UK Politics

Hard Brexiteers don’t understand the consequences of a WTO deal Brexit

BY Ben Kelly | tweet thescepticisle   /  16 August 2018

The worst-case scenario Brexit scenario is what happens if negotiations end acrimoniously and the UK’s EU membership expires with no transition period secured and no agreements in place. There is more than enough evidence to clearly show that it would be an unmitigated political and economic disaster that neither the UK nor the EU can afford.

Brexit is a messy legal situation, which is why legal commentators have risen to prominence as commentators. Brexit means attempting to disentangle forty years of deep political, economic and legal integration. A sensible Brexit means accepting that this is an incremental process and the legislative web must be unpicked carefully, patiently and in stages over time. The WTO option is a nightmare because it means going at that tangled web too hard, too fast.

The image portrayed of the ‘no-deal’ scenario – lorries queueing for miles at our ports, supermarket shelves running low on European foodstuffs, retail prices inflating, flights disrupted, the value of the pound plummeting – is so dramatic it’s difficult to believe. All some people see is ‘Project Fear II’ and all they hear is ‘wolf! Wolf!’ But, of course, the wolf did arrive in the end.

I fully expect that if a ‘no deal’ situation becomes a serious possibility after talks collapse in the Autumn, the government would intervene to dampen the crisis and begin emergency discussions with the EU. Basic emergency agreements would need to be thrown together to address the high-risk areas of security cooperation, aviation and pharmaceutical supplies. This has colloquially become known as the ‘no deal deal’.

I suspect that if deals could not be reached Article 50 talks would be extended – the UK would be in dire straits, but I believe the extent of the potential damage to the EU is being complacently underestimated. It’s mutually assured destruction.

There are intricate and complex systems that put food on the shelves of our supermarkets, get planes from A to B, that power our economy and keep Britain ticking over. If Article 50 negotiations were to end without any agreement, the treaties on which they are based cease to apply, thus the systems cannot function properly and breakdown. It’s that simple.

There are a plethora of issues raised by this because everything from licencing for lorry drivers to certification for pilots, isn’t covered by WTO Agreements. That’s why it’s a recipe for chaos. Even if we just concentrate on trade issues, the risks are severe.

The WTO option is Kamikaze Brexit

The full-blooded no-deal “WTO option”, or the ‘world trade deal’ as some hard Brexiteers have disingenuously started calling it, is madness. It’s one thing to consider the potential for a ‘no-deal’ situation, it’s quite another to actively call for it because of a delusion that it will be beneficial.

There is no logic to the position. The same people who say that it will be good for the British economy if we have no deal with the EU (our most important trading partner by far) say that it will be good for our economy to have deals with countries around the world. If cooperating with our trading partners under WTO rules is so great, why on Earth does any country ever negotiate a Free Trade Agreement or form trade blocs? Why don’t they just all trade under WTO rules?  Answers on the back of a postcard, please.

Only scorched Earth dogmatic Brexiteers think the WTO option will lead to a kind of national revival after economic shock treatment. They seem to believe that the WTO option means a return to swashbuckling free trade. That unencumbered by pesky rules and regulations we can simply buy buy buy and sell sell sell. This has become an article of faith but it’s nonsense. The WTO option is the anti-free trade option.

All close trading partnerships necessarily have a complex legal foundation that make trade “frictionless”. In the Single Market, border checks have been eliminated because there are common rules and common enforcement. Opting for the ‘no deal’ WTO option is like flipping the main switch in your fuse box to “off”. Our system of trade and cooperation with the EU collapses. Trade barriers arise.

It means all our goods lose export approval overnight and therefore face checks, inspections and testing. So, every area of our trade would be adversely affected to varying degrees. It’s a huge risk for industries reliant upon seamless supply chains. That’s why there are concerns about shortages of food and pharmaceuticals. Indeed, how long will manufacturers in the automotive and aerospace industry remain in the UK when they face tariffs and malfunctioning supply chains?

While I’m sure the government would seek an accord on aviation to avert chaos, we cannot be confident that suddenly dropping out of the European Common Aviation Area and the aviation safety acquis will not have serious consequences for UK aviation.

The potential for economic and political chaos in the UK and in the EU is enormous – it’s a risk not worth taking.

Raising trade barriers out of spite would hurt the EU, so surely it won’t happen?

A key pillar of the pro-WTO option argument is that on day one of a ‘no deal Brexit’ our regulations would be in alignment and therefore, no border checks are necessary.

