No-deal Brexit: what would ‘WTO terms’ mean for UK-EU trade?

Copyright REUTERS/Toby Melville

Published on 19/12/2018 - 17:16•Updated 23/12/2019 - 11:27

The UK is on course to leave the EU with a divorce deal following Boris Johnson's election victory. But what if it fails to secure a future trade agreement with the EU?

This article originally published in December 2018 has been updated to take account of the UK general election result in December 2019.

Following the British Conservative Party's emphatic victory in the general election in December, the UK is on course to leave the European Union on January 31, 2020. It will do so under the terms of the revised divorce deal Boris Johnson negotiated with the EU, as long as this is ratified by the British and European parliaments.

Throughout 2019, the fear for many on both sides of the English Channel was that the UK could "crash out" of the EU without an agreed deal on either the terms of the divorce or the future relationship. In such an event, legal arrangements covering many aspects of everyday life would abruptly cease to apply.

Although a "no deal" exit in January 2020 remains technically possible, the UK election result makes it unlikely. Once ratified, divorce agreement terms on issues such as citizens' rights will take legal effect.

However, another "cliff-edge" could soon loom over the horizon — on trade and future relations. A post-Brexit transition period, keeping most UK-EU arrangements as they are now, is due to expire on December 31, 2020. The Johnson government has ruled out extending it.

Unless a new trade deal can be struck with the EU by the end of 2020, then future trade between the UK and the EU will be done on world trade terms. The consequences have been the subject of fierce and acrimonious debate in the UK. Opponents have predicted cross-border disruption, higher prices and a shortage of essential goods.

The EU is the UK’s largest trading partner, although its importance has been slightly declining. Official UK figures show that 44% of all UK exports went to the EU in 2017, while 53% of all UK imports came from the EU. As a bloc, EU countries sell more to the UK than vice-versa.

From EU rules to WTO rules

Under former Prime Minister Theresa May, the British government acknowledged that with no exit agreement in place, the EU would consider the UK “a third country for all purposes”. It published details of its own no-deal preparations.

In the absence of a new agreement, trade rules would change from those of the European Union – based on its single market and customs union – to those of the World Trade Organisation (WTO).

WTO rules mean each member must grant the same market access to all other members – except developing countries and those that have free trade agreements. Trade experts agree that the EU could not treat the UK differently to other states: rules currently imposed on third countries would apply.

Pro-Brexit economists argue that most world trade is done on WTO terms, which will still give the UK access to EU markets.
Many other economists and academics argue that although the UK could indeed adjust, WTO terms would be damaging for several sectors of the British economy including services, manufacturing and agriculture.

The impact of no deal for the UK would extend beyond its trade with the EU. At the moment Britain trades with the rest of the world as an EU member. Under “no deal”, some 40 existing trade agreements fully or partly in place between the EU and dozens of countries would no longer apply to the UK.

Although some Brexit supporters claim many of these can be “rolled over”, by autumn 2019 the British government had secured only around 15 such deals. These include agreements with Switzerland, Israel, several African and South American nations – but not those with big trading partners such as Japan, Canada and Turkey.

Tariffs would apply

The Confederation of British Industry (CBI) estimates that with no deal, 90% of the UK’s goods exports to the EU by value would face tariffs. The average tariff on UK exports to the bloc would be 4.3 percent, it calculates, while the average on imports from the EU into the UK would be around 5.7 percent. Tariffs in some sectors – for example in agriculture and food, the car industry and textiles – would be “significantly higher”.

Brexiteers argue that the UK could survive EU tariffs, and that higher tariffs faced by exporters could be offset by a more favourable exchange rate created by the fall in the value of the pound. However, a report by one group of economists found that UK exports had been damaged, not boosted, since the referendum.
Pro-Brexit economists also quote estimates suggesting that import tariffs from EU countries could generate significant revenue for the UK. But a report by the think-tank UK in a Changing Europe says revenue gains from import tariffs would come at a cost of higher consumer prices.
Some no-deal economists have also claimed that the UK could unilaterally drop all tariffs, slashing consumer prices. Their critics agree that prices would come down – but, they argue, so would protection for various sectors of the economy. There’ve been warnings that much UK manufacturing – including the car industry – as well as British agriculture would be severely damaged by total exposure to global competition.
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Non-tariff barriers: checks and regulations

“The free circulation of goods between the UK and EU would cease,” says the UK government’s no-deal advice to businesses.

It says there would be “immediate changes” to procedures for businesses trading with the EU — and the details make it clear they involve more bureaucracy. The papers reveal that UK companies exporting and importing to and from the bloc face a mass of new red tape — potentially devastating for smaller firms.

The advice goes on to say that trade under “third country” status would mean customs declarations, upfront VAT payments, and higher costs. Some firms may need export licences which could bring delays, or to employ customs brokers.

The UK would no longer be part of the EU system of mutual recognition. The government says the UK would continue to follow EU regulations in many areas – but firms would have to deal with new regulatory regimes, for instance for medicines. Pharmaceutical firms are advised to stockpile six weeks’ supplies. New certification is needed in farming, leading to warnings that trade in organic food may effectively be suspended.

The National Audit Office said in a report in October 2018 that the number of customs declarations the UK authorities need to process might rise from 55 million a year to 260 million. New border systems would be needed, but in September the body responsible reported that 11 out of 12 projects might not be ready in time.
The CBI estimates that non-tariff barriers are likely to hit competitiveness even more than tariffs, especially for smaller companies. Highly regulated industries such as food, chemicals, aerospace and cars would suffer most – subject to new checks for safety and quality standards.
“The biggest costs would come not from moving to new regulatory arrangements for trade, but from a partial or complete breakdown of the regulatory arrangements that make trade possible at all,” UK in a Changing Europe has estimated.

