Misunderstandings on Brexit and the WTO

One of my pet peeves is how some people seem to think the WTO and other trade agreements are used to impose high tariffs. In fact, these trade agreements involve promises to lower tariff rates. For example, if the U.S. and Canada both charge a 20% tariff on car imports, a trade agreement between them might involve a promise that neither will charge more than a 10% tariff. This would mean the existing 20% tariff would have to be lowered to 10% or less. It’s not a perfect solution to the problem of tariffs, but it does move us in the right direction.

I bring this up because of something I read by Tim Worstall about the Brexit debate. He quotes the Director General of the WTO, Robert Azevedo, but appears to misunderstand Azevedo’s point. Here’s how Worstall puts it:

In the barrage of bloodcurdling tales we’re having thrown at us about the costs of Britain leaving the European Union this one really does have to take the biscuit. The head of the World Trade Organisation, Roberto Azevedo, is stating that British consumers will have to carry a heavy burden of up to £9 billion of import tariffs on the goods that they purchase. This is an entirely nonsensical assertion, a ludicrous one. Azevedo then goes on to state that it would be illegal for Britain not to charge such tariffs. This is seriously absurd. Because his claim is that it would be the rules of his organisation which make it so: but his point is that Britain would not be, on Brexit, a member of his organisation. I would prefer to believe that there’s been some mistake in translation, possibly reporting, than to believe that a major world organisation might be in the hands of someone so confused. A sovereign state is only bound by the rules of those international organisations which it belongs to, not those which it doesn’t.

The allegation:

World Trade Organization chief Roberto Azevedo warned about the potential economic cost of a Brexit, stating that leaving the EU would cost UK consumers £9 billion in annual additional import tariffs.

Azevedo told The Financial Times that a Brexit would require the UK to negotiate its membership of the WTO, as it is currently represented by the EU – this is on top of having to strike new trade deals with countries around the world.

That’s claim one: that it is the EU which is part of the WTO, thus if Britain leaves then it would be necessary to negotiate entry into the WTO. OK, fair enough. But then there’s claim two:

Mr Azevedo said: “The consumer in the UK will have to pay those duties. The UK is not in a position to decide ‘I’m not charging duties here’. That is impossible. That is illegal.” 

But under whose rules must Britain charge such duties? The WTO ones, the organisation Azevedo has just insisted that Britain is not a part of and therefore whose rules do not apply.

Thus, as Mr. Worstall sees all this, WTO rules would prevent the UK from eliminating tariff duties. But as noted, that’s completely wrong, and I’ve heard this kind of thing enough that I wanted to correct the record. An independent UK is certainly free to eliminate all of its tariffs, and would be applauded at the WTO if it did so.

As to why there was a misunderstanding in this instance, let me give the full quote from Azevedo in the underlying Financial Times article:

An exit from the EU, for example, would cause the UK to lose the preferential access to other markets covered by 36 trade agreements with 58 countries negotiated by the EU. As a result, to remain compliant with WTO rules the UK would have to impose higher “most favoured nation” tariffs on imports from those 58 countries, while they would have to levy their own surcharges on British exports, Mr Azevêdo said. 

A WTO analysis had calculated the cost of the additional tariffs on goods imports to British consumers at £9bn, while British merchandise exports would be subject to a further £5.5bn in tariffs at their destination. 

“The consumer in the UK will have to pay those duties. The UK is not in a position to decide ‘I’m not charging duties here’. That is impossible. That is illegal,” Mr Azevêdo said. 

The only other option available to the UK would be removing all barriers for all WTO members, effectively turning its economy into a duty-free one like Singapore and lifting the protections politically sensitive domestic industries enjoy under the EU. “That is possible. But that is also very unlikely,” he said. 

It’s a little complicated, but here’s what’s going on. Generally speaking under WTO rules, countries have to charge the same tariffs to all trading partners. For example, the U.S. can’t charge a 10% tariff on Canadian car imports and a 20% tariff on Mexican car imports. Discrimination of this sort is generally prohibited. But there is an exception for comprehensive free trade areas, such as the NAFTA. In those situations, countries can charge lower tariffs to specific trading partners.

This is relevant here because the EU has negotiated various free trade agreements already, and can charge lower tariffs on imports of goods from countries with whom it has signed an agreement. Azevedo was just saying that if the UK leaves the EU, it cannot, without negotiating its own free trade areas, charge the lower tariffs offered by the EU through its FTAs.

Of course, that doesn’t mean the UK cannot get rid of its tariffs more generally, and, as noted above, if it actually did so, it would no doubt receive thunderous applause at the next WTO meeting.  (Azevedo notes this possibility, and its unlikely prospects, in the last quoted paragraph). In addition, the UK would be free to negotiate its own FTAs, and reduce tariffs that way.

Unfortunately, it’s not clear if Brexit would lead us in this direction, as there is talk about how the new UK power over trade policy after Brexit could actually be used to impose higher tariffs. But if an independent UK wanted to lower tariffs, which is what it should do, it will certainly be able to do so.

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