The Brexit blog: trading on WTO terms

Posted on January 25, 2019 · Posted in Derry Journal, Holywell Trust

The prospects for a no deal Brexit have become widely discussed in the last few days, not least with Theresa May’s proposed withdrawal agreement having been decisively defeated in the House of Commons.  Her approach is to propose something which is more acceptable to Brexiteers in the Conservative Party and the DUP – but this, inevitably, is less acceptable to the European Union.

 

A spokesman for the European Commission sparked anger earlier this week when he commented that it was “pretty obvious” that without a Brexit deal, there would be a return to a hard border in Ireland.  Brexiteers have argued that the European Commission should rule this out as an option.  But it is an interesting question whether they are actually able to, even if they wished.

 

Without a negotiated withdrawal agreement, the UK would trade with all countries, including Ireland and other EU nations, on World Trade Organisation, WTO, terms.  WTO rules apply where economically advanced nations do not have free trade agreements with each other.

 

Under WTO rules, the EU would have to apply the same tariffs and customs checks on UK goods as on those from other countries outside the EU, such as the US or China, with which it does not have a free trade agreement.  Under WTO law the goods of all members of the WTO must be treated alike – this is called the ‘Most Favoured Nation’ obligation.

 

EU tariffs vary according to the type of goods. They average 1.5%, which does not seem very much, but businesses will typically pass these costs on to the consumer, providing an inflationary pressure.

 

More concerning is the impact on particular sectors.  The tariffs on cars and car parts are 10%.  UK manufactured cars would become uncompetitive within the EU and in those countries where the UK currently benefits from an EU free trade agreement.  It could destroy the UK car industry.

 

On food products, tariffs average 8.7%, but they are much higher on some products, with an average tariff of 36% on dairy products.  Trading on no deal terms is likely to nearly eliminate farm exports to Ireland and other EU countries.  The UK could avoid the cost of tariffs on imports by simply deciding not to impose them.  But under WTO rules, the EU would not be allowed to reciprocate.

 

If the UK did decide not to impose tariffs on EU food imports, under WTO rules it would have to do the same with produce from other countries.  UK food production would be undercut at home and uncompetitive abroad.  Nor would the UK be able to compensate farmers by providing subsidies – these are limited to 5% of their value under WTO rules.

 

Non-tariff barriers – customs controls and regulatory requirements – are a bigger cost than tariffs.  But the positive news is that WTO rules do not specifically require hard borders to enforce these.  The bad news is that WTO rules do require countries to treat each other on an equal basis.  So if Ireland inspects goods coming in from China by plane, it should do the same with goods coming in from the UK by road.  It might be possible under WTO rules to argue that Irish/NI border should not be controlled because of security concerns, but then those controls would be needed between GB and island of Ireland.

 

The upshot is that the issue of the border is pretty well identical whether it is addressed according to the requirements of the European Union, or under WTO rules.  Having said that, the WTO is not very effective in resolving disputes – they can take months and years to resolve.

 

In the latest Holywell Trust Brexit podcast, Stephen Kelly – chief executive of Manufacturing NI and a native of Derry – told us that in a survey, 94.4% of his members supported Theresa May’s deal, as it kept open supply chains and their routes to market.  “A year ago, 21% of manufacturers felt that Brexit could be a success: that is down to just 4% now,” he told us.

 

“For our members, we need to stay in the Customs Union and we need to stay in the Single Market.”  Leaving the EU without a deal would be “really, really difficult”, said Kelly.  “It would add huge amounts of additional cost and complexity.  In a part of the economy that is so sensitive to cost, that is potentially existential for many firms.”

 

So there you have it.  The manufacturing sector, which generates large numbers of jobs in our area, will see many firms struggle to survive if the UK leaves the EU on a no deal basis.  Yet the chances of this remain high.  The latest Holywell Trust Brexit podcast is now available and also contains an interview with another Derry-man, Colin Harvey, professor of human rights law at Queen’s University, on the likely impact of Brexit on human rights in Northern Ireland.

 

The series has just been listed in the RTE Listeners’ Guide to Brexit podcasts as one of the best in Ireland.  The latest episode can be heard at https://soundcloud.com/holywelltrust/holywell-podcast-brexit-focus-episode-14