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WTO would be no feather bed post-Brexit

by David Hannay | 26.05.2016

The head of the World Trade Organisation has punctured the illusion nurtured by the Leave campaign that WTO membership is some kind of comfortable feather bed onto which post-Brexit Britain could insouciantly flop. To pursue the metaphor, it would be a bed full of peas, which made sleep for the princess in the fable impossible.

According to Roberto Azevedo, the director-general of the WTO, “pretty much all of the UK’s trade” would have to be renegotiated with the WTO’s other 161 members if Britain left the EU; the challenges of the “unprecedented” negotiations should not be underestimated, he told the Financial Times.

So far the debate about Britain’s trade policy outside the EU has tended to concentrate on its relationship with the remaining members of the EU. The debate has thrown up plenty of complexities and hard choices – whether to go for the Norwegian option, the Swiss model, the Canadian alternative or just to rely on WTO membership. Most economic commentators have demonstrated that trading under WTO rules would be the least beneficial (or most damaging) of those choices. But now the spotlight has swung onto Britain’s relationship with all those 130-plus WTO members who are not in the EU.

Since we joined the EU our external tariff has been the bloc’s Common External Tariff (CET). So the first thing a Britain outside the EU would need to do is to construct an entirely new external tariff and to set rates for several thousand tariff lines. It would also have to craft a new system of agricultural support – no easy or simple tasks.

If the new tariff and agricultural support levels were higher than the CET, we would be required under WTO rules to offer trade compensation to all other WTO members for whom the CET rates are a bound maximum. Negotiations over compensation would be on a bilateral basis with each WTO member and would take account of the volume of two-way trade that would be affected.

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As one who was involved on those sort of negotiations when Britain joined the European Community in 1973, I can testify that the talks are highly adversarial in nature and involve the threat, and potentially the reality, of unilateral trade retaliation against us.

And then there would be those third countries – 58 of them – with whom the EU, and thus Britain, already has free trade agreements. Imposing our new tariffs on them would give rise to more claims for compensation and the need for more bilateral talks, all to be carried out by a civil service that has only a handful of experienced trade negotiators.

Of course, these sorts of problems would not arise if the new British tariffs were set at zero (dubbed the Singapore option) or at rates lower than the CET. But that would mean British manufacturers, businessmen and farmers would lose some or all of the protection they currently enjoy without getting compensating benefits in other markets. And there’s the rub: the Leave campaign is split between those who favour a free trade approach (Nigel Lawson, Patrick Minford and others) and those who back using our new-found freedom of manoeuvre to achieve higher protection (Nigel Farage and no doubt some MPs with such trade interests in their constituencies).

What a cat’s cradle, you might think. And you would be right. That was one of the reasons why the government warned that the whole process of renegotiating Britain’s trade relationships outside the EU could take as long as 10 years. During that time the EU, without us, could well be obtaining better access for itself to a whole range of overseas markets, in particular those with which it is currently negotiating – the US, Japan, India and Mercosur.

Edited by Alan Wheatley

2 Responses to “WTO would be no feather bed post-Brexit”

  • David Hannay’s article above about the consequences of relying on World Trade Organisation rules to determine our trade relations around the world is absolutely right, as I can confirm from having spent a civil service career as a trade negotiator. It’s a message which needs to be repeated by the Remain campaign, perhaps in a simpler form, over the coming weeks. If we don’t stay in the single market (and accept freedom of movement of people), British business will not be able to avoid many years of uncertainty about the terms on which we can trade with the rest of the world. The proposals of some pro-Brexit economists to remove all tariff and other protection from manufacturing and agriculture ( including for example dumping duties on Chinese steel) would not be accepted by any political party.

  • The Leave camp were fully aware of the limitations of the limitations of the WTO options. This is their own briefing note on the issue:
    http://leavehq.com/blogview.aspx?blogno=128
    Of particular interest are the concluding paragraphs:

    “One can say, unequivocally, that the UK could not survive as a trading nation by relying on the WTO Option. It would be an unmitigated disaster, and no responsible government would allow it. If, on the other hand, the official Leave campaign adopts it, the Remain side will be counting its blessings.

    Initially, we will be looking at a slow burn. In what is an arcane field, pro-EU analysts are almost as much in the dark as our own, often more so. And there is always a possibility that mutual ignorance would cancel out pro- and anti-EU campaigns. But, with this ticking time bomb at the heart of the Leave campaign, it would be unwise to assume that real trade experts will not brief the opposition on the implications of the WTO Option. If that happens, we can expect the FUD to be lethal.

    The chances of the Leave side winning would quickly recede to nil, especially if the demolition took place in the last weeks of the campaign. That is why the WTO Option should be rejected.”