Forget Brussels, Brexit’s toughest battleground is the WTO
A confident Liam Fox speaks at the WTO forum | Fabrice Coffrini/AFP via Getty Images
Negotiating Brexit with 27 occasionally hostile EU states will turn out to be the easy task for the U.K.
That will seem like nothing next to the imbroglio Prime Minister Theresa May faces when she sets about crafting Britain’s global trade terms with the more than 160 members of the World Trade Organization.
Britain is a member of the WTO under the auspices of the EU, the world’s largest trade bloc. Once the U.K. leaves, it has claimed that it will finally be free to decide for itself the tariffs it slaps on imported steel and lamb, and the levels of subsidies paid to its farmers.
But Britain’s freedom to set trade policy — and the EU’s response to that new regime — also will have to conform to the dizzyingly complex architecture of the WTO. Brexit has now become “first and foremost a WTO matter,” said Daniel Guéguen, head of strategy and lobbying at Pact European Affairs.
The U.K. is a member of [the WTO] in its own right, so it’s not like being kicked out — WTO’s head of accession negotiations
And overall, Britain’s trade terms depend on so many factors outside London’s control that they are impossible to steer from Westminster.
“The stakes are so large and the problems so interwoven with each other that the issue, while vital, becomes virtual – almost theoretical. It is like not knowing how to find the end of a ball of wool,” Guéguen observed in his blog.
The good news for May is that Britain does not need to reapply to the WTO. Maika Oshikawa, the WTO’s head of accession negotiations, said that Britain would not have to run the gauntlet of a formal application process. “The U.K. is a member in its own right, so it’s not like being kicked out of the WTO,” she said. “This is not a case of applying.”
That gift aside, Oshikawa said it was likely that the U.K. would need to forge political consensus among more than 163 WTO members to agree its new “schedule” — the tariffs and subsidies that farmers, manufacturers and service companies would commit to after Brexit. By the time Britain leaves, new entrants such as Bosnia, Sudan and Comoros probably also will have a say in haggling over Britain’s terms.
Oshikawa said she could not comment directly on the details of this post-Brexit tussle but did say that the WTO will enter uncharted territory. “It’s going to be a unique case and unprecedented. So if anybody is interested in trade, of course it’s an interesting brainstorming exercise,” she said. “I think diplomacy is an important tool in how to approach this.”
Politicians from Britain’s ruling Conservative party have claimed the process will be straightforward. At the WTO in Geneva last month, Trade Minister Liam Fox stressed that there would be no “legal vacuum” as the U.K. would abide by the same schedule of commitments that it signed up to as an EU member.
Guéguen countered that the situation was far from clear cut. “We are preparing to enter a jungle,” he said, adding that the question of agriculture alone raised “a wide range of problems.”
Britain’s farmers now benefit from EU subsidies paid under the Common Agricultural Policy. The CAP is frequently criticized by developing countries in Africa and South Asia as one of the world’s most protectionist state support systems, but they are powerless to fight the EU as a bloc at WTO level. A Britain separated from the EU could find itself isolated and hard pressed by countries such as India and Bangladesh to give up paying farmers EU-level subsidies once the Brexit process is complete.
From heifers to tennis balls
Negotiations will also have to decide Britain’s continued involvement in broad multilateral trade initiatives, in which the U.K now participates as an EU member. Compounding the confusion are the international quota systems for reduced-tariff products such as beef and poultry imported into the EU. These will need to be renegotiated to agree what share Britain should take. Quota realignment for new members is often a lengthy, agonizing process.
If a WTO country objects to another country’s subsidies or other trade-related measures, it can fight them at WTO panels, which can declare the measures illegal. In anticipation Britain has been cautious about the level of state support it will offer farmers and beleaguered steel producers after Brexit. At his speech in Geneva, Fox also promised that Britain would shift to a “more liberalized” trade agenda after originally inheriting the EU’s WTO commitments.
Oshikawa said that no country had so far raised Brexit concerns at the WTO but observed that any discussions on new schedules would ultimately need unanimity. “Anything in WTO is total consensus,” she said.
One of the biggest challenges for Britain is that it will face the EU’s standard tariffs for goods under WTO rules after it leaves the single market. These meticulously catalog duties on everything from heifers to tennis balls and in several cases, are alarmingly high for British industry, particularly for food and live animals. Cars face 10 percent tariffs, while woolens and textile goods face 12 percent duties.
Senior Conservative parliamentarians including Peter Lilley and John Redwood, both advocates of a swift Brexit, have argued that Britain should call the EU’s bluff on tariffs. They argue Britain should keep its tariffs at zero, piling the pressure on the EU to do the same to avoid disruption to valuable trade flows.
“The onus would then be on the EU 27 to continue free trade — or take the blame for triggering [WTO] tariffs on their exports to their biggest market,” Lilley, a former trade minister, has argued on the Conservative Home web site. “Continental governments contemplating this would face the wrath of German car makers and unions, French wine growers, Dutch cut flower-growers et cetera for initiating an unnecessary tariff battle in which they lose more than we do.”
The first difficulty with this gambit is reciprocity. One core element of WTO rules is that a country cannot offer favorable tariff terms to another without offering the same regime to all comers. If Britain wants to import French steel for its submarines with 0 percent tariffs, it would have to offer the same deal on that product to China and Russia. From the often high trade defenses of the EU, Britain would have to shift seamlessly to being a free-trading Singapore.
The way around this problem would be a free trade agreement, so both parties could agree to drop trade barriers bilaterally. British officials have said they would consider an arrangement similar to Canada’s accord with the EU as a model. This pact largely eradicates tariffs but offers nothing close to single market membership. It has also been a bruising process. The Canada deal has not been concluded after seven tortuous years of diplomacy, and it will ultimately be hostage to votes in 38 national and regional assemblies, some of which have threatened to veto over the rights of migrant workers.
The chronology is also sensitive here. Lilley has called on the EU not to “prevaricate” over securing a trade deal that would reduce tariffs to zero.
But EU Trade Commissioner Cecilia Malmström has underlined that talks on a trade accord cannot begin until Britain has left and has already dropped onto the WTO regime. Until then, the EU can only agree to trade accords with non-members.