries. That is a problem which lawyers are going to make lots of money out of. It could even, in a worst case scenario, discourage the EU from offering the UK a better deal at all.
But the bigger issue comes if there is no deal. Our tariffs with Europe are currently zero on everything, because we’re in the same customs union. Brexiters insist that even if we fail to get a deal with Brussels, we can unilaterally decide to keep our tariffs where they are and demand that they do the same. But Most Favoured Nation means that the repercussions of this would be very severe, as we would have to eradicate all our tariffs for every other country on earth, from Afghanistan to Zimbabwe.
Insane as it sounds, some Brexiters like the sound of this. Daniel Hannan, the Tory MEP whose think tank has been warmly welcomed into Whitehall by Boris Johnson and Liam Fox, is a leading proponent of the idea. This type of Brexiter typically believes in unilateral tariff reduction as a kind of Viagra Capitalism, unleashing a potent new Britain onto the world stage.
The reality would be rather different. The first thing that would happen is that British agriculture would be devastated. Cheap food would flood in from around the world, leaving domestic producers unable to compete. Some of them might be able to carve out a niche in the upper end of the market by focusing on quality. Others would diversify. But most would struggle to make it, especially after European subsidies dry up and tariff walls went up against their exports. Similar things would happen, to a lesser but very meaningful extent, in manufacturing.
Some free marketeers say that this is all part of the regrettable but necessary process of capitalist renewal. The truth is these producers aren’t globally competitive. Those farmers will just have to retrain as digital consultants or something. The consumer, meanwhile, will be getting a cheaper product.
The reality is far more complicated. Countries like Brazil and Thailand heavily subsidise much of their agriculture. They subsidise sugar, for instance. If they start dumping it in the UK, there is no way for domestically-produced British Sugar to compete. But that’s not the free market. It’s the British government’s failure to protect its domestic industries from the effects of foreign government subsidies.
British producers would be up against the wall. While cheap foreign goods flooded the market, they would be unable to export their own produce, because no reciprocal tariff reduction would have been secured. Everyone else’s barriers would still be up. We’d be the only ones smashing ours to pieces.
This is the remorseless logic of Most Favoured Nation. It is the chief reason why a deal with Europe is of paramount importance. If it is not secured, Britain faces either closing itself off from its largest market, or opening itself up to everyone else. Neither option is particularly attractive.
Brexit Britain: the future of industry is a publication which examines the future of UK manufacturing through the prism of the recently released Industrial Strategy White Paper. The report features contributions from the likes of Greg Clark MP, Miriam Gonzalez, Richard Graham MP and Frances O’Grady.
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