What happens, if the European Union and Great Britain do not agree on a new trade agreement?

Recently, Theresa May and Jean-Claude Juncker have appeared on the media and declared joyfully that they had agreed on the first principles of Great Britain leaving the European Union. The agreement about money and about the positioning of foreigners living in the respective country is a first step only. The main question remains if Great Britain and the European Union will agree on a new-trade agreement. In case they will not agree on such a new trade agreement, the rules of the WTO as the World Trade Organization would apply. And if such WTO rules replace the current regulations of the European Union, the European Union will be required to apply an “external tariff” in line with the principal of the so called “Most Favorite Nations” according to the WTO regulations. This principal is in accordance with the charter of the WTO which states that all other 161 WTO members have to receive the same treatment.

In such case, the United Kingdom could face substantial tariffs and expenditures far higher than anticipated by politicians at the present time. Recent researches conducted by the political think tank Civitas show that in a scenario, in which the tariffs have to be adopted according to WTO rules, United Kingdom exports could face the potential of more than five billion GBP in tariffs on goods being sold to the European Union. Such estimate results from the fact that around 16% of United Kingdom exports that come to the European Union would face tariffs of more than 7%. A high amount of exports refers to motorcars which could face tariffs of up to 10%.

The car industry is specifically a factor that has become one of the most debated topics of concerns since the referendum of England leaving the European Union due to the WTO rules. The car industry of the United Kingdom represents the biggest element of its export values: In 2015, United Kingdom export on cars to the European Union in the value of some GBP 10.2 billion, which represents more than half of the United Kingdom car exports worldwide. In particular, the region of north east of England has one of the highest shares of European Union exports in the United Kingdom regional economy, which results from an investment of Japanese car manufacturers. 10% tariff on such industry would imply an additional charge of around GBP 1.3 billion.

Moreover, the United Kingdom would also be forced to raise its tariffs under the WTO rules, which would make components to the car industry that are being sourced from the European Union significantly more expensive. At the present, more than 40% of the components purchased by United Kingdom car industry are manufactured in countries within the European Union, which would further increase the United Kingdom car industries prices. Similar, the agricultural industry of the United Kingdom would suffer severely from tariffs according to the WTO regulations as such tariffs could average to a staging of 35%. The average tariff on the tobacco industry alone is at 43 % and amounts to some 35% for smoking and tobacco. This might increase the state of health of Citizens of the European Union due to the fact that cigarettes from the United Kingdom will almost become unaffordable. It will, however, also continuously hurt the United Kingdom industries and significantly damage the business of export in the United Kingdom and foreign investors based within the United Kingdom.

Looking at the alternatives for a free trade agreement, from a legal perspective, it shows, that a fallback position to the WTO rules in applying its tariffs to the United Kingdom trade with the European Union will have a significant detrimental impact on United Kingdom exporting industry. Even as those numbers are staggering, it remains uncertain, if the European Union is willing to come to very favorable terms with Great Britain as clearly the European Union objective is to show to the rest of its members that leaving the European Union will come with a high sacrifice and economic downturn.