Allie Renison is Head of Europe and Trade Policy at the Institute of Directors.
Let’s cut to the chase – the referendum battle shows no sign of abating, nearly a year since the UK voted to leave the EU. Though exhausting, it’s hardly surprising, given the debate on what leaving might mean only started in earnest detail late last year – it is far easier in a campaign to enumerate grievances against Brussels than map out practical scenarios, complete with a win-loss column set of trade-offs. The new divide should be much starker and less evenly split but, troublingly, Remainers and Leavers seem to be redrawing their battle lines over what “going WTO” would mean for the UK. The political entrenchment over this latest Euro-fixation has already reached such fever pitch that I have all but given up hoping for a reasoned debate over what a free trade deal with the EU should contain anytime soon.
Such misplaced focus is not entirely without merit of course. Combine “no deal is better than a bad deal”, opting against an “off-the-shelf” alternative, the existence of some WTO “known knowns” in a bowl and add a dash of election season (where ingredient A unsurprisingly becomes the main fault line). One can see why delving into the complexities of this large and unprecedented grey void called a free trade agreement becomes far less interesting than arguing over whether we can or should shrug off “going WTO”.
To its credit, ConservativeHome’s series last week on what moving to Most-Favoured Nation (MFN) trade terms with the EU might mean for the UK was not short on technical detail. But I found most of the contributors ended up sketching out a series of deals which the two sides could come to agreement on rather than setting out the implications of relying solely on multilateral-level agreements. This roundabout “just-don’t-call-it-a-free-trade-agreement” way of arguing for a deal is perplexing, given Article 50 presents an opportunity to lay the foundations for one, and in some ways forces the EU’s hand more than it might care to admit.
The talk of “crashing out without a deal” is not some threat in ideological isolation. It exists as a notion largely because of the ambivalence of both UK and EU leaders towards discussion of transitional – or, as I like to call them, “bridging”- arrangements. Moving to WTO terms might not terrify so many businesses if they felt reassured that doing so would be conducted in an orderly fashion, with a minimum 18 month notification period to adapt to the changes that would ensue. But letting two-thirds of the two-year timeframe provided go by without engaging on this crucial issue, letting it go down to the wire and deciding in the last three to six months whether to extend the negotiating period or stick a fork in it all, is where the panic sets in. We shouldn’t want companies to activate their contingency plans which see jobs relocated and trading activity displaced before they absolutely need to. But this may be inevitable if firms feel no clearer about what happens in April 2019 by next summer (at the latest). It is not simply the WTO ‘option’ which those firms are worried about, but the speed at which it might be thrust upon them. And trying to separate out or predict the differences between a “bare-bones WTO” and “some-level-of-agreement-but-still-WTO” outcome becomes an even more difficult and risky business to bet on.
Nowhere is this challenge more existential than in Northern Ireland. I was very surprised to see that none of last week’s contributors uttered a word about this momentous variable in the Brexit equation. Perhaps my perspective is biased – I have spent two out of the past four weeks with a slew of companies from both sides of the virtually non-existent Irish border, starting in Brussels and ending up in Belfast. The criss-crossing of supply chains there, with particularly large volumes in agri-food trade – one of the most exposed sectors to a no-deal scenario – makes for a large cumulative economic and social cost to exiting the EU without a new customs agreement in place.
This risk would be magnified if the UK were to begin pursuing trade negotiations with the US without an EU agreement in place, as the need for customs checks would increase exponentially given the sharp differentiation in food standards legislation between the two. The worry is that Northern Ireland will be forced to choose between having a border in place and its trade links with the rest of the UK. I am not prone to apocalyptic predictions on anything relating to Brexit, but the fear in their voices and cascade of practical examples of how any border would impact their business and communities was enough to give one goosebumps.
The one ray of light is that the EU have committed to treat the “Irish question” as one of its three items for the first half of Article 50 negotiations. But from our trip to Brussels it seems the focus and level of detail is currently on money and citizens rights, with this issue being put on the back burner because no one has thought much about solutions yet. Setting up a joint EU-UK customs committee as quickly as possible could help refocus minds, but until both sides are wiling to talk trade and transition (and soon), it may be rendered meaningless.
As Lee Rotherham set out, there are a variety of mitigating strategies which could be negotiated to keep things like rules of origin from being too costly and complicated for firms to navigate, and customs checks to a virtual minimum. But reaching a deal on cumulation or liberal rules of origin, mutual recognition of respective trusted trader schemes, transit certification, perhaps even self-certification for origin paperwork – these are all essential components and the building blocks of a trade agreement.
Co-operation agreements between customs authorities, who are answerable to DG TAXUD in the European Commission, and who in turn broker those facilitation agreements, do exist with third countries without a formal trade deal being in place. But with EU exit, there would need to be trade negotiations on rules of origin to determine whether this cooperation could continue the frictionless border we have now. The two must go hand-in-hand. MFN terms alone do not provide for these preferential agreements, where risk and customs checks can then be judged accordingly on the basis of intelligence-based methods. The capacity of HMRC to keep pace with negotiations and simultaneously have in place the IT systems capable of making the switch to a “no-deal scenario” should also be a guiding principle. Unfortunately, recent news about its ability to deliver an ongoing transformation change on time makes this concern more than just a remote worry.
