No Deal Is Bad For Global Trade
London 18th January 2019
By Chris Southworth, ICC United Kingdom Secretary General
Although there are efforts in Parliament to take a no deal option off the table, it is by no means guaranteed and should be our focus as an international business community in discussions with the UK government. We have to accept that the disbenefits of a no deal to world trade are still poorly understood, particularly the impact on poorer communities and UK trading relationships.
No country trades on WTO rules alone, let alone a G7 or G20 country with trading relationships of the scale of the UK. The WTO, who understand the issue the most, have been crystal clear that this is not a recommended option. The truth is that WTO rules act as a baseline set of rules to govern trade. In reality, all countries enhance their trading relationships through agreements with neighbouring countries and regions. It is unprecedented for a country with an economy of this size to even contemplate such an option and generates pure bewilderment for those overseas looking on. In the end, it just provides ammunition to investors who are looking at options for shifting their resources elsewhere and damages relationships with companies who don’t want to deal with the additional costs or the hassle of more red tape.
The costs of the UK dropping out of the EU and onto WTO rules would be extreme for some sectors and businesses, particularly in the automotive and food and drink sectors – both of which employ over four million people across the UK – and importantly in the most vulnerable parts of the UK. The additional red tape and form filling should also be enough to put a sensible policy maker off any such idea, especially in the UK where the government has spent the last 20 plus years cutting unnecessary bureaucracy. Even leaving the Single Market but staying in the Customs Union will unleash a sea of form filling as every small goods trader will have to start filling in Customs Declarations on every shipment. A no deal would unleash a lot more red tape than that.
It is easy to talk in philosophical or general terms about a no deal and be dismissive of the impacts, but if you are a farmer or small supply chain business, a hike of 10-50% on tariffs is more than enough to put you out of business if you can’t pass those costs onto consumers. And customers themselves won’t be impressed if the price of their car or food suddenly increases. Many are fine margin businesses that are not able to absorb the costs. Equally, farmers often operate on impossibly small margins squeezed by the consumer who doesn’t want to pay more for milk, cheese or beef at the supermarket and are themselves under intense personal budget pressure to keep the monthly bills low. Even the big investors can operate on small margins. A large car plant in the UK may only be 2-3% more competitive than its continental counterpart so if the costs go up 10% you can see the logic for a company to think about leaving the UK.
At the end of the day, the UK is a good place to do business – it’s highly competitive but not that much more competitive than the likes of Germany, the Netherlands or Eastern Europe. If you are a foreign business or investor, the sudden increase in costs will just act as a disincentive to trade with UK companies. It would be easier to re-route supply chains and look for trading partners on the continent who can operate at lower cost. Once that supply chain relationship is re-routed, it is naïve to assume the relationship would come back to the UK. Why would it? The world will have moved on. There are many countries with attractive propositions for anyone with investment.
The UK has already lost over $150 billion in foreign investment since the referendum and with it, its exalted position as the number one destination for foreign investment in the EU. Thousands of jobs have also left the UK, most recently with the announcements from Jaguar Land Rover and Toshiba. Not all the reasons relate to Brexit, but Brexit is playing a significant role in creating intolerable levels of uncertainty for companies planning long-term. It is a perfect storm that will only impact poor communities the hardest, where the UK needs employment the most. It is testimony to the strength of the UK’s business landscape that more investment hasn’t been lost, but it is sheer arrogance to think that more investment won’t disappear if the current situation continues, or if a no deal happens. The money must go somewhere, and it can’t be on hold forever.
The Brexit camp have done well in capturing the mood and frustration with snappy sound bites, so we must up our game on the facts and impress the reality of a no deal option. World business leaders meet next week at Davos – they will be discussing how to remove barriers to trade, not increase them. A no deal puts the UK directly at odds with the international business community who know only too well that companies trade best when the business environment is simple and barriers to trade are minimal.
No deal must be taken off the table to protect jobs, livelihoods and local communities. The business community must work hard and use every available channel to communicate with the wider public in plain English. Not to promote fear but to help people understand why a no deal means more barriers and what this means in practical terms to local jobs, so the voter can make informed decisions and communicate on an informed basis to their representatives in Parliament.
ICC is the largest world business organisation representing 45 million companies and 1 billion employees in over 100 countries and the only business organisation with UN Observer Status. ICC United Kingdom is the representative office of ICC in the UK and works with British business groups worldwide to represent the voice of British business at inter-governmental level - the United Nations, G20 and World Trade Organization.