Wednesday, 27 September 2017

The WTO threat is a bee sting

One increasingly notable feature of Brexit discussion, emanating largely from Leave-supporting politicians, is the idea that the government must now start to plan for a no-deal, or what is called the WTO option. This involves abandoning all negotiations with the European Union and falling back on the WTO/GATT framework, including the provisions of both the TBT Agreement (Agreement on Technical Barriers to Trade) and SPS Agreement (which refers to sanitary and phytosanitary trade) as a basis for trade-relevant matters.

There are several problems with this which vary in magnitude. Firstly, this option does not take into account agreements required from the EU on matters not related to trade, like cross-European research and educational initiatives. Secondly, WTO provisions are not designed for states to use them as primary mechanisms for trade facilitation. This is mostly because they do not address regulatory divergence and partly because dispute settlement is slow and arduous. 

If they were, then why does no, even remotely, major economy trade with the EU exclusively on such terms? Third countries have top-up, bilateral agreements, such as MRAs, FTAs and Customs Cooperation Agreements upon which to base trading relations. Supplementary deals ensure more extensive customs cooperation and a more targeted, streamlined (normally bilateral) approach to resolving disputes. Beyond this, we have to deal with tariffs and, more importantly, the impact of non-tariff barriers, which are under-discussed and house the real economic minefield which accompanies a no-deal Brexit. 

Upon leaving the EU, becoming a third country and recreating solitary membership of the WTO, Brussels is legally obliged to impose upon Britain the same tariff schedules as it does other ordinary members (there are exemptions for countries with which members have FTAs or those which are Customs Unions). It isn't predatory action, it is a fundamental aspect of a no-deal situation. This is based on a principle known as 'Most Favoured Nation', which conceptually means that WTO members must treat others equally and apply one standard to all - barring the aforementioned examples. A tariff applied to a country covering wheat, for instance, must be attached uniformly to other members. This is done for the purpose of promotion a culture of non-discrimination, and the EU will honour such rules. 

Source: WTO

After the EU applies new, inferior tariff schedules to the UK (the same ones it currently applies to other third countries), if we retaliate and fight back, we must do so - again - uniformly. If we apply punitive tariffs to certain goods in response it has to be done to similar goods from all other countries - or more specifically: every single WTO member with whom we do not have an FTA, which by current count is every member. This will have a marked impact upon domestic pricing, as I'm sure readers have worked out. But, even with this precedent, tariffs are still of little relevance to the grand scheme of global trade. They have plummeted thanks to globalisation and pale in comparison to the economic importance of non-tariff barriers (NTBs). 

Non-tariff barriers to trade come mostly in the form of regulatory divergence and differences in domestic law. Being that they are any barrier to trade no relevant to tariffs or duties, they are practically limitless in terms of what they can be. Their scope is varied and this is why they can inflict profound financial harm upon trading nations. It has been estimated that NTBs add up to twenty percent to the cost of international trade, so our national failure to talk about them has been especially worrying. In a no-deal Brexit, they form a stick web of problems which have the potential to bring large portions of British trade to a standstill. 

To understand why, we first remember that the UK is a ghost in international trade. Or perhaps parasite is a more accurate term. There are no UK-specific trade agreements of any kind, and crucially, no UK customs cooperation agreements. This is because over forty years we have latched onto commonly crafted, EU trade deals. When we leave, we leave them. There is no way around this, we do it to ourselves. Leaving with nothing in place means to quite literally start from scratch. And what is of paramount importance to highlight is the fact that the UK has no customs cooperation agreements, like Mutual Recognition Agreements, in place to be able to establish or participate in conformity assessment verification. This will undoubtedly lead to standstills and our goods being turned away at borders.

Conformity assessment is important. Programmes, usually established as per treaty provisions, make useful attempts to crack down upon criminal action, like fraud, and shields consumers from faulty or dangerous goods. Without valid agreements in place, consignments of British goods at Border Inspection Posts (BIPs) and docks will find themselves at the mercy of customs officers unable to (electronically) verify that they meet national standards required for entry. It is not clear what third countries would do in such scenarios, but what does seem apparent is that trade flow will be immeasurably damaged.  

Delays for goods inspection will take up precious time for our exporters. If containers of goods require detention for inspection purposes, fines are issued to exporters and they can be expensive. Perishable or fragile goods may find themselves at risk of being wasted or damaged and subsequently devalued if held in storage for long periods. All ensuing costs are the unseen effects of erecting technical barriers to trade. This is where the no deal option will pinch most. Specifically, if we take an issue like food exports to the EU of animal origin, we will find doors to frictionless trade slammed quickly in our faces. And regulatory equivalence, which we'll have, is not enough. 

