Brexit: True cost of UK leaving EU without trade deal revealed

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The damage to Britain’s goods exporters of leaving the European Union without a new free trade deal in place would be at least £4.5bn a year – and in all likelihood many multiples of that – an investigation by The Independent has found.

David Davis, the Brexit Secretary, admitted earlier this month that it was possible the UK could leave the EU without a deal and would be forced to trade with the rest of the continent under World Trade Organisation rules.

And the International Trade Secretary Liam Fox issued a press release in August that suggested to exporters this could be the ultimate outcome of Brexit.

Some trade experts are concerned that even if the Government tries its best to negotiate a free trade agreement with the EU it could be impossible to complete within the two-year timetable for Britain to leave after Article 50 of the Lisbon Treaty is triggered.

World Trade Organisation rules mean that UK exporters would be hit with the EU’s Common Customs Tariff – a wide range of taxes on imports.

These would serve to push up the price of UK exports, rendering them instantly less competitive in local markets and damaging British-based exporting firms.

Research by The Independent published today confirms that trading under WTO rules would have a serious impact on several important UK goods export industries, including car manufacturing, plastics production, machinery and clothing.

In 2015 official statistics show the UK exported £133bn worth of goods to the rest of the European Union, almost half of our global goods exports.

This included £10bn in food and drink, £16bn of fuel and around £10bn of motor vehicles.

The average EU tariff is 4.8 per cent and applying this to total UK exports to the EU implies a “cost” of around £4.5bn – which would have to be absorbed as lower competitiveness for UK exports or as lower profits for firms if they chose to reduce prices in response to maintain their competitive edge.

But the EU tariff is uneven, ranging from 0 per cent on pharmaceutical products and 11 per cent on footwear to as high as 45 per cent on tobacco, meaning that some UK industries are much more vulnerable than others.

A full list of the UK’s goods exports to the rest of the EU and the average tariffs they would face under WTO trade terms can be found below.

The Independent’s calculations suggest that vehicle exporters facing an average 6 per cent tariff on £14.5bn of exports would be hit by £850m, plastic producers facing a 6 per cent tariff on £5bn of exports would be hit by £300m, and machinery makers with a 2 per cent tariff on £15bn of exports by £275m.

These costs would shift depending on the level of exports from various sectors when Brexit occurred – and patterns of trade would probably change over time in response to the tariffs – but the estimates give a ball-park figure of the initial shock.

Moreover, this would be only the beginning of the cost of the WTO scenario for exporters.

Leaving the EU with no free trade deal would mean the UK would also fall out of the coverage of the more than 50 free trade in goods deals the EU has concluded with other countries including significant markets such as Korea, Switzerland and Mexico.

And, over time, UK goods exports would also face “Non-tariff Barriers” (NTBs) in the EU such as the enforcement of different market standards and regulations.

Some experts have estimated the effective cost of these NTBs for chemicals, motor vehicles and aerospace is between 10 and 20 per cent.

And NTBs would be especially damaging for the UK's services exporters, which make up almost half of the UK's total exports.

Before the referendum Oxford Economics estimated the long-term cost to the UK economy of trading under WTO terms of between 1.5 and 3.9 per cent of GDP relative to otherwise by 2030.

It also estimated that overall UK exports would be 8.8 per cent lower than otherwise by this date.

A separate analysis by the London School of Economics suggested the welfare losses of moving to the WTO rules in a “big bang” would be up to 3.5 per cent of GDP per head instantly.

“The fact that the country is in some way being told to be prepared to face what we regarded as a very pessimistic outcome is quite discouraging in itself,” said Gianmarco Ottaviano of the LSE.

John Van Reenen, a former colleague of Ottaviano and now Professor of Economics at MIT in the US, said trading under WTO rules would be a “truly dreadful outcome for British people”.

"Exports to our closest neighbours would crash,” he said. “This will lower our ability to pay for imports, the productivity of British business and ultimately our living standards. It would be one of the worst own goals in British trade policy in living memory.”

Industry bodies have lined up to warn ministers against even considering the WTO terms trade scenario.

Ben Digby, the CBI international director, said: “Tariffs on trade with the EU would have a significant impact on several sectors, from agriculture to automotive, pushing up prices for UK consumers and making our exports less attractive.”

Dominic King, the head of representation at UK Steel, said: “Dealing with the EU under WTO rules would be a serious blow to manufacturers, leading to new tariffs being imposed on around 90 per cent of the UK’s goods exported to the EU, leading to manufactures automatically becoming less price competitive."

The Japanese government wrote a letter to the UK Government earlier this month stressing the need to “maintain customs duty-free trade between the UK and the EU” and suggesting that a failure to do could see Japan pull investment and jobs from the UK.

The Nissan plant in Sunderland, which has a workforce of 6,700, exported around 250,000 cars to the EU last year, around half its output. Those exports would face a tariff of up to 10 per cent under WTO rules.

However, some economists pointed to offsetting factors.

Martin Beck of Oxford Economics pointed out that the 10 per cent plunge in the value of sterling since the Brexit vote cushioned the loss of competitiveness that would result from facing EU tariffs on goods.

“EU tariffs would represent a burden to UK exporters, but to put it in context, a cost of £4bn or so is only around half of the UK’s net contribution to the EU budget and could be adjusted to through relatively modest movements in taxes on companies, wages and the exchange rate” he said.

And Ryan Bourne of the “Economists for Brexit” group argued that the negative impact on exporters could be more than offset by cheaper imports if the UK decided to unilaterally drop all its import tariffs at the same time.

“Moving to unilateral free trade, in the absence of a trade deal with the EU, would lead to significant net gains to consumers and formerly unprotected producers through lower global import prices. These would both lower input costs directly, and through exposing all sectors to competition, would lead to greater economic dynamism as we trade according to our comparative advantages” he said.

However, the LSE’s economic model suggests that the benefits for consumers of lifting import tariffs would be relatively small and would not cancel out the damage of facing export tariffs.

The LSE’s economists have also severely criticised the Economists for Brexit group's modelling as implausible, arguing that it is underpinned by ideology rather than science.

David Davis told the Commons Foreign Affairs Committee on 13 September that Britain trading with the EU under WTO rules was “not ... in my view a very likely outcome”, but he conceded it was possible.

The Prime Minister, Theresa May, has avoided any detailed comment about her own preferences for UK trade post Brexit, but said in New York earlier this week: “I believe in good trading relations, I have said I want the UK to be a global leader in free trade.”

A number of other prominent Brexit supporters such as the former Chancellor Nigel Lawson and the Wetherspoons pub chain boss Tim Martin are also urging the Government to embrace the WTO option, insiting that Britain has nothing to fear.

UPDATE 26/09/2016

Peter Ungphakorn, a former WTO official and now blogger on trade issues, says that the headline tariffs rates for agricultural products quoted below considerably understate the likely scale of the hit to UK food producers selling to Europe because they are also often subject to complex additional tariffs known as "specific duties", expressed as euros per 100kg of imports.

Estimates of the economic impact are also complicated by restrictions on the overall quantities that the EU imposes on agricultural imports from the rest of the world.

Mr Ungphakorn says that the overall impact on the UK agricultural sector of exporting under WTO rules would hinge on the outcome of detailed negotiations between the UK and the EU and the rest of the WTO.

Source: ONS, WTO, Independent calculations

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