What would a no-deal Brexit mean for trade?

The Economist is running a series of articles on the potential impact of a no-deal Brexit on everything from immigration to universities, cars to retailing. Our first piece looks at trade.

If Britain falls out of the EU, membership of the World Trade Organisation (WTO) will be its crash mat. Unfortunately, it will be one without a huge amount of padding. Members of the WTO are supposed to uphold the principle of “most favoured nation”: any market access a country grants to one member must be offered to everyone else in the club too. The exception is for members who agree trade deals between them. They are allowed to give each other special treatment.

It is this special treatment from the EU that Britain would lose upon a no-deal Brexit. As a member of the EU, Britain is part of its single market; it enjoys special (and tariff-free) access to the bloc that other WTO members do not get. Outside it and without any sort of trade deal, WTO rules would stop both Britain and the EU from giving each other privileged tariff relief.

According to the Confederation of British Industry, that means Britain’s importers would face a trade-weighted average tariff of around 5.7% for stuff coming in from the EU. Goods going the other way would face an equivalent tariff of 4.3%. Neither party would be able to lower its tariffs on food products, say, or on imported cars without doing the same for all other WTO members. Although some Brexiteers argue that Britain could unilaterally lower its tariffs to zero, in practice the government would be highly unlikely to do so for fear of wrecking domestic industries.

Just as bad would be the other sorts of trade barriers that would spring up. At the least, British importers and exporters would face new customs checks. Some Brexiteers have claimed that the WTO’s Trade Facilitation Agreement would prevent the EU from erecting such barriers, but this is wrong. That agreement is supposed to make regulations more transparent for traders, not negate the need for compliance checks.

WTO membership should nonetheless grant British goods-exporters continued access to the EU’s market, at the cost of some added hassle. The hardest landing would come for trade in services, where tariffs and customs checks are irrelevant. In this area WTO rules are much thinner. That is because slashing trade barriers on services requires regulatory harmonisation, which is tough to agree between 164 members. Indeed, the risk is that in some areas the EU would block incoming trade entirely. For example, as long as Britain is a member of the EU, financial-services companies can set up shop in Britain and sell to the rest of the EU. Outside it, WTO rules would not stop the EU from ending that access.

Britain would not only risk access to the EU’s market in the event of a no-deal Brexit. It would also lose access to all the countries with which the EU has signed trade deals, such as Canada, Japan and Mexico. Unless Britain can secure new bilateral trade deals with those countries by Brexit day, any special access it has to them would disappear, and trade terms would lurch back to those set out at the WTO. In theory, the only trading relationships unaffected should be those with countries that do not already have deals with the EU, like America or Australia (though negotiations are under way in both cases). But if Britain’s trading infrastructure came to a standstill because of extra trading frictions with the EU, trade with those partners would suffer too.

There have even been questions about whether Britain’s membership of the WTO would be secure in the event of a no-deal Brexit. This worry is overdone. True, Britain is facing formal objections to its proposed terms of membership from 27 other WTO member countries. But negotiators will probably haggle away these complaints, perhaps by offering a larger lamb quota in exchange for their approval. Such haggling can go on after March 29th without causing any additional disruption.

What all this adds up to in terms of economic impact is clearly subject to great uncertainty. But economists have made some long-term estimates. According to the Centre for Economic Performance, a research institute, a no-deal Brexit would lower Britain’s trade with the EU by two-fifths over ten years. For its part the British government has estimated that a WTO-only deal would cut Britain’s cumulative growth over the next 15 years from about 25% to about 17%.

See more Brexit briefs:
What would a no-deal Brexit mean for the economy?
What would a no-deal Brexit mean for the island of Ireland?
What would a no-deal Brexit mean for immigration?
What would a no-deal Brexit mean for retailing?
What would a no-deal Brexit mean for the automotive industry?