This is blind to the political realities at stake – the EU will not raise trade barriers as a punishment, but as soon as the UK’s EU membership expires it simply becomes a third country and the EU must treat the UK the same as it does every other third country with which it has no preferential trade agreements.

The UK will face costly tariff and non-tariff barriers. The WTO prevents countries from discriminating between their trading partners. If you raise or lower tariffs for one nation you must do so for all WTO members. This is the principle of “most favoured nation” treatment. Thus, when imposing MFN tariffs on the UK, and carrying out third country border checks, the EU is simply following the rules of the WTO. After offering the UK preferential treatment the EU’s trading partners will come a knocking and will raise disputes.

Moreover, the EU has to protect the integrity of the Single Market and prevent contamination by non-compliant goods, therefore it will not simply wave through imports from the UK. Trade between member states isn’t based on trust, but shared ruled and enforcement and institutional oversight.

But we trade with the rest of the world under WTO rules, so we’ll be fine! Right?

Wrong. To be clear, despite frequent claims otherwise, the EU (and so the UK) doesn’t trade with any developed country under WTO rules alone – no, not the USA or China – even where there is no Free Trade Agreement in place, there is generally a range of bilateral and multilateral treaties governing trade. For example, the EU treaties database lists 20 bilateral treaties between the EU and the USA which govern trade.

Why is this? Might it be because basic WTO agreements are an inadequate basis for trade partnerships? It would seem so looking at the trade policy of every developed country.

Some Brexiteers have just discovered the WTO Trade Facilitation Agreement, the Technical Barriers to Trade Agreement and the WTO Agreement on the Application of Sanitary and Phytosanitary Measures, but they are a chimerical set of solutions. These agreements aim to promote low level best practice in goods clearance and call for regulation to be evidence-based and to have a minimal distortion effect on trade. If they are of any use it will be in promoting compliance in developing countries in order to facilitate trade.

What they will not do is prevent the EU requiring certification from EU approved authorities for the import of products from the UK. The WTO cannot force the EU to import goods that are not certified by a body that it recognises and trusts.

But, surely the warnings about food shortages are hysterical?

The export and imports of food is a good area to examine to understand the risks of the WTO option.

The food on our supermarket shelves doesn’t appear there by magic. Behind the scenes, there’s a sophisticated logistical system in operation powering a constant, seamless cycle ensuring products get from producer to consumer as quickly and efficiently as possible. That’s why we can buy fresh meat, fruit and veg from all over Europe that stays good for days or even weeks after purchase.

This supply chain works on a ‘Just In Time’ basis but the WTO option throws a bag of spanners into the works. For example, products of animal origin from outside the EU must pass through border inspection posts manned by vets. The inspection and testing process takes up to 36 hours. Worst of all, we don’t actually have the infrastructure in place or the manpower to apply the same treatment to EU products overnight, nor the cold storage facilities to prevent spoilage. All in all, this is a recipe for utter chaos.

Meanwhile, meat imports into the Single market require third-party certification from notified national bodies with EU approved facilities. After dropping out of the Single market the UK would be out of the certification system; meaning certificates from UK bodies will no longer be valid. The certificates act as a stamp of approval that prove the product meets all the necessary standards for animal welfare and health.

With domestic food production accounting for only 60% of what we consume, and imports from the EU account for around 30%, the UK is heavily reliant on this supply chain, which is why shortages of food from Europe is a potential issue. No, we wouldn’t starve, as the government would take every measure it could to alleviate any crisis and maintain food supplies, but it would be wrong to underestimate the potential for disruption.

One solution touted by hard Brexiteers is to simply wave through all imports of food from the EU and conduct no checks at all. We have been told that post-Brexit we will continue to uphold high standards, but this is a call for having no standards at all and no protection for UK consumers.

A unilateral refusal to check imports of food is an open invite for fraudsters to operate with impunity. The supply chain could become contaminated with all kinds of food and drink products that don’t meet our standards or could be potentially dangerous. With no spot check system in place there are no safeguards. It’s a no go.

An infrastructure nightmare

In the paper “Ready on Day 1”, Charlie Elphicke made a number of recommendations to prepare for a ‘no deal’ scenario. This included major investment in the road network approaching Dover, widening the M20, building the new Lower Thames crossing and giving the green light to the cancelled lorry park off the M20.

