LeaveHQ, 13/03/2017  

Updated version

The WTO Option is an approach to Brexit much favoured by some groupings. It is an approach where the UK leaves the EU without having negotiated any trade agreements with the EU, either within the framework of Article 50 negotiations, or on the margins. Instead, it relies entirely on multilateral WTO agreements covering trade-related matters.

The general thrust of the WTO Option argument is that: "Were the UK to leave the EU, it would continue to have access to the EU's markets, as World Trade Organisation rules prevent the EU from imposing unfair, punitive tariffs on UK exports". In reality, the WTO rules only afford very limited protection against discrimination, and then only in respect of tariffs - which are no longer central to trade matters.

As the WTO site itself says, "by their very nature RTAs (Regional Trade Agreements — as is the EU) are discriminatory", and, under WTO rules, an amount of discrimination against third countries (and that would include the UK) is permitted. The WTO observes:

Modern RTAs, and not exclusively those linking the most developed economies, tend to go far beyond tariff-cutting exercises. They provide for increasingly complex regulations governing intra-trade (e.g. with respect to standards, safeguard provisions, customs administration, etc.) and they often also provide for a preferential regulatory framework for mutual services trade. The most sophisticated RTAs go beyond traditional trade policy mechanisms, to include regional rules on investment, competition, environment and labour.

The crunch issue here is the "preferential regulatory framework". Unless goods seeking entrance to the EU Single Market (i.e. British exports) conform to the regulations which comprise the framework, they are not permitted entry. Thus, the assertion that, if the UK left the EU, "it would continue to have access to the EU's markets …", is simply not true. And ,  to spell it out,  if it's not true, it's false.

With or without tariff issues being resolved ,  which are actually irrelevant to the access issue , the claim is false. Tariffs do not prevent access to a market. They simply impose a tax on entry. The actual barrier is the regulatory conformity,  what is known generally as a non-tariff barrier (NTB) or, sometimes, as technical barrier to trade (TBT).

Nevertheless, it is generally recognised that, in order to access the Single Market, goods must comply with EU rules. Conformity is the way of overcoming the NTB. But what advocates of the WTO option have not realised is that there is more to it than that . Much more. Potential exporters not only have to ensure their goods conform, they must provide evidence of their so doing. This requires putting the goods through a recognised system of what is known as "conformity assessment".

We are at this point entering serious nerd territory. If your eyes are beginning to glaze over, all we can say is welcome to the world as it really is. It has taken years of mind-numbing, tedious study to understand this amount of detail, and either you know it, or you don't. If you don't, you are going to make serious mistakes. And that is just what the WTO Option advocates have done. In a moment we’ll see why their mistakes are not so much serious as catastrophic.

And, for all that, the fundamentals are quite simple. The point about the Single Market is that border checks have been eliminated. The common rules are monitored by relevant national authorities and there is mutual recognition of standards. Thus, if you so desire, you can load a truck with grommets in Glasgow and ship them all the way to Alexandroupoli on the Turkish border, with just the occasional document check.

But the moment we leave the EU, this stops. Your component manufacturer may still comply with exactly the same standards, but if the product requires independent testing , any testing houses and the regulatory agencies are no longer recognised. The consignment has no valid paperwork. And, without it, it must be subject to border checks, visual inspection and physical testing.

What that means in practice is that the customs inspector detains your shipment and takes samples to send to an approved testing house (one for the inspector, one for the office pool, one for the stevedores and one for the lab is often the case). Your container inspection is typically about £700 and detention costs about £80 a day for the ten days or so it will take to get your results back. Add the testing fee and you’re paying an extra £2,000 to deliver a container into the EU.

Apart from the costs, the delays are highly damaging. Many European industries have highly integrated supply chains, relying on components shipped from multiple countries right across Europe, working to a "just in time" regime. If even a small number of consignments are delayed, the whole system starts to snarl up.

