Expert View

WTO is the problem, not the answer, to trade under ‘no deal’

by David Hannay | 02.01.2019

David Hannay is a member of the House of Lords and former UK ambassador to the EU and UN.

When the European Commission surfaced its contingency plans for a no-deal Brexit shortly before Christmas, most of the media comment focused on provisions for citizens’ rights, air travel, road haulage and financial transactions. All these demonstrated some potential flexibility and a desire to avoid the worst immediate disruption if the UK crashed out without a deal.

These are all policy areas where neither the EU nor the UK are bound by wider international rules. But that is not the case where trade in goods is concerned, where both the EU and the UK are bound by WTO rules.

In particular, both must follow the WTO’s “most favoured nation” rules. This means giving equal treatment to all countries with whom they do not have free trade or customs union agreements covering “substantially all their trade”. The UK and EU would end up levying the same tariffs on each other’s exports as they do to those from countries such as the US or Brazil or India.

On this the Commission shows no flexibility at all: “If the Withdrawal Agreement is not ratified, all relevant EU legislation on imported goods and exported goods will apply as of the withdrawal date.” Not surprising, really, since it cannot be in the EU’s – nor the UK’s – interest to flout WTO rules.

The Commission goes on to add: “Member states must be in a position as from the withdrawal date to apply the EU Customs Code and the relevant rules on indirect taxation to all imports from and exports to the United Kingdom.” So bang also goes the current frictionless handling of of VAT between the EU and the UK.

All this will apply to trade across the border between Ireland and Northern Ireland, since that will become an external border between the EU and a non-EU “third country” (the UK). This will not be imposed due to EU ill will and inflexibility, but by the application of WTO rules. And the UK will be bound by those rules too in respect of trade across that border.

Why not just scrap tariffs?

In theory, the UK could avoid the imposition of tariffs on trade with the EU and stay within WTO rules. But it would have to reduce to zero any levies from imports on all other countries on a worldwide basis.

That would damage both our industry and our agriculture by removing all protection for our businesses and farmers from cheaper foreign imports. It would also lose us any leverage in the subsequent negotiation of free trade agreements with countries outside the EU.

What’s more, the EU would not be compelled to slash its tariffs on our exports in the same way. Indeed, EU countries are not going to remove their protection to the rest of the world just to retain duty free access to the UK market.

And don’t forget that a no-deal scenario will also mean that, as of March 29 this year, the UK would lose the benefit of all the EU’s free trade agreements with other countries. These cover a substantial proportion of our exports on top of the 44% which go to the EU.

Not a pretty prospect. But that does not seem to concern the Brexiters, who continue to maintain that a no-deal exit would be a walk in the park. And they prattle on about a “managed no deal” which could be easily achieved, even though the same WTO rules would apply in those ill-defined circumstances too.

All the more reason therefore for Parliament categorically to rule out a no-deal Brexit, and for the government to accept that judgement and act accordingly – by proposing postponement of the Article 50 cut off date and by giving the people a say in a new referendum.

Edited by Luke Lythgoe

9 Responses to “WTO is the problem, not the answer, to trade under ‘no deal’”

  • I heard it reported (by a UKIP MEP who seemed knowledgeable) that, under GAT rules, if a country declares that it is negotiating a free trade deal with another country, then, under WTO rules, it is entitled to impose lesser or zero tariffs on that country.
    In other words, in the event of a “no deal” BREXIT, since the EU and Britain presumably intend to negotiate a free trade deal, then they can maintain the current zero tariffs during that negotiation.
    Can someone authoritatively state whether this is true or not because it seems vitally important to the considerations around “no deal”.

  • Let’s, for the sake of an example, say that I am Mexico, and I want to buy 60,00 cars. At the moment, I buy from the UK, and I pay the UK, because I have a trade agreement with the UK, through the EU. Now, let’s be Mexico post Brexit. I want to buy 60,000 cars. Do I a) buy from the UK and pay a their tariff for each and every car, making them more expensive as I no longer have a trade deal with them through the EU? or b) buy 60,000 cars from Germany with whom I still have a trade deal through the EU and not pay the tariff? What do you think my decision would be?

  • If leaving the EU is so critical for the UK, why are you pushing for a people’s vote? Besides the “best of three” argument, it’s like asking the passengers of an aeroplane to land the plane.

  • Roger Goodgroves : Thanks for the link to the Rees-Mogg statement and its analysis. From that, there is a link to the actual WTO rule.
    From reading that, it seems to me that the 10 year rule is correct, except that it is conditional upon both parties agreeing to negotiate a free trade agreement or customs union. In this case it seems to me that because the EU requires free movement and contributions from any country wanting such an agreement, and with the UK red lines ruling those out, there would seem to be no way that the EU and UK could in good faith declare that they were negotiating such an agreement, and therefore the 10-year waver could not be invoked?

  • To ‘Bonnie Says’ – I think you have the tariff issue backwards. The country exporting the cars does not place tariffs on the exported cars, the importing country does, so in your example if a couttry has a free trade deal with the EU its government will not place tariffs of EU cars, whichever EU country exports them. Once the UK leaves the EU and trades under WTO terms either there needs to be a very quick free trade deal between UK and the said country or the latter is obliged to levy the same tariff on UK cars as on cars from any other country. In the meantime any EU deals continue.
    Also I think if any country wants 60,000 cars they will not get them from the UK anyway unless they only want Nissan Qashcai because we don’t make any other mass-volume cars here, and the Nissan/Renault partnership can avoid any WTO tariff issues by exporting from their Spanish plant instead of the UK

  • The ex PM of Australia has said that Australia has No Deal with the EU and it trades just fine. Remoaners just wont stop with Project Fear. Are they being paid by the EU, NWO and OBF?