If agreement cannot be reached on a free trade agreement before the end of the Brexit transition period, the UK-EU trading relationship will be governed largely by World Trade Organisation (WTO) rules. This Q&A explains what the WTO is, how it works and discusses some of the potential consequences for UK-EU trade of relying on WTO rules.
Brexit Q&A: WTO Rules
- What is the WTO?
- What do WTO rules cover?
- How are WTO rules enforced?
- How do the EU's WTO commitments compare with the UK's current level of access?
- How can I find out what commitments a WTO member has made under GATT or GATS?
- Will the UK be able to rely on WTO rules after Brexit?
- Do other countries rely solely on WTO rules?
- Can the UK negotiate free trade agreements with other countries?
What is the WTO?
The WTO is an international organisation designed primarily to facilitate trading arrangements amongst its 164 members by removing barriers to trade. In relation to goods, the WTO has tended to focus on tariffs (i.e. duties imposed on imported goods). Successive multilateral rounds of negotiations have resulted in significant tariff reductions for many categories of goods, reducing costs for businesses and consumers.
The WTO also tries to reduce and/or remove other less visible trade barriers including quotas, domestic subsidies, non-domestic taxes and "technical barriers to trade" or TBTs (e.g. national regulatory requirements), which can distort market access. All of these are known collectively as "non-tariff barriers" (NTBs).
In relation to services, the WTO's focus has been on NTBs such as restrictions on who can provide certain services or the manner in which certain services can be provided. However, NTBs are often more difficult to identify than tariffs and it is generally felt that the WTO has been less successful in this area in relation to both goods and services. It has not been able to go as far as the European Union, which has sought to harmonise standards to provide a "level playing field" across the Single Market, regardless of the nationality of the goods or service provider.
KEY WTO AGREEMENTS
The two key WTO agreements are:
- General Agreement on Tariffs and Trade (GATT); and
- General Agreement on Trade in Services (GATS).
The WTO is also responsible for important agreements on intellectual property (TRIPs) and public procurement (Agreement on Government Procurement or GPA). In recent years, the WTO has made limited progress with further liberalisation. This has resulted in a renewed interest on the part of many countries in bilateral free trade agreements. However, the WTO has recently negotiated a new treaty on trade facilitation (see Question 7 for further information).
What do WTO rules cover?
Upon entry into the WTO, each member negotiates schedules setting out specific concessions/commitments on trade that it will provide to other WTO members. For example, it may commit to impose maximum tariffs on certain goods or to allow a provider from another member state to provide certain services, which were previously reserved to nationals of the first member state.
KEY WTO PRINCIPLES
There are two main principles which underpin the commitments made by WTO members:
- Firstly, the principle of most-favoured-nation (MFN) treatment requires that each WTO member provide equal trading terms (including lower tariffs and customs duties) to other WTO members.
- Secondly, the principle of national treatment (NT) provides that each WTO member accord the same treatment to goods and services of other WTO members as it accords to goods and services provided by its own nationals.
Both of these principles are limited to the areas which are covered by the relevant WTO member's commitments, and subject to some exceptions as detailed below.
In practice, many nations use their commitments on tariffs as an import duty ceiling and the tariffs which they actually levy are often set at a somewhat lower level than set out in the schedule. In addition, a WTO member's commitments will often contain a significant number of exceptions and derogations from these principles, particularly in relation to services and certain categories of goods (e.g. agricultural goods). Indeed, in some cases, WTO members will specify that they are "unbound" i.e. they make no commitment at all in relation to the type of goods or services specified in the schedule of concessions.
Free trade agreements
Free trade agreements (FTAs) are one significant exception to the usual MFN rule. They allow WTO members to go further than the commitments in their schedule of concessions/commitments in relation to specific countries without having to offer that preferential treatment to all other WTO members. It is also increasingly common for countries to have bilateral trade facilitation agreements relating to issues such as customs formalities (see Question 7 below for further information).
The need for changes to the UK's WTO schedules
Whilst the UK is a member of the WTO in its own right, its schedules of concessions/commitments are currently determined by the European Commission acting on behalf of all EU member states. This is because (a) EU Member States have agreed to give the Commission the lead role in trade policy; and (b) the EU Customs Union necessitates the use of a "Common External Tariff" for goods i.e. the same import duty is payable when goods enter the EU, whether the point of entry is the UK or another EU Member State. The UK will therefore require its own schedules of concessions/commitments when it leaves the EU (see Question 6 below for further information).
How are WTO rules enforced?
