No deal, all change?

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As the clock runs down towards March 29, we’ll all be hearing more about ‘WTO rules’ – a lot more. What are they, and should we be concerned?

‘WTO’ refers to ‘World Trade Organisation’, which is the global body that governs international trade. Where two WTO members do not have a free trade agreement, they trade with one another under WTO rules. Whilst under a withdrawal agreement the next two years will be spent negotiating a trade deal that would avoid this outcome, exiting with no deal would leave the UK reliant on WTO rules for our trade with the EU.

What would this involve? Well, a lot of work for our civil service, which would have to prepare and agree ‘schedules’ – a list of tariffs and quotas that the UK will apply to other countries in the event of ‘no deal’. And of course, UK businesses would have to factor in EU tariffs on goods, which, whilst on average are around 1.5% across all sectors, rise to approximately 10% on cars and car parts, 35% on some dairy products, 23% on sugar and confectionary, 6.5% on textiles and 4.5% on chemicals, to identify but a few. And it isn’t just the tariff regime that will need to be addressed – some form of system to mutually recognise each other’s product standards and regulations will also be needed to avoid the imposition of non-tariff barriers such as compliance checks at the border.

It has been suggested that to prevent friction in the event of a no deal exit, the UK could reduce or eliminate tariffs to zero on goods from Europe, to ensure the flow of components and equipment required for our industry, especially businesses involved in just-in-in-time manufacturing, and goods for consumers. But this is problematic. The unilateral removal of tariffs, whilst helping many UK businesses to reduce costs and keep supply chains fluid, would place some EU exporters at an advantage over some British exporters. What’s more, under the WTO’s ‘most favoured nation’ principle, an advantage extended to one WTO member must be extended to all WTO members, potentially opening up UK markets to fierce competition from across the world.

Of course, we already trade on WTO rules through the EU with lots of countries perfectly successfully, most notably with the United States. But we don’t trade with them purely on WTO rules, because there is in place between the EU and US a whole series of bilateral agreements that regulate aspects of our trade – the same is true of many other of our most important WTO trading partners. By leaving the EU, the UK will lose the benefit of such deals, which may have an effect on trade, at least until those deals can be replicated or replaced. How quickly this could be done in the event of a sudden exit from the EU is not clear, but one thing is for certain – in the event that we leave on March 29 with no deal, many businesses unfamiliar with trade on WTO terms will have to prepare carefully for a significant new trading relationship with our European partners.

For help with preparing your business for Brexit please contact Luke or one of the team.