Monday, 13 February 2017

The myth of the WTO option

When Theresa May said that “no deal is better than a bad deal” this was widely interpreted to mean that she would be prepared to see the UK trading on WTO terms if necessary. It bears saying, first of all, that if the UK leaves the EU with no deal, it will have a calamitous impact well beyond trade – everything from airline flying rights to data transfer protocols would be affected, each of which is a hugely complex issue in its own right.

As regards trade, May is channelling what has been a persistent Brexiter myth going back well before the referendum. The myth is that WTO rules offer some kind of basic, entry-level framework for international trade which is sitting, ready and waiting, for the UK to ‘revert to’. Nested within that myth is another one, namely that what is at stake in international trade rules is primarily, or even solely, tariffs (a misunderstanding that remainers, too, are prone to). And nested within that is an idea that it is companies that do trade, not governments, so that international trade rules and agreements are a nicety if not an irrelevance.

That latter point – put to me by a member of UKIP just the other day – is hardly worth discussing. Apart from smuggling, no international trade can occur in the absence of some set of laws and regulations that transcend the nation state. The idea of free trade as a kind of state of nature as it appears within Brexit mythology has recently been comprehensively debunked by Professor Steven Weatherill of Oxford University writing on the EU Law Analysis blog. This is also why the Brexiter idea of sovereignty is so naïve: as soon as international trade occurs some diminution of sovereignty (in the sense that they mean it) is entailed. This applies quite as much to the WTO as the EU – arguably even more so in terms of transparency and accountability - and indeed the WTO is often criticised by activists on these grounds.

The other issues are much more complicated. The first is the complexity of unbundling the UK from the EU’s membership of WTO. Brexiters talk of this as ‘regaining our seat’, but far more is involved than moving around the table. A particular difficulty is that the EU’s current commitments to the WTO are unknown, as former WTO official Peter Ungphakhorn explains (along with much more detail on many other aspects of what is at stake):

“The only confirmed commitments on tariffs, quotas, and farm subsidies are from before 2004 when the EU had 15 member states. The EU has expanded three times since then, but in 12 years it has been unable to agree with the WTO membership on revised commitments.”

The word ‘quotas’ in this is a reminder that trading on WTO terms is not just a matter of adopting a certain tariff regime. Within that, countries have different quotas of trade, with different tariff levels above and below the quota. Thus unbundling the UK from the EU entails establishing what proportion of EU trade in a massive number of goods can be attributed to the UK. This is not just a mindbogglingly complex technical matter, although it is surely that, but also entails potentially acrimonious political negotiations not just with the EU but with other WTO members. Depending on which good is under discussion, different countries – some friendly, some hostile to the UK – will have significant interests at stake. If Brexiters complain about the difficulties of the UK ‘getting its own way’ with 27 other EU countries, they are in for a nasty shock when dealing with the 160+ WTO members. To get a flavour of what is involved, read Ian Dunt’s explanation of the issues using the example of trade in lamb. It makes for sobering reading.

In any case, tariffs and even quotas on trade in goods are not the main issues at stake here. The WTO framework has only limited applicability to trade in services and to non-tariff barriers to trade in both good and services (for an overview, see this briefing from Sussex University’s UK Trade Policy Observatory), and indeed has in many other respects been stalled since the failure of the so-called Doha Round that began in 2001 and was effectively abandoned last year. In this sense, the idea of WTO rules as a comprehensive trade framework is a misnomer. Brexiters often sneer at those who point to the dangers of leaving the single market and the uncertainties of creating free trade agreements by saying that countries such as the USA and China trade with the EU without either single market membership or a free trade agreement. The implication is that these countries simply trade on WTO terms. They do not.

In fact, such countries trade via a complex web of Mutual Recognition Agreements (MRAs) which are principally concerned with removing the non-tariff barriers to trade which are, in most cases, far more important than tariffs. Each MRA is a highly technical and, in most cases, lengthy document and the outcome of long periods of negotiation. The USA, for example, has some 135 MRAs with the EU, and China has 65. On Brexit with no deal, not only would the UK not have any MRAs with the EU but it would also have exited the EU’s MRAs with countries like the USA and China. For none of these MRAs exist as part of the WTO rules to which the UK will supposedly revert. It is for this reason that the pro-Brexit economist Peter North of the Leave Alliance writes:

“One can say, unequivocally, that the UK could not survive as a trading nation by relying on the WTO Option. It would be an unmitigated disaster, and no responsible government would allow it.”

