Boris Johnson might want to sign an “ambitious” free trade agreement with the EU by the end of the year. But what if he can’t get one?
The prime minister has told Brussels there are no circumstances under which the UK would extend the transition beyond 2020. He would rather crash out deal-less than fail to “get Brexit done”.
Exit on WTO terms hardly looks appealing. It is generally seen as leaving Britain between a rock and a hard place, forced either to cut tariffs on all countries or to impose them on the remaining EU27 at the same level the bloc presently applies to the rest of the world. That’s certainly how Brussels frames a no-deal outcome. Either choice threatens to deliver the UK economy a shock, and one far greater proportionally than the EU27 would face.
It is easy to see why politicians and others believe new tariffs to be inevitable in a no-deal situation. The concept of “most-favoured nation” (MFN) status is hard-wired into the world’s trading rules. It obliges states to treat the same goods alike, regardless of where they come from. So if you lower your tariffs on shirts from one state from 5 to 2 per cent, then you must do the same for everybody else.
Within the EU customs union, Britain enjoys quota-free zero tariffs. Preserving that in a no-deal exit would involve extending those same terms to all 164 WTO members; an outcome that, while lowering certain prices (think food), would also likely dynamite numerous industries wholesale. That’s why many think tariffs would go up, creating extra costs and bottlenecks. And why that vision is one that Brussels is keen to wave as an implicit threat.
But what if that wasn’t in fact the correct interpretation? One strain of thought, encapsulated in a paper by Tom Grant, an international lawyer, believes it misunderstands the nature of the EU, which binds its participants far more tightly than any conventional free trade arrangement. While an international organisation based on treaties, in trade at least it acts as if it were a sovereign in its own right.
World trade rules developed at a time when other entities existed that shared some characteristics with today’s EU. These were the colonial empires, where subject states delegated their international relations to the metropolitan master. In the late 1940s, when the General Agreement on Tariffs and Trade (GATT) was signed, these were being dismantled as colonies exercised self-determination.
Recognising that such states needed time to adjust as they integrated into the world economy, GATT offered derogations for members from MFN rules. They could prefer imports from ex-colonies without offering the same terms to everyone else.
Many examples exist, such as French and British exemptions for commodities from their former colonies, or the one applied to Egypt for the ex-Ottoman territories, despite not having been a member of that empire since 1914. The US still has outstanding derogations for certain Pacific colonies it inherited from a Japanese mandate in 1945 and decolonised between 1986 and 1994.
Amusingly, the EU itself benefited from just such an exemption, which allowed its six members unilaterally to prefer each other’s coal and steel imports. Without it, the European Coal and Steel Community could not have come into being. All this suggests, Dr Grant argues, that when a state emerges from a union such as the EU, MFN should be derogated until new trade arrangements are put in place.
Granted, it’s not a consensus interpretation. Many believe that the so-called exemption to be obsolete, having only ever been designed to deal with the specifics of decolonisation. But MFN is not an abstract concept; it exists to promote trade liberalisation. That is hard to reconcile with “an interpretation of MFN that compels the snapping into place of tariffs between two of the world’s largest economies,” writes Dr Grant. Nor does it matter that the UK is far larger and more developed than other examples. Arguably, that makes it more relevant not less.
World trade rules were introduced to banish memories of the 1930s, and the economic and political shocks that resulted when countries used trade as a political lever.
True, the EU has hardly embarked on a thirties style trade war. But it is arguably using the no-deal threat to induce the UK to sign up to “level playing field” provisions that go beyond any free-trade deal to date.
Mr Johnson may or may not secure a deal in his timetable. What is at issue is whether trade should be used as a political lever. GATT’s founders applied an MFN exemption in analogous cases of political change in the 1940s. Now Brexit seems certain, would it not be consistent for that same principle to apply?
