Europe Scrambles to Avert Brexit Strains on World Economy

Jonathan Stearns

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To understand how Brexit threatens to morph quickly from a European political firestorm into a global trade headache, consider a line from the Federal Reserve’s Beige Book this week. 

“A Virginia manufacturer reported looking for new suppliers over concerns about the possible effects of Brexit,” the report stated.

Sounds isolated enough until you consider how interwoven the British economy is not just with the European Union but with the U.S. and beyond. Uncertainty stemming mostly from the U.S.-China trade war may spread. The potential disruptions help explain why EU and U.K. negotiators scrambled to reach a withdrawal deal, subject to the U.K. Parliament’s approval on Saturday, ahead of a European summit Thursday and Friday in Brussels.

Hardcore Brexit supporters insist the U.K. could rely on the basic World Trade Organization rule book to keep international commerce flowing should the country leave the bloc without a transition agreement. They are only half right.

While the WTO forces each member nation to treat all others equally when it comes to trading rights, including tariff levels, a no-deal Brexit on Oct. 31 would mean overnight cost increases for British and EU importers of everything from cars to jackets.

The reason: The point of departure for both sides is the current total absence of border taxes in the European single market, which accounts for around half of overall U.K. trade.

Because a hard Brexit would subject Britain to EU import duties already imposed on the rest of the world, the U.K. government plans to replicate a number of those levies to ensure British producers have a level playing field with competitors based in the bloc.

So, for example, an existing EU tariff of 10% on foreign autos would also become the U.K. levy on imported vehicles. Ditto on men’s woolen jackets and blazers, which would face a 12% import duty in Britain and in the EU. The U.K. would also replicate the EU tariff regime for sheep meat, which faces an import levy of 12.8% plus 129 euros ($144) per 100 kilograms once a duty-free quota allotted to foreign suppliers is exhausted. Not so for another kind of food: blue-veined cheeses. While the EU duty in this case is 140.9 euros per 100 kilograms, Britain plans a significantly lower import levy of 18.6 euros per 100 kilograms. Still, for U.K. buyers of blue-veined cheeses made in EU countries such as France, the British tariff would still represent a cost increase versus the status quo.

For goods that it largely imports rather than produces, Britain plans no tariffs.

Oranges are an example. While a no-deal Brexit would subject the U.K. to a 12% EU levy on oranges, the British government intends to allow duty-free imports of the fruit. In the generally bleak no-deal Brexit scenario, that’s a bit of good news for Spain — the EU’s biggest orange producer.

Charting the Trade War

Failure to strike an agreement at a summit this week would plunge the U.K.’s divorce from the EU back into chaos. In total, about 0.9% of global GDP is exposed to Brexit trade risk, according to Bloomberg Economics. No surprise, the U.K. is the most vulnerable major economy, with 10% of GDP at risk. Ireland isn’t far behind, at 9.7 %. For the euro area as a whole, 2.7 % of GDP is exposed.

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Coming Up

Oct. 18-20: IMF’s annual meetings in Washington Oct. 21: Japan and South Korea trade data Oct. 25: CPB releases Global Trade Monitor

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