European Union: World Trade Organisation Trading Terms: A Safety Net For The ‘No Deal' Scenario?

Last Updated: 13 February 2019
Article by Douglas McLachlan
'Be careful what you wish for'

is often said to be an ancient Chinese proverb and, as we enter the Year of the Pig, will WTO rules provide a safety net for a no-deal scenario?

Much has been claimed in Brexit debates about our future ability to trade internationally in reliance of WTO tariffs and new Free Trade Agreements (FTAs). Here we outline what this could mean and ask whether or not will we come to regret our new found trading freedom.

The WTO explained

The WTO is a forum for international trade negotiations. It monitors members' trade policies and also has a dispute settlement function, of which more later. Its coverage now extends beyond goods to services and intellectual property (including geographic indicators of origin) and some government procurement. After Brexit, WTO law will apply between the EU and the UK, alongside and in addition to any other agreements that are negotiated.

It is a treaty based intergovernmental organisation with a large secretariat based in Geneva. Although not part of the United Nations family of bodies, it does have near global membership, including China (since 2001) and Russia (since 2012). The WTO is the successor body to the General Agreement on Tariffs and Trade (the GATT), which primarily focussed on tariffs and other border barriers to trade and still exists in the form of a legal agreement (GATT 1994) under the WTO framework.

WTO tariffs - how do they work?

Each WTO member has to publish a table listing the customs tariffs to be applied to goods imported to it. These 'schedules' are lengthy with complex listing to distinguish between different types of goods. WTO 'most-favoured-nation' (MFN) rules require all WTO members to be treated equally – with preferences granted to one country extended all other WTO members. Hence the UK cannot, in principle, decide to simply waive duties on EU goods without waiving duties on the same goods from elsewhere, unless it enters into a comprehensive Free Trade Agreement (FTA) with the EU.

Free Trade Agreements - how soon after Brexit will we have these?

The principal goal of FTAs on goods and services are to seek to remove or reduce tariffs and non-tariff barriers to trade such as quotas and discriminatory regulations between the countries which are parties to the agreement. Frictionless trade and the efficient movement of materials, components and finished goods are crucial key business factors, with just over a third of UK traders relying on just-in-time delivery.

WTO rules permit them as an exception to MFN rules in defined circumstances. It is important nonetheless to appreciate that FTAs must cover all trade between the countries in question, not just particular types of products or sectors (such as motor vehicles or agriculture). Negotiations are never straight forward, nor are they quick. The EU – Canada FTA took 8 years to agree, which is why many experts question how soon after Brexit the UK will have new FTAs in place with the EU and indeed the rest of the World.

The EU currently has around 40 FTAs with 70 countries, which impact on 12% of UK trade. Whether those countries will agree to the UK continuing to benefit from the deals agreed with the EU during any transition period under a negotiated Brexit settlement, or ultimately to terms no worse than those with the EU on Brexit (on whatever basis) without concessions remains to be seen. In either case, there will need to be a negotiation with the other country as some existing provisions will not be capable of simply being copied over. The prospect of the UK entering into a network of FTAs with countries such as the USA, Australia, New Zealand, China etc. is one of the two key prizes (the other being greater Sovereignty) that motivates many who favour the UK leaving the EU.

Whilst WTO rules and specific FTAs may provide a basis for our trading with remaining EU members and other nations in the future, it should be appreciated that WTO rules do not remove the need for import / export paperwork (or checks on livestock etc.), provide rights for hauliers to operate in the EU, provide mutual recognition of product standards or professional qualifications, or provide for free cross-border flows of data. Our article on Authorised Economic Operator Status will provide further reading around this subject.

WTO disputes are only for the mighty!

Equally, while the WTO has a well-respected disputes settlement mechanism, only member states (and not individuals or companies) can bring a case. This means a company suffering discrimination would need to lobby its government to raise a case. There are no retrospective remedies and no awards of damages.

In effect, even if a case is successfully raised, there can be several years of 'free' violation before any judgement. This is a substantially weaker position than the present right for any person or company trading in the EU to bring proceedings directly in the courts and to seek damages or specific court orders. This means that only large, well-funded businesses or industries are likely to be in a position to persuade the UK Government to bring proceedings and to ride out the dispute.

In any event, the WTO's dispute resolution process has all but ground to a halt and is in crisis, because the USA has ceased granting approval of appointments to judges to its Appellate Body (and the system requires unanimity). There are a number of reasons for this, including what the US considers to be the Appellate Body's judicial activism and overreach. The WTO's system, it seems, is not immune to the criticisms that have been made of the European Court of Justice.

Leaving the EU without a trade deal - is the price worth paying?

While there is little doubt that the WTO has achieved substantial success in reducing tariffs, non-tariff barriers and quotas across the globe, it takes a fundamentally different approach to trade than the EU's Single Market. While the WTO system does offer a default 'safety net' if the UK leaves the EU without a trade deal, there will undoubtedly be some more friction in the trading system and the sudden imposition of external tariffs may pose significant challenges to certain industries like agriculture, food and drink, cars etc.

That said, Article XXIV of GATT 1994 and contains a potential a glimmer of hope that tariffs might not have to be imposed suddenly as it allows for the possibility of an 'interim agreement', or an agreement leading within a certain period to the establishment of a customs union or free-trade area. The WTO Understanding on the Interpretation of Article XXIV states that this period should not exceed 10 years. There is an equivalent provision in the General Agreement on Trade in Services (GATS).

There remains some debate about how effective this arrangement would be because: (i) the UK and the EU would still have to reach a deal; (ii) that deal would need to include a plan and timetable for reaching the final agreement; and (iii) the WTO membership could demand changes.

While it's possible that the UK and the EU will co-operate out of urgency to avoid suddenly imposing tariffs after 29 March 2019, it seems likely that it would at best only offer limited cover while they frantically try to reach a more stable and comprehensive deal, something that has eluded them to date.

Accordingly, whichever way you look at it, it seems likely that trading on WTO terms will still require businesses, farmers, producers and employers to make significant adjustments to their arrangements in a hurry and all that will come at a cost.

The questions being endlessly debated right now are; just how high a cost that will be and is it worth paying?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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