WTO, here we come…or maybe not…

As the Withdrawal Agreement approaches its moment of truth, the UK is already plotting a course for new trading arrangements in the wider world. That’s if we are ever let out of our cage, writes Victor Hill.

The empty seat at the WTO

While America mutters about leaving the World Trade Organisation (WTO) and about using tariffs to advance its national interests, the UK aspires to become a new member and promises to use that membership to promote free trade.

On 24 July this year, Julian Braithwaite, the UK’s man in Geneva, deposited the UK’s Schedule of Concessions with the WTO. This was the first step to Britain becoming a full functioning member of the WTO after years of our trade policy being determined by Brussels. Under the terms of the provisional transitional arrangement agreed in March, and now by the EU Withdrawal Agreement to be endorsed at the EU summit on Sunday, 25 November (if it happens), the UK will regain its seat at the WTO in January 2021. Or will it?

The Withdrawal Agreement envisages that the UK will remain within the EU Customs Union until such time as a “Canada-style” Free trade Agreement (FTA) can be concluded. That is not likely before 2021 and it could even be as distant as 2024, if then. Under a UK-EU FTA there would probably be tariff-free trade but there would most likely be border checks and other trade “frictions”. The UK will not be able to negotiate third-party FTAs until it finally leaves the EU Customs Union.

The UK’s Department for International Trade (DIT) under Dr Liam Fox since 2016 has established 14 Trade Working Groups covering 21 countries to lay the framework for future deals through so-called scoping agreements. Japanese Prime Minister Shinzo Abe even proposed in October that the UK would be welcomed into the 11-nation Trans-Pacific Partnership (TPP) with open arms. However, negotiating FTAs notoriously takes years, so it may even be a decade before the UK is able to strike trade deals with all of its major trading partners.

Under the terms of the EU Customs Union, whenever a UK company buys a product from a non-EU country that product is subject to a tariff (correctly import duty) which is collected by HMRC and paid over to the EU less an administration fee of roughly ten percent. The level of import duties is set by the EU as part of its Common Commercial Policy. So long as the UK remains inside the Customs Union it cannot set its own levels of import duty or to eliminate them on, say, Kenyan pineapples – or whatever.

Note that it is now Labour Party policy that the UK should remain in the Customs Union in perpetuity (though, if I recall correctly, that was not their policy during the 2017 general election). So this issue is likely to be debated ad nauseam up to and during the next UK general election which must take place before June 2022.

When and if the UK takes up its seat at the WTO all it has to do to vary import duties is to lodge a Schedule of Concessions in Geneva. Other WTO members then have three months to object to any schedule, but they only tend to do this if they perceive that they will be disadvantaged. Under WTO rules, the amount of tariff levied on each product must be the same for all countries. So, for example, it would not be possible for the UK to levy one import duty on wine coming from the EU and another preferential one on Australian wine. There are exceptions to this principle for bilateral trade agreements with developing countries.

The UK has been an advocate of the liberalisation of free trade for many years from inside the EU despite not having its own seat at the WTO. We can therefore suppose that the UK would seek to lower tariffs once free from Brussels. The government’s trade white paper, published in October 2017, talked encouragingly about maintaining a rules-based international trade policy but was short on detail about precisely which tariffs might be reduced in future.

The EU levies an average level of import duty of 4.2 percent on manufactured goods but 10.8 percent on agricultural products. This is because, historically, the EU has been keen to protect its farmers (particularly French farmers) from foreign competition under the Common Agricultural Policy (CAP). These are much higher than tariffs levied by the United States – 3.1 percent and 5.1 percent respectively.

Benchmarks

Once free of EU trade policy, the UK could reduce tariffs on imported foodstuffs, although there could be opposition to this from UK farmers. Logically however, as HSBC economist Mark Berrisford-Smith has suggested[i], the UK, which has a competitive advantage in services, might want to offer improved access to its home market for foreign goods in exchange for better access to foreign markets for British services such as banking, insurance, telecommunications and advertising.

