The Government are openly speculating about the UK leaving the EU with no deal at all and trading by WTO rules only. Open Britain believes this would be a disastrous option for the UK economy. Below is a background briefing explaining why.
Economic evidence: the worst of all deals
• Open Britain believes that this would be disastrous for the UK economy and should not be considered. Relying solely on WTO rules would result in a significant reduction in the openness of the UK economy and would see the introduction of new tariff and non-tariff barriers. As the Treasury and others have shown, it would be the alternative to membership with the most negative long-term impact.
• The Treasury has suggested it would reduce GDP by 7.5 per cent after 15 years and would shrink tax receipts by £45bn per year. The National Institute for Economic and Social Research has shown that under the WTO model real wages would be projected to fall, by between 4.6 per cent and 6.3 per cent. NIESR has also shown that all principal independent, expert economic studies have found that the WTO scenario has the gravest consequences for trade, FDI and GDP. In short, the relationship that gives the UK the furthest distance from the single market does the most damage.
• If the referendum result was a reaction against the inequities of the global economy, this worst-of-all-worlds outcome would undermine government ability to tackle the problems we know exist. Investment would be lower and our manufacturing base would be hit, affecting both earnings and jobs. Anyone who wants to help those ‘just managing’ should rule it out.
• It is important to note that the WTO governs the conduct of international trade. It does not cover matters relating to co-operation on policing, criminal justice, counter-terrorism or security and in foreign policy, so if we were to leave with no deal in place this would also mean that we would have no co-operation in these wider areas.
• Under the WTO model, the UK would be subject to the EU’s common external tariff when trading with the EU. Tariffs would be imposed on around 90 per cent of the goods the UK exports to the EU, including 15 per cent on food, 10 per cent on cars, and 36 per cent on dairy. These costs would either be passed on to consumers in the form of higher prices, or be absorbed by businesses so lowering their profits and opportunities to expand and increase employment.
• WTO ‘most favoured nation’ tariff rules mean that, without an FTA in place, the EU would not be able to give the UK preferential tariff rates as these would need to apply to every other WTO member. If we unilaterally dropped tariffs on EU trade we would have to drop tariffs for all countries, with no guarantee of reciprocal action, which would be disastrous for domestic industries. Arch Brexiteer Professor Patrick Minford advocates this and has himself admitted that this would “mostly eliminate manufacturing” in the UK.
• For service sectors, the WTO option means services would have much weaker market access, without the presumed right of commercial establishment (for example no financial services ‘passport’); no mutual recognition of qualifications; no formal equivalence agreement in any sector; no recognition by the EU’s regulatory bodies; and so as a result legal uncertainty about the ability to continue trading.
• In practice this would mean that services providers such as airlines and broadcasters would have their ability to trade with the EU significantly limited. US professional service providers like accountants, financiers and architects would not be able to operate freely across the EU as they can at present and would consider relocating to the Continent.
• Services would operate under the WTO’s General Agreement in Trade in Services (GATS), which focuses not on opening up market access and lowering non-tariff barriers but on the rules of service trade, in particular ensuring fair and equitable treatment of all participants(principle of non-discrimination). This is a far weaker agreement than being a member of the EU’s single market in services, even considering that this is incomplete.
EU Free Trade Agreements (FTAs)
• Moving on to WTO rules would mean losing preferential access to the EU’s FTAs with 36 countries which give the UK preferential access to over 50 markets around the world. In theory, the UK, EU and third party countries could amend these FTAs to note the UK's new status and continue on current terms, but this could only be possible if the UK's trade arrangements remain constant, ie within the single market, which the Government has already rejected. We would have to seek to renegotiate these as bilateral deals but offering far more restricted access to the EU and amidst and economic shock, and would therefore likely face new restrictions on access to these global markets with whom we currently trade freely.
FTAs with third party countries
• The Office of Budget Responsibility has been clear that the prospect of new Free Trade Agreements (FTAs) with third party countries will not compensate for any lost trade with the EU: “at least over the forecast period, the process of leaving the EU and negotiating new trading arrangements is assumed to be associated with a lower trade intensity of UK economic activity” . Lost trade with the EU would be most sever under a WTO scenario. The Government claims that new deals will make up for lost trade, for example with Commonwealth countries, but the OBR clearly refutes this.
Moving on to the WTO and setting a new tariff regime
• The UK would have to set its own goods and service schedules. The only practical course for the UK is, at the point of Brexit, to submit to the WTO national schedules that replicate the EU’s current tariff and GATS access schedules, as Liam Fox has now committed to do. The UK’s schedule can only be adopted if none of the WTO’s 163 members object. Views differ on how easy the process of establishing the UK’s schedules at the WTO will be - agriculture is one area which presents particular challenges and where other WTO members may seek concessions from the UK. The key point is that this complex process is not guaranteed to proceed smoothly, could result in global trade disputes and would have to be completed before any third party would consider signing an FTA with the UK.
Not escaping EU rules and regulations
• The EU will remain our largest trading partner. To maintain trade, UK businesses exporting goods and services into the EU would have to follow EU product standards and over time regulatory divergence would make trade increasingly costly. As the CBI has noted, “British businesses could face new barriers to trade such as burdensome customs procedures, discriminatory tax rules and practices, duplicate technical regulations, standards and conformity assessment procedures, sanitary and phytosanitary measures (SPS) and barriers to FDI.”