Cost of Brexit Transition and Spillovers to Developing Countries
Ms. Sonal Garg, Research Assistant &
Dr. Priyadarshi Dash, Assistant Professor
UK exited the European Union in the first month of
2020 and entered into an 11-month transition period, which allows it to follow
Union’s rules and maintain the status quo
until a new deal is struck between the two entities. The 11-month period, the
purpose of which was to provide a window of opportunity to both the parties to
negotiate various aspects of a future agreement, expires on 31st
December 2020 following which UK will lose its ties and forgo its membership of
the European Union. EU’s level of access
to UK waters, state-aid, trade deal, Irish border issue and dispute settlement
mechanism are some of the contentious yet important issues that remain to be
negotiated.[i] As the transition period
is nearing its end, it has become imperative for the two parties to fast-track
If both the parties fail to sign an agreement that
clearly stipulates the rules and standards of the future relationship, UK would
have to exit the customs union without a deal. In the absence of a post-Brexit
trade deal, also referred to as no-deal, EU and UK would have to adhere to
WTO’s multilateral trade rules and restrictions. They would be bound by WTO’s ‘most-favored nations’ rules implying that
the two partners would now be trading at MFN rates, which are much higher than
the tariff rates that the countries enjoy under the custom union.[ii] Given that EU is UK’s largest trading
partner, accounting for 47 per cent of its total trade,[iii]
a no post-Brexit trade deal will have costly implications for both the parties.
As per government’s own projections,[iv]
UK’s GDP is expected to experience a hit of almost 8 per cent after 15 years in
case of a no deal.
In addition to increase in tariff rates, non-tariff
barriers and creation of more red tape will further add to trade costs by
giving rise to logistical and operational challenges.[v]
For instance, according to the report titled ‘UK in a Changing Europe’,[vi]
increased tariffs and non-tariff barriers in the form of Sanitary and Phytosanitary
rules, custom checks and Rules of Origin will hurt the farmers, who would have
to incur higher export costs. The report further underlines that barriers to
trade in services will also be significant between the two parties even in the
presence of a trade agreement. For example, heavily regulated services like
financial and legal services will be more exposed to the severe consequences
from losing access to a single market.
The impact of Brexit is not confined to UK and EU
member nations. UK accounts for
more than 5 per cent of total exports of some developing countries like Bangladesh,
Pakistan, Seychelles, Saint Lucia etc. Sugarcane, bananas and apparel are
important sectors in which these countries have enjoyed substantial margins in
the UK market under EU’s Generalised Scheme
of Preferences (GSP).[vii] However, the dynamics of
changing EU-UK relations are bound to alter the current trade relations that
developing countries have with these two markets.
Earlier this year
UK announced Global Tariff (UKGT) for all the countries with whom it does not
have a free trade agreement. UKGT is set at a lower rate than the EU’s Common
External Tariff. In addition, UK has also announced its version of preferential
treatment, which will cover all the countries that are currently eligible for
EU’s GSP.[viii] As per a study by
Centre for Global Development,[ix] while the scheme
replicates the already existing regime of preferential treatment, the poorest
countries are still expected to lose from these changes. This is because these
countries will face competition from other countries that are not subjected to
any preferential treatment but are likely to gain from lower tariffs under
In other words,
GSP preference margins will be squeezed for the potential beneficiaries of GSP.
As Centre for Global Development observes, HS sections like tobacco, raw hides, skins and leather,
manufactures or cork, straw and plaiting materials, and preparation of meat and
fish are expected to observe the largest differences in margins. The paper
also draws special attention to the case of small countries like Lesotho, Bangladesh
and Uganda that may lose substantial amounts of preference margins in several
agricultural products like corn and maize
flour, barley flour, rice flour, etc. In case of larger developing countries,
Philippines is likely to experience an astounding loss of USD 1.8 million in
tariff savings in prepared skipjack tuna. India is expected to undergo a
similar decline in savings in electric materials (USD 1.5 million) and
turbojets (USD 1.4 million).
Almost 33 lower
income countries that have Economic Partnership Agreements with the EU and have
had zero-tariff access to UK, stand to lose USD 19 million in exports because
of the increased competition. Majority of the developing countries (95
percent), with the exception of few countries like India, Indonesia and Vietnam
(who are expected to experience a small increase in their exports to UK), will
not experience improved access to the UK market. Moreover, while UK’s interest
in improving trade access to developing countries remains supreme, there is a
need for reforms so as to reduce trade barriers. Some of the important
suggestions and recommendations that have been made in the report are:
· Identification and reduction/removal of tariff
lines from GSP that fulfil the criteria of not immediately affecting the
· Simplifying ‘rules of origin’;
· Supporting Africa’s plans for trade integration
both regionally and as part of the African Continental Free Trade Area
· Reductions in the substantial support for
agriculture in the UK, and promoting developing country interests globally
through the WTO
current backdrop of uncertainty and ambiguity, it is necessary for EU and UK to
find a common ground before the window of transition period closes, in order to
minimize the magnitude of economic damages for both parties and the spillovers
to the rest of the world. It is important for the UK government to set up a GSP
regime that is in the interest of developing and the poorest countries and
reduces the negative impact of the changing EU-UK trade relation on them.
- Rankin, J. (2020, September 08). Brexit
Talks: Why the Wrangles over State Aid?. The Guardian.
- BBC News. (2020, September 23). Brexit: All you need to know about the UK leaving the EU.
- Ward, M. (2020). Statistics on UK-EU Trade (Briefing Paper No. 7851).
- Treasury, H. M. (2018). EU Exit: Long-Term Economic Analysis. Treasury: London, UK.
- Morris, C. (2020, October 19). What does 'no-deal' Australia-style Brexit mean?. BBC News.
- UK in a Changing Europe. (2020). What would No Deal Mean?.
- Nicita, A. (2019). Brexit: Implication for Developing Countries (No. 83). United Nations Conference on Trade and Development.
- Department for International Trade. (2020, November 11). Preferential Tariffs Continue for Eligible Developing Countries.
- Ubaldo. M.D., et al. (2020). Developing Country Trade Access after Brexit: The UK’s Plans for the Generalized System of Preferences, CGD Policy Paper No. 187.