One benchmark that the UK DIT has been studying is New Zealand. Currently, EU tariffs on manufacturers are not very high, being mostly in single digits – although cars and commercial vehicles are exceptions. Agricultural imports into the EU, however, often carry the ad valorem import duty plus a charge per unit. So, by way of example, imports of frozen or chilled sheep carcasses into the EU incur a duty of 12.8 percent of their value plus a charge of €171.30 per 100 kilos.

In contrast, New Zealand levies just three rates of import duty: zero, 5 percent and 10 percent (the top rate applying to motor vehicles – which New Zealand does not manufacture – and textiles). The UK may well wish to follow a similar simplified model.

Crashing out

Right now it is very uncertain if Parliament will ratify Mrs May’s November Brexit deal so there is much talk of Britain crashing out of the EU on 29 March 2019 with no-deal. Under this scenario the UK would immediately revert to trading with the EU on WTO rules. In this situation the UK would be free to pursue its own trade policy straight away – which is why many Tory Brexiteers are keen on it, for all the turbulence and disruption that might come about in the early days.

In this situation tariffs would be imposed immediately on all UK exports to the EU and all EU exports to the UK. If Britain were to cut tariffs on EU imports there is no certainty that an intransigent EU might wish to reciprocate. This would be a massive headache for major UK car exporters such as Nissan (TYO:7201) and Jaguar Land-Rover (owned by Tata Motors (NSE:TATAMOTORS)) not to mention small volume manufacturers such as Aston Martin (LON:AML). These manufacturers would be hit with a 10 percent tariff on all units entering the EU-27.

Arguably, a mid-range Nissan Qashqai, made in Sunderland, could still compete in the European market as the tariff is probably less than the dealers’ margin. I note that Nissan’s share price fell by about 10 percent last week on the news that its legendary Chairman, Carlos Ghosn has been accused by the Tokyo authorities of under-declaring his income. He has since been dismissed. (I have forgotten the Japanese word for tax evasion). I much doubt that Nissan’s share price would fall by as much in the event of a no-deal Brexit. That should give us some sense of perspective.

It would also be a challenge for exporters of agricultural produce since many of their goods would be rendered uncompetitive: e.g. Welsh lamb up against its Spanish counterpart. But if British agricultural goods were spurned by European consumers they might very well be favoured by British ones. I can foresee that there could well be a strong public reaction in favour of buying British food at the expense of European imports. That would also make ecological sense (fewer food miles), and could result in a lower food prices.

I have argued in these pages repeatedly that the burgeoning English wine industry could be given a boost by reducing excise duties on home-produced wines just as tariffs were imposed on imported wine. One year hence, at Christmas 2019, we may well be toasting how we all survived a challenging year with a glass of fizz courtesy of Chapel Down or Nyetimber.

Something that is unclear at the time of writing is the status of the EU’s existing FTAs with third countries in the event of a no-deal Brexit. In an orderly Brexit it is understood that the EU will notify all countries concerned requesting that these arrangements be perpetuated with the now third-party UK. Further to a cliff-edge no-deal Brexit no one knows what would happen to these arrangements. The most important EU FTAs are those with Switzerland, Norway, Canada, South Korea, Singapore, South Africa and Mexico.

As I have written before, there is a strong argument in favour of Britain teaming up with Canada in the context of an overall CANZUK (Canada, Australia, New Zealand and UK) alignment – and the Canadian Conservative Party has already adopted this as policy.

Unrest at the DIT – and in cabinet

On 20 November the Australian Business Insider reported that the UK’s chief trade negotiator, Crawford Falconer, had privately expressed frustration with the Brexit Withdrawal Agreement[ii]. This was not the first rumour that he was on the verge of resigning his role at the DIT. Mr Falconer, who has both British and New Zealand nationality, was appointed by Mrs May to work alongside Trade Secretary Liam Fox on post-Brexit trade deals in June 2017 purportedly on a salary much higher than the PM’s. His expertise on trade matters is unquestioned. Previously he was New Zealand Ambassador and Permanent Representative to the WTO, and was New Zealand’s Chief Trade Negotiator. Before his appointment to the DIT he was Special Trade Commissioner for the Legatum Institute, a private think tank.

