The UK may be moving closer to trading with the EU on World Trade Organisation terms, but that could carry a major additional economic hit as London faces up to the costs of the coronavirus pandemic.
EU and UK negotiators will hold the final round of talks next week before a High Level meeting between Prime Minister Boris Johnson and Commission President Ursula von der Leyen when the two leaders will decide if a new trade deal can actually be reached by the end of 2020.
A paper published this week by the UK in a Changing Europe academic think-tank warns that the direct economic impact of leaving on WTO terms would be a 3.3% reduction in GDP after 10 years, and that UK GDP would be 8.1% lower than it would otherwise have been when factoring in indirect effects.
Although officials on both sides do not expect talks to be suspended following the summit, there is little prospect of Johnson’s government agreeing to an extension that would see it stay in the Single Market beyond 1 January.
“A lot of people talk, sometimes flippantly, about the UK trading with the EU on WTO terms. Our report explains what this actually means. It outlines the substantial economic consequences which, are highly significant given the economic challenges we’re already facing,” said Professor Anand Menon, the think-tank’s director.
The UK is already forecast to suffer one of the worst economic downturns this year as a result of the coronavirus pandemic. The Bank of England has warned that the UK economy could shrink by 14% in 2020, though it expects a V-shaped recovery, with growth of 15% predicted in 2021.
But EU officials, including Trade Commissioner Phil Hogan, have expressed concern that Johnson is prepared to run down the clock on trade talks and blame the EU and the pandemic for the stalemate.
London says that if it cannot obtain a trade pact modelled on the EU-Canada trade agreement it will revert to a commercial relationship similar to that between the EU and Australia, which essentially means reverting to WTO terms.
That means, for instance, a 10% tariff on cars, in both directions, and much higher tariffs on some agricultural goods from January 2021 as part of the UK’s new Global Tariff, which is set to replace the EU’s Common Commercial Policy. That would likely drive up consumer prices.
The think-tank also warns that since more than 80% of the UK’s economic output, and 45% of its exports, comes from service industries, a free trade deal with the EU solely on goods would do little to offset the economic damage.
One of the main sticking points in the talks between Michel Barnier’s EU Task Force and his UK counterpart David Frost has been over dispute resolution and the role of the European Court of Justice.
However, the UK in a Changing Europe paper warns that the WTO’s dispute settlement mechanism is “very weak and rests on peer review, pressure to comply, retaliation and compensation. The WTO does not enforce its rules. It does not even enforce its dispute rulings.”
The UK has held the first round of talks with the US on a trade deal, and has also agreed to roll-over nineteen EU trade deals with third countries, most notably with South Korea and Switzerland.
However, other key trading partners including Canada and Japan want to see what the UK’s trading relationships with the EU and the rest of the world will look like before discussing a bilateral arrangement.
[Edited Sam Morgan]