(Bloomberg Opinion) -- Brexiters see the World Trade Organization as their best hope for a clean break from the European Union. Maybe it is. But it's not a very good one.
Nobody can say now where Brexit negotiations will lead, but as the choice looks increasingly between either close alignment with the European Union and no deal at all, Brexit supporters have warmed to a no-deal exit, which they now refer to as trading under WTO rules. Leading Brexiter Jacob Rees-Mogg, a Conservative MP, says “Trading with the EU on WTO terms would work well for the U.K. and allows us to achieve Brexit sooner."
The Spectator magazine published an article by City, University of London professor David Collins, who argues that a no-deal Brexit is nothing to fear: "With the WTO option as an entirely acceptable, workable alternative to a trade deal, the U.K. is truly in a position to walk away." A former British ambassador to the U.S. gave the piece a thumbs-up in a tweet, saying "It is hard to mount a rational argument against this article."
There have, in fact, been a number of informed, dispassionate and highly rational arguments against the idea that a WTO-based trade order would be a trade-multiplying breeze for Britain. They have come from Peter Ungphakorn, a former official with the WTO Secretariat, from Australian trade expert and former WTO negotiator Dmitry Grozoubinski and from others; the debate is worth following.
The immediate impact of trading on WTO terms would be that instead of the current zero percent tariffs, the EU would apply the same tariffs to U.K. goods that it applies to imports from other non-EU countries. While mostly these are low -- around 2 percent to 3 percent -- they are non-negligible in some critical sectors of the economy, such as cars, dairy and chemicals, as Alex Stojanovic and Jill Rutter point out in a paper for the Institute for Government. This would impose costs on exporters from both sides of the EU-U.K. relationship, and ultimately consumers.
But it isn't tariffs that would pose the biggest challenge, it’s the non-tariff barriers. Professor Collins notes that "non-tariff barriers such as arbitrary health and safety inspections and borders would be prohibited under the WTO’s Sanitary and Phytosanitary (SPS) and Technical Barriers to Trade (TBT) agreements." But prohibited is a strong word. In fact, the WTO tells members to enter into consultations, but it doesn't force them to recognize another's standards.
Similarly, the WTO’s Trade Facilitation Agreement aims at frictionless borders, but the idea that it could be used to prevent border infrastructure in Ireland after a no-deal Brexit is fanciful. Every developed country has signed up to it, including some famously non-porous borders, which tells you something about its teeth.
While EU members may individually want to recognize British goods as compliant, the EU's Customs Code imposes more onerous procedures and checks on third-party goods than those member states are subjected to. For example, U.K. exporters would have to complete, among other forms, a Single Administrative Document, with 54 parts, for each declaration. They would lose access to the New Computerized Transit System, the IT system that facilitates trade.
This isn't the EU deciding to be obstreperous or imposing new barriers; it's a legal thing -- or, as Stojanovic put it in a conversation, it's literally a case of "computer says no." The U.K. will be treated like any other outside country.
The U.K. government could take the EU to a dispute resolution body to complain that its standards haven't been automatically recognized. But good luck with that; the EU would fight any attack on its single market rights vigorously and it would all take a very long time to resolve.
Given the high level of integration in the U.K.-EU supply chain (there are sectors where over 70 percent of the supply chain are comprised of imports from or exports to the EU), it's clear that any increase in the cost of moving things across the border will cascade down -- adding cost each time an intermediate good crosses a border. Companies that operate just-in-time processes will have to invest in bigger inventories to minimize delays that might be caused by border friction. That's an even bigger problem for perishable products. The point here is not that it's impossible, but that getting to WTO-based trade from today's seamless, integrated trade is a massive and sudden disruption.
Nor is it plausible that the U.K. can just replace existing markets with new deals, as Stojanovic and Rutter have argued. "A finished car can be sold to an Australian or to a German. But a car part can only be sold to countries that have car factories -- which Australia doesn't." The entire supply-chain specialization faces disruption.
Proponents argue that if the U.S., China and others trade with the EU according to WTO rules, why not the U.K.? The entire U.K.-EU trading relationship (unlike the EU-China one) is of course structured around frictionless trade so, to repeat, this isn't a small transition. But it's also the case that the bloc has hundreds of bilateral agreements with various trading partners that aren't lodged with the WTO. The U.S. trades with the EU on the basis of myriad agreements that the WTO doesn't cover -- including vital ones such as open skies and data protection agreements. The EU may trade with, say, Cuba solely on WTO terms; but that's a long way from an economy as large and integrated with EU markets as the U.K.
Of course in good time, new arrangements with the U.K. would also be struck too. But how long will that take? And under WTO rules, free-trade deals are supposed to cover "substantially all the trade" between the countries involved, not just one or two areas, which would limit the U.K.'s ability to try to carve out protections for key sectors like cars.
Would agreements with non-EU countries compensate for these costs? It’s hard to see how. The U.K. hopes to roll over many of the EU's existing free trade agreements with third countries. International Trade Secretary Liam Fox told a Tory audience last October that the U.K. would have up to 40 agreements ready to be signed "for one second after midnight in March 2019," though the government later walked back that claim on timing.
Converting these EU agreements into bilateral agreements, however, isn't quite so simple, as Ungphakorn notes. The EU-South Korea agreement alone is full of references to EU treaties, regulations and approval processes. All of that would have to be replaced with U.K. equivalents. And grandfathering existing agreements would likely require some negotiation with the EU too, explain Michael Gasiorek and Peter Holmes of Sussex University in a paper for the U.K. Trade Policy Observatory. The EU is like a big, well-meaning but imposing neighbor you just can't escape.
For all its usefulness and progress in recent years, the WTO is not all-encompassing. It doesn't really do services, though if Britain did manage to get the EU to open its markets to U.K. services (the lion's share of the U.K. economy) under WTO rules, the same terms would likely have to be granted to countries with whom the EU has free trade agreements, such as Canada and South Korea. For a sobering look at the many areas of trade – from ecommerce to broadcasting rights – that will be affected by the U.K. departure, check out the European Commission's Brexit Preparedness Notices.
Withdrawal deal or no-deal the U.K. is a WTO member and will need its own "schedules," which is WTO-speak for the list of commitments and concessions covering tariff quotas, subsidies and other matters. The U.K. hopes to just replicate the existing EU schedules, but having those certified depends on none of the other 163 members objecting to them.
Disputes can come if another member state argues that the new U.K. schedules are to its detriment, in which case they can claim compensation or seek arbitration. While the U.K. can still trade under WTO terms even without full certification (not all the EU schedule updates are certified), it might hold up trade agreements and would create some uncertainty if there are substantial disputes.
Decisions on how to divide up the EU's tariff rate quotas, something that has to be done anyhow, are likely to be contentious. New Zealand is already objecting to the proposed division of its EU meat export quotas, based on recent exports. It argues that without clarity around the future trading relationship between the EU and the U.K., it can't judge the merits of any quota arrangement. The U.S., Canada, Uruguay and Thailand have all registered objections to proposed tariff quotas.
The list of costs imposed by a no-deal exit is long, well beyond the Irish border problem. Pilots and planes flying from the U.K. into the EU would no longer be able to rely on existing certificates issued by the European Aviation Safety Agency; nor could truck drivers who transport goods into Europe rely on EU certificates of professional competence.
Brexiters sometimes admit that there will be economic costs to exiting, but they argue that achieving control over Britain's laws and freedom from the EU is worth almost any price. Control, though, has turned out to be not quite the prize it once seemed. Brexiters may not like it, but one way or another, after Brexit, the U.K. will be both a rule-maker and a rule-taker, much as it is now. The question really is how much poorer will it be.