In October, Mr Falconer told The Daily Telegraph that his job would be redundant if the UK were to remain in a Customs Union with the European Union. One report earlier this year suggested that Mr Falconer’s role was “marginalised” by Downing Street in the Brexit talks. That would be consistent with what happened to the two now ex-Brexit Secretaries, David Davis MP and Dominic Raab MP. We now know that they were side-lined and that all of the critical negotiations were conducted by the Prime Minister herself, assisted by senior Whitehall mandarins, amongst whose number Oliver Robbins (adviser since September 2017) has been pre-eminent.

Mr Falconer was apparently on the verge of resignation when May Mrs revealed her plan for a “common rule book” with the EU as part of her Chequers proposals advanced in July. The UK will be able to implement trade deals in services and investment once the transition period is over. However, the UK will be limited in the scope of FTAs relating to goods as long as it remains tied to the EU regulatory framework.

Tom Brake MP, the Lib Dem Brexit spokesperson and supporter of anti-Brexit group Best for Britain, said this week: “The PM’s deal makes it as clear as spring water that there hasn’t been, and probably never will be, a purpose to the DIT. It would hardly be surprising in the circumstances if people chose to walk.”

Dr Fox was expected to resign from Mrs May’s cabinet last week along with Mr Raab and Ms McVey but conspicuously did not. He is now supposedly a member of the cabinet Gang of Five – along with Jeremy Hunt, Michael Gove, Andrea Leadsom and Penny Mordaunt. This caucus has supposedly decided to stay in May’s cabinet in order to push for changes to the Withdrawal Agreement. Last week, Dr Fox urged pro-Brexit MPs who dislike the draft deal to stay loyal to the Prime Minister in the national interest.

As I filed my piece last Friday morning (16 November) the media was palpitating with excitement about Michael Gove’s imminent resignation – he had reportedly turned down the job of Brexit Secretary. (Wise move). Why did he stay? According to The Spectator’s James Forsyth[iii] he couldn’t see what would be achieved by his departure. With fewer and fewer fully paid-up Brexiteers around the cabinet table, Mrs May’s government might drift further towards Labour-style fudge and equivocation.

The Single Market: a sacred cow

Mr Clegg and others told us of the immeasurable benefits of the EU Single Market during the referendum campaign. Will Podmore points out in his book, Brexit: the road to freedom, that UK exports to the EEC rose steadily over the period 1973-1993. After the advent of the Single Market on 01 January 1993, from 1993 to 2015, UK exports to the EU as a percentage of GDP actually declined. In 1999, 61 percent of our trade was with the EU and by 2015 it was 43 percent.

In fact, the UK was overtaken by many of the countries that traded with the EU under WTO rules such as China, the USA, Japan and Australia. Most of British trade now is already conducted under WTO rules. Our biggest single-country trading partner is the USA, where we sell around 17 percent of our exports – all under WTO rules. £111 billion of the UK’s £115 billion balance of payments deficit in 2016 was with the EU-27, and only £4 billion with the rest of the world. How can this be the case if membership of the Single Market and Customs Union works so well for us?

UK exports to countries with which we trade under WTO rules have grown four times faster than our exports to the EU since 1993. UK exports to the EU grew by only 10 percent between 2010 and 2017. Over the same period our sales to the USA were up 41 percent, to China up 60 percent, New Zealand 40 percent, Japan 60 percent and South Korea 100 percent.

Deal delirium

Readers will not be surprised that I have grave reservations about Mrs May’s Brexit deal. Compromise is all well and good but it can end up satisfying no one and this one will ultimately create bigger problems further down the road. Dan Hannan MEP says that everyone in Brussels assumes that the transition period will last forever[iv]. He points out that in any future trade deals concluded by the EU in future, for example with India, Britain would be obliged to match all of the concessions made by the EU but India would only have to reciprocate to the EU 27, not to Britain. (I pointed out this problem in June). He compares the deal to throwing away the burger and eating the napkin.

Mrs May was lionised by the Confederation of British Industry (CBI) on Monday. Whereas the CBI used to be an incubator of new entrepreneurial ideas, under Director-General Carolyn Fairbairn it has become a sort of lunch club for fat and lonely people. Since when have entrepreneurs been entirely risk-averse? Maybe the fatties should join quangos or become public sector consultants instead of company directors.

