How Britain and the EU Would Trade Under WTO Rules
The U.K. and the EU are headed down to the the hardest form of Brexit — one with no deal in place at all.
(Bloomberg) -- The U.K. is no longer a member state of the European Union and negotiators have until Dec. 31, 2020, to strike a trade deal to govern Britain’s future commercial relationship with the trade bloc. If they fail, Britain could lose frictionless, duty-free access to the EU and the two sides would immediately revert to commercial rules negotiated in 1995 by members of the World Trade Organization. That means new tariffs on British exports to the EU and traffic-snarling customs controls at ferry terminals. It’s been compared to “downshifting a car at full speed from fifth gear to first.”
1. Why WTO rules?
The U.K. is an original member of the WTO and will remain so after its withdrawal agreement with the EU expires at year-end. If there’s no new trade agreement in place then, trade in both directions will revert to WTO terms. The Geneva-based body oversees a set of baseline tariffs for global trade in goods and services. All 164 members agree to deal with each other equally according to a principle known as most-favored nation treatment. There’s been a raging debate among U.K. lawmakers about whether this would decimate British industry and destroy jobs, or provide an opportunity for an unshackled Britain to pursue better trade terms with other nations.
2. How would Britain export to the EU?
Trade in goods and services between the U.K. and the 27 remaining countries of the EU would no longer be free of tariffs and customs paperwork. Instead, British exports would be subject to the WTO-negotiated tariffs -- which act like a tax on goods -- that the EU now places on third parties. The bloc accounts for 46% of U.K. goods exports, and the shift could bring costs, controls and red tape that haven’t existed for decades. Some examples:
- Food: The EU’s average most-favored nation tariff rates are 11.4% for agricultural goods, 16.3% for animal products and 37.5% for dairy.
- Automobiles: British carmakers would face a 10% tariff on all auto exports to the EU. The British car industry would face a 55 billion-pound ($74 billion) hit from a collapse in demand and local production due to tariffs, according to the Society of Motor Manufacturers and Traders.
3. What would happen to imports from the EU?
Prices would increase for certain European imports, including food, cars and textiles. The U.K. has proposed to replicate the EU’s tariff commitments and quotas at the WTO. That means U.K. tariff rates on imports of certain European goods would increase from their current rate of zero. They include:
- Cars: 10% tariff.
- Plastic: 6.5% tariff.
- Precious metal jewelry: 2.5% tariff.
- Cod and haddock: 12% and 7.5% tariff, respectively.
- Suits, clothing and other apparel: 12% tariff.
- Britain would also impose tariffs and import quotas on beef, lamb, fish, poultry and pork.
4. Could Britain benefit from other EU trade deals?
Yes. U.K. officials have worked hard to maintain trade relations with the 72 nations that have forged preferential trade agreements with the EU. So far, the government has secured continuity agreements to extend its current trade terms with Canada, Japan, Mexico, South Korea, Switzerland and many other countries. But Britain has not completed negotiations to roll over its participation in EU agreements with Turkey and a handful of other nations. If the U.K. leaves the EU without these accords in place, those nations will apply WTO terms to British goods and services. For example, Turkey may impose a 10% tariff on British cars and a 2.7% tariff on engines.
5. Can Britain strike new trade deals?
Yes. The British government wants to independently forge new trade deals with non-EU nations like the U.S. President Donald Trump talked up the prospects for a “very big trade deal” between the two nations and his top trade negotiator, Robert Lighthizer, said it’s “extremely likely” the U.S. and U.K. can reach a free trade agreement before long, potentially even prior to Trump leaving office. But if it’s not in place by then, it’s unclear whether President-elect Joe Biden would move as quickly as his predecessor to secure an agreement. Biden has pledged to focus on domestic priorities and warned that he would not support a U.K.-U.S. trade deal if Brexit compromised the 1998 Good Friday Agreement that brought peace in Northern Ireland.
6. What will happen at borders if there’s no deal?
The British government said it expects massive border queues and persistent delays that could endure for six months or more. France had planned to immediately implement post-Brexit border controls, and the U.K. government estimated 50% to 85% of freight truckers wouldn’t have the correct paperwork to enter the EU via France. That would delay cross-border shipments by up to 2 1/2 days and disrupt the EU and U.K.’s tightly integrated supply chains. Her Majesty’s Revenue and Customs, the U.K.’s tax-collecting agency, estimated that British businesses would spend 15 billion pounds extra per year on paperwork in the event of a “no deal” Brexit.
7. What about the impact on U.K. services?
U.K. service industries such as finance, law and accounting could lose preferred access to the European single market, which provides freedom of establishment (the right to set up a business or work as a self-employed person) and free movement of people within the EU trading bloc. That points to more red tape and headaches for Britain’s services providers, who collectively make up 79% of the U.K. economy and 45% of exports. Cross-border services companies would need to hire lawyers and accountants to help them navigate a complex constellation of European regulatory, legal and administrative hurdles. London’s fight to remain a global financial hub rests on a once-obscure regulatory process controlled by politicians in Europe known as “equivalence.”
8. Isn’t the WTO broken?
No, but it’s somewhat dysfunctional. The WTO’s ability to fully settle trade disputes was dealt a major blow when the U.S. paralyzed the organization’s appellate body in 2019. While this may result in more tit-for-tat trade fights among WTO members, it won’t have an immediate impact on the rules that govern U.K.-EU trade. The WTO is also operating without a leader after its previous director-general unexpectedly quit and the U.S. rejected the preferred candidate of WTO members to replace him. Despite the chaos, the WTO still has the ability to negotiate new trade deals and monitor how nations implement their trade accords.
The Reference Shelf
- A primer about the WTO and what it does.
- Full text of the U.K.’s “Yellowhammer” no-deal preparation assessment.
- The U.K. government’s guidance from 2018 on how to prepare for a no-deal Brexit and the October 2019 “No Deal Readiness Report.”
- How businesses were preparing for Brexit, deal or no deal.
©2020 Bloomberg L.P.