Why a WTO-based exit from the EU is best for the UK

Why a WTO-based exit from the EU is best for the UK

Rational debate and the movement of opinion swayed by facts and analysis has always been at the centre of our parliamentary affairs. As a nation we want issues to be decided by this rational process. So it should be with Brexit.

The one option we could choose that has not had the attention it has deserved has been the option of leaving the EU without any trade agreement under the auspices of international law as administered by the WTO. Brexiteers have focused understandably on the aim of a good trade agreement with the EU. Diehard Remainers have argued that we should stay in the EU Customs Union to avoid the ‘high costs’ that would attend any trade agreement, let alone the ‘chaos’ that would be unleashed if we left with none at all under WTO law. In this they have been aided by selective leaks from a Civil Service report which has claimed there will be lost GDP under any scheme short of staying in the EU fully, but especially under the WTO option.

Yet sober economic analysis shows that the option based on WTO rules not only brings us substantial gains from free trade – as well as control of our laws and borders – but it also implies the very opposite of chaos; and most importantly of all, it can be implemented without any assistance from a plainly uncooperative EU. This makes it highly attractive. All that remains is to convince our lawmakers of these points and to that end Economists for Free Trade have just published a report explaining the advantages.

Let us begin with the WTO. Because we surrendered our active role in the WTO to the EEC when we joined it in 1972, 46 years ago, it is not surprising that the WTO’s role and workings are little known or understood in UK public circles.

The WTO has had a long-existing function to police non-discrimination in tariffs via the Most Favoured Nation principle. But the WTO has also in recent years produced three path-breaking sets of rules to codify and enforce non-discrimination in trade standards for goods and services, and to streamline border procedures.

Some people seem to think the WTO is an irrelevant ‘toothless’ body which will be trampled on by large trading powers such as the US, the EU and China. However, the US has relied on it to force the EU to admit GM foods and also in a recent dispute between Airbus and Boeing. For China, the imprimatur of the WTO has always been crucial to underpin its massive export planning. The EU in turn will want to use the power of the WTO to hold back or complicate as far as possible President Trump’s tariff threats. Countries generally choose to obey the law because then others will do the same.

The WTO and Standards

When it comes to the UK and EU’s trade relations after Brexit, WTO law is very clear.  There can be no discrimination in standards laid down by the EU or the UK; once a ‘domestic’ standard has been imposed it must be generalised to foreign countries’ exporters, without discrimination between them. This implies, for example, that if a UK exporting industry obeys such a standard, it cannot be told there is another standard to meet. To do this, the EU would have to change the whole EU-wide standard that is being applied – which would of course provoke widespread opposition (besides being damaging to EU consumers, given that the previous standard was a good one).

The same is true for the UK. Notice too that any standard changes can be challenged in the WTO and the international standard-setting bodies.

The WTO and customs procedures

The WTO directions about customs procedures are similarly uncompromising. Borders must be seamless and best technological practice employed. This new emphasis on streamlined borders comes from the commercial needs of supply chains and just-in-time systems. For this reason best-practice customs are extremely low-cost: for example the highly efficient Swiss border service has estimated its border cost on EU-Swiss borders to be only 0.1% of traded value. HMRC has always claimed that it too operated at high efficiency, and HM Government’s proposed Maximum Facilitation border procedures are designed to meet these high WTO standards. Furthermore, three channel-facing customs have declared similar aims in oral evidence to the Treasury Committee on Tuesday 5th June. Similar methods are even now used to keep the N Ireland/Ireland border low cost and seamless.

The implications of WTO law for the WTO Free Trade Option

As I have pointed out before, the large costs claimed by the leaked Civil Service report for the WTO Option were based on four key assumptions, all of them mistaken:

  1. Customs costs would be around 6% of trade value (illegal) and cost 1.3% of GDP
  2. Costs due to ‘changed standards’ (illegal) would be another 20% of trade value and cost 4.5% of GDP
  3. EU-UK tariffs would average 4.5% (true) and cost 1.0% of GDP (false: no cost)
  4. UK Free Trade Agreements with the rest of the world would only gain us 0.3-0.6% of GDP (false: gain 4% of GDP)

Putting in the right assumptions turns a large loss into a gain of 4% of GDP.

There is more. When all elements of Brexit are put into the mix, the full gain to UK GDP is 7%, or 0.5% a year extra growth over the next 15 years. By avoiding an EU trade dealwe gain another £650 billion one-off in present value; the EU’s corresponding loss is £500 billion, which just might incentivise them to be rationally cooperative at last.

And what of that chaos? The Customs authorities’ mandated job is to meet the high standards the WTO requires and that they currently meet on all our trade. The difference that will occur on 30th March 2019 is that EU-UK trade will now pay tariffs; this trade is all recorded anyway on Customs computers. Those computers must now be reprogrammed. None of this affects speed of clearing; nor is there any extra ‘paperwork’.

Unless the EU changes its tune substantially, any EU trade deal on offer looks as if it will be thoroughly inferior to this WTO Free Trade Option. It is time that Parliament understood this.