The reasoning behind this is that none of our ports or infrastructure are remotely equipped for the trade barriers that are erected with the WTO option. They are fully geared towards frictionless trade with the EU via the Single Market. 99% of freight traffic from non-EU countries passing through UK ports is containers, but 69% from the EU is lorry traffic. 45% of our trade with the EU is conducted via ‘roll on, roll off’ lorry traffic. When checks are introduced suddenly, and that lorry traffic is no longer ‘roll on, roll off’, the problem should be obvious to see.

We would very quickly see a queue of lorries on both sides of the Channel. This study from Dr Ke Han, a Lecturer in Transport Operations and Logistics at the Imperial College London, found that a mere extra two minutes in delays in paperwork clearance would result in a 20-mile tailback from Dover.

Mutually Assured Destruction

This all sounds so thoroughly awful, but there is a silver lining. The risks are so severe that I simply do not believe it will be allowed to happen. Yes. We have come closer to it than I had hoped or expected, and yes there are some dogmatic loons willing it from both extremes. Brexit headbangers want to leap off the cliff edge, and hardcore Europhiles want to see the UK squirm.

There is a developing narrative that the UK will be in chaos while the EU will be absolutely fine. I think this is misguided complacency.

A suddenly departing member state collapsing into an economic and political mess is not going to leave Europe unscathed. It would hit our main trading partners very hard indeed, and cause instability in the financial system. The potential for the contagion of recession to spread across the Continent is real.

As Mark Carney has warned, it is a serious risk to the EU’s financial system because the UK is the banker of Europe. I’m sure the European Central Bank and the Bank of England would act and look to provide liquidity, but the consequences of a ‘no deal’ on the financial system is unpredictable and likely to have unforeseen consequences. It is not a risk the eurozone can afford.

Meanwhile, nearly every member state would face an economic hit form disrupted trade. For France, dealing with traffic chaos in Calais, the UK accounts for 7.1% of their exports to the tune of circa £28 Billion. It’s difficult to believe it will not feel that.

Dutch exports to the United Kingdom amount to over £41 Billion, 9.5% of its exports. The UK is the Netherlands’ third most important market with the global hub port of Rotterdam receiving a huge amount of business from the UK. Again, is it really credible to think this will not have an ill effect?

The Republic of Ireland has the most to lose of all member states. The issue of the Irish border risks more than economic troubles, and the UK is the Republic’s second most important market which accounts for 12.7% of its overall exports and is worth over £13 Billion.

Spain’s exports to the UK amount to nearly £17 billion, accounting for 7.5% of overall exports. For Poland, we represent 6.6 per cent of their overall exports as their second most important market worth over £10 Billion. Germany’s exports amount to nearly £80 Billion 8.7%.

You get the point. A country as economically fragile as Italy needs to lose easy access to its fourth most important market like it needs a hole in the head. The UK is also the fourth most important export market for Portugal, the Czech Republic, Belgium and Sweden.

Each takes a hit and the EU is not a single economy able to absorb it as one. I’m not saying ‘they need us more than we need them’ but I am saying that this is a situation no one can really afford.

Keep calm and do a deal

Let’s just dispense with the idea that it’s a good idea to forgo a trade agreement to facilitate the UK’s £270 billion a year export trade with the EU, or that the mighty EU can brush off ‘no deal’ like a fly on the shoulder of a giant. This is a high stakes game we should not be playing.

What is the aim of the Article 50 negotiations? To settle accounts (done) and scope out the framework of the future UK-EU relationship. This will result in a political declaration which will form the basis of the proper negotiations where the substance of the future relationship will be decided.

This is the crazy thing, we are arguing over a mere declaration which mandates nothing. It will not hold either side to anything and is likely to be so ambiguous in places that much of what the relationship will look like will still be up in the air. The Article 50 agreement is almost meaningless and is mainly a means of getting past this stage and securing a transition period. Then, and only then, can real talks begin.

Political instability in the UK, coupled with government ineptitude, has a lot to answer for in why we have got so uncomfortably close to negotiations failing. However, the intransigence of the EU and its merciless use of the Irish border as leverage has hardly helped. If the EU genuinely cared, it would not play with fire by suggesting a border between Northern Ireland the rest of the UK.

It is said that the agreement is 80% complete. As both sides want to get it finalised and move on to the next stage, this bodes well. Let’s all calm down and start thinking about the next round of negotiations. Then we can keep on arguing for another few years. Huzzah!


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