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wto terms

If the last phase of the Brexit talks proved anything, it is that a ‘no trade deal’ outcome is perfectly possible.

Whether it be fish, or state aid, or Northern Ireland that prompts it, a breakdown in the negotiations cannot be ruled out.

Were that to happen, trade between the UK and the EU would be carried out ‘on WTO terms’. So, what exactly would this mean? The simple answer is that trade with the EU will become more difficult and more expensive.

Tariffs will be charged, checks carried out, and service exports potentially rendered unviable.

UK exports to the EU would be liable to tariffs. In accordance with the WTO’s ‘most favoured nation’ (MFN) principle, these must be the same as those charged on goods from any state with which the EU does not have a free trade agreement. The average duty is 3.2 per cent.

However, tariffs are higher for agricultural goods—8.7 per cent on average. In fact, duties exceed 25 per cent for more than one in ten agricultural products.

The highest EU MFN tariffs are the equivalent of 189% for some dairy products and 116 per cent for some animal products.

The UK, of course, could decide not to charge tariffs, but under MFN would have to do the same for all WTO members.

And then there will be checks. Currently, goods entering the UK from the rest of the EU are assumed to be safe because of common standards and checks in the EU’s internal market.

They are therefore not normally inspected at the border. This will no longer be the case once the UK is outside this market.

Without a free trade agreement, the EU will treat imports from the UK in the same way as it does those from any country with which is does not have a free trade agreement.

All products of animal origin will have to enter via a veterinary border inspection post where both documents and the goods themselves would be checked.

All consignments of milk for human consumption would also be subject to document and identity checks, with at least half subject to additional physical checks.

Some products, such as medicines and chemicals, require approval by testing bodies.

If the UK and EU are trading on WTO terms, the EU will no longer recognise declarations of compliance with EU standards by UK-based bodies, meaning that importers would need to find a way of ensuring certification, which might provide them with an incentive to find an EU supplier.

For some manufacturing industries such as automotive, the additional time taken at borders could make it very difficult if not impossible to maintain the ‘just in time’ supply chains on which they currently rely.

Of course, the UK could unilaterally scrap checks on imports from the EU. Again, however, it would have to do the same for imports from elsewhere in the world.

And this would post a serious risk that products such as contaminated food, animal and plant products carrying pests and diseases and dangerous electrical goods might enter the UK market.

And then there are services, which make up more than 80 per cent of UK economic output and 45 per cent of exports. WTO rules contain agreed basic requirements on how governments set standards and regulations.

However, provisions for trade in services are far less developed than they are for goods.

There are different types of service, each has several methods of delivery, whether it is setting up a branch in a foreign country or flying the customer into the country (as with tourism) or an expert out to provide the service.

States deploy a number of measures to impede the provision of services by foreign providers.

These include requirements making it hard to establish a commercial presence such as a branch or subsidiary, or to hold qualifications or a practitioner’s licence accepted by the host state.

Immigration law, too, affects both an exporter’s ability to supply a service and a consumer’s ability to consume them abroad. WTO agreements do not provide such extensive protection for services as they do for goods.

And a WTO outcome also means that trade will become more difficult with a number of other countries.

Through its EU membership, the UK has enjoyed access to a large number of free trade agreements with countries such as Canada, Japan, Singapore and South Korea.

The UK is attempting to renegotiate all these EU deals. So far, 19 have been rolled over. Where they are not, or a new agreement not put in place by the end of transition, the UK’s trade with that country or bloc will also be on WTO terms.

In an earlier report, we modelled the impact of a WTO outcome.

We assumed that UK–EU goods trade would be subject to the EU’s most-favoured nation tariffs and all UK–EU trade would face an increase in non-tariff barriers equalling three-quarters of the estimated reducible non-tariff barriers between the EU and the US.

We found that the direct impact would be to reduce UK GDP and income per head by 3.3 per cent over ten years (in ten years’ time GDP would be 3.3 per cent lower than it otherwise would be).

However, with plausible estimates of the indirect impacts—in particular, the hit to productivity resulting from reduced international trade—it would rise to 8.1 per cent.

This estimate is broadly consistent with the government’s own impact assessment, which estimated a negative impact of 7.6 per cent of GDP. Of course, this decline is dwarfed by the economic impact of the pandemic.

However, whereas it is hoped that the impact of Covid-19 will be relatively short-lived, the impact of Brexit will not be.

Trade between the UK and EU is going to be more difficult after Brexit. How much more difficult depends on what can be agreed.

WTO terms provide a basic floor for world trade and a basic level of predictability and non-discrimination.

Using them as the sole basis for our trade with the EU would significantly disrupt that trade.

By Professor Anand Menon and Professor Catherine Barnard, director and senior fellow respectively at the UK in a Changing Europe. This piece was originally published by The Telegraph. Read the updated report on what trading on WTO terms would mean here.

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