If the UK leaves the EU with ‘no deal’, it will fall back on World Trade Organisation Rules, but what does this mean?
The WTO and Free Trade
The WTO was founded in 1995 and sets the rule book by which global trade takes place.
One of the main things it has done over the past two decades is to reduce tariffs (basically taxes) levied by governments on imports and exports, and to promote a free-trade agenda.
In 1947, the average external tariff charged by GATT (the predecessor of the WTO) signatories was 22%, which was a massive disincentive to trade, by 1999 it was down to 5%, and today the weighted average tariff charged by the US and EU is 1.6%.
Over the same period, there has been a massive increase in world trade: In the 1950s international trade accounted for 8% of the world economy, today it accounts for 30% of a much bigger global economy.
The Limitations of the WTO
Recently, the WTO’s trade liberalisation has stalled, and most of the progress countries have made in reducing barriers to trade have been through regional and bilateral trade agreements. The European Union is a principle example of this: UK companies pay no tariffs on exports to Europe or imports from Europe, which makes trade easy.
If we were to fall back on WTO trade rules, there are some economic areas which still have very high tariffs – cars and car parts would face a 10% tariff every time they crossed a boarder (making BMWs a LOT more expensive! given international supply chains) and agricultural tariffs stand at 35%.
The latest Treasury forecast predicts that the UK economy would be 9.3% smaller in 15 years if we exited the EU under WTO rules.
Isn’t this just all part of ‘project fear’?
Of course Brexiteers argue that we could forge new bilateral and multilateral trade agreements once we leave the EU, but most estimates suggest that a no deal WTO fall-back Brexit would be detrimental to the UK economy.
However, what all of the above suggests is maybe that ‘globalisation’ isn’t so good for world trade anymore…. maybe it’s too difficult to sort out genuinely mutually beneficial trade agreements between all 160 odd member states of the WTO.
Instead it seems that regional agreements are much more important for economic growth – it makes sense that it’s easier to get a deal between a dozen local countries rather than ten times that number after all.
To my mind it seems unlikely that we’re going to be able to negotiate dozens of little deals with specific countries that outweigh the benefits of being part of a massive trading block like the EU!
The Week, 26 January.