A NO-DEAL Brexit could damage smaller economies that have trade relations with the UK, hit European Union (EU) exports hard, but bring substantial gains for China. New UNCTAD research shows that the UK and its future trading partners need to speed up bilateral agreements if they are to avoid the costs of leaving the EU without an agreement. As the Report points out, the costs are considerable, with the EU’s position threatening to lose $34.5 billion in exports to the UK.
The second biggest loser in the event of a UK departure without an agreement with the EU would be Turkey, with a result of $2.4 billion in exports. China, meanwhile, could earn additional $10.2 billion in exports to the UK, along with the U.S. which could add $5.3 billion, with new exports. “Brexit is not just a regional affair. Once the UK abandons its 27 EU partners, the ability of non-EU countries to export to the UK market will change,” said UNCTAD’s Director of International Trade and Commodities Pamela Coke-Hamilton.
The UK market accounts for about 3.5% of world trade and is an important trading partner for many developing countries. In 2018, the UK was the fifth largest importer in the EU. It imported almost $680 billion of goods from the rest of the world, of which about $360 billion came from other EU countries.
Winners and losers
UNCTAD research estimates that the largest losses occur in EU countries, as they are the most economically integrated with the UK. But other countries are also likely to see a decline in their exports. In addition to Turkey, the research cites South Korea, Pakistan, Norway, Iceland, Cambodia and Switzerland as being at risk.
The main beneficiaries of a failure to reach an agreement would be the countries that currently face higher tariffs. In addition to China and the United States, Japan could expect to earn $4.9 billion. Brexit without agreements is also expected to result in increased imports from Thailand, South Africa, India, Brazil, the Russian Federation, Vietnam and New Zealand.
“The UK’s intention to lower the tariffs of the most favoured nations would increase the relative competitiveness of major exporting countries, such as China or the United States, thereby eroding market share from the least competitive countries,” added Mrs. Coke-Hamilton.
But an unagreed Brexit will have an impact on smaller economies with a relatively higher level of exports to the UK market. These countries will suffer.
Go to the negotiating table
Exports from many developing countries enjoy very favourable market access conditions to UK markets, due to bilateral trade agreements and unilateral EU preferential regimes. Countries that want to maintain this market access must negotiate, and quickly with the UK. The EU currently has around 70 trade agreements, but they are often not easy to replicate and negotiations take time.
“In many cases the UK-third country agreements, or continuity agreements, have not been signed and there is substantial uncertainty that many of these agreements will be concluded in the near future,” said Mrs Coke-Hamilton.
As of March 2019, only 26 continuity agreements had been signed between the UK and its trading partners. In a Brexit scenario without agreement, the EU’s preferential trade agreements with third countries will suddenly cease to apply and imports into the UK could end up taking place in the terms of the Most Favoured Nation (MFN). This is a World Trade Organisation (WTO) principle that the same tariffs should apply to any trading partner, unless there is an exception laid down in a genuine trade agreement.
A Brexit without an agreement would have immediate repercussions for the exports of many developing countries, with UNCTAD’s research raising the spectre of serious disruption and economic damage to developing countries whose exports depend heavily on the UK market and/or are currently beneficiaries of EU preferences. While the sums involved may appear to be of low value, the impacts on these countries would be large if measured as a percentage of their exports.
“To avoid negative impacts on developing nations, UK MFN tariffs on what are often major exports from low-income countries, such as sugar cane or bananas, should not be substantially reduced,” Ms Coke-Hamilton stressed. “In these circumstances, the best response from developing countries is to speed up negotiations to replace agreements, especially on hot issues that go beyond tariffs, including rules of origin, non-tariff measures or quotas.
Mrs Coke-Hamilton added that “untied economic integration is not only complex, but that doing it completely is a bad idea”.
Figure 1: No-deal Brexit: winners and losers in the UK market (selected countries)