The Bank of England governor, Mark Carney, has said that the UK would be hit automatically by tariffs on exports to the EU in a no-deal Brexit, rejecting a claim made by Boris Johnson that this could be avoided.
Tory leadership candidate Johnson said this week that tariffs would not necessarily have to be paid if the UK left the EU without a deal because the UK could rely on article 24 of the general agreement on tariffs and trade (Gatt).
Some Brexit supporters have claimed that the Gatt, a treaty under the auspices of the World Trade Organization (WTO), would allow a “standstill” in which tariffs are avoided, even in the absence of any agreement on trade.
Many trade experts say this is not the case without agreement from both sides. Carney cited the head of the WTO and Liam Fox, the minister for international trade who backed the Vote Leave campaign in 2016, to contradict Johnson.
Talking to the BBC, Carney said: “Gatt 24 applies if you have an agreement, not if you’ve decided not to have an agreement or have been unable to come to an agreement.
“Not having an agreement with the EU means that there are tariffs automatically because the Europeans have to apply the same rules to us as they apply to everyone else. If they were to decide not to put in place tariffs they also have to lower their tariffs with the United States, with the rest of the world. And the same would hold for us.”
If the UK leaves the EU without a deal it would by default, become a “third country”, with no overarching post-Brexit plan in place and no transition period. The UK would no longer be paying into the EU budget, nor would it hand over the £39bn divorce payment.
The UK would drop out of countless arrangements, pacts and treaties, covering everything from tariffs to the movement of people, foodstuffs, other goods and data, to numerous specific deals on things such as aviation, and policing and security. Without an overall withdrawal agreement each element would need to be agreed. In the immediate aftermath, without a deal the UK would trade with the EU on the default terms of the World Trade Organization (WTO), including tariffs on agricultural goods. This has also been referred to by government ministers as an "Australia-style deal". Australia does not have a free trade agreement with the EU.
The UK government has already indicated that it will set low or no tariffs on goods coming into the country. This would lower the price of imports – making it harder for British manufacturers to compete with foreign goods. If the UK sets the tariffs to zero on goods coming in from the EU, under WTO “most favoured nation” rules it must also offer the same zero tariffs to other countries.
WTO rules only cover goods – they do not apply to financial services, a significant part of the UK’s economy. Trading under WTO rules will also require border checks, which could cause delays at ports, and a severe challenge to the peace process in Ireland without alternative arrangements in place to avoid a hard border.
Some no-deal supporters have claimed that the UK can use article XXIV of the General Agreement on Tariffs and Trade (Gatt) to force the EU to accept a period of up to 10 years where there are no tariffs while a free trade agreement is negotiated. However, the UK cannot invoke article XXIV unilaterally – the EU would have to agree to it. In previous cases where the article has been used, the two sides had a deal in place, and it has never been used to replicate something of the scale and complexity of the EU and the UK’s trading relationship.
The director general of the WTO, Roberto Azevêdo, has told Prospect magazine that “in simple factual terms in this scenario, you could expect to see the application of tariffs between the UK and EU where currently there are none”.
Until some agreements are in place, a no-deal scenario will place extra overheads on UK businesses – eg the current government advice is that all drivers, including lorries and commercial vehicles, will require extra documentation to be able to drive in Europe if there is no deal. Those arguing for a “managed” no deal envisage that a range of smaller, sector-by-sector, bilateral agreements could be quickly put into place as mutual self-interest between the UK and EU to avoid introducing or to rapidly remove this kind of bureaucracy.
The Bank’s governor has been an outspoken critic of Britain leaving the EU without a deal. However, Johnson has repeatedly said the UK must leave on 31 October, whether a deal is agreed or not.
Carney said on Friday that as many as 150,000 British businesses did not have the paperwork in place to export to the EU in the event of a no-deal Brexit. Around 40% of 250,000 exporters were prepared, he said.
For businesses importing to the UK, Carney said that there was only a “very short-term level of preparation” in the form of stockpiles of goods and materials. These would only last “weeks”, Carney said, highlighting sectors such as the automotive manufacturing sector.
He said: “No deal means no deal. It means there is a substantial change in the trading relationship with the European Union.”
Carney is set to serve as governor until 31 January 2020, meaning he will serve under the incoming prime minister. Johnson won every round of voting among Conservative MPs as they chose the final two candidates to be the party leader.
Conservative party members will choose between Johnson and Jeremy Hunt, the foreign secretary, in a vote next month.
