Worst-case scenario
The worst-case Brexit scenario would be one in which the United Kingdom failed to negotiate a free trade agreement with the European Union. Such an outcome might result from the Union playing hard ball in order to discourage any other members from leaving or, alternatively, Brussels might demand too high a price – such as the continued free movement of labour – for Britain to agree.
Nevertheless, even in that pessimistic case, the losses for British trade or manufacturing industry would not be catastrophic. If it transpired, British exports to the European Union would face the latter’s common external tariff. This is sometimes called the ‘World Trade Organization option’, as the United Kingdom’s trade with Europe would be governed by the ‘most-favoured nation’ rules.13 Britain would be subject to the same tariff as the European Union charges other non-member countries, without any discrimination against the United Kingdom.
However, there have been 3 key developments over the past few years which mean that this would be a far smaller concern than it would have been in the past.
First, tariffs have fallen substantially as part of a world-wide trend towards reducing trade barriers. As part of this, the average European Union most-favoured nation tariff on manufactured goods has fallen to just 4%. That compares to over 8% at the start of the 1990s. According to Business for Britain (the pro-Brexit group which concedes that leaving could carry a cost, but a manageable one), the average effective tariff, based on the specific mix of goods and services that the United Kingdom sells to the European Union, would be a touch higher, but still only 4.4%. (See Figure 8.)