Regardless of the EU, the UK’s trading status is about to default to the WTO

Jun 17, 2020

The UK has already left the EU. That’s the reality. What remains to be decided, before 31 December, is its future relationship with the EU. But there is more to it than that.

Agreement or no agreement (cliff face or not) the UK’s trading regime, as a sovereign state, will default regardless to that of the World Trade Organisation (WTO).

The difficulties facing the UK/EU negotiators over their future relationship post-Brexit should not be underestimated. Unlike most international negotiations these are impelled by a legal deadline (31 December) which, until this July, may be extended for up to two years by mutual agreement but otherwise would act automatically to conclude the negotiations deal or no deal. The mental approach of the parties varies from wishful thinking on the part of the British to hard reality on the part of the EU’s 27 members.

At for wishful thinking Prime Minister Boris Johnson has been incredibly successful since he came to office in using simplistic slogans or catchy phrases in pursuing political objectives: “Let’s get Brexit done”, “Make Britain Great again”, and now “Take back control”. The problem with the latter slogan is that for nearly 50 years the UK gave away substantial control in these areas in the interests of consensus and common agreement – initially to the Common Market and subsequently to the Union. Taking back control involves an incredibly complex process of disentanglement without a clear view at any stage of the consequences.

The perception of an airy indifference by the British to the strict terms of the Withdrawal Agreement, the Political Declaration, and the Instrument with respect to Northern Ireland (the protocol that keeps Northern Ireland in the EU’s customs union while at the same time remaining in the UK market with the complexities associated with that) has roused the ire of the EU negotiators. A substantial change of attitude by the British towards the imperatives of those commitments would seem overdue. The UK would also be minded that among the 27 EU members are critical security partners in the wider geostrategic world that it would wish to keep onside, particularly France and Germany.

The timing of the negotiations set months ago is doubly unfortunate when all the parties have been combatting the coronavirus pandemic and negotiators have been able to communicate only through video link and correspondence. The economic background to is dispiriting with the UK Treasury estimating that the cost of the pandemic there is running at £300 billion this year. If the ‘recovery’ were to be L shaped rather than V-shaped, the annual cost could be £520 billion this year, rising to a cumulative £1.19 trillion over 5 years.

The loss of production could be anywhere between 6 and 9%. The cost for the EU countries will be considerable also (a possible drop of 8.7% in productivity this year); but they are living in a settled economic and market structure and happy to maintain the status quo among themselves. They are not ready to concede much to the British on market access, standards and other common arrangements, as much to discourage others who might be thinking of departing like the British.

There are tensions within the EU over-indebtedness, particularly the unwillingness of the northern creditor countries to mutualise the debts of the southern countries. However recent accommodations in this regard involving grants and loans – inter alia, as post-coronavirus recovery funds, amounting to some 750 billion Euros, partly underwritten by the European Central Bank – have done much to alleviate these tensions and strengthened cooperation in containing the virus pandemic.

As of now Prime Minister Johnson and the President of the European Commission, Ursula von der Leyden, are due to meet around 19th June to break the current impasse in the negotiations. This is believed to be imperative at this stage if the UK is to retain the option in the Withdrawal Agreement to seek an extension (one or two years) of the ‘transition period beyond 31 December.

As yet neither party is taking really seriously the deadline for seeking an extension because they believe in the negotiating tactic of leaving the intractable until the last minute when the pressure to concede is the greatest. But as foreshadowed above, bluff may not work this time because of legal and process constraints that cannot be shoved aside without amending national legislation, and this would require the consent of all 27 EU members and in some cases their political sub-divisions also. For some time now Boris Johnson has been adamant that the British will not agree to an extension. However his current political standing in the wake of alleged mishandling of the coronavirus pandemic – notwithstanding an 80-seat majority in the House of Commons – is weaker now than at any stage of his premiership.

A backdown won’t look good but then the consequences of going over the cliff without a deal of some kind maybe even worse. But some of his hung-ho backers may even see positives in ‘standing up for Britain, to hell with the consequences’, which in this populist climate they may well be right politically. Brexit is not only about trade in goods and services. It is about culture, familiarity and community. So how bad would “going over the cliff without a deal” be for Britain? In trade terms, it would not be a disaster, largely inconvenient.

All those revived customs declarations, rules of origin certifications, phytosanitary and environmental standards to be complied with, and so on which will break the smooth running of supply chains and cause major holdups at sea and airports. The UK is preparing for this now being in the process of recruiting some 50,000 new staff to handle the demand.

The reality is that much of this cannot be avoided anyway as the UK has already left the EU and what remains is to regulate its status as a third country which means defaulting to WTO rules. As founding members of the GATT/WTO system both the UK and the EU have always been subject to WTO rules which primarily consist of the most-favoured-nation treatment rule and the rule of non-discrimination.

Members are permitted to vary their trading terms within groupings by way of free trade areas or single markets (pursuant to Article 24), but whatever they agree must be negotiated and sanctioned by all 136 WTO members and incorporated in WTO Schedules which takes an inordinate amount of time  – usually years.

A free trade area must, to satisfy Article 24, include substantially all the trade between the parties with respective provisions covering tariffs, quotas, non-tariff barriers, subsidies and fluctuating currencies.  A link with the projected Comprehensive and Progressive Agreement for the Trans-Pacific Partnership incorporating its rules once approved would be a useful short cut to a viable platform, particularly if it included the US (for now it won’t) and Australia.

As it happens an analysis of UK trade in recent decades suggests that it has benefited more from its trade under WTO rules with third countries (many being within so-called free trade areas) than it has with the EU itself. And with services, there has been next to no benefit. So the loss from the EU will consist more or less ease of movement (air, rail, and vehicle), residency and trader status, mutual citizenship, etc. – all profound losses. More like a divorce than a trading issue. This applies to both sides.

So the immediate question is whether the UK will leave without an agreement, or with an agreement consistent with WTO rules for a free trade area, including agriculture and fisheries (a customs area has been ruled out). Once decided, future trade arrangements, including with  Australia, will have to be negotiated within the WTO (as noted above, with all 136 members!) which will take some doing and sometimes, in addition to sorting out countless other areas of bilateral activity that will need to be placed on a sound, legally structured. basis. Life will go on but more than a little disrupted (perhaps no worse than a pandemic!).

If the requisite political will is absent it is hard to see how there can be a viable bilateral settlement with legal underpinnings in place by 31 December. In any event, the matter will be over to the WTO thereafter and its rules-based system on which all members depend.

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