Internet entrepreneur and domain name expert Edwin Hayward explains what “trading on WTO terms” really means…
As EU members, we participate in over 750 international treaties. Many relate to trade, enabling us to trade freely with the EU, the EEA, and 40+ other countries.
Other treaties cover non-trade issues, from airworthiness certificates to drivers' licences, UK and EU citizens’ rights, food safety, environmental protections, workers rights, etc.
On Brexit Day, we leave the EU. That means we lose all the benefits of its treaties. Those treaties are gone in a flash, as if we’d fed them into a shredder. (That’s not the EU being vindictive, it’s just how the Article 50 process works.)
Even IF we have a transition period, the treaties will already be gone, but we will be shielded from the immediate shock by the transition arrangement.
Right now, we share in trade deals with 78 countries (22 more pending). These deals cover 60.7% of all our of all our goods imports, and 66.9% of our exports. Overnight, we will lose them all, wave goodbye to the painstaking gains of over forty years of trade negotiations.
In the absence of trade deals, we will be reduced to trading on WTO terms. WTO is a complicated system of tariffs and quotas, plus a baseline set of rules designed to make trade a little less painful and a little smoother than it otherwise would be.
WTO provides a baseline for trade, but it is the absolute minimum that all rational countries seek to improve on. That's why everyone's trying to sign trade deals all the time. The whole point of trade deals is to improve on the basic terms offered by WTO.
In trade terms, WTO can be likened to fourth division football: it's definitely a step up from a kick-around in the park using jerseys as goalposts, but it's by no means a high standard.
Let's talk about tariffs. WTO has an immensely complex schedule of tariffs, running into thousands of categories. Different products attract different tariffs. For example, under WTO, cars are subject to tariffs of 10%. Tariffs are paid by importers, but of course they then turn around and pass those extra costs onto the consumer.
Right now, UK manufacturers can sell cars to the EU tariff free. But under WTO, those cars will be subject to 10% tariffs, effectively making UK-made cars 10% more expensive for EU consumers.
But all the major car manufacturers have manufacturing facilities elsewhere, including other EU countries. So if we're reduced to trading on WTO terms, they'll just shift production to the EU and avoid the 10% tariffs.
WTO gives us the right to control the tariffs on our imports, even reduce them to zero if we want to.
But that's when the WTO "Most Favoured Nation" rule kicks in - possibly the most misleading expression ever invented, because what it really means is that we are not allowed to favour one nation over another in our WTO dealings.
So if for example if we are desperate for cabbages, we can set a tariff of 0% on them. That makes them cheaper, which stimulates demand and encourages more producers to send us their cabbages.
But we can't set a tariff of 0% for just one country. If we decide to drop the tariff on cabbages to 0%, that becomes our new tariff for every country in the world. So we get flooded with cabbages from the cheapest producers on the planet.
That's great if you love cabbages, but absolutely devastating if you're a UK cabbage farmer.
You can't have it both ways. Either you shelter behind tariffs to protect domestic producers, or you reduce them or cut them to zero to encourage cheap imports - and destroy your local industry in the process. The rules of WTO force that tradeoff for every product sector.
But that’s only half the picture. We have no control over other countries’ import tariffs - the tariffs imposed on the things UK-based producers export to them. If we’re trading with them on WTO terms, both the EU and non-EU countries will impose whatever tariffs the WTO demands.
Overnight, our exports will be more expensive. That, combined with the fact that we will no longer share common standards with the markets we export to (also covered by the treaties we will have lost) will make products manufactured in the UK significantly less competitive in the global market.
For instance, why would any overseas consumer buy a UK-made car if they can get exactly the same car from the EU or elsewhere at a lower cost?
Short answer: they won't.
But what if the EU were to drop their tariff on cars to 0%? That would help our car producers, because our cars would no longer incur tariffs.
However, "Most Favoured Nation" would kick in. The EU would be forced to offer every country in the world 0% tariffs on cars. The mere notion is absurd. After all, the EU aren't going to leave their domestic market unprotected just to help the UK. It would be completely irrational to expect them to.
So, in practice, trading on WTO terms will mean that everything we make in the UK will be more expensive for overseas consumers at a stroke. Some industries may be able to reduce their production costs to offset the tariffs; most will collapse.
And we will be faced with the impossible task of choosing product by product, industry by industry, which producers to protect by maintaining our own tariffs, and which to throw to the wolves by cutting or eliminating our tariffs.
If all of the above sounds grim, that's because it is. There are no countries in the world that trade exclusively on WTO terms with other nations. None whatsoever. Even North Korea has a couple of trade facilitation arrangements.
We will have none. Nothing at all. No country has ever torn up all its international arrangements before (quite frankly, none have been crazy enough to). So we will be in a very lonely, exclusive club.
So if somebody tells you the UK will be OK trading on WTO terms, they either:
A) Don't understand what that means
B) Are lying to you
For example, Patrick Minford (of Economists for Brexit) is on record as stating that WTO would destroy the UK car industry, but that would be a price worth paying for the freedom afforded by Brexit.
In other words, Brexiters see manufacturers as collateral damage, to be swept aside in pursuit of Brexit.
Perhaps you're not so sanguine? Perhaps you would quite like the UK to keep manufacturing things?
In which case, you need to take heed of just how destructive, how damaging, trading on WTO terms would be. Estimates for the likely damage range from 7%-10% of GDP. Even at the low end, that's worse than the 2008 financial crash.
But unlike the crash, we'd be deliberately, willingly inflicting the pain on ourselves. Incredible, but true.
And the result would be the return of austerity, not for a few years, but for decades or generations to come.
WTO: just say no!
The original post can be found on the London4Europe website