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Falling back on global trade rules poor option for UK

by Jack Schickler | 10.05.2016

If we leave the EU, say Brexiteers, we would seek a free trade deal with the EU. If we can’t get one, we would have to rely on the framework provided by the World Trade Organisation (WTO).

Vote Leave’s Nigel Lawson has said this would be “perfectly acceptable” and “far from disaster”. It is anything but. The Treasury estimates the cost of relying on WTO rules after Brexit at between £3,700 and £6,600 per household. It is a scenario not only damaging – but worryingly likely.

The WTO offers next to nothing for services, which are worth 37% of our exports, well above the EU average. Financial services, for example, is a major UK export industry, with around one-third of exports going to the EU. EU membership gives UK-based banks a passport to operate across the European single market. WTO rules would not.

For goods, WTO tariffs would be limited, but still high. According to the UK Treasury, the EU’s reassuring-sounding average tariff of 5.3% on imports from outside the EU masks significant divergences. For example, EU tariffs are over 20% on animal products, sugar and confectionery, and as high as 70% on some beef products. This matters, because EU nations account for 61% of UK agri-food exports. Under the WTO’s most-favoured nation principle, when it came to food, cars, clothing or anything else, the EU could not offer Britain more favourable tariffs than it offers others, unless we negotiate a formal trade deal with the EU.

The WTO also offers little protection on barriers like licensing or approval regimes for goods. Pharmaceuticals and chemicals – a UK sector worth over £22 billion, selling over 50% of its exports to Europe – is an example of a highly regulated sector vulnerable to these non-tariff barriers.

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    While unattractive, the WTO scenario is not unlikely. If voters support Brexit, the UK government will notify the EU of our intention to leave, after which we would have two years to negotiate our future relations. If we cannot – a typical EU trade deal takes far longer than that, and this would be unusually complex – then either all other 27 nations have to agree an extension, or we fall back on WTO rules, whether we want to or not.

    Brexiteers like to argue the EU would be desperate to do a post-Brexit trade deal with us, given our trade deficit. The reasoning is incorrect – we would be the desperate ones. But it is especially incorrect for services, where we run a trade surplus. Germany, Italy and the Netherlands – for whom services are just 16-18% of exports – would not be as worried about the WTO fallback option as we are.

    A similar argument applies to non-EU trade. Through the EU, we enjoy favourable trade agreements with over 50 other countries. We’d lose access to those deals if we left. Meanwhile, our number one export partner, the USA, is currently negotiating an EU trade agreement, but Barack Obama has said we would go to the back of the queue if we left. Replacement deals could take years or decades. In the meantime, the WTO would be the ugly alternative.

    Edited by Sebastian Mallaby

    One Response to “Falling back on global trade rules poor option for UK”

    • Would it not be better to quote the loss as a %GDP or absolute figure rather than per household?

      GDP loss per household risks being confused with drop in household income.

      It is the sort of error that Remain would criticise Leave for so should we not hold ourselves to the same standards?

      Good article otherwise