Brexit: World Trade Organization Option Delusion

Brexit: World Trade Organization Option Delusion


Britain’s Secretary of State for Exiting the European Union, Dominic Raab, looks on as he holds a joint news conference with European Union’s chief Brexit negotiator Michel Barnier (not pictured) in Brussels, Belgium, July 26, 2018. (Yves Herman/Reuters)

There are unmistakable signs that the U.K. may be heading for a “no deal” exit from the EU. Over the weekend, Britain’s international-trade secretary said that he rated the chances of such a departure at 60-40. A few days before, the governor of the Bank of England (officially neutral, but clearly a Remainer) commented that odds of no deal were “uncomfortably high.” Predictably enough, Prime Minister May’s recent meeting with France’s President Macron did nothing to break the deadlock.

The pretty way to label a no-deal Brexit is to describe it as “opting” (by default) for the “WTO option.” This assumes that the U.K. can simply drop out of the EU without any deal, and then trade with its former partners on the same basis (allegedly) as just about anybody else. In fact, as I mentioned in post last week, the reality is considerably more complicated and considerably more unpleasant.

It’s worth noting what someone named Roberto Azevedo had to say about the WTO option late last year. It would not, he said, be “the end of the world” (something he defined as “a situation where all trade stops, and there is a collapse in terms of the economy as a whole”), for which, I suppose, we must give thanks, but (my emphasis added):

It’s not going to be a walk in the park. It’s not like nothing happened, there will be an impact. It will be a very bumpy road, and maybe long as well.

Now, the question is how bumpy and how long — and that depends a lot on the terms of the agreement that will be reached between the UK and the EU, I have no way of knowing at this point in time.

To the extent that the value chain, for example, the production chains, they’re disrupted, or the conditions of supplying services, they are disrupted — the tendency is that prices will go up, of course. You have to absorb the cost of that disruption, and that in itself will mean it will be costlier to do business, potentially costlier to live, but it’s how much — and it’s impossible to predict that at this point in time.

What Azevedo is effectively describing is a “no deal” Brexit, followed by the negotiation of a free-trade agreement, something that, as he rightly implies, can take time (free-trade agreements take years to negotiate). And what he is clearly saying is that the interlude between no deal and deal won’t be much fun.

That’s bad economically, and it’s bad politically: It will not be forgiven by the voters any time soon, something that Jeremy Corbyn’s Labour party will have every reason to celebrate.

So who is Azevedo, this know-nothing, to spread gloom and doom about the WTO option?

He’s the director-general of the WTO.

Oh.

One of the problems for those who (rightly) warn of the problems that the WTO option would bring in its wake is that the legacy of disreputable and discredited Remainer forecasts of instant catastrophe in the wake of a vote for Brexit has meant that those who warn about the direction that Brexit has been taking (to a hard Brexit or, worse still, a no deal Brexit) are not taken as seriously as they should be.

But their concerns cannot be wished away. In a post in his blog on Sunday, Pete North repeated another set of warnings, this time from the know-nothings of the (British) Road Haulage Association and added:

We are then looking at a ripple effect through just about every supply chain, which worsens depending on the sector and the level of third country import requirements. This is major for food, pharmaceuticals and chemicals, the latter two requiring a re-start of the product authorisation process.

Meanwhile, the BBC reports:

France’s Sanofi is increasing its stocks by four weeks to give it a 14 week supply of medicines. Switzerland’s Novartis said it was also preparing for the possibility of a no-deal Brexit. Sanofi, which makes insulin, is worried about any transport delays following Brexit, as most of its supplies have to cross the Channel.

“The uncertainty in the Brexit negotiations means that Sanofi has been planning for a ‘no deal’ scenario,” said Hugo Fry, managing director, Sanofi UK, adding this was in line with recommendations by the European Federation of Pharmaceutical Industries and Associations…

Other pharmaceutical companies have also begun to increase their stock piles. Last month, AstraZeneca said it was increasing drug stockpiles by about 20% in preparation for a no-deal Brexit. It is not just pharmaceutical companies that are talking about stockpiling. Plane manufacturer Airbus has said it may have to build supplies as its operates as “just in time” supply chain that replies on frictionless trade across the EU. UK engine maker Rolls-Royce has also warned about the need to stockpile parts.”

More know-nothings . . .

Writing in The Weekly Standard, The Spectator’s Ed West:

One of the most disconcerting things, from a conservative point of view, is watching so many of my political co-religionists turn into Maoists, intent on radicalism and revolution, interested only in distant, vague prospects of a better future and blind to the immediate, far larger, chances of catastrophe.

Conservatism is by nature averse to risks and is based on the principle that huge, radical changes are almost by definition unwise, whatever direction they take. And while the Leave vote was a gamble, the “hard Brexit” version being called for by Tory rebels looks like Russian roulette with five bullets in the cylinder.

Polarization tends to develop its own momentum, and what was off the table even two years ago now seems mainstream. There was always a Tory strain of Euroskepticism but it crystallised in the late 1980s with growing centralization and the onward rush of the Maastricht Treaty which, in 1993, turned the European Community into the European Union. Back then, hostility was largely directed towards political aspects of the E.U., the principal gripe being that Britain had meant to join a “Common Market,” not a super-state. Which was true enough. Back then, the Euroskeptics merely wanted a new relationship, as Liam Fox said in 2012, “one based on an economic partnership involving a customs union and a single market in goods and services.”

That would have been me (minus approval of the Customs Union), but, to return to West:

Just six years later the same Liam Fox now calls such an arrangement a “betrayal” — and he’s certainly not the only one who’s hardened his stance. Some of us nervously supported Leave on the understanding that a Conservative party, led by fairly intelligent people, would lead us into a “soft” Brexit, accepting that it was not possible to reverse much international harmonization and that we would have to accept many of the standards laid down in Brussels in order to avoid tariffs and barriers.

These rules certainly reduce democratic accountability and national sovereignty. But the economic costs of exiting them would be staggering. Yet we seem to have been left behind as things fall apart and Tory Leavers propose a Brexit far harder than anything imagined in 2016.

Indeed they do. And what makes it even nuttier is that an option exists (yes, it’s time to mention the “Norway option” yet again) that would achieve the Thatcherite ideal (something that, I would have thought that the Tory Brexiteer Right should appreciate) of continued membership of the Single Market (via EFTA, not the EU) without the political baggage of “ever closer union” or, any significant (all trade deals have their technocratic side) loss of democratic accountability, let alone sovereignty.

And yet that smooth(ish) break from the EU is not enough, apparently, to satisfy that faction within the Tory party that is currently forcing the pace of Brexit — right over a cliff.





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