An anti-Brexit demonstrator stands under a European Union (EU) umbrella fitted with LED lights outside the Houses of Parliament in London, U.K., on Tuesday, Jan. 29, 2019. The pound is vulnerable to swings Tuesday as traders tweak positions ahead of votes by lawmakers to change Theresa May’s Brexit deal. (Bloomberg)

The U.K. and the European Union are at a standoff on the terms of their divorce. With the departure of British Prime Minister Theresa May, there’s growing concern that the hardest form of Brexit, one with no deal in place at all, has become more likely. Without a withdrawal accord, the U.K. would lose duty-free access to the world’s largest trading bloc, reverting instead to commercial rules negotiated in 1995 by members of the World Trade Organization. That could mean tariffs on U.K. exports to the EU along with traffic-snarling customs controls at ferry terminals. A “no-deal” Brexit has been compared to “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, losing its preferred access to the EU, trade will be subject to WTO terms. Some U.K. lawmakers paint this as a disaster for the British economy, while others see an opportunity for an unshackled 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 after a no-deal Brexit?

Trade of goods and services would no longer be frictionless and tariff-free between the U.K. and the 27 remaining countries of the EU. Instead, it would be subject to the WTO-negotiated tariffs -- which act like a tax on goods -- that the EU places on third parties. The bloc accounts for 48% of U.K. goods exports, and the shift could bring costs, paperwork and controls that haven’t existed for decades. Tariffs would differ for various products, but the EU’s average tariff rate is 3%. Here are some examples:

• Food: The EU’s average most-favored nation tariff rates are 11.1% for agricultural goods, 15.7% for animal products and 35.4% 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% tariff on all car exports to the EU. Those levies could exceed 5.7 billion euros ($6.4 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?

U.K. consumer prices would increase for certain European imports, including food, cars and textiles. The U.K. government has sought to avoid sudden price hikes and on March 13 offered a temporary 12-month plan to cut tariffs on 87% of goods imports from the EU and all other trading partners except those already covered by bilateral trade accords. Nevertheless, some European goods would face U.K. quotas and tariffs in order to protect sensitive British industries from competition. According to the government’s draft proposal, U.K. tariffs on EU imports on certain goods would increase from zero. They include:

• Cars: Introduction of a 10% tariff.

• Clothes and linen: A new 12% levy.

• Porcelain and china: A 12% tariff.

• In addition, Britain would impose import quotas on beef, lamb, fish, poultry and swine.

4. What would happen at the Northern Irish border?

The U.K. government has said that it doesn’t intend, at least during its 12-month plan, to impose import tariffs on goods crossing from the Republic of Ireland (which would still be part of the EU) into Northern Ireland (part of the U.K.) in order to avoid new checks and controls at that border. Such a move could run afoul of the WTO’s most-favored nation principle and a WTO rule that requires governments to impose their regulations in a “uniform, impartial and reasonable manner.”

5. What about the impact on U.K. services?

Service industries, from finance, pensions and accounting to legal and medical advice, make up 79% of the British economy and 45% of U.K. exports. Without a deal, service providers would lose their current preferential access to European markets and could be subject to new and disruptive compliance requirements. The shift might persuade some U.K.-based companies to relocate to the European continent. The Centre for European Reform estimates that exiting the European single market could reduce U.K. exports of financial services to the EU by as much as 59%, slash insurance and pensions services exports by 19%, and lead to a 10% drop for other service export sectors including law, accountancy and professional services.

6. Could Britain benefit from the EU’s other trade deals?

The U.K. could lose continuity of trade relations with many of 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 only a handful of countries, including Chile, Norway, Israel, Switzerland and various African nations, to protect bilateral trade relations. If the U.K. is unable to roll over the EU’s other trade agreements, WTO tariffs would likely apply to British goods and services exported to those nations. For example:

• Japan may introduce a 12% tariff on British tea and a 19% levy on malt.

• Canada may impose a 6.1% tariff on British cars and a 25% charge on dredging vessels.

• South Korea may introduce a 20% tariff on British liquors.

7. 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 country’s most popular tea, bread and sugar brands, 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.

8. How could this disrupt the British economy?

Absent any transitional agreements, British exporters would 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 said on Nov. 28 that a no-deal Brexit could, in the worst case, shrink the U.K.’s gross domestic product by 8% within a year. Some U.K. lawmakers dismiss the warning as part of anti-Brexit campaigns they’ve dubbed “project fear.” Still, others suggest that what they call an Article 24 arrangement could be used to avoid trade chaos.

9. 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.

10. So could Article 24 be invoked?

Liam Fox, the U.K. trade secretary, has already rejected the approach, saying he didn’t think it could apply since the U.K. and the EU haven’t already agreed to a trade accord. WTO Director-General Roberto Azevedo confirmed that there must be a bilateral agreement between the EU and U.K. in order to claim an implementation period under GATT Article 24. “Once they have an agreement I think Article 24 could give them some time for implementation of that agreement,” he told Bloomberg. “But the first question is the agreement itself.”

--With assistance from Irene García Pérez.

To contact the reporter on this story: Bryce Baschuk in Geneva at bbaschuk2@bloomberg.net

To contact the editors responsible for this story: Richard Bravo at rbravo5@bloomberg.net, Melissa Pozsgay, Andy Reinhardt

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