Brexit: What is the 'no deal' WTO option?
Remember how this time last year we were talking about No Deal and the WTO option? Well, it's back.
It's not exactly the same thing, because the UK has now left the European Union (EU). A Withdrawal Agreement was ratified, and the UK is now in a transition period until the end of the year. That means it is still part of the EU single market and the customs union, and all the rules and regulations (and budget payments) remain the same.
But the UK has decided not to take up the option of extending the transition period for one or two years, to allow more time for negotiation on a future free trade deal.
So, if those negotiations were to run out of time, there would be a new version of No Deal. The UK would leave the transition period with no trade deal in place, and - at that point - trade with the EU would automatically fall back on basic World Trade Organization (WTO) rules.
First, the basics. What is the WTO?
The WTO is the place where countries negotiate the rules of international trade - there are 164 members and, if they don't have free trade agreements with each other, they trade under "WTO rules".
Every WTO member has a list of tariffs (taxes on imports of goods) and quotas (limits on the number of goods) that they apply to other countries with which they don't have a deal. These are known as their WTO schedules.
The average EU tariff is pretty low (about 2.8% for non-agricultural products) - but, in some sectors, tariffs can be quite high. Under WTO rules, cars would be taxed at 10% when they crossed the UK-EU border after the end of the transition period. And agricultural tariffs would be even higher, rising to an average of more than 35% for dairy products.
What's the UK doing?
The UK has released details of the tariffs it will charge from January 2021 to countries with which it does not have a free trade deal (which could of course include the EU).
In some areas tariffs are being maintained to protect UK producers. For example, they will still be charged on most types of vehicles to protect the UK automotive sector, and also on most agricultural products to avoid "additional disruption for UK farmers and consumers".
But the government is removing all tariffs below 2.5%, which it refers to as "nuisance tariffs". It is also cutting back on the number of different tariffs applied. So, some of the tariffs the UK has been charging as part of the EU will disappear - in areas, for example, where there isn't that much domestic UK production that needs protecting.
It means that 47% of all products will have zero tariffs, compared with 27% when in the EU. Among the biggest tariff cuts will be types of preserved mushrooms, which will have their tariffs cut from 18.4% to zero and yeast, which will have its tariff cut from up to 14.7% to zero.
Here are some other items that are having their tariffs cut to zero.
Products due to have their tariffs cut to zero
|Product||Current tariff rate/%|
|Prepared baking powders||6.1|
|Sewing thread for retail||5.0|
|Corks and stoppers||4.7|
|Bicycle inner tubes||4.0|
|Sewing machine needles||2.7|
|Pistachios in shells||1.6|
At first glance it looks like trade overall will be freer. But don't forget that the EU is the UK's biggest single trading partner, and at the moment there are no tariffs at all on UK-EU trade. Without a deal before the end of this year, that will change.
It's also important to remember that, under the WTO's "most favoured nation" rules, the UK couldn't lower tariffs just for the EU (or any specific country) without doing so for the rest of the world, unless it had agreed a trade deal, or as part of a transition to that deal.
What about other checks and costs?
These are what are known as "non-tariff barriers" and include things such as product standards, safety regulations and sanitary checks on food and animals. They are more complicated, and more important, than tariffs themselves.
So, the UK and the EU need to find ways to work with each other's regulations. Without a trade deal that will take time to happen.
The UK has announced that - with or without a deal - checks on EU goods coming into the UK will be phased in next year to give firms "time to adjust". The EU has not announced anything similar on goods going in the other direction.
You can argue that it might seem unreasonable for the EU to go from imposing no checks on UK products at borders the day before the transition ends, to insisting on all sorts of checks one day later, even if the UK hadn't changed any of its rules and regulations immediately.
But one source close to the WTO said the EU would be well within its rights to insist on checks in the absence of any mutual recognition agreement.
Non-tariff barriers would have an even greater impact on the service sector, which makes up about 80% of the UK economy.
Doesn't the UK already trade with many countries on WTO rules?
Yes, it did in theory as part of the EU, and still does in the transition period.
Examples include the United States and China, Brazil and Australia. In fact, it's any country with which the EU (and therefore the UK) has not signed a free trade deal. That's when WTO rules kick in.
But it's a lot more complicated than that. Those big economies don't just rely on WTO rules - they have all done other deals with the EU on top of that, to help facilitate trade.
The US, for example, has at least 20 agreements with the EU that help regulate specific sectors, covering everything from wine and bananas to insurance and energy-efficiency labelling.
It's worth remembering that 46% of all UK exports in 2018 went to the rest of the EU as part of the single market and the customs union. That's down from 55% in 2006, but the EU is still by far the largest UK export market.
So, going to WTO rules for trade with the EU - without any other deals in place - would be a huge change.
And UK companies would be having to deal with that change at the same time as trying to recover from the impact of coronavirus.
"If you can maintain the degree of integration and relationship that you had before Brexit it is a less traumatic situation of course than if you have to go to WTO terms," the WTO's director general, Roberto Azevedo, told the BBC's Andrew Marr Show on 14 June.
He added that trading on WTO terms is "not a catastrophe... but it will impose a number of adjustments and those adjustments can be painful".
Some people say it won't be a problem
A number of articles by supporters of Brexit have made reference to the WTO's Trade Facilitation Agreement (TFA), which came into force in 2017, arguing that it obliges the EU to treat the UK fairly.
But the TFA is aimed primarily at less developed countries and it seeks to encourage transparency and streamline bureaucratic procedures.
It does mean the EU cannot discriminate against the UK, but it does not mean the UK can expect to be treated in the same way that it is now.
The UK would be treated like any other third country - and in the absence of any agreement, that means tariffs, border checks and other barriers to trade.