In this week’s Spectator James Forsyth argues that if Britain ever wants to move further from Europe, it will be obliged to leave Northern Ireland behind. Which was of course Mr Selmayr’s objective all along. (Hence the chagrin of the DUP). This choice, between sovereignty and the union, says Mr Forsyth, could tear the Tory Party apart. Martin Howe QC’s verdict is that the deal is atrocious. MPs who say we can change it later haven’t read the small print.

That said – it is the only deal in town. The alternatives, as Mrs May has correctly said, are either no-deal or no-Brexit. Personally, I am not afraid of no-deal; I just think that the Deep State, assisted by mainstream media, will do all it can to transmute no-deal into no-Brexit. In fact, Parliament would have to approve no-deal – and will certainly not do so. So no-deal is economically survivable but politically impossible.

Last week it seemed quite possible that Mrs May could be toppled. Now that looks unlikely – the Tory Ultras have been unable to garner the necessary 48 letters to the 1922 Committee Chairman. We are probably post-peak Mogg. Mr Johnson looks marginal – though Tories are still whispering to one another in corridors that Boris has a plan…

And support for the deal is emerging from unexpected quarters (not least The Daily Mail). On Wednesday morning, Sir Roger Gale MP[v] came out in favour of the deal. Sir Roger is a kind of bellwether Tory – an instinctive Eurosceptic of a pragmatic mindset. He writes:

We shall regain control of our own borders and our own immigration policy… We shall avoid the ‘cliff edge’ that businesses have feared and that would prove so damaging to the prospects of thousands of jobs. We will, when and only when a full political determination is achieved, meet our remaining financial obligations at a cost far lower than some had predicted. We will no longer be subject to the jurisdiction of the European Court of Justice and any disputes between Britain and the EU will be resolved by an independent arbitration panel. We shall leave the Common Agricultural Policy behind us and we shall become an independent coastal state with commitments to ensure sustainable fishing levels and a new fisheries agreement with the EU. There will be a comprehensive air transport agreement with comparable access for freight operators, buses and coaches. We shall have the ability to strike trade deals around the world…[vi]

This seems to be a somewhat optimistic reading of the Withdrawal Agreement as it assumes that the transition period will be finite and it ignores the threat of the Irish backstop.

If the House of Commons rejected the deal the Europeans would then collectively shrug their shoulders and we would lurch towards no-deal. That would be manageable except that – such is the national mood – everyone would blame everyone else in a frenzy of righteous indignation. The House of Commons would then block no-deal, leaving the government in stasis.

According to one source on Thursday evening (22 November) 88 Tories have pledged to vote against the deal. I calculate that, if the vote on the Brexit Withdrawal Agreement were to take place early this week, the Government would be defeated by about 67 votes. That could change – all Mrs May needs is a small miracle. Stasis it probably is, then. Followed by further disputation about a people’s vote which will only re-toxify the political class.

The paradox is that whether Britain remains manacled to the EU Customs Union forever, or is permitted to escape some years hence to make its own trade deals, the EU, while remaining an important trading partner, will be of declining importance to our exporters. In contrast, large Commonwealth countries, especially English-speaking ones, and developing countries, will be of rising importance.

How did we get here?

How long have you got…?

Sources:

[i] HSBC UK Economic Commentary, 14 September 2018

[ii] See: https://www.businessinsider.com.au/uk-trade-advisor-crawford-falconer-angry-with-theresa-may-brexit-deal-customs-union-2018-11?fbclid=IwAR2HOz1w1m8UT94MMcCz87LCr1U5TeMYqgmTNKK9W7qCOLWu8RvslovhOog

[iii] See: https://blogs.spectator.co.uk/2018/11/michael-gove-will-not-resign-from-defra/?utm_source=Adestra&utm_medium=email&utm_content=Lunchtime_Espresso_16112018&utm_campaign=Lunchtime_Espresso

[iv] Interview with Sky News, 22 November 2018. See: https://www.youtube.com/watch?v=1QxVtGUQHEo

[v] MP for Thanet North since 1983

[vi] Gale’s View, 21 November 2018