The myth of the WTO option

When Theresa May said that “no deal is better than a bad deal” this was widely interpreted to mean that she would be prepared to see the UK trading on WTO terms if necessary. It bears saying, first of all, that if the UK leaves the EU with no deal, it will have a calamitous impact well beyond trade – everything from airline flying rights to data transfer protocols would be affected, each of which is a hugely complex issue in its own right.

As regards trade, May is channelling what has been a persistent Brexiter myth going back well before the referendum. The myth is that WTO rules offer some kind of basic, entry-level framework for international trade which is sitting, ready and waiting, for the UK to ‘revert to’. Nested within that myth is another one, namely that what is at stake in international trade rules is primarily, or even solely, tariffs (a misunderstanding that remainers, too, are prone to). And nested within that is an idea that it is companies that do trade, not governments, so that international trade rules and agreements are a nicety if not an irrelevance.

That latter point – put to me by a member of UKIP just the other day – is hardly worth discussing. Apart from smuggling, no international trade can occur in the absence of some set of laws and regulations that transcend the nation state. The idea of free trade as a kind of state of nature as it appears within Brexit mythology has recently been comprehensively debunked by Professor Steven Weatherill of Oxford University writing on the EU Law Analysis blog. This is also why the Brexiter idea of sovereignty is so naïve: as soon as international trade occurs some diminution of sovereignty (in the sense that they mean it) is entailed. This applies quite as much to the WTO as the EU – arguably even more so in terms of transparency and accountability - and indeed the WTO is often criticised by activists on these grounds.

The other issues are much more complicated. The first is the complexity of unbundling the UK from the EU’s membership of WTO. Brexiters talk of this as ‘regaining our seat’, but far more is involved than moving around the table. A particular difficulty is that the EU’s current commitments to the WTO are unknown, as former WTO official Peter Ungphakhorn explains (along with much more detail on many other aspects of what is at stake):

“The only confirmed commitments on tariffs, quotas, and farm subsidies are from before 2004 when the EU had 15 member states. The EU has expanded three times since then, but in 12 years it has been unable to agree with the WTO membership on revised commitments.”

The word ‘quotas’ in this is a reminder that trading on WTO terms is not just a matter of adopting a certain tariff regime. Within that, countries have different quotas of trade, with different tariff levels above and below the quota. Thus unbundling the UK from the EU entails establishing what proportion of EU trade in a massive number of goods can be attributed to the UK. This is not just a mindbogglingly complex technical matter, although it is surely that, but also entails potentially acrimonious political negotiations not just with the EU but with other WTO members. Depending on which good is under discussion, different countries – some friendly, some hostile to the UK – will have significant interests at stake. If Brexiters complain about the difficulties of the UK ‘getting its own way’ with 27 other EU countries, they are in for a nasty shock when dealing with the 160+ WTO members. To get a flavour of what is involved, read Ian Dunt’s explanation of the issues using the example of trade in lamb. It makes for sobering reading.

In any case, tariffs and even quotas on trade in goods are not the main issues at stake here. The WTO framework has only limited applicability to trade in services and to non-tariff barriers to trade in both good and services (for an overview, see this briefing from Sussex University’s UK Trade Policy Observatory), and indeed has in many other respects been stalled since the failure of the so-called Doha Round that began in 2001 and was effectively abandoned last year. In this sense, the idea of WTO rules as a comprehensive trade framework is a misnomer. Brexiters often sneer at those who point to the dangers of leaving the single market and the uncertainties of creating free trade agreements by saying that countries such as the USA and China trade with the EU without either single market membership or a free trade agreement. The implication is that these countries simply trade on WTO terms. They do not.

In fact, such countries trade via a complex web of Mutual Recognition Agreements (MRAs) which are principally concerned with removing the non-tariff barriers to trade which are, in most cases, far more important than tariffs. Each MRA is a highly technical and, in most cases, lengthy document and the outcome of long periods of negotiation. The USA, for example, has some 135 MRAs with the EU, and China has 65. On Brexit with no deal, not only would the UK not have any MRAs with the EU but it would also have exited the EU’s MRAs with countries like the USA and China. For none of these MRAs exist as part of the WTO rules to which the UK will supposedly revert. It is for this reason that the pro-Brexit economist Peter North of the Leave Alliance writes:

“One can say, unequivocally, that the UK could not survive as a trading nation by relying on the WTO Option. It would be an unmitigated disaster, and no responsible government would allow it.”

So when Theresa May says that no deal is better than a bad deal she is either willing to entertain such a disaster or it is simply a negotiating tactic. But if it is a negotiating tactic it is a strange one since it is to say: do as I want or I will shoot myself in the head.

Update (16 February 2017): Since writing this post, I have been contacted by Peter Ungphakhorn (quoted in my post) to say that, whilst he agrees with the thrust of my argument, schedules for the EU-25 (i.e. its 2004 membership) were updated for goods in December 2016. For much more detail see his blogpost: https://tradebetablog.wordpress.com/2017/02/04/after-12-years-eu-25-goods-commitments/

I’m grateful for that information. It does reduce one aspect of the complexities I discuss (i.e. the commitments from which the UK must unbundle). Equally, the fact that it took 12 years to get to that point serves to underscore just how great those complexities are!
 

Update (11 February 2018): This blog erroneously refers to all trade agreements between EU and US (or China) as being MRAs. Only some are. But the point holds that these agreements augment WTO rules and thus it is a myth that EU trade with such countries is conducted solely on WTO terms.