‘Computer Says No’ to Jacob Rees-Mogg on ‘no pain’ Brexit

Brexiters see the World Trade Organisation as their best hope for a clean break from the European Union. Maybe it is. But it's not a very good one.

Nobody can say now where Brexit negotiations will lead but as the choice looks increasingly between either close alignment with the European Union and no deal at all, Brexit supporters have warmed to a no-deal exit, which they now refer to as trading under WTO rules.

Leading Brexiter Jacob Rees-Mogg, a Conservative MP, says: “Trading with the EU on WTO terms would work well for the UK and allows us to achieve Brexit sooner.”

The Spectator magazine published an article by City, University of London professor David Collins, who argues that a no-deal Brexit is nothing to fear: "With the WTO option as an entirely acceptable, workable alternative to a trade deal, the UK is truly in a position to walk away." A former British ambassador to the US gave the piece a thumbs-up in a tweet, saying: "It is hard to mount a rational argument against this article."

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There have, in fact, been a number of informed, dispassionate and highly rational arguments against the idea that a WTO-based trade order would be a trade-multiplying breeze for Britain. They have come from Peter Ungphakorn, a former official with the WTO secretariat, from Australian trade expert and former WTO negotiator Dmitry Grozoubinski and from others; the debate is worth following.

The immediate impact of trading on WTO terms would be that, instead of the current zero per cent tariffs, the EU would apply the same tariffs to UK goods that it applies to imports from other non-EU countries. While mostly these are low – about 2 per cent to 3 per cent – they are non-negligible in some critical sectors of the economy, such as cars, dairy and chemicals.

Biggest challenge

This would impose costs on exporters from both sides of the EU-UK relationship, and ultimately consumers. But it isn’t tariffs that would pose the biggest challenge, it’s the non-tariff barriers.

While EU members may individually want to recognise British goods as compliant, the EU’s customs code imposes more onerous procedures and checks on third-party goods than those member states are subjected to. For example, UK exporters would have to complete, among other forms, a single administrative document, with 54 parts, for each declaration. They would lose access to the new computerised transit system, the IT system that facilitates trade.

This isn’t the EU deciding to be obstreperous or imposing new barriers; it’s a legal thing – or, as Stojanovic put it in a conversation, it’s literally a case of “computer says no”.

The UK will be treated like any other outside country. Given the high level of integration in the UK-EU supply chain (there are sectors where over 70 per cent of the supply chain is comprised of imports from or exports to the EU), it’s clear that any increase in the cost of moving things across the border will cascade down – adding cost each time an intermediate good crosses a border.

Border friction

Companies that operate just-in-time processes will have to invest in bigger inventories to minimise delays that might be caused by border friction. That’s an even bigger problem for perishable products. The point here is not that it’s impossible, but that getting to WTO-based trade from today’s seamless, integrated trade is a massive and sudden disruption.

Proponents argue that if the US, China and others trade with the EU according to WTO rules, why not the UK? The entire UK-EU trading relationship (unlike the EU-China one) is, of course, structured around frictionless trade so, to repeat, this isn’t a small transition.

But it’s also the case that the bloc has hundreds of bilateral agreements with various trading partners that aren’t lodged with the WTO. The US trades with the EU on the basis of myriad agreements that the WTO doesn’t cover – including vital ones such as open skies and data protection agreements. The EU may trade with, say, Cuba solely on WTO terms; but that’s a long way from an economy as large and integrated with EU markets as the UK.

Of course, in good time, new arrangements with the UK would also be struck. But how long will that take?

Compensate

And under WTO rules, free-trade deals are supposed to cover “substantially all the trade” between the countries involved, not just one or two areas, which would limit the UK’s ability to try to carve out protections for key sectors such as cars.

Would agreements with non-EU countries compensate for these costs? It’s hard to see how.

The EU is like a big, well-meaning but imposing neighbour you just can’t escape. For all its usefulness and progress in recent years, the WTO is not all-encompassing. It doesn’t really do services, the lion’s share of the UK economy. And if it did, under WTO rules, the same terms would likely have to be granted to countries with whom the EU has free trade agreements, such as Canada and South Korea.

And where disputes arise, as they might – either with the EU or third party WTO members – along the way, it would all take a very long time to resolve.

The list of costs imposed by a no-deal exit is long, well beyond the Irish Border problem. Pilots and planes flying from the UK into the EU would no longer be able to rely on existing certificates issued by the European Aviation Safety Agency; nor could truck drivers who transport goods into Europe rely on EU certificates of professional competence.

Brexiters sometimes admit that there will be economic costs to exiting, but they argue that achieving control over Britain’s laws and freedom from the EU is worth almost any price. Control, though, has turned out to be not quite the prize it once seemed.

Brexiters may not like it, but one way or another, after Brexit, the UK will be both a rule-maker and a rule-taker, much as it is now. The question really is how much poorer will it be. – Bloomberg