In the absence of an agreed basis for continued regulatory co-operation, with the UK out of the EU’s Internal Market, the latter has no reliable way of knowing to what extent we are continuing to follow the rules that govern it or have diverged from them. Having no deal to tackle the future of regulatory interaction and alignment in this space is one of the main reasons our respective customs authorities would be duty-bound to step up inspections significantly. The UK’s participation in European standards bodies such as CEN, CENELEC and ETSI will not be affected by Brexit, but these are voluntary and quite a different kettle of fish to mandatory technical regulations, which are what generate the documentation requirements and compliance-checking.
As the EU continues to develop and implement its New Legislative Framework for the placement of goods on its Internal Market, the ability of notified bodies in the UK to continue acting as conformity assessment-granting bodies for EU-bound products would almost certainly cease, absent an agreement. This also goes for the issuing of EC Type-Examination Certificates, which at present the Vehicles Certification Agency can do for vehicles and related components destined for Europe. The loss of this type-approval issuing ability is among the automotive industry’s foremost concerns. The automotive industry has made clear its worry over the invalidation of the VCA’s European approvals process following exit day without a new deal in place.
The point of trade agreements is to eliminate the need for costly double testing across borders if regulatory standards are deemed to be equivalent or mutually recognised. Exiting the EU without any agreed substitute for our current regulatory set-up with Brussels would impose a significant cost through new testing requirements in Europe on the UK’s manufacturers, at a time when profit margins are already wafer-thin. “Trust us our rules are still the same right now” in the form of the Great Repeal Bill is not a substitute for a reciprocal regulatory arrangement that would guarantee such continued mutual recognition. The UK’s ability to compete for new FDI into manufacturing would be under serious threat from a cocktail of compounding issues, of which moving to WTO rules would be a driving force. Lack of certainty about if or when such an agreement might be reached, on bridging arrangements, and new costs in the interregnum (leaving aside the rules of origin challenges that Japanese carmakers in particular are concerned about) would make for an unsavoury prospect. A unilateral commitment from the UK to keep following EU technical regulations after Brexit could help but this seems politically unlikely unless limited to specific sectors.
And what of services, which of course dominate the UK economy? It is much more difficult to gauge the extent of any fall-out from moving to a WTO-grounded system of trade between the UK and EU, as previous contributors have rightly noted. Unlike goods, there is not the same uniform, comprehensive regime of rules for the Internal Market which clearly distinguish between how EEA and non-EEA service providers are treated. These vary by sector, with EU rules more advanced and rigorously enforced in some than others. There are a few areas which apply to a wide array of service-supplying industries where having no comprehensive agreement could make a sizeable impact. These include – but are not limited to – cross-border VAT arrangements, labour mobility and data transfers, which for the purposes of brevity here I will return to in a follow-up article.
These above examples are not meant to convey an impending sense of doom about the prospects of leaving the EU without a new free trade deal in place, but rather to set out some complexities that would be particularly amplified in the absence of a comprehensive agreement. The IoD has continually stressed that businesses need to play an active role in preparing now for a worst-case scenario of no deal and cannot stick their heads in the sand over this possibility, but they need assistance from government by way of honesty and communication to help with that planning. More details on what steps we think the next government should take to do so can be found here, while our earlier Navigating Brexit report contains a preliminary list of steps businesses should be looking at to mitigate a worst-case outcome.
In summary, these are some of the key takeaways to consider when looking at the so-called “WTO option”.
- The implications of this shift cannot be separated from what kind of transitional/bridging arrangements would be put in place to accompany it;
- Comparing the existence of trade on MFN terms generally or between the UK and non-EU countries makes for an illogical analogy – the uniformity of starting points between the UK and EU makes for a better chance at a deal but a bigger disruption in the absence of one;
- The volume of trade and integration between these two highly-regulated markets increases the scope for negative consequences from this, because many sectors are so dependent on the predictability of EU rules for seamless market authorisation, movement and operation. WTO rules are often more subjective in interpretation, give less recourse to individuals or businesses in cross-border dispute settlement, and are harder to enforce swiftly than what a preferential trade agreement would entail;
- Extent of any negative impact on UK businesses will also depend on how prepared they are for a no-deal scenario; pushing the trigger button on contingency plans at an early stage may reduce the scale of direct trade between the UK and EU and somewhat reduce the Treasury’s tax take but limit any overall economic instability resulting from a potential disorderly move to WTO rules;
- The UK economy will still be able to thrive even if no trade agreement is reached with the EU (as long as the shift is not disorderly – a big assumption to make), but it is a large headache for government and business made worse that will still need sorting out. The government will have regained many domestic policy levers, but its ability to organise and deploy those may take some time to yield tangible benefits;
- There is a fundamental tension between absolute sovereignty and market access/trade liberalisation – negotiations with the EU will be the UK’s first real experience of navigating those trade-offs on its own but certainly not the last;
- The UK will face many thorny trade negotiations with other countries going forward – is it really that willing to walk away from a deal when the going gets tough with the EU but not with anyone else?;
- The EU is one of the biggest trade blocs and regulators in the world – like it or not. The Swiss may have negotiated a more arms-length relationship with Brussels, but it follows EU law (and jurisprudence) very closely even in the areas not covered by bilateral agreements. This should serve as a reminder to both EU and UK negotiators when it comes to flexibility and concessions.