Brexit and trade: Why stakes for business are so high

Whisky exports are key to Scotland's trade. Picture: Neil Hanna/JP

In the event of a “no-deal” exit, the UK’s trade with the rest of the world be governed by World Trade Organisation rules. But what would this involve? Would it lift the UK’s global trade and, free of EU rules, improve our competitiveness? Or would it create huge disruption to our international trade and choke business with border checks, tariffs and bureaucracy?

Global context matters here, both for Scotland and the UK. Scotland exported £75.6 billion in 2016. Of this, some £17bn or 23 per cent went to the rest of the world and £12.7bn or 17 per cent to the EU. Exports to the rest of the UK came to £45.8bn or 61 per cent of the total. Scotland’s biggest overseas export market is the US, accounting for £4.8bn.

More recent figures from Her Majesty’s Revenue and Customs (HMRC) for the year to June showed Scotland’s goods exports at £28.8bn, up 7 per cent on the previous 12 months, outpacing the growth at UK level. Scotland’s superior performance was driven by a rise in exports to the EU, up 18 per cent to £14.9bn,

An outstanding Scottish export success has been food and drink – Scotland’s food and drinks industry is a major employer and revenue source, so a successful Brexit trade outcome is critical for our economy. Exports rose 11 per cent to £6bn last year. Fish and seafood exports to all markets were up sharply – a rise of 23 per cent to £944 million. But the jewel in Scotland’s export crown remains Scotch whisky – sales here last year were up 10.8 per cent to almost £2bn. While the US remains by far the biggest export market for Scotch, there were substantial rises scored in exports to China and India.

As for the UK overall, Britain is the world’s tenth largest exporting country. UK exports in the year to March totalled £620bn. And while continental Europe is a vital market for UK goods and services – and will long remain so whatever the Brexit outcome – UK exports in that 12-month period grew faster to Canada (up 12.7 per cent), India (31.8 per cent) and China (15.3 per cent) than to the EU (10 per cent).

Overall, while the collective 27 member countries of the EU form the largest UK export market, the EU’s share of UK exports has been declining – from 55 per cent in 2006 to 44 per cent last year. Non-EU countries remain the main destination for UK services (£167.4bn), making up 60.4 per cent of all services exports.

It is this global context – and the changing dynamics of world trade – that backlights the economic argument for Brexit. Why tie ourselves, argue the Brexiteers, to a trading bloc that is in relative decline?

But opting for WTO deals on tariffs and regulatory issues – from product specification through quotas to safety standards – can take years to negotiate. And in the meantime, there is a formidable list of uncertainties for UK businesses from leaving the EU Single Market and Customs Union.

Problem areas here include securing agreement on the division of quotas for goods where the EU currently has agreed quotas at EU level. And it would also be necessary for the UK to negotiate with other countries with which the EU has free trade agreements.

Under WTO rules, each member must grant the same “most favoured nation” (MFN) market access to all other WTO members – that is, exports to the EU would be subject to the same customs checks, tariffs and regulatory barriers that the UK and EU currently charge on trade with countries such as the US. Imposing tariffs on trade with the EU would increase costs for both UK importers – and thus consumers – and exporters. The average EU tariff rate is low – around 1.5 per cent. However, for specific goods the tariffs would be much larger: for cars and car parts the tariff rate is 10 per cent. The impacts would also be large on agriculture, where EU tariffs and quotas remain high, rising to an average of over 35 per cent for dairy products. The UK’s fishing exports to the EU would be subject to a 9.6 per cent tariff under WTO-only rules. Clothes manufactured in the UK and exported to the EU would be subject to an 11 per cent tariff.

But the main cost of doing business across borders comes from non-tariff barriers such as border checks, custom controls and compliance with different product standards and regulations across countries. Under WTO rules, without mutual recognition agreements for product standards, UK products could require further checks at the border. UK businesses could end up having to produce two different product lines – one for the UK and one for the EU.

One suggestion is that the UK scrap all tariffs and regulations for EU imports and continue to accept all products from the EU without checks. But, according to the WTO rules, the UK has to treat everyone equally. If the UK allowed all food products, tariff-free and without checks into the UK market, this could be very damaging to UK farmers and the food industry.

The Centre for Economic Performance estimates that a “No-Deal WTO rules only” scenario would reduce the UK’s trade with the EU by 40 per cent over ten years, bringing a fall in income per head of 2.6 per cent per year (net of the savings from no membership fees). And if that isn’t scary enough, a leaked Civil Service Cross-Whitehall Report has suggested that it will cost the UK 7.7 per cent of GDP over the next decade and a half.

However, there would be gains from being outside EU bureaucracy and controls and the UK being able to strike free trade deals unilaterally across the world. As it is, we already export £99bn of goods to the US each year compared with £83bn to the EU’s two largest economies – Germany and France – combined.

Calculations by the pro-Leave Economists for Free Trade calculate that the cost to the UK economy of growth foregone by staying in the EU would be 7 per cent of GDP – or around 0.5 per cent growth a year over the next decade and a half.

As it is, the UK is already doing some 60 per cent of its overseas trade under WTO Rules. And as Roberto Azevedo, director general of the WTO has observed: “It’s not the end of the world going to stop. There will be an impact, but I suppose it is perfectly manageable.”

A Clean Brexit, say proponents, would bring long-run gains, for example, moving to free trade with non-EU countries that currently face high EU protection in goods trade; substituting UK-based regulation for EU-based Single Market regulation, and ending our Budget contribution to the EU. Economist Patrick Minford forecasts that consumer prices will fall by 8 per cent and GDP rise by 4 per cent.

Both Scottish Enterprise and the UK government websites provide some guidance for specific sector and industries, but detail are still scant. Whatever the final outcome, securing and building on overseas trade is vital. And this is all the more urgent given the signs from the IMF and others that the world economy may be entering a period of slowdown. That should surely concentrate minds.