No Deal: The UK and EU Trading on WTO Terms
Were the UK and EU unable to agree to a high-quality bilateral free trade agreement (FTA), it would be bizarre – and could only be attributable to bloody-mindedness by the EU. No two economies that have entered into an FTA negotiation have been more deeply integrated than are the UK and EU today. Already, trade between them is free, their respective services are largely open, and the UK has adopted the EU’s acquis for regulations for the past 44 years.
Yet were this to happen and the UK and EU were unable to reach agreement on an FTA, the papers in the series on this site over the past week have shown that it is likely that it would be the EU and not the UK that would be most disadvantaged by this.
While neither the UK nor the EU is looking over a precipice, conducting trade on the basis of the WTO’s Most Favoured Nation (MFN) rules would cost the EU relatively more than the UK. While a high-quality FTA with the EU is the preferred outcome and in the best interests of both parties, the UK need not fear a world in which trade in goods and services and the regulatory disciplines that apply are those of the modern WTO.
The WTO Today
Over the years, successive negotiations have not only drastically reduced most tariffs, but also brought effective new disciplines into force for trade in services, intellectual property, technical barriers to trade and product conformity assessments, and agricultural trade and subsidy policies. Almost every trade issue now disciplined by intra-EU rules has a counterpart in rules found in a WTO agreement.
For practical purposes, it is only necessary to focus on the rules that would apply – and barriers to trade that would exist – in UK-EU goods and services trade based only on WTO obligations. Many areas covered by the WTO, such as intellectual property and sanitary and phytosanitary measures, impose on members an absolute obligation to apply them on the basis of both national treatment and MFN, so the UK need not be concerned about possible discriminatory regimes being applied against it.
In agriculture, the WTO still permits high levels of tariffs, complex tariff-rate quotas, and subsidies. How these will be divided between the EU and the UK after Brexit is not known, but trade in agricultural products is in fact an absolutely small share of EU-UK trade, accounting for just over six per cent of UK exports to the EU and just over 10 per cent of the EU’s to the UK.
While these matters will eventually need to be resolved, in the overall picture of UK/EU trade they are not material. In any event, from these numbers it can also be seen that the EU has comparatively more at stake in keeping markets open than the UK.
Trade in Goods
Trade in goods obligations under the WTO are divided essentially between those relating to tariffs and those rules applying to a wide range of non-tariff measures. Insofar as tariffs are concerned, both the UK (which is a full member of the WTO in its own right) and the remaining members of the EU would have the current Common External Tariff (CXT) schedule of the EU as their separate – but identical – WTO tariff schedules. This would mean that post-Brexit UK exports to the EU would face CXT-level tariffs upon entry, and that those same CXT-level tariffs would apply to EU exports to the UK.
Using UK Government trade statistics for the month of January this year, and identifying the most significant areas of trade as those worth more than £ 200 million for the month, there are 14 top categories of UK manufactured exports to other EU members. These fourteen categories taken together made up 73.3 percent of all UK exports to the other EU members in the month.
The single most important of these export categories is motor vehicles, with UK exports for the month valued at £ 1.5 billion. The CXT-level tariff would be 10 per cent ad valorem (or as high as 22 per cent for some truck types). This looks bad for the UK, but it looks even worse for the other EU members which exported £ 3.6 billion in vehicles to the UK in the same period. So, insistence on applying CXT-level tariffs would appear to hurt other EU members far more than the UK. When we add sterling’s more than 10 per cent depreciation since the Brexit vote, the CXT protection for vehicles is effectively eliminated on UK exports but doubled on those from other EU members to the UK.
For other manufactures (apart from textiles and clothing with a CXT tariff of 12 per cent and where the UK and other EU members sent each other about £ 230 millions of goods in January 2017) CXT tariffs are much lower. In general, sectors in the “top fourteen” that are “protected” face a tariff of 6.5 per cent (plastics and plastic products; organic chemicals; miscellaneous chemical products; and essential oils and resinoids). UK exports of these goods categories in January 2017 came to a total of £1.36 billion, with imports from other EU members into the UK amounting to £1.7 billion.
Most machinery exports would face CXT-level tariffs of 1.7 per cent – 2.7% per centand exports of pharmaceuticals (£ 1.05 billion in January 2017), mineral fuels (£ 1.2 billion), and iron and steel (£ 214 million) would enter the EU nearly entirely duty-free.
It is worth noting here that, in January, the UK recorded a trade deficit with its combined other EU partners of £ 6.76 billion. That’s the result of trade inside the customs union.
Post-Brexit, the introduction of border controls and customs checks, should they occur, would also interfere with the UK’s trade with its former EU partners. However, the UK can take some comfort from the WTO’s new Trade Facilitation Agreement (TFA) which entered into force with immediate effect for the EU on 22 February 2017. TFA cuts red tape at the border to facilitate easier trade with new provisions to expedite clearance of goods; availability of information on rules and procedures; automation and e-services; disciplines on fees and penalties; and harmonized processes and standards.
All of these new rules will considerably mitigate the delays and costs of border procedures. But again, if the UK and the EU did not reach agreement on an FTA, which addressed these issues, then EU exporters would also face similar impediments should the UK decide to impose them.
Trade remedies (anti-dumping, countervailing duties, and safeguards) are a potential problem, as these actions do not operate within the Customs Union. But this is probably a blessing in disguise for the UK, which will be free to operate trade remedies on a national customs territory basis and no longer be subject to the border restrictions currently in place due to the EU’s Customs Union-wide application of such measures.
Other WTO rules agreements applied to trade in goods should not disturb existing arrangments for trade between the UK and EU. Moreover, as Lee Rotherham pointed out in his first contribution to this series, many issues like conformity assessment and compliance with product standards are effectively governed today not by the EU or WTO, but by other international agreements and organisations.
Trade in Commercial Services
Unlike the Single Market for trade in goods inside the EU, the current situation for trade in commercial services is very fragmented, so leaving the EU may be less problematic for many British services suppliers. It is well-known that UK banks, insurance suppliers and other financial services actors fear the loss of so-called “passporting” privileges. While there will be some cost in this to certain UK financial service providers, it is not known how many actually avail themselves of this and what share of financial services would be adversely affected.
In any event, both the UK and EU have accepted important obligations in respect of market access for financial services suppliers in their WTO GATS schedules of specific commitments for services, so going back to a WTO-only relationship does not mean returning to zero.
Moreover, WTO also has a specific and quite far-reaching agreement on trade in telecommunications services that should protect UK telecoms companies from future discrimination in the EU market.
Prospects are bright for a new Trade in Services Agreement (TiSA) currently under negotiation in Geneva. Twenty-three WTO Members, counting the EU as “one”, are participating in this negotiation which, if successful, will cover about 70 per cent of global trade in services. The UK should be among the founding members of TiSA which, among other things, would mean that TiSA would facilitate services trade between the UK and EU in the post-Brexit period.
A WTO-only world for the UK
Without doubt, it would be desirable for the UK and EU to try hard to negotiate a high-quality FTA that would preserve as much as possible for the preferential trade treatment now enjoyed inside the Single Market. Doing so would avert possible disruptions to supply chains that have been developed over decades of the UK’s membership in the EU. Moreover, where a relatively high tariff (such as for automobiles) might seem to create problems for UK exporters, it is likely to create even bigger problems for EU exporters to the UK. Surely, if there are sensible people in Brussels, they will come to recognise these facts.
However, if a high-quality preferential trade deal proves impossible to negotiate concurrently with the Brexit negotiations, then reverting to a WTO-only trading relationship would clearly not be the disaster some paint it as. This much is clear from the other papers contributed over the past week and from this summary.