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New Study by UNCTAD on Implications of No-Deal Brexit for Developing Countries

New Study by UNCTAD on Implications of No-Deal Brexit for Developing Countries

Charlotte Sieber-Gasser (DCU Brexit Institute)

A recent study by UNCTAD indicates that the poorest developing countries are at risk of a decline in exports to the UK in the case of No-Deal Brexit. On the other hand, industrial countries, emerging markets and developing countries, which are not currently trading with the EU on a preferential basis, may benefit substantially from a No-Deal Brexit. According to the authors of the study, winners of a No-Deal Brexit may very likely include China, the US, Japan, Thailand and South Africa. While clearly effects of No-Deal Brexit will be worst for exports from the EU to the UK, the study finds that market access conditions for poor countries such as Cameroon, Guatemala, Ghana, Honduras, and Nicaragua would deteriorate significantly. In terms of value of exports potentially lost due to No-Deal Brexit, Turkey, South Korea and Pakistan are likely to suffer the greatest losses next to the EU.

It has been previously pointed out that implications of Brexit for developing countries should not be underestimated. Therefore, the unilateral adoption of the UK’s Generalised Scheme of Preferences which allows the continuity of tariff preferences to developing countries even in a No-Deal Brexit scenario is considered a highly critical step in the interest of LDC’s and developing countries (see UK’s GSP).

Why No-Deal Brexit Changes Export-Patterns of Third Countries

The UK is currently part of over 80 EU trade agreements and of the EU’s Generalised Scheme of Preferences (GSP). This means not only that the UK is able to trade on a preferential basis with partner states all around the world, but also that partner states have preferential access to the UK market. As the UNCTAD study shows, there is a correlation between the level of preferential market access and country exposure to the UK market (Figure 2).

In the case of No-Deal Brexit, all these preferences disappear, since the UK will no longer be a member of EU trade agreements or of the EU’s GSP. What applies to trade in a No-Deal Brexit situation are potentially already negotiated interim agreements between existing partner states and the UK, the UK’s GSP, and WTO tariff rates as, for example, proposed by the UK government in the draft schedule. WTO tariff rates, however, apply to all countries alike and existing preferences therewith disappear.

Potential Losers in a No-Deal Brexit Situation

Belize, Jamaica, Guyana, and Nicaragua currently all have a preferential margin of over five per cent on exports to the UK. All four countries trade in cane sugar with the UK. Although No-Deal Brexit would not necessarily mean that the UK would impose higher tariffs on cane sugar, No-Deal Brexit would in all likelihood mean that all exports of cane sugar to the UK will be treated the same (see temporary tariff rates and the most-favoured nation rule). Belize, Jamaica, Guyana and Nicaragua would therewith loose their comparative advantage in, for example, cane sugar exports to the UK vis-à-vis other cane sugar exporting countries. Thus, countries with a high preferential margin currently are generally at risk of loosing market shares in the UK due to an increase in competition from other exporting countries.

The same mechanism can have a bigger effect in countries, which economically depend to a considerable degree on their market shares in the UK. The study identifies eight countries (Seychelles, Belize, Bangladesh, Mauritius, Cambodia, Pakistan, Saint Lucia and Turkey) to be currently exporting over five per cent of their overall exports on a preferential margin to the UK. They are also likely to encounter an increase in competition as a consequence of lower tariff rates applied to all countries, instead of a few. Hence, given the current share of overall exports going to the UK (more than ten per cent in the case of the Seychelles and Belize), the economic stability in these eight countries’ is vulnerable in a No-Deal Brexit scenario.

Potential Winners in a No-Deal Brexit Situation

Assuming that consumption more or less remains the same in the UK, shifting imports away from one country means to get them from another one instead. Hence, a number of countries stand to gain from the losses of others. The UNCTAD study indicates among others China, the US, Japan, Thailand and South Africa as potential winners of a No-Deal Brexit scenario (Figure 1).

Unfortunately the study does not provide more in-depth analysis as to why these countries are identified as potentially gaining additional access to market shares in the UK in a No-Deal Brexit scenario. The basic assessment could be that China, Thailand or the US do not currently trade with the UK on a preferential basis and would therefore benefit from more equal footing in the UK market once most-favoured nation tariff rates apply. This is, however, not true for Japan and or for South Africa, with which the EU each already has a preferential trade agreement.

Furthermore, it has to be noted that trade diversion (shifting imports away from one country to another) typically happens within one particular sector and with respect to one particular good (or substitute). Thus, while, for example, imports of cane sugar may very likely shift away from Guyana in a No-Deal Brexit scenario, they will go to another cane sugar exporting country instead. Typically this would be neither China nor the US or Japan, even though these countries are identified by the UNCTAD study as the beneficiaries of No-Deal Brexit. Thus, the study’s three potential top-winners are more likely benefitting from predicted losses in UK market shares from other countries. Considering their relative comparative advantages and their strengths in exporting, China, the US and Japan are likely to benefit from the predicted market losses of the EU, and not from losses of developing countries (apparel, industrial goods, aso.). This remains, however, subject to political uncertainties and will depend largely on the willingness of the UK to compromise with regard to product and production standards.

Not Limited to a No-Deal Brexit Situation

While the UNCTAD study unfortunately offers little in-depth insights into potential trade diversion and trade creation in the case of a No-Deal Brexit, it helps identifying the most vulnerable developing economies and the most critical tariff lines (e.g. on cane sugar, bananas, or apparel). According to the study, the UK government already identified the risks for developing economies associated with a No-Deal Brexit scenario and has promised to ‘maintain forms of preferences for products where low-income trading partners have significant export interest’ (p. 11).

Most importantly however, the UNCTAD study shows that negative implications of Brexit for developing countries are not limited to a No-Deal Brexit situation: since they are linked with the introduction of (lower) most-favoured nation tariff rates, they apply also to any other potential Brexit scenario which has an impact on most-favoured nation tariff rates in the UK. It should also be kept in mind that the study looked at tariff rates alone and more or less ignored non-tariff barriers, technical barriers, services and investment and labour migration. Given that up to sixty per cent of the prize of the final product today depend on non-tariff and technical barriers, as well as services, negative implications of Brexit for third countries without a continuity agreement might even be bigger than estimated here. After all, one of the world’s biggest economies is in the process of re-defining all of its external trade relations – in a globalised world this is bound to have an impact on others.

 

Charlotte Sieber-Gasser is a PostDoc Research Fellow at the DCU Brexit Institute

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