Post-Brexit UK-EU trade deal critical for both sides
It was two British economists, Adam Smith and David Ricardo, who developed the idea of free trade in its modern and recognizable form in the late 18th century. It is therefore rather fitting that, in the context of the UK’s impending departure from the EU, the very concept that was born out of Britain’s long history as an international hub for trade is now at the center of discussions.
With Brexit dominating news and analysis in the UK media, it is important to realize that those in other markets are not as distracted by every moving development. However, should the UK and the EU not reach an agreement by March 29, with Britain therefore tumbling out of the union in a “no-deal” scenario, there will be significant trade implications for all.
Early economists who advocated free trade believed it was the reason why certain civilizations prospered economically. As the world became more integrated, many classical liberals — especially in 19th and early 20th century Britain, such as John Stuart Mill, and in the US, such as Henry Ford and Secretary of State Cordell Hull — believed that free trade promoted peace.
Following the implosion of the old world order after the First World War, US President Woodrow Wilson actually included free trade rhetoric in his plan for world peace, the “Fourteen Points” speech of 1918. “The program of the world’s peace (includes) the removal, so far as possible, of all economic barriers and the establishment of equality of trade conditions among all the nations consenting to the peace,” Wilson said.
Efforts materialized in 1947, when the World Trade Organization’s (WTO) predecessor, the General Agreement on Tariffs and Trade (GATT), was signed in Geneva. Based on a fundamental principle of non-discrimination, the 23 nations that signed up agreed to offer equal trade tariffs to all other signatories under the “most favored nations” principle, treating foreign goods that had passed through customs as local goods. Inheriting this philosophy, the WTO, founded in 1995, now sets the basic global rulebook for trade and acts as a referee for its 164 members to resolve disputes through its legally binding system. As a result, international trade now accounts for a massive 30 percent of the world economy.
Recently, however, the WTO’s progress in the liberalization of global trade has slowed down. Amidst the Brexit saga, there have been other challenges to globalization, mainly in the form of protectionism. Though headway has been made through regional and bilateral trade agreements, national governments have challenged the WTO order through failing to reform laws governing state subsidies, intellectual property and their industrial policies. In the context of China, for example, its failure in this regard has even pushed the US to veto appointments to the WTO’s judging panel, the Appellate Body, and indeed threaten to withdraw from the organization altogether.
As the UK feels its way through its withdrawal from the EU, it is planned that, in the event of a no-deal exit, it will broadly adopt the EU’s “schedules” on tariffs and quotas that it applies to other WTO members.
Zaid M. Belbagi
As the UK feels its way through its withdrawal from the EU, it is planned that, in the event of a no-deal exit, it will broadly adopt the EU’s “schedules” on tariffs and quotas that it applies to other WTO members. In some cases, these are quite competitive — for example on non-agricultural goods — but in other instances they are much higher. If the UK were to trade with the EU exclusively on WTO terms, cars and car parts could face duties of 10 percent on crossing the border (which, in the context of modern supply chains, could mean more than once per car). With regards to agricultural tariffs, this could be higher still, up to almost 35 percent, forcing British farmers to pay hefty tariffs to enter their largest export market.
It is critical that the UK does not leave the EU without a deal in this context. The UK risks losing the benefits of the 35 or so free trade agreements that the EU has struck with third parties. Given the lengthy negotiation and ratification timelines involved, the UK would not be able to expedite new trade deals quickly enough as to offset the decline in EU trade. For example, in the context of trade with the US, with which the EU trades on WTO terms, the UK would have to seek a similar framework of extensive bilateral agreements so as to reap the same benefits. In 2017, 44 percent of UK exports went to the EU on free trade terms — the Treasury has thus forecast that the UK economy’s growth over the next 15 years could be slowed by 9.3 percent should the country exit the EU without a deal. Economists who think otherwise, who are by far in the minority, argue this would be offset by a WTO Brexit that would boost the economy by 6.8 percent over the same period.
In any case, with Mercedes-Benz motorcars and French cheese very likely to increase in price, the onus is on the UK to seek a workable arrangement with the EU. Such a solution is critical for both sides as, after all, the UK is central to European economies. One in seven cars made in Germany are sold in Britain and more German cars are exported to the UK than anywhere else.
Brexit is an opportune moment for the UK to reassess its trade relationships in the spirit of the very free trade theories that it gave to the world. By unilaterally cutting or abolishing tariffs, such as in Singapore or Hong Kong (incidentally both international business hubs created by London), the UK could become a beacon of free trade. Perfectly legal under WTO rules, such policies would help offset post-Brexit jitters by making imports cheaper and driving consumer spending, which is presently curtailed by the EU’s common external tariffs on clothing and footwear of up to 12 percent. In the long run, the UK and EU must and will continue to trade — how they reach such a modus operandi will be interesting to observe.
• Zaid M. Belbagi is a political commentator, and an adviser to private clients between London and the Gulf Cooperation Council (GCC). Twitter: @Moulay_Zaid