Dr Gerard Lyons is the Chief Economic Advisor to Policy Exchange and has co-authored ‘Clean Brexit’ with Daily Telegraph economics commentator Liam Halligan.
The UK should leave the single market and the customs union and be prepared to trade under the most favoured nation status of the World Trade Organisation (WTO).
These are some of the clear messages from a report I have just written with the leading economics commentator Liam Halligan and published with Policy Exchange. The report is endorsed by Lord Lawson and Lord Owen, giving cross-party support to the idea of a ‘Clean Brexit’.
A key part of our analysis is the opportunity presented by Britain’s future as an independent member of the World Trade Organisation (WTO). It is likely that we will hear a lot more mention of this global body as membership of it becomes central to our post-Brexit life.
The WTO operates a system of trade rules, and provides a Geneva-based forum in which governments negotiate trade agreements and settle trade disputes. It is central to global trade, with 164 countries as members and another 22 in the process of joining.
The UK is currently represented at the WTO as part of the EU. As we point out in our report, once we leave the EU we can regain our independent WTO seat.
During the referendum campaign Robert Azevedo, Director of the WTO, warned that in such circumstances the UK would face tortuous negotiations with WTO members, as effectively we would have to accede to membership. Following the referendum result, though, Azevedo changed his tone, acknowledging that the UK would remain a member in our own right.
The question, then, is on what terms, and what this would mean?
Each WTO member has its own tariff schedules that determine the basis of its trade. WTO rules allow us to trade freely and seek free trade agreements (FTAs) with like-minded countries across the world. The UK intends to be at the forefront of a free trade agenda and, as we already trade extensively outside the EU, is starting from a strong position.
One worry often expressed is that the UK would not be able to operate as a member of the WTO without its own schedules, and that all other WTO members would have to agree to them. But as long as no other country is worse off than now (with us as an EU member), they cannot complain about our new schedules.
And any complaints need not interrupt our trading relationships – these are commonplace at the WTO. The EU has had 97 dispute cases as complainant, 83 as respondent and 159 as a third party, so we should not unduly worry about them, even though we do not intend to trigger them.
In formal terms, our schedules must “maintain a general level of reciprocal and mutually advantageous concessions not less favourable”. This means we cannot be more protectionist than the EU is now.
That is unlikely anyway. The EU’s Common External Tariffs increase the price of non-EU imports significantly – some estimates suggest that food is 17 per cent more expensive than it would be outside the single market. Agriculture is a particularly sensitive area where we must ensure tariff rate quotas do not cause such a problem that other countries feel worse off, but where there are also huge opportunities.
The other principle is that members of the WTO can agree to accord “Most-Favoured Nation” status to each other, and can then be charged ‘the normal non-discriminatory tariff’ on imports. The exceptions to this include when you are in a customs union or do a trade deal with a country, in which case you can treat each other better. Some countries that trade freely under WTO rules may have specific bilateral arrangements in place to facilitate trade in some sectors.
All this reinforces the importance of non-tariff barriers (NTBs) like quotas – and, outside the EU, Britain will be well-placed to play a leading role in NTB reduction, key for future trade in services.
Once we are outside the customs union and operating under WTO rules, we will need to invest more in our port facilities and our customs staff. Some worry it will take days to clear customs outside the EU.
This risk is misplaced. Increasingly, customs and its related processes are electronic and thus scalable, able to handle larger volumes. The average “dwell time” of consignments of non-EU goods entering via French ports, for instance, is less than six minutes.
The US and Canada are not in a customs union, yet more goods cross the US/Canadian border each year than do the EU’s external border – with no delays. Providing we get the bodies that check standards for the EU market accredited here in the UK before we leave, the vast majority of UK-EU customs clearance once we are outside can be done electronically, as happens within the North American Free Trade Area.
Trading under WTO rules, then, while the most straightforward option, still requires preparations: retaking our WTO seat and setting tariff schedules, while enhancing the physical and technical infrastructure enabling UK customs checks. The Government also needs to put in place transitional arrangements for specific sectors like agriculture, and ensure that we maintain uniform regulatory standards and conform with technical standards agreed in existing agreements.
But once those processes are in place and once we resume our WTO seat, there are huge opportunities for the UK. Leaving the customs union will allow us to position ourselves to increase trade flows with the rest of the world and we hope that the Prime Minister will outline tomorrow that it will be relatively easy and beneficial for the UK to trade under WTO rules.