Businesses should prepare for the possibility of the UK exiting without an FTA and having to revert to WTO rules.
As the implications of Brexit unwind businesses should prepare for the possibility of the UK exiting without an FTA and having to revert to WTO rules.
What Brexit means Brexit means is becoming clearer as we move towards the irrevocable step of triggering Article 50 later this month.
The government has ruled out remaining a member of the single market and full customs union and is pursuing a Free Trade Agreement (FTA) that is as “frictionless as possible” (but what that means in practice is a very open question), and Theresa May has said that “no deal for Britain is better than a bad deal for Britain” and David Davies has warned Cabinet that they must be prepared for Britain leaving the EU without a trade deal in place.
We know that it took Canada 5 years to reach an FTA with the EU. The “Comprehensive Economic and Trade Agreement” (CTEA) removes tariffs on all industrial and most agricultural products, although there are quotas for some products beyond which Canada must pay tariffs.
We also know that any FTA between the UK and the EU must be ratified by the other 27 member states, which is likely to take at least six months, so we will have about 18 months to negotiate an FTA, once Article 50 is triggered.
It is therefore going to be quite a challenge to reach a comprehensive FTA by the time we leave the EU and there are likely to have to be transitional arrangements, but we currently know very little about what those transitional arrangements might involve, but they are likely to deal with immigration controls and customs systems.
An FTA promotes cross-border trade by reducing or eliminating customs duties on imports (tariffs) and non-tariff barriers that restrict trade, but they generally give more access to goods than services and, of course, the UK is predominantly a service driven economy.
FTA’s do not give full access to the single market or grant passporting rights, which is a system that reduces barriers to the market in financial services, on which the City is heavily dependent.
On the other hand, we would be able to conclude FTA’s with other countries which currently we are not able to do, we would not have to accept free movement of people or contribute to the EU budget and the influence of EU law would be considerably reduced, albeit not eliminated, depending on the terms of the FTA.
The negotiations are likely to be difficult and fraught and each side will presumably be threatening the other with tariff and non-tariff barriers if agreement cannot be reached.
As Theresa May has made it clear that she will walk away if he does not get a good deal and as the EU has made it clear that Britain cannot be allowed to be better off outside the EU than in it, there has to be a real risk that we will end up leaving on WTO rules, hence David Davies’s warning to the Cabinet.
WTO rules would mean that we would have no access to the single market, but on the other hand would not have to accept free movement of people, contribute to the EU budget or submit to EU law and we would be free to conclude our own trade agreements with other countries.
The World Trade Organisation, of which most of the trading nations of the world are members, including the UK and the EU, governs trade between members in goods and services.
WTO members are not supposed to discriminate against each other by, for example, imposing nontariff barriers and to give members equal “most favoured nation” treatment, but the rub is that if there is a breach of WTO rules it is for the government to bring a claim and affected businesses cannot do so directly.
If the UK does not reach an FTA with the EU it must agree WTO schedules with the EU and the other WTO members and would be subject to the EU’s common external tariff and impose its own WTO schedules on EU imports.
If we do not reach an FTA with the EU there is likely to be significant uncertainty and disruption to trade whilst we agree WTO schedules and even then exporting businesses are likely to find that cross-border trade with the EU becomes more difficult and expensive. The Guardian newspaper has said that its analysis is that it would cost exporters an extra 6 billion a year in higher duties (The Guardian 01.03.17).