Thursday 02 February 2017 6:01 pm

Defaulting to WTO terms post-Brexit would be a disaster for British trade

Now that MPs have given permission to trigger Article 50 and Theresa May has outlined her 12-point plan for Brexit in both a speech and a White Paper, we finally have some clarity about the government’s intentions.

But we still start with a clean piece of paper: we are leaving the Single Market and the Customs Union, but in terms of the form any post-Brexit trading agreement will take, we are none the wiser.

Once we fire the starting pistol on Article 50, we are in for a long and tedious ride, having effectively passed the gun to Brussels to hold to our head. It will be up to 27 other nations to debate and negotiate, deliberate and disagree, frustrate and procrastinate. Contentious and significant decisions tend to get made at the point of crisis in the EU, as we experienced with Greece.

The EU Commission’s overriding priority is self-preservation. This is driving a motivation to make the UK suffer as much as possible so that no other EU member considers giving their voters a referendum on EU membership.

Likewise, it is going to be extremely easy for any of the 27 EU member states to derail any agreement worth its salt. Since it will have to be endorsed unanimously, and given the recent troubles involved in pushing through the EU’s trade deal with Canada, it could be a tall order to gain agreement on anything within the two year period available. If this happens, we can ask the EU to extend the timetable, but again, this is something on which they all have to agree.

If we fail to reach a trade agreement or transitional arrangement over two years and are denied an extension, or we walk away from a bad deal, what happens next? We would then default into World Trade Organisation (WTO) rules.

An early observation is that no other country actually trades with the EU under WTO rules, with all having established additional agreements over time. In fact, the EU has 880 bilateral agreements with its trading partners which includes most of the 196 countries of the world. Within this, the US has 38 trade deals with the EU and China a further 65.

One thing we do know is that a key part of being a member of the EU is also being part of the Customs Union, which in layman’s terms means no bonded warehouses at our ports for goods from the EU. Goods arriving from the EU on trucks and ships, by rail or on aircraft can pass freely without any inspection for customs purposes.

This arrangement is enshrined within EU law and there is no ready-made alternative legal customs framework in place for the UK. If we trade under WTO rules, this would have to be created from scratch which is probably impossible within just two years.

More important will be the requirement for all exports to the EU to be inspected for conformity with EU rules on product safety and specifications. It is quite possible that a business seeking to export a container of goods into the EU will have to pay for that container to be stored, inspected and tested. If the product is of animal origin, we then get into health certificates and entry into the EU only via designated border inspection posts.

There are currently no facilities in place for any of this storage, inspection and verification process when exporting into the EU from the UK. This explains why most non-EU countries have separate bilateral trade agreements with the EU, rather than merely WTO rules, as the latter are wholly inadequate.

Another feature of WTO rules is the imposition of tariffs, which government sources estimate are an average of 8.7 per cent. Switzerland, for example, faces a 15.4 per cent tariff when exporting prepared meats into the EU, a 3.2 per cent tariff on instant print cameras and a 12.2 per cent tariff on anoraks!

The EU also has other agreements with the likes of the US, China and Japan which allow fast track movement of goods and services without customs inspection and delay. The UK will automatically fall out of these when it leaves the EU and will have to agree replacements independently. If the timetable has run out, there will be no agreements in place and therefore free trade will cease immediately.

My view is that the WTO rules default option is entirely unworkable and will cause significant parts of our current international trade to grind to a halt. We therefore either have to agree an all-compassing bilateral EU agreement within the two years, or a transitional deal, or gain an extension to the timetable to prevent significant harm to our economy.

However, before emigrating in droves, readers should remember that the UK is a net importer with a significant trade deficit with the EU, especially with the likes of Germany. The WTO rules option will also cause significant harm to EU economies and that is in no-one’s interest.

It is unhelpful to see British ministers trade threats with their EU counterparts when, in reality, trade is important to both sides. Let us hope that, after triggering Article 50, we move to a grown-up process of pragmatic dialogue and negotiation and move away from silly insults. Both sides have a lot at stake and, if we continue to irritate ministers in Brussels and member states, the WTO option will look increasingly likely and would be the hardest Brexit option possible.