We will initially have to apply, as all other third countries have to (remember - equal treatment), in order to qualify to export certain categories of food to the EU. This process could take a couple of months to complete. Then, after this, we have compliance to deal with. We will need to have our establishments (warehouses, factories, production equipment, this sort of thing) legitimised to ensure they provide sufficient conditions for producing the food. We will then have to ensure that we abide by animal health requirements, with certificates and documentation often requiring the signatures of vets. Lastly, consignments headed for the EU will be diverted to a BIP, such as in Dunkirk, where a percentage (perhaps a third) of goods will be physically inspected in order to assess whether standards have been met. 

These are problems which staying in the Single Market would have meant avoiding. EFTA/EEA states (such as the dreaded Norway) enjoy a plentiful supply of exemptions from third country provisions, largely because they enjoy a high level of trust and have adopted the full EEA acquis covering food controls, BIPs and import regimes. Issues like this are what encouraged me to change my mind on our place in the Single Market. My above example concerning food exports of animal origin is a small but pertinent one. These difficulties add up, and where they do, lorries will stand idly on motorways and congestion will disrupt ports: thus causing delays for vehicles behind. 

With the exception of my critique of Patrick Minford, I have not explored the effects of the WTO scenario in depth because I can't quite bring myself to believe that the government will actually pursue it. Fronting a campaign against it didn't seem worth it beforehand. A no-deal conclusion to negotiations would bring untold harm right across Europe and nobody I can think of stands to benefit. Veering closer to it will spark EU member states into intensive lobbying, particularly those who enjoy massive trade surpluses with Britain and there is, to be clear, no patriotism to be found in storming arrogantly out of negotiations and leaving with no deal. 

The WTO option does have one use in that it can be used as a negotiating weapon. There is sense in using it as a bargaining chip and taking it to the table. Eliminating our options early reduces the scope for reaching an agreeable settlement. (Note here the peculiarity behind the government's insistence on ruling out the Norway option whilst ceaselessly threatening the WTO alternative, if we can call it an alternative.) The problem is that, as we have discussed, a threat is all it should be. Iain Duncan Smith, for example, now thinks we should make preparations for it, but intriguingly makes no real attempt to explain what a no-deal is or means. No wonder. I think government officials and the civil service should, if anything, make noise about planning for a no-deal but in reality maintain focus on reaching a settlement. If our bark is worse than our bite, we might get away with it. 


  1. Very useful contribution. We need at very least to be in EFTA giving us a minimum if we cannot reach a satisfactory deal with EU ourselves.

  2. A thought provoking article as always. As I stated earlier, you persuaded me the simplicity of a hard Brexit is simply not worth it. It is clear it would cause both the UK and certain EU countries, I would guess Germany and France in particular, serious economic and logistical disruption . However the bureaucratic rigidity of the EC gives us a major tactical negotiating problem, given the weakness of the current Conservative government. It is likely that, following May's Florence speech, all parties know we will have to take anything Barnier's team lands on us. None of the outcomes of this are good. One might be that we keep on negotiating in the hope of a deal, which will gradually get worst as deadline approaches to the point where we cannot get parliament to agree it and we crash out completely unprepared.

    Some time ago D Davis said he was having a study made of the effect of leaving without a deal, but I am not aware of anything being published. Possibly it would be unpalatable for the government. However the classic failure of government to make other than short term decisions is dangerous at this point.

    The EU team won't be fooled by mere noise about planning for a 'no deal' Brexit, it will have to be actually planned for as Duncan Smith suggests. Frankly we should have been doing so since before Article 50 was exercised. It might be extremely uncomfortable, but perhaps less so if we are prepared. And, as you suggest, such plans will have to be recognised by Barnier as plausible, which will undoubtedly improve the likelihood of a negotiated deal that than the alternative for both the UK and EU.

    David Whitehouse

  3. Great piece Oliver, as ever. What do you make of the argument from some quarters that were we actually seriously entertaining a no-deal WTO crash out type scenario, that we'd need to be building new port bureaucracy/capacity to cope with all the new border checks/procedures. The argument being that the EU know we aren't doing this, therefore both sides are acknowledging that some far-worse-than-what-we-already-have deal is the only really outcome. I'm not sure what Tory high command gain from this but then the whole thing is a faith-based initiative really... so maybe reward comes in the next life ... :-/

  4. A true democrat does not silence people by blocking them on Twitter.