The WTO has its own dispute resolution procedure, which can be used if a WTO member fails to adhere to its obligations. A WTO member must have incurred actual harm as a result of the non-compliance to initiate proceedings. Only WTO members (i.e. states) are able to initiate proceedings, not companies or citizens and the WTO itself does not actively monitor or enforce its own rules in the same way that the European Commission, for example, seeks to enforce compliance with EU rules (the WTO merely acts as a forum for the resolution of disputes).
WTO DISPUTE RESOLUTION PROCEDURES
The WTO prefers members to consult with each other first and try to resolve any dispute informally before any formal action is taken. If this fails, an aggrieved WTO member can request the WTO to appoint a panel which will hear from both members and produce a report of its findings. If the panel decides a WTO member is in breach of a WTO obligation, it will provide a recommendation, which is presented to all other WTO members. Unless it is rejected, it will become a ruling within 60 days.
If the infringing WTO member does not comply, it is expected (yet not obliged) to provide compensation to the aggrieved member, which could take the form of lowering trade barriers in other areas not subject to the dispute to the benefit of the "winning" party. If satisfactory compensation is not agreed or provided, the aggrieved WTO member may request permission to retaliate by suspending its own obligations to the individual member in the same sector. For example, it could increase its tariffs on the infringing party's goods.
In reality, the process is much slower than the WTO suggests on its website. The increase in complaints received by the WTO has significantly slowed down the process. For example, a complaint by the US against the EU in 2001 took 7 years to be resolved.
The challenge for the UK after Brexit
Currently, the EU conducts WTO litigation on behalf of all Member States and has considerable expertise and experience in doing so. Once the transition period comes to an end, the UK will need to handle this highly complex, long-lasting and costly litigation itself.
How do the EU's WTO commitments compare with the UK's current level of access?
Most commentators agree that, as compared with the current position, the UK's access to EU markets would be substantially reduced if it is unable to reach a free trade agreement with the EU and relies solely on WTO rules.
In relation to goods, if the UK-EU trading relationship reverts to WTO rules, then UK exports will face tariffs. Although the EU's tariffs on the majority of goods are relatively low, sectors such as food and automotive will be subject to substantial increases. This may well prompt EU customers to switch to other suppliers within the EU Single Market, thus avoiding tariffs altogether.
Both the UK and the EU have set out the tariffs they expect to apply from the end of the transition period – so you can estimate the level of additional costs that you or your customers would face (note that, unless agreed otherwise, tariffs are usually paid by customers). We can help you with this analysis.
As regards services, there are many sectors where the EU has either made no commitments at all or has done so on a very limited basis. For example, in relation to many types of financial services, the EU has made no commitments at all in relation to cross-border trade (i.e. financial services provided from the UK to customers in an EU member state). This contrasts with the position within the Single Market, where UK firms have historically been able to use their passporting rights to provide many types of financial services throughout the EU, without having to establish themselves in other Member States.
The EU has made commitments in other sectors but these are often subject to significant reservations, which may vary from one Member State to another. This contrasts with the current position where EU law gives UK firms the right to establishment in all EU Member States. It also limits the extent to which individual Member States can impose restrictions on businesses from other EU Member States (for example, EU law prohibits discrimination on grounds of nationality).
For more discussion of the impact of Brexit on services, including how we can help you work out what level of access you can expect after the end of the Brexit transition, see this briefing.
For discussion of the impact of no deal generally (i.e. an exit from the transition period based primarily on WTO rules), see: Brexit: what difference does no deal make?
How can I find out what commitments a WTO member has made under GATT or GATS?
You will need to examine the relevant WTO member's schedule of concessions/commitments, which can be accessed via the WTO's website. Please contact us if you would like help with this. Alternatively, your trade association may be able to assist you.
If you provide services, you should be aware that the WTO treaty on services (GATS) defines trade in services in terms of four modes of supply as set out below. These are significant when considering a WTO member's commitments under GATS. For example, it may have committed to Mode 1 access, but not to Mode 4.
SERVICES: THE 4 MODES OF SUPPLY
- Mode 1: Cross border supply: this refers to services where a customer in Member State Y receives the services from a supplier in Member State X. This may include consultancy services and advice provided by email, phone etc or banking services provided electronically.
- Mode 2: Consumption abroad: this applies where a customer in Member State Y has to move to Member State X to use and/or obtain the service from a provider in Member State X. This includes tourists, students or patients.
- Mode 3: Commercial presence: this refers to services where a service supplier in Member State X establishes a presence through a locally established office or subsidiary in Member State Y to provide the service.
- Mode 4: Presence of natural persons: this refers to the presence of persons from Member State X travelling to Member State Y to provide a service ("fly in, fly out"). WTO members will often include restrictions in their commitments covering visa and