The Truth Behind a No deal-WTO Brexit

No deal Brexit. 2 years ago, this proposition seemed almost unfathomable. Yet this alarming proposition is holding businesses, markets and traders across the continent on tenterhooks. As this consuming debate threatens to marshal off our borders and seal our divide from the continental mainland, analysis of the varied impact of a No deal Brexit provides an insight into who – both in the UK and EU – will be most affected under this scenario. As the impenetrable fortress along the Channel begins to harden, the plunge into isolation for Britain may in fact leave Europe breathing a sigh of relief.

Under a No deal Brexit with no free trade agreement, UK-EU trade would be conducted under WTO rules. The UK would be forced to trade with the Most Favoured Nation principle that underlines WTO policy – thus facing the full wrath of the EU Common External Tariff, which it applies to all countries it does not have a free trade deal with.

Boris Johnson described this scenario as “perfectly OK”. It isn’t.

Johnson claims that this apocalyptic tariff can be offset by parading the seven seas to source new free trade partners far and wide. Yet with the European Union accounting for 44.16% of total British exports, “no amount of trade deals with New Zealand” will make up for it, in the words of former Chancellor Osborne. Britain’s trade markets are overwhelmingly skewed towards its continental home, whilst Britain itself accounts for only 6.99% of EU exports – a clear indication of where the bargaining power lies in trade negotiations.

Liam Fox claims that “you couldn’t have a no deal without disadvantaging both UK and EU citizens” yet the numbers above argue to the contrary in terms of magnitude. The average tariff on British exports to the single market under WTO rules would be 4.1%, with 5.7% average on imports. Yet whilst this would decrease British exports by 9.8%, European trade would fall by an average of only 2.13% – with the continental powerhouse, Germany, falling by 2.54%. The enormity of this disparity is evidence that the EU has little to lose under this scenario – whilst European exports to the UK would decrease by a whopping 30%, Britain is such a minute player in the international world that its share of European trade is minimal.

However, the more complex hurdle the UK is facing will be regulatory. Tariffs vary wildly, with the highest taxes levied on food and clothes – neither of which are primary UK exports – whilst technological products including electricals and telecom face a tariff of only 1%. But if the UK credibly commits to its threat to ‘tear up the rulebook’, regulatory idiosyncrasies would only add to the costs of British exporters – and given the current productivity laggard status assigned to our firms, many small exporters will likely run into financial difficulty as interest rates by the Bank of England continue their upwards path.

Yet costs will be high for European nations too. Customs barriers, border checks and IT systems to regulate such trade will cost 600mn euros for the Dutch alone – excessive red tape that is a burden on SMEs who have never traded outside of the customs union. With 200,000 employed in trade with Britain and the prospect of purchasing 4.2mn export licenses, a No deal Brexit is an unattractive proposition for the Dutch – evidence testified by the Brexiteers who hark that European business will drive its government into softer negotiations.

But the stakes in a soft Brexit are higher. A British deal whereby borders are closed to migrants but open to trade would create a near-certain European implosion; the far right from Hungary to Italy would follow in Britain’s wake, and the single market would collapse. Evidently, such a situation would be worse for the Dutch; the destruction of the eurozone, continental trade and ensuing chaos trump the dismay of losing some trade with the UK – despite what the Little Englanders may want to believe. Europe would once more return to the fractured state it existed in prior to the ECSC in 1952; and given the centuries of conflict that preceded this, such a proposition would send fear throughout the continent. British trade is thus a small price to pay in a much more dangerous game.

Brexit is not only a deal in which the UK must hit the sweet spot. The EU too must get this deal right. By balancing business with larger geopolitical interests, a WTO scenario is easily bearable for those at the nexus of eurocentrism – notably France, Germany and the Netherlands, who happen to be amongst the UK’s largest trade partners within the bloc. Britain must open its eyes to this reality; whilst the EU may breathe a sigh of relief at this outcome, Britain would plunge into isolation. In this struggle for supremacy by the British against the EU27, Europe will have won.

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Craig Stock

Second Year Economics Undergraduate at Warwick University.

Craig Stock has 15 posts and counting. See all posts by Craig Stock

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