If You‘re Wondering How Hard a ’Hard Brexit Could Be

The U.K. and the European Union are headed down to the wire on their divorce and there‘s mounting concern about what the hardest form of Brexit — one with no deal in place at all — could look like. Without a withdrawal accord, the U.K. would be set to lose duty-free access to the world’s largest trading bloc on March 29, reverting to commercial rules negotiated in 1995 by members of the World Trade Organization. That could mean tariffs for U.K. exports to the EU — which act like a tax on goods — along with traffic-snarling customs controls at ferry terminals. Former Australian WTO negotiator Dmitry Grozoubinski has said that a “no-deal” Brexit would be like “downshifting a car at full speed from fifth gear to first.”

1. Why WTO rules？

The U.K. is already part of the WTO, and will remain so after its departure from the EU. So if Britain leaves the bloc without an agreement, it will lose its preferred access to the EU and will trade on WTO terms. Some U.K. lawmakers are painting this as a disaster for the British economy, while others herald the possibility as a “World Trade Deal” that would unshackle Britain to pursue better trade terms with other nations. The Geneva-based WTO oversees a set of baseline terms for trade in goods and services. All 164 member states agree to deal with each other equally according to a principle known as most-favored nation treatment. The WTO also monitors how countries implement trade agreements and helps settle international trade disputes.

2. How would Britain export to the EU under WTO rules？

Goods and services would no longer benefit from frictionless and tariff-free treatment between the U.K. and the 27 remaining countries of the EU, but would be subject to the WTO-negotiated tariffs the EU places on third parties. The bloc accounts for 48 percent of U.K. goods exports and the shift could increase costs, paperwork and controls that haven‘t existed for decades. Tariffs on goods entering the EU from the U.K. would differ for various products, but the EU’s average tariff rate is 3 percent. Here are some examples:

• Food: The EUs average most-favored nation tariff rates are 11.1 percent for agricultural goods, 15.7 percent for animal products and 35.4 percent for dairy.

• Finance: U.K.-based financial companies would lose EU “passporting” rights that allow them to market products and services in any EU country without having to set up a branch there.

• Automobiles: British carmakers would face a 10 percent tariff on all car exports to the EU. Those levies could exceed 5.7 billion euros ($6.5 billion) per year, and increase the average price of a British car sold in the EU by 3,000 euros per car, according to the British Society of Motor Manufacturers and Traders.

3. What would happen to imports from the EU？

European goods and services going to the U.K. may face increased import controls and tariffs equivalent to the EU‘s WTO commitments. For example, EU-made cars sold in the U.K. would face a 10 percent tariff in line with the forthcoming EU duties on British cars. U.K. Trade Secretary Liam Fox floated the possibility for the British government to unilaterally scrap its tariffs on EU imports but he acknowledged such a move would expose the U.K. to sudden competition in sensitive sectors such as agriculture. Doing so would also require the U.K. to cut its tariffs on imports from the rest of the world under the WTO’s most-favored nation rule. That would cede negotiating leverage in the U.K.s forthcoming trade talks with non-EU nations like the U.S. and China.

Liam Fox

Photographer: Luke MacGregor/Bloomberg

4. Can Britain benefit from the EUs other trade deals？

The U.K. could lose continuity of trade relations with the 71 nations that have forged preferential trade agreements with the EU — including Canada, Japan, South Korea and Turkey. The U.K. is in talks to roll over its participation in those agreements. So far, the British government has secured agreements with Chile, the Faroe Islands, Switzerland and various African nations to protect their bilateral trade relations after March 29. If the U.K. is unable to roll over the EUs other trade agreements, WTO tariffs will apply to British goods and services exported to those nations. For example:

• Japan would introduce a 12 percent tariff on British tea and a 19 percent levy on malt.

• Canada would impose a 6.1 percent tariff on British cars and a 25 percent charge on dredging vessels.

• South Korea would introduce a 20 percent tariff on British liquors.

5. How are British businesses preparing？

They are stockpiling goods, from medicine and car parts to printing ink and booze. Business Minister Richard Harrington declared that “nearly every square meter” of warehouse space in the country is now full. Businesses from engine-maker Rolls Royce Holdings Plc to brewer Heineken NV have outlined plans to hoard in case a tumultuous Brexit chokes just-in-time supply chains and creates backlogs at ports. Associated British Foods Plc, whose products include some of the countrys most popular tea, bread and sugar, is buying ingredients, packaging and machinery ahead of time to mitigate the risk of any disruption. Drugmakers are adding to inventories of key medicines such as insulin.

6. How could this disrupt the British economy？

Absent any transitional agreements, British exporters will need to obtain new EU certifications — a process that could take six months or more. In a bid to ease any holdups, the U.K. government has pledged to wave through EU goods landing at British ports for a temporary period. Still, the threat of delays has triggered a U.K. plan to turn a major highway near the Port of Dover into a holding zone for trucks. The National Farmers Union has said border inspection delays could have a “catastrophic” impact on British agriculture. Britain‘s central bank says a no-deal Brexit could, in the worst case, shrink the U.K.’s gross domestic product by 8 percent within a year. Some U.K. lawmakers dismiss the warning as part of anti-Brexit campaigns theyve dubbed “project fear.” Still, others suggest that what they call an Article 24 arrangement could be used to avoid trade chaos.

7. What is Article 24？

Brexit supporters say Article 24 of the General Agreement on Tariffs and Trade — the precursor agreement to the WTO — offers a way to avoid tariffs and border restrictions if the U.K. leaves the EU without a deal. They say the provision allows WTO members engaged in trade negotiations to discriminate in favor of each other without passing along those benefits to all members, as the organization‘s most-favored nation principle requires. But the provision cannot be unilaterally invoked and the EU is unlikely to agree to it because it would compromise the stability of the EU’s external customs border. Furthermore, any WTO member could object to such an arrangement and demand it be modified. Fox, the U.K. trade secretary, has already rejected the approach and told British lawmakers that Article 24 is “only applicable where the two sides have already agreed a trade agreement but haven‘t fully implemented it — perhaps not ratified it. So I don’t see this being applicable.”

The Reference Shelf

• A primer about the WTO and what it does.

• Bloomberg columnist Therese Raphael explains how Brexit supporters seized on Article 24.

• The U.K. governments guidance on how to prepare for a no-deal Brexit.

• A QuickTake guide to the Brexit drama, and a Q&A on the no-deal scenario.

• A collection of stories on how businesses are preparing for Brexit, deal or no deal.

— With assistance by Irene Garcia Perez