A NO-DEAL Brexit scenario could severely damage smaller economies that trade with the United Kingdom. This event would hit European Union (EU) exports hard, but it would guarantee substantial trade gains for China. A new UNCTAD study shows that London and its trading partners must accelerate bilateral deals. Only speed will help them avoid the heavy costs of an EU departure without an agreement. According to the report, the EU risks losing up to 34.5 billion dollars in exports to the British market.
Turkey represents the second most penalized country in a no-deal scenario, facing an estimated 2.4 billion dollar loss in exports. In contrast, China could record a 10.2 billion dollar increase in its exports to the UK. Parallel to this, the United States could add another 5.3 billion dollars in new sales. “Brexit is not just a regional matter,” says Pamela Coke-Hamilton, UNCTAD’s Director of International Trade. “London’s departure from its 27 European partners will radically alter the ability of non-EU countries to export to the UK market.”
The UK market absorbs about 3.5% of world trade. It constitutes a vital partner for many developing economies. In 2018, Great Britain ranked as the fifth-largest importer within the EU. The country imported global goods worth nearly 680 billion dollars, with about 360 billion dollars originating from other EU member states.
UNCTAD forecasts the heaviest losses for EU countries due to their deep economic integration with London. However, other non-EU nations will also see a contraction in their exports. The study explicitly names South Korea, Pakistan, Norway, Iceland, Cambodia, and Switzerland among the most at-risk markets.
The largest benefits will instead go to countries that currently face higher British customs tariffs. Along with China and the United States, Japan estimates a gain of 4.9 billion dollars. Analysts also predict import increases from Thailand, South Africa, India, Brazil, Russia, Vietnam, and New Zealand.
“The UK’s intention to cut tariffs for Most Favored Nations will increase the competitiveness of giants like China and the United States,” Coke-Hamilton explains. “This process will inevitably erode the market shares of less competitive countries.” A no-deal Brexit will therefore strike a heavy blow to small states that rely heavily on sales across the Channel.
Today, many developing countries enjoy excellent access to the British market thanks to bilateral agreements and unilateral EU preferential schemes. Nations wishing to preserve these advantages must negotiate quickly with London. The European Union currently manages around 70 trade agreements. Unfortunately, replicating these treaties requires significant time and complex bureaucratic steps.
“In many cases, London and third countries have not yet signed new continuity agreements,” warns Coke-Hamilton. “Substantial uncertainty surrounds the conclusion of these talks in the short term.” By March 2019, trading partners had signed only 26 continuity agreements with the UK.
Without a formal deal, European preferential treaties will expire instantly. Consequently, imports into the UK will take place under Most Favored Nation (MFN) rules. This World Trade Organization (WTO) principle requires countries to apply identical tariffs to all trading partners, unless a true free trade agreement establishes an exception.
The UNCTAD research highlights the risk of severe economic shocks for low-income nations whose exports depend on the British market. Even if absolute figures seem small, the impact will prove devastating when measured as a percentage of these small economies’ total exports.
“To protect developing nations, London should not drastically reduce MFN tariffs on sensitive agricultural products like bananas or cane sugar,” concludes Coke-Hamilton. “The best response for these countries remains accelerated negotiations. They must quickly define crucial issues like rules of origin, non-tariff measures, and import quotas. Unwinding a consolidated economic integration without a complete plan represents a terrible idea.”
Coke-Hamilton added that “unscrambling economic integration is not only complex, but doing it completely is a bad idea.”
Chart 1: No-deal Brexit: Winners and losers in the UK market (selected countries).