Then, as European ports start having to deal with the unexpected burden of thousands of inspections, and a backlog of testing as a huge range of products sit at the ports awaiting results, the system will grind to a halt. It won't just slow down. It will stop. Trucks waiting to cross the Channel at Dover will be backed up the motorway all the way to London.

For animal products exported to the EU, the situation is even worse — if that is possible. Products from third countries (which is now the UK) are permitted entry only through Border Inspection Posts (BIPs). Only at these can they be inspected and, if necessary, detained for testing. But, for trade between the UK and EU member states, the capacity of BIP is entirely inadequate. Until more capacity has been provided, trade in these products stops dead — say goodbye to a £9 billion export trade.

If the way out of the country becomes blocked, very quickly the return route gets blocked and incoming trade from the EU starts suffering. In the UK, goods from the EU are no longer delivered. Trade slows. Manufacturers which depend on imported components start struggling and then have to close. And while the naysayers talk about losing three million jobs if we leave the EU, we are looking at twice that and more — seven or eight million jobs are at stake.

At this point, you might say, “But how can this possibly happen?”

The WTO Option advocates will tell you that countries such as China, the United States and Australia all trade with the EU without formal trade agreements, and therefore operate under WTO rules. They don't have these problems so why would the UK? The answer, however, is remarkably simple. These countries don't rely solely on WTO rules.

What the WTO Option advocates have done is make a very basic but fatal mistake. They’re so obsessed with tariffs, they haven’t begun to focus on non-tariff barriers. Thus, by and large, they are only looking at trade agreements dealing with tariffs — a sub-set of international agreements which are registered with the WTO. But there are many different types of agreement and many which involve trade, either directly or indirectly, which are not registered with the WTO. These, for our WTO Option advocates, remain under the radar. To them, they are invisible.

Yet one of the most important types of trade agreement is the Mutual Recognition Agreement (MRA) on conformity assessment. This gets round the problem of border checks, as the EU will then recognise the paperwork on product testing and conformity certification. Throw in an agreement on Customs cooperation — to ensure that official paperwork and systems mesh — and you are on your way to trouble-free border crossings.

China has a Mutual Recognition Agreement on Economic Operators, signed in May 2014, the United States has one on conformity assessment which runs to 81 pages, agreed in 1999. Australia has one on conformity assessment. 

All of these are outside the remit of the WTO but they are nonetheless trade agreements, and vital ones at that. But look then what the think-tank Global Britain — another WTO Option advocate — is doing. "As an example", it writes, "Australia has no trade agreement with the EU…". It then goes on to cite an EU web page, which actually tells us:

The EU and Australia conduct their trade and economic relations under the EU-Australia Partnership Framework of October 2008. This aims, apart from cooperation on the multilateral trade system and trade in services and investment issues, to facilitate trade in industrial products between the EU and Australia by reducing technical barriers, including conformity assessment procedures.

What is the EU-Australia Partnership Framework, if not (inter alia) a trade agreement? In the detail, it sets the framework for the all-important MRA on conformity assessment. One MRA runs to 110 pages, with an amendment running to a further 20 pages.

There are, in fact, 82 agreements between the EU and Australia, of which 18 are bilateral. There are 65 between the EU and China, of which 13 are bilateral. Between the EU and the United States, there are 135, of which 55 are bilateral. As regards trading agreements, not only is Global Britain incorrect in its assertions, its authors apparently don’t even read their own reports.

Such is the importance of agreements such as the MRAs that the UK would have no option but to seek a deal with the EU, for which there is a facility within Article 50. But, the moment it sought such deals, it would no longer be relying exclusively on WTO rules. It would now be seeking bilateral agreements along the lines of the so-called "Swiss option". This comes with as many problems as the WTO Option, if not more, not least the length of time it would take to agree a Swiss-type arrangement (10 years or more?)…And that's assuming the EU wants another complex Swiss-type arrangement, which it doesn't.

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 should allow it. The option should be rejected.

Powered by FundRazr

Log in

Sign THA