So when Theresa May says that no deal is better than a bad deal she is either willing to entertain such a disaster or it is simply a negotiating tactic. But if it is a negotiating tactic it is a strange one since it is to say: do as I want or I will shoot myself in the head.






Update (16 February 2017): Since writing this post, I have been contacted by Peter Ungphakhorn (quoted in my post) to say that, whilst he agrees with the thrust of my argument, schedules for the EU-25 (i.e. its 2004 membership) were updated for goods in December 2016. For much more detail see his blogpost: https://tradebetablog.wordpress.com/2017/02/04/after-12-years-eu-25-goods-commitments/

I’m grateful for that information. It does reduce one aspect of the complexities I discuss (i.e. the commitments from which the UK must unbundle). Equally, the fact that it took 12 years to get to that point serves to underscore just how great those complexities are!
 

16 comments:

  1. Shooting herself in the head is one thing, shooting the rest of us in the head is quite another.

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  2. We will be just fine. Experts were all wrong before. The EU is changing rapidly. Britain is adapting in advance as is prudent.

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  3. Erm, where did you get the idea Pete North is an economist? He's a blogger and Twitter user and sometime computer coder or developer. But he's not an economist.

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  4. Weren't we led to understand that we'd be triggering article 50 soon after result if leavers got their way? Weren't forecasts based on this prediction? Have we forgotten that? Our reckoning will come not now but when (and I cling to false hope 'if') article 50 is triggered, and again when we fall out of the club two years later. Currently we have booked a loose appointment at the dignitas clinic. The markets remain hopeful. I for one have already lost around 20 per cent of my income; but I'm lucky; I'm just working 20% harder to make up for the losses in sterling...

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  5. could she shoot herself in the head now (get that essential rubbish disposal over with) and then we can go back to the best option,
    re-run the referendum, this time getting a sane informed result
    - of staying in.

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    1. Unfortunately, you will still get the same result. I don't think that the reasons for wanting to quit the EU were ever economic. It seems that to many,a vote out of the EU was a vote to keep out other Europeans. I doubt that this sentiment has changed amongst those who voted to leave.

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  6. Much of the blog majors on WTO schedules. Even Dr North (father of unemployed programmer Pete North) thinks this is not an issue ( http://www.eureferendum.com/documents/BrexitMonograph008.pdf ).

    As to WTO, MRAs etc, I would recommend reading the Door to Freedom Blog for a considered & balanced analysis: http://doortofreedom.uk/conformity-assessment-and-the-wto-option

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    1. Thank you for the links. On the first one, Dr (Richard) North mainly addresses the issue of whether the UK could easily, on leaving the EU, be a full member of WTO, something which arose during the referendum campaign. North argues that this is not a problem. So far as I know he is right, and it is not an issue I raised in my blog post. What I was discussing was the complexity involved. He agrees, writing “No sensible person could argue that the Brexit process will not be complicated and time consuming” (p.10). Absolutely correct.

      Regarding the second link, I cannot determine who the author is, apart from being an apparently pro-Brexit lawyer? It discusses in some detail the complexities, comparing more pessimistic views of these by some and advancing the author’s slightly more optimistic view. I suppose that ultimately only time will tell, but I do notice that on the front page of the blog there is a similarly detailed discussion of the High Court Article 50 ruling, and similarly taking an optimistic view that the Supreme Court might over turn it. That proved not to be the case and I wonder whether the sympathies of the author lead him or her towards more optimistic, but not necessarily accurate, predictions. That might be true of the opinions expressed wrt WTO.

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  7. As the EU countries (eg Germany) have as much to lose from no agreement/WTO as the UK, surely the most sensible thing is on day one, do the equivalent of "The Great Repeal Act", ie our trading relationship and terms with the EU stay the same, and get re-negotiated over time, rather than in the 18 months or so that will be available before the ratification process.

