• Mathieu Provencher

Will Brexit bring Shortages similar to WWII?

(picture taken from Wix's library)

Hello everyone! I’ve tried to put ahead as much of a clickbait title as I could (I’m not very good at this as you can tell)… if you are reading this it might just have worked!!!! Rest assured that I did this for your own good as this may prove a useful article to some of you guys.

Just a little context for those that are too young (or uninterested) to know what I’m referring to. During the second World War (WWII), the UK was under siege by the Nazi army. This siege meant constant bombardment coming from the nearby coasts (from France) as well as a shortage of goods, including food and other necessities. The UK government established rationing of important food products to make sure they would not starve.

SO! What does that have to do with Brexit (The UK leaving the EU)?

Before I answer that question, a cautionary statement: Brexit has not happened yet and may never happen. Although I’ve been reflecting on the possible impact of Brexit on the economy of the UK, I am not going to make predictions on the date of Brexit or even on its feasibility. Although Brexit seems more likely than ever (for those that don’t follow international news, Mr. Johnson was elected with a strong majority the 12th of this month), I’ve given up trying to understand politicians (they often don’t follow economic logic).

I have been reading arguments for and against Brexit and listening to debates on the topic since before the now infamous referendum. There is a myriad of possibilities regarding Brexit: from a simple political statement of independence with everything else staying the same to the dreaded (by many people, including Economists) so-called “no deal” scenario. If you want to read one of my previous articles on the uncertain results of Brexit, you can find it here: “Brexit, how much do we know?

I’m going to focus on that last possibility: the UK leaving the EU with no free-trade agreement whatsoever (no-deal) outside of basic World Trade Organization (WTO) rules. It is for this scenario that several economists and politicians predicted that the UK would be facing substantial shortages of all sort of imported products, including food, medicine, cars, clothing, and more.

Here’s the argument: if the UK leaves the EU with no deal (outside of WTO rules), they will have to implement border controls on all products entering the country. This is something that the UK is currently avoiding for products coming from the EU (as is the case for all EU countries, it’s part of the deal). These border controls include paperwork and physical inspections that will substantially slow down the flow of products from the EU to their markets. Since the infrastructure is not in place, it may even lead to a complete stop of all relevant imports while these infrastructures are put in place. In addition, even if some EU products can still enter the UK market, they will face heavy import taxes and be unaffordable to lower income households (In the EU, import taxes are zero on most important products coming from other EU countries). Under WTO rules, countries cannot offer preferential tariffs to a trading partner or group of partners without offering the same deal to all other countries... which means the UK will need to tax imports from the EU.

This could lead to shortages of products (including food) somewhat similar to their rationing experience during WWII (in the worst-case scenario). The UK doesn’t produce enough food to feed its population the same variety as they have access to right now. They don’t produce enough cars (given that they will continue exporting), clothes, and other important goods to keep the same lifestyle. It will take time for the UK to sign new trade agreements with non-EU countries and thus shortages can endure for a long time.

There is, however, an important detail that such arguments did not consider: The UK does not have to impose trade barriers (such as import taxes) or border controls on EU products… at least not right away. The WTO allows for a country to ignore its rules under special circumstances… it seems very clear that Brexit is indeed one of those special cases. If the UK left the EU without any trade agreement, it could choose to simply continue importing from the EU under the exact same conditions. It could have zero import taxes and no border control knowing that the quality of products coming from the EU is absolutely in line with their required standards… we know this because that’s what the UK is doing right now (importing from the EU without any checks).

SO! As long as the UK government wants to avoid any shock to its imports, it definitely can… and very easily and cheaply. The UK can fall back on WTO rules for trading with non-EU countries and have a temporary free-trade and free-movement of goods (for imports) policy with the EU. The UK economy might still suffer in the short-term because of a potential reduction in its exports but it will not have any shortages in food, medicine, clothing, and others.

This being said, this special provision of the WTO cannot be used for decades to come. The UK should still formalize its relationship with the EU and negotiate trade agreements with them and the rest of the world. Will that be to its advantage or disadvantage in the long-run? As goes my very favourite phrase of all times when trying to predict economic outcomes: it depends!!!!!

This time around, it depends on so many things that I don’t want to try my hand at predicting that result.

I hope you guys learnt a few things! Take care and don’t forget to have fun!!!!!

#Macroeconomics #Shortages #Brexit #Trade #WTO