Anthony Hilton: Disaster lurks in May’s empty bluff on trade

Anthony Hilton
Theresa May has hailed the 'astounding' Tory victory in Copeland: REUTERS

You can understand why the British Chambers of Commerce is desperately worried. For the past 70 or so years, since the end of the Second World War, the world has sought to increase levels of trade and make it easier. A unique aspect of the forthcoming Brexit negotiations is that it is aimed at doing the opposite. These will be the first trade talks in three generations where even the best possible outcome for either side will be worse than what exists currently.

Prime Minister Theresa May’s claim that she will negotiate the best possible trade deal actually means the second-best or least-worst one. Barriers will be erected where currently there are none. The trade talks will be complicated, too, because it is now accepted even by the Government that there will not be enough time to negotiate a comprehensive trade deal before we cease being a member of the European Union. So Ministers in private briefings talk now about securing transitional arrangements that will form a bridge to some permanent deal, which will be thrashed out a number of years in the future.

Life is unlikely to be that simple. Even if the EU negotiators want to give us an interim agreement, it might not be in the Commission’s power to deliver it. Fully fledged formal trade deals have to be ratified by each and every member state — which, not counting Britain, means 27 countries and 39 parliamentary chambers — before they can come into force.

The so far untested question is whether an interim deal counts as a new deal that needs such ratification or whether it can be passed off as a continuation of the status quo, in which case perhaps there would be no need for the national governments to have a say.

That is impossible to predict but, given that May is insisting that we do formally leave and that we end free movement of people and have no more dealing with the European Court of Justice, it is going to be very hard to claim it is all business as usual. This is before the EU makes sure we are worse off as a consequence of leaving after we have alienated it further by refusing to pay the €60 billion (£51 billion) exit bill.

The point is, however, that if an interim deal requires approval from all the member states, it is impossible to see how it can be ready in time. There is also a potential problem with the World Trade Organisation. Under its rules, one country cannot give favoured status to another without extending the same favour to everyone else — the most-favoured nation principle — unless it is part of a comprehensive trade treaty. One view is that what the EU granted us would also have to be available to everyone else, so they would not do it.

Lawyers are split on this. Dorothy Livingston, a trade expert and partner at Herbert Smith Freehills, thinks it may not be a problem. She says the 1947 treaty that created the General Agreement on Tariffs and Trade (fore-runner to the World Trade Organisation) allows for interim arrangements, provided the arrangement will lead to the implementation of a WTO-compliant trade agreement.

But even without this legal challenge, there is a much bigger problem. The UK is a sovereign member of the WTO but applies the tariffs and schedules on goods and services laid down by the EU. These are in effect the baseline for trade with the rest of the world, except where modified by specific trade agreements. Once out, however, Britain would have to register its own schedules of tariffs and services, setting its own baselines.

It has a potential problem because 40 nations have joined the WTO during Britain’s time as a member of the EU — and, from our position within the EU, we have been one of the toughest countries in demanding concessions from them before they were allowed in. They are now forming a queue to kick us back the moment we are on our own.

Before accepting our schedules, South American countries could demand more access for their beef and orange juice; the Chinese want access for their cars, the Americans access to the NHS and so on. The EU will also have to agree, which will be interesting if the talks have been difficult. The point is that, without concessions, the other nations could block the UK schedules, leaving Britain in such limbo it will be unable to deal with anyone.

If the British try simply to adopt the current EU schedules, there is a different problem. These mark out the EU’s position with the rest of the world — for example, a tariff of 10% on cars, one of 12.5% on lamb. So that is what Britain would have — but the schedules would also apply between post-Brexit Britain and the EU.

That means all the supply chains back and forth between Britain and Europe would be subject to tariffs. In cars and aviation, goods go backwards and forwards several times during the manufacturing process. There would be a tariff added with each border crossing. Cross-border supply chains with the EU would become uneconomic overnight.

As a postscript, if Britain tried to lower its tariffs with the EU to overcome the above difficulties, WTO most-favoured nation rules mean it would have to ease them with the rest of the world too — without getting anything in return.

Hardline Brexiteers to whose tune the Prime Minister dances say that if the EU does not give us an interim deal, we will simply use the WTO. The above analysis shows why this would be disastrous, how empty is the Prime Minister’s bluff, and how irresponsible it is to trigger Article 50 while pretending these problems don’t exist.