Why a World Trade Deal – Brexit on WTO terms – would be highly advantageous

Why a World Trade Deal – Brexit on WTO terms – would be highly advantageous

Today Economists For Free Trade publish A World Trade Deal: The Complete Guide, namely a WTO-based exit from the EU. This has been made necessary by two things: the mess in our negotiations with the EU on the basis of Mrs. May’s ill-fated Chequers proposals and the widespread ignorance among our politicians – not to speak of the general public – about the WTO and its workings.

What we show in great detail in a series of responses to some two dozen frequently-met questions, is that a WTO-based exit from the EU without an explicit EU trade deal is highly advantageous to the UK’s economy, to ordinary people generally and also to the public finances, besides delivering a Brexit in line with the referendum result. We have called it a World Trade Deal to emphasise the fact that the WTO-based legal order already constitutes a ‘deal’ and is far from the concept of ‘no deal’, with all its implications of disorder.

The Chequers proposals subject UK farming and manufacturing to EU Single Market regulations and also agree to maintain social (including labour) and environmental regulations currently mandated by the EU, which govern much of the activity across the whole economy. This means that we cannot alter these EU standards, many of which discriminate against non-EU suppliers such as the US, when we enter into Free Trade Agreements (FTAs), with the rest of the world; we can reduce or eliminate tariffs but we cannot eliminate the protection created by EU standards.

The New Customs Partnership Mark 2 now supposedly makes setting lower or zero tariffs on non-EU FTA partners feasible; however, doubts remain about the practicality of this proposal too. Finally, some formula about enhanced EU migration in the proposals implies that there will also be free migration in some degree from the EU; the EU may well also ask us for a financial contribution to the ‘upkeep’ of the EU’s rule book.

Could Canada+ offer a negotiated EU trade deal?

There is a far better route to a negotiated EU trade deal: Canada+. To understand the World Trade Deal, it is helpful first to go through how the Canada+ deal would work.

Canada+ would mean we would have zero tariffs between the UK and the EU, and also zero non-tariff barriers, together with freedom to see whatever standards were best for the UK home market. Standards on EU exports would of course remain in place as those mandated by the EU; standards on UK imports would be free for us to determine as part of our domestic decisions on standards. If we liberalised these to permit goods from non-EU countries to be sold here, we would not discriminate against EU imports – they would be free to impose their own current EU standards, which would also meet our new liberalised standards which would be more embracing of variety from around the world.

What then of the threatened surge in barriers between us and the EU that the Chequers proposals are supposed to avoid? The simple point is that there is no such threat. Any such surge would be completely illegal under WTO rules. Border procedures must be seamless and effectively costless; if existing standards on both sides are met by industry, as they already are, then there can be no sudden withdrawal of trade permissions.

What has happened in our internal political debate is that extreme ignorance of how the WTO works has allowed Project Fear to take hold among industrialists and the Civil Service interacting with them. They have assumed that the WTO world is a lawless world in which ‘hostile governments’ can ‘make trouble’. Yet WTO law is plain – it mandates seamless border procedures and outlaws discrimination on standards. Furthermore, no-one in their right mind would claim that either the UK or the EU would defy international law: both make a particular point of adhering to it, given the centrality of international law to the Treaties on which both take their stands.

Canada+ delivers to us substantial economic gains over the long term: an extra 7% on GDP, the equivalent of an extra 0.5% annual average growth over the decade and a half after Brexit. These gains come: 4% from achieving free trade around the world, 2% from setting our own regulations and the rest from controlling unskilled immigration and eliminating our EU budget contribution. Because the Treasury’s revenues are boosted by 10%, there are further second-round gains to be had from ending austerity and bringing in tax cuts. Finally, all households gain directly from prices falling 8%, with the poorest households gaining 15% from both falling prices and the end of mass unskilled immigration.

Why a World Trade Deal is the best deal for the UK

However, it may well be that Canada+ deal will not be agreed, either by the EU or by our fractious government or Parliament. It is at this point that we strongly recommend the World Trade Deal where we have no EU trade deal at all but simply trade with the EU as we do with all other countries outside the EU’s ambit. In fact, this will occur by default if no EU trade deal can be agreed by all sides. As we will explain, it brings us all the same economic gains as Canada+, but with some helpful additions.

The reasons for these gains are the same as under Canada+: ‘access’ to the EU market for us and for the EU to ours is protected under WTO rules. The border must be seamless and as we each satisfy each other’s export product standards there can be no denial of recognition of each other’s standards without breaching the rules on non-discrimination.

The only impediment to our trade will be tariffs on goods each way. These are on average rather low, at around 4%. However they will have a negative effect: on the EU, not on us. To understand why, think about how when we leave the EU we will sign FTAs with many countries around the world from whom we will therefore buy at world prices with no tariffs imposed from our side. Apart from benefiting our consumers, this creates strong competition in our home market between all producers, whether domestic or foreign. EU producers are no exception; they will have to meet these prices to sell anything much here at all. So any tariffs we impose, they will have to absorb. As for our producers selling in the EU, they too will sell at world prices since their competitors here would quickly undercut them if they charged more. Therefore any EU tariffs on them will be paid by EU importers, who can easily do so as EU prices are higher because of their trade barriers on world producers.

What this all means is that if we leave the EU without a trade agreement, under WTO rules, and therefore with no transition (which is dependent on a trade deal), the EU carries the burden of paying about £13 billion a year tariff revenue to HM Treasury, it loses our £39 billion budget contribution for the transition period and the world competition from our FTAs kicks in two years early. The cost of all this when discounted to present value is around £500 billion. On the other hand, it gives us some useful extra gains, in the form of an earlier start to higher growth and higher Treasury revenues, amounting in present value to £650 billion.

Much nonsense has recently been talked about ‘no deal’ halting air traffic, upsetting pensions, derailing Northern Ireland’s electricity deal with Ireland and much else. However these matters have nothing at all with ‘no trade deal’ which is the issue here. They are the basic meat and drink of any competent government to resolve as they deal with the necessary separation from the EU under Article 50, which indeed was created for this very purpose. For these negotiations about practical matters to fail, one would need to assume that the EU and the UK were planning some sort of acrimonious divorce amounting to a level of implicit warfare. Since they are both allies in NATO, cooperating on security and supposedly maintaining friendly diplomatic relations into the future, this would be a serious failure indeed. It would imply that one would kiss goodbye to good cross-Channel relations indefinitely. It would not stop Brexit however; it would merely reinforce in the British mind the picture of basic EU hostility and strengthen the urge to leave at any cost. For this reason, it is reasonable to dismiss failure to agree these basic matters; indeed, it has been said repeatedly by both sides that 80% of them are already agreed.

A World Trade Deal is another matter and, as we have seen, it is an attractive option for the UK, even better than the Canada+ deal that we would naturally cooperate on with the EU in the interest of good neighbourliness. But so bad is the mess into which the poorly thought-out Chequers proposals have plunged the UK-EU negotiations that the default World Trade Deal looks ever more likely. As our new Guide shows, this will bring us the full gains from Brexit and by bringing them faster with no burdensome transition period and tariff revenues from the EU, provide an additional fillip on top.