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  8. Worth reading this: http://www.forbes.com/sites/timworstall/2016/11/01/britain-simply-isnt-going-to-have-a-wto-problem-post-brexit/#7b363d9e2e61

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    1. Thank you for the link. The piece in question is written by Tim Worstall, a well-known pro-Brexit economist. It makes two arguments. The first is a version of one that I discuss and dismiss in my post. It is that in some way trade does not need rules in place so that: “When push comes to shove it'll be shove the paperwork and push the trade”. All I will say beyond what I wrote is that if Mr Worstall wants to pay me to buy my house but is not bothered about having a legal contract to make the purchase, I will happily take his cash.

      His other argument is about the issue of the UK resuming/continuing its WTO membership. Worstall argues that this is not a problem. So far as I know he is right, and it is not an issue I raised in my blog post. Where I disagree with him is that he seems to think that this and tariff levels is the only issue that matters, rather than the unbundling issues, non-tariff barriers etc with which my post is concerned. It is interesting to note that someone in the comments put this to him, and his response is to say that he has phoned the WTO and they have said it will be fine. This doesn’t sound very convincing, frankly, especially as in the article he says that this phone call was about the question of the UK’s independent membership of the WTO, not the unbundling process.

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    2. This comment has been removed by the author.

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  9. Get real. Remember, the 4 freedoms are indivisible. Who in there right mind in the EU would agree to this?
    And Germany have FAR more to lose from
    an unstable EU than protecting uk in some way.
    Tough times ahead for UK

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  10. 1) I'm not an economist.

    2) "and his response is to say that he has phoned the WTO and they have said it will be fine. This doesn’t sound very convincing,"

    How, actually, is an economic journalist supposed to check claims being made other than by phoning up the people who know the answer?

    3) The entire approach you're using is incorrect in those economic terms. It is imports that make the UK richer, not exports. Thus the complexity of the rules over what we import, the thing we care about, is in our hands, is it not?

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    1. 1) I apologise, thank you for correcting me. I should perhaps have said you are a pro-Brexit journalist who writes about economics.

      2) I agree with you - always good to check facts with the real experts. What I found unconvincing was that someone in the WTO told you in a phone call that there was no difficulty in unbundling the UK from the EU in terms of the negotiation of schedules, quotas and so on. I don’t have any difficulty being convinced that you were told that the UK continues to be a member of the WTO in its own right, of course – which is what in the article linked to you quote as having been said to you. As I mentioned in my previous comment, this is also my understanding of the situation.

      3) I’m not an economist either, so I’m not sure I understand your point, but I seem to remember from the economics I studied long ago that most economists subscribe to the theory of comparative advantage and also think that long-term balance of payments deficits are to be avoided. But perhaps both those views are now discredited. If not, it seems to suggest that imports and exports are both economically important for the UK and therefore that the rules of trade between the UK and other countries are also important. That’s certainly what most business people seem to think, but perhaps they are wrong. And as I understand it most politicians also regard UK exports, not just imports, as being economically important. They may also be wrong. I imagine that those employed in exporting businesses also think that. Again, it may be that they are wrong. There may be economists reading this who can enlighten us both.

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    2. I understand WTO staff are reluctant to go into detail on Brexit. There are statements from DG Roberto Azevêdo who has repeatedly said all of this is uncertain because it has never been done before. See for example, the quotes here https://tradebetablog.wordpress.com/2016/08/17/2nd-bite-how-simple-uk-eu-wto/#azevedo

      It's also possible to assess where difficulties might arise by looking at the detail. To extract the UK's WTO commitments from the EU's, most EU tariffs ought to be copied easily to the UK's. Similarly, I'm told services commitments. should be straightforward although the volume of copying, pasting and checking is high (as also with tariffs). The biggest difficulty is tariff quotas, which I've looked at several times, the latest being this https://tradebetablog.wordpress.com/2017/01/06/limits-of-possibility/. It's pretty clear where problems could arise, possibly serious.

      Will they arise and will they be serious? Who knows at this stage? It depends on what the UK wants, how the EU reacts and how other countries respond. We can guess (and there've been guesses in all directions), but we cannot know for sure until the talking really starts. We can't even know for sure whether this can be done in two years or not. I think.

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