Warnings of trade disruption

The prospect of sudden barriers going up under no deal has brought warnings of chaos hitting UK ports, especially Dover, and surrounding areas.

Reports by Dover and Kent councils have warned of massive disruption, with long delays and jams on the roads. The UK government has estimated that Channel ports could be hit for up to six months in a worst-case scenario. The head of the Calais region in northern France has insisted that French ports will be ready for a no-deal exit – as long as authorities on the British side are prepared.

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Similar warnings of disruption have come from industries relying on “just-in-time” supplies of parts – such as the car industry – or the food and drink industry which relies on the efficient distribution of fresh produce.

Among UK carmakers – affected by other shifting global conditions – Nissan has cancelled plans to build a new model in Britain, Jaguar Land Rover has announced job cuts, while Ford has warned of more cuts if there is a no-deal Brexit. Honda announced plans to close a factory but denied that Brexit was the reason.
Major manufacturers such as Siemens UK and Airbus have said a no-deal Brexit will direct future investment elsewhere. Other UK businesses have been transferring operations abroad, although some have benefitted from a weaker pound or say they can adjust supply chains.

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Easing trade flows

The British government under Theresa May said it had reached agreement to ease trade flows in the event of no-deal. By successfully negotiating continued membership of the Common Transit Convention (CTC) after Brexit, customs declarations will be made and import duties paid not at border points but at the final destination.

The news was welcomed by the UK Road Haulage Association, which warns however that “setting it up will take time and significant upskilling”.

However, a UK parliamentary committee report in September 2018 said that CTC membership would not be enough to achieve “frictionless” trade. It would displace but not remove customs controls, and did nothing to address new regulatory barriers such as inspections.

The EU has dropped plans to limit quotas for road haulage permits that UK truckers would need on the continent. But the measure to allow access is temporary and conditional.

Services

The UK services industry makes up an estimated 80 percent of the country’s economy. Whereas the EU sells more goods to the UK than it buys from Britain, the UK has a “trade surplus” in services, exporting more to the EU than it imports.

Latest figures show a large rise in activity between the UK and the EU. Half of the UK’s trade in services in 2016 was with Europe, and most of that was with the EU.

A “hard Brexit” option under WTO rules offers only limited integration for services, and according to the UK Institute for Government many countries consider WTO rules do not address trade barriers sufficiently.

Banks and financial services firms are set to lose “passporting rights” enabling them to serve clients in the EU from the UK. Some UK companies have been moving operations to the continent.

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Impact on the European Union

The United Kingdom was the European Union’s second largest economy in 2016, according to Eurostat, accounting for 16 percent of its GDP, as much as the 19 smallest EU countries put together.

The UK accounts for about 13% of the EU’s trade in goods and services, according to the International Monetary Fund. The IMF has warned that economic growth across the remaining 27 EU states would fall by up to 1.5 percent in the long run and employment would fall by 0.7 percent, if the UK fell back on WTO rules to trade with the bloc after Brexit.

Ireland would suffer an output loss of four percent, the IMF concludes, while the economies of countries geographically close and with strong trading links to the UK – such as the Netherlands, Denmark, Belgium and the Czech Republic – would be hit to a lesser extent.
German carmakers are among the major EU exporters to the UK market, with industry figures showing that the UK imported more than three quarters of a million German cars in 2017. They could be hit by reciprocal UK tariffs once the EU levied a 10 percent tax on UK car imports under WTO arrangements.
The French government – which is allocating €50 million in border infrastructure – has said it is concerned that businesses aren’t ready for no-deal. The consultants Oliver Wyman have estimated that France would be the third most affected country by a hard Brexit, with trade on WTO terms costing French companies €4 billion a year. With the UK taking some 10% of French food and drink exports in 2017, cheese and wine producers would be among those hit by tariffs and regulatory controls.
According to Oliver Wyman, with 7% of the Netherlands’ exports going to the UK in 2016, WTO trading could cost the Dutch economy an extra €4.5 billion a year.

The European Commission has updated its contingency plans for a “no deal” Brexit. Far from envisaging the sort of “managed no-deal” that some in Britain are calling for, it sets out a series of basic arrangements to limit disruption.

No deal – better than a bad deal?

The revised Withdrawal Agreement and Political Declaration on future ties, negotiated by London and Brussels, need the approval of both the British and European parliaments. Otherwise the agreed measures – including the transition period after Brexit – will not apply.

But the debate over a future "no deal scenario" is likely to be revived during trade negotiations, even in the event of a smooth UK departure from the EU with a divorce deal.

Theresa May’s mantra, that “no deal is better than a bad deal”, was seized upon by Brexiteers who argued in favour of leaving the EU without an agreement. They are at ease with the idea of trading on WTO terms, saying that a clean break with EU rules would open up new opportunities, enabling the UK to boost trade with the rest of the world.

Opponents argue that such opportunities exist already – and that “no deal” would harm not only trade, but destroy 45 years of smooth arrangements between the UK and the continent. They say it would bring severe economic damage, legal chaos, and wreck Britain’s international credibility.

Read also:

Brexit Guide: where are we now?

What would a no-deal Brexit mean for citizens' rights?

How would a no-deal Brexit affect travel and consumers?

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