How Britain and the EU would trade under WTO rules

This article is written by Silla Brush and Alexander Weber. It appeared first on the Bloomberg Terminal.

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 world’s largest 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.”

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.

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 currently accounts for 46% of U.K. goods exports, and the shift could bring costs, controls and red tape that haven’t existed for decades. The EU’s average tariff rate is 3%, but tariffs would be much higher for certain products. Some examples:

• Food: The EU’s average most-favored nation tariff rates are 11.1% for agricultural goods, 15.7% for animal products and 35.4% for dairy.
   
• Automobiles: British carmakers would face a 10% tariff on all auto exports to the EU. Those levies could exceed 5.7 billion euros ($6.3 billion) per year and increase the average price of a British car sold in the EU by 3,000 euros.

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: A 10% tariff.​​​​
• Cod and Haddock: A 12% tariff.
• Suits, clothing and other apparel: A 12% tariff.
• Britain would also impose tariffs and import quotas on beef, lamb, fish, poultry and swine.

Could Britain benefit from the EU’s other trade deals?

The U.K. may lose continuity of trade relations with many of the 72 nations that have forged preferential trade agreements with the EU, including Canada, Japan and Turkey. Britain is in talks to roll over its participation in those agreements. So far, the government has secured continuity agreements with more than a dozen countries, including Israel, South Korea and Switzerland. WTO tariffs would likely apply to British goods and services exported to nations where the U.K. fails to roll over EU agreements. For example:

• Japan may introduce a 12% tariff on British tea and a 19% levy on malt.
• Canada may impose a 6.1% tariff on British cars and a 25% charge on dredging vessels.

 

Can Britain strike new trade deals?

Yes. The U.K. government wants to independently forge new trade deals with non-EU nations. U.S. President Donald Trump has talked up the prospects for a “very big trade deal” between the two nations. U.S. Trade Representative Robert Lighthizer has unveiled plans to negotiate an “ambitious” U.S.-U.K. free trade agreement.

What will happen at the borders if there’s no trade deal?

The British government said it expects massive border queues and persistent delays that could endure for six months or more. France had planed 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 ($19.6 billion) extra per year on paperwork in the event of a “no deal” Brexit.

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.”

Isn’t the WTO broken?

No. 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 means the WTO can’t fully settle trade disputes, it won’t have an immediate impact on the rules that govern U.K.-EU trade. Countries are developing an interim appeal-arbitration mechanism to help resolve their disputes and the WTO still has the ability to negotiate new trade deals and monitor how nations implement their trade accords.