Guest column by Clemens Boonekamp
Partner at IDEAS Centre, former director of Agriculture and Trade Policy Reviews, WTO Secretariat
POSTED FEBRUARY 12, 2017 | UPDATED FEBRUARY 12, 2017
The UK Prime Minister has opted for a hard Brexit. She is correct. A soft Brexit would have been unlikely. The UK has been a balancing force in Europe for centuries. This role is in question with Brexit, causing disquiet and some anger on the continent. A number of continental EU members also have their own “leave” constituencies with mainstream leaders ready to show that parting is not without cost.
These factors alone would have made it naive to think that the “single market” would be available for anything less than the “four freedoms”, substantial payments and no seat at the table — a situation considerably inferior to the EU-membership that the voters rejected!
Making it an issue in the Brexit negotiations could have led to an embarrassing rebuff, with the economy then in an increased state of uncertainty, with its attendant costs. A customs union might be possible but then the UK would forego its independence to negotiate bilateral trade deals.
There is a radical alternative on the trade front. Don’t negotiate. Announce, after invoking Article 50, that:
- The UK will “cut and paste” the EU schedules of commitments in the WTO — which are the UK’s schedules as a member of the WTO in its own right
- But in agriculture the UK will not have an AMS (the right to use trade-distorting domestic support beyond the “de minimis” 5% of the value of production; AMS is a measure of this, the aggregate measurement of support)
- The UK will scrap all tariff quotas, applying the in-quota rates to unlimited quantities of imports on those lines (or products) where the EU has tariff quotas
- The UK will trade on an “MFN basis” with the EU — trade between the UK and EU will have the same tariffs as trade between the UK and the rest of the world
- The UK could also use this opportunity to simplify some extremely complicated tariffs it inherits from the EU, such as on processed agricultural products, where the rates depend on how much milk, sugar and other ingredients they contain. It could apply the lowest rates on all products where the EU has multiple rates
This has advantages: it is quick and clean, gets the job done, reduces uncertainty, avoids potential rebuffs and frees the UK to pursue trade relations with third parties.
It can take control by following a strategy that is bold and independent, simply not negotiating on trade and being generous on all other matters, to the benefit of all
In addition, it may reduce calls for compensation from those who will argue, correctly, that an x% percent tariff into the UK market is not worth as much as the same tariff into the previous EU–28 or, for that matter, the “new” EU–27 market — “nullification and impairment” of expected WTO rights is a likely issue.
Also, there will be a sense of schadenfreude in that there will be WTO members who will want to see the post-Brexit EU AMS reduced and the in-quota amounts of its TRQs (tariff-rate quotas) maintained, while some EU members will argue for the opposite — i.e. the EU will have a problem.
The UK can then move forward on its own choices for its trade relations, buttressed by its WTO membership. Proceed, perhaps, as follows:
- maintain the generalised system of preferences for developing countries (GSP) provisions of the EU, as well its “everything but arms” duty free/ quota free access for least developed countries (LDCs)
- propose a free trade agreement (FTA) to the US, offering essentially free access for goods and services, albeit with carefully circumscribed labour mobility
On the latter, knowing that the gains from liberalisation accrue mainly to those that undertake it and that FTAs need not be symmetric, accept any reasonable offer from the US — the point being to get it done quickly, reducing uncertainty and laying the basis for an independent trade framework.
Propose the same to the Commonwealth and China. When done, and acting with alacrity and generosity it might well happen in reasonably short order, re-approach the EU, suggesting similar terms but with some emphasis on mutual recognition and the financial “passport”. If successful, the UK would establish itself as a free-trade haven in Europe, with the economy to reap the benefits.
There are, of course, difficulties. It is probably impossible to know the “cost” of Brexit for the UK economy, but whatever it is there is likely to be a perceived need to safeguard some sensitive sectors. Agriculture, politically important, is an example.
Following Brexit the UK will “lose” EU support to its agricultural sector, amounting to upwards of €4 billion a year, equivalent to some 14% of its agricultural output.
In addition, around 60% of the UK’s agricultural exports go to the EU and would face an average tariff of almost 11%; assuming a unitary price-responsiveness, this could result in an annual income loss for the sector of up to €1.5 billion (and though the “responsiveness” may seem high it serves also as a proxy for areas such as lamb, where the EU has tariff quotas and where the UK loss of market share is almost certain to be substantial).
Making good, WTO-legally
There would then be pressure for the government to make good these revenue shortfalls — which, incidentally, probably could be done comfortably in a WTO-legal manner by use of the “de-minimis” (permitted trade-distorting support of up to 5% of the value of production) and Green Box (non-trade distorting support) provisions of the WTO’s Agriculture Agreement.
Other sensitive sectors could also face significant revenue “losses”, including motor vehicles, which would face an average tariff of around 10% into the EU for a possible loss also of some €1.5 billion a year. The government could consider compensating such sensitive sectors with performance contingent, time-bound, industrial policy measures.
It is not inconceivable that Brexit-related support to sensitive sectors could add well over 1% to government expenditures. This is doable, particularly given the presently low borrowing costs. But it is not a long-term solution; that requires market access, among a range of factors, and growth. The above may be a quick step in that direction.
Other issues will need to be settled with the EU for Brexit, including compensation and pensions. On the former, scrupulously pay the “rent, water and light” until you “close the door behind you”. On the latter, it may be an EU obligation but it does involve UK citizens; accommodation and generosity could well be good domestic and foreign policy.
The UK is in a box. Its future trade relations, and hence its economic actors, are uncertain. It can take control by following a strategy that is bold and independent, simply not negotiating on trade and being generous on all other matters, to the benefit of all.
Like this blog as a whole, guest contributions are intended to contribute to the debate. I don’t necessarily agree with them.
Updates: None so far
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