07 January 2017

The Economist: The “WTO option” for Brexit is far from straightforward

The two sides of the Brexit debate do not agree on much, but they agree on this: if Britain fails to reach a trade deal with the EU it will have to revert to the “WTO option”. This involves trading only under rules set by the World Trade Organisation. The Leave camp is happy with this idea; Remainers less so. But the awkward truth is that the WTO option is not much of a fallback. Becoming an independent WTO member will be tortuous.

It is puzzling that Brexiteers, whose campaign was summed up as “Vote Leave, take back control”, seem happy with the WTO option. The WTO is truly global, with only a handful of countries outside it (zealous as they are about sovereignty, Brexiteers do not want to join the ranks of Turkmenistan and Nauru). But forsaking one unelected, unaccountable bureaucracy in Brussels for another housed in a leafy district of Geneva seems perverse. WTO members are at the mercy of its “dispute-settlement” regime, which allows other countries to enforce penalties.

Inconsistency has its upside. Membership of the WTO appears to be good for trade. Most economists believe Britain’s overall trade will suffer if Britain leaves the single market. But Brexiteers argue that, out of the EU’s clutches, Britain will be the WTO’s star pupil, striking trade deals across the world. China’s explosive export growth after joining in 2001 testifies to its potency.

However, there is a snag. Britain is already a member of the WTO, but operates through the EU. To become a fully independent member, Britain needs to have its own “schedules”, WTO-speak for the lists of tariffs and quotas that it would apply to other countries’ products. Alan Winters, of the UK Trade Policy Observatory at the University of Sussex, says that, in theory, it would not be too hard for Britain to acquire its own schedules. Any change would require the acquiescence of other members. But, using a “rectification” procedure, the government would simply cut “EU” at the top of the page and paste in “UK” instead. Bigger changes—say, raising tariffs on certain goods—might require a more ambitious “modification” and more thorough negotiations.

The most simple course, then, would seem to be for Britain to keep its schedules as they are under the EU, including the “common external tariff”, applied uniformly by EU members to imports from third countries. The government has recently hinted as much. This avoids diplomatic wrangling. But simply to readopt EU-approved commitments hardly looks like “taking back control”. It would also lead to other problems.

WTO trade agreements assume that the EU as it currently stands is a coherent economic bloc. Trade in goods between the 28 member states is pretty free. Multinationals, which need to move components back and forth frequently between different member states, have set up supply chains accordingly. Brexit complicates this arrangement. If Britain kept the common external tariff in place, then it might also apply to a company moving components between the EU and Britain. Such a firm could incur tariff charges each time a border is crossed. A WTO member might kick up a fuss if, say, one of its car companies with production facilities in both Britain and the EU suddenly found it more expensive to assemble a model.

A related problem concerns the WTO’s “tariff-rate quotas” (TRQs). These allow a certain amount of a good to enter at a cheaper tariff rate. The EU has almost 100 of them. [...] Expect to hear more about TRQs in 2017. According to Luis González García of Matrix Chambers, a legal-services firm, they are likely to become “the most contentious issue” in Britain’s re-establishment of its status as an independent WTO member.

Least-favoured nation

The WTO will even shape the Brexit negotiations themselves. In recent weeks, the government has appeared keen to ensure that, even after Brexit, Britain’s big exporters will be able to sell freely to the single market. It has mooted paying into the EU budget to guarantee access for the City of London’s financiers. It has assured Nissan, a carmaker, that it will not lose from Brexit. It has studiously refused to spell out the terms of this guarantee, rumoured to entail as-yet-unspent regional-development funds.

WTO rules, however, make such industry-specific deals hard. If Britain were to agree bilaterally with the EU not to apply tariffs on cars, the WTO’s “most-favoured nation” principle would force it to offer tariff-free access to other countries’ too, says Mr Ungphakorn. And free-trade deals are not supposed to cover just one or two goods, but “substantially all the trade” between the countries involved. Meanwhile, channelling government money to boost exports is frowned on in Geneva. [...]

Full article on The Economist

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