If Britain leaves the European Union with no deal in place to govern trade with its biggest partner, it will fall back on World Trade Organisation rules. The same set of rules would apply to EU countries and non-EU trade partners. This is why the UK government has published a series of “technical notices” detailing preparations for a no-deal Brexit.
Here are seven reasons that sum up why a no-deal Brexit and defaulting to WTO rules would be bad for British businesses and the wider economy.
When countries trade, they have historically imposed taxes on imports from other countries. These are known as tariffs. The WTO (and its predecessor the GATT) has been focused on making trade easier between countries and has been successful in bringing down tariffs from an average of around 40% after World War II to less than 5% by the end of the 1990s.
But tariffs remain a feature of trading under WTO rules and the EU charges a range of tariffs depending on the product or service. For example, the tariff on food products and beverages imported into the EU is 21% of the value of a shipment. The UK’s fishing exports to the EU would be subject to a 9.6% tariff under WTO-only rules. Clothes manufactured in the UK and exported to the EU would be subject to an 11% tariff.
This would be costly for these exporters and others affected by tariffs.
2. Costly non-tariff barriers
WTO rules on non-tariff barriers (things like regulations on product safety, rules of origin and quotas) are very limited and not recognised universally. For example, they do not prevent the EU requiring certification for a whole host of goods and services that originate from outside the EU.
Things such as medicines, product and food safety standards in the UK are currently recognised as EU ones. But when the UK leaves the EU, UK manufacturers may need conformity assessments from the EU recognised body, which is a legal responsibility of an EU importer. This would mean that UK exports would take longer to reach the EU markets and the UK products would be more expensive in the EU.
3. Border control
Under WTO-only rules, the UK will not be able to have a frictionless border with the EU. Exporters would have to prove they meet all of the EU’s product standards and regulations, which will be costly and slow down business.
One suggestion has been that the UK scrap all tariffs and regulations for EU imports and continue to accept all products from the EU without checks. But, according to the WTO rules, the UK should extend this approach to products from all other WTO members (it has to treat everyone equally). Is the UK ready to allow all food products, tariff-free and without checks into the UK market? Not only would this be very damaging to UK farmers and the food industry, it would threaten food quality and safety standards.
4. Services not covered
WTO rules barely cover trade in services, including financial services and transportation. So, trading on only the WTO terms would mean no deal on air transport. Access to the EU single aviation market requires airline companies to have their headquarters and majority shareholdings in the EU so airlines would have to relocate.
There is also nothing in WTO rules that would allow UK-based banks to keep trading across the EU. This is why the government has said banks could set up subsidiaries in the EU.
5. Hard to enforce
WTO rule enforcement is lengthy. It takes two years on average to settle a dispute. That also frequently leads to non-compliance with the WTO rulings
Also, there is no supremacy of the WTO rules over national and sub-national rules and regulations. For example, the EU and the UK have ignored some of these rules for a long time – there is no science-based evidence that genetically modified food and chlorine-washed chicken is bad for human health so, according to the WTO rules, they should be allowed to be sold to consumers. But these rules have been ignored and the products banned from sale in the EU.
By this same logic, the EU could ignore some of the WTO rules and block UK products it doesn’t like from being sold in the EU market in the future.
6. The need for trade deals
Issues with the WTO has led to a proliferation of trade deals where countries make arrangements for preferential trade either as part of a bloc or one-on-one. More than 50% of all trade is now done under preferential terms. As we’ve shown in our research, preferential trade agreements grow in importance over time and they increase trade between participating countries by about 40%. Inevitably, these agreements deal with areas where the WTO has failed – reducing and synchronising non-tariff measures, increasing mutual access to services and investment.
The UK would have to start from scratch in brokering its own trade deals, which require considerable capacity and time, with the potential for significant delays even between signing and implementation. Plus, the UK would be likely to find it harder to make deals when outside a large trade block. While these new deals are being struck, it would be left with just the WTO rules in place.
7. Reduced EU trade
The EU is the UK’s biggest trade partner. In 2017, 44% of UK exports went to the EU and 53% of all UK imports came from the EU. So new trade deals with non-EU countries, should the UK sign them, would not compensate for the decline in EU trade as a result of new trade barriers.
If the UK leaves the EU with no deal, the UK would lose all the benefits of the free trade agreements it had as part of the EU, most importantly losing benefits of the preferential trading with the EU itself, since under WTO terms, the EU should treat the UK as any other country without providing any preferences and applying WTO tariffs – a big change from the zero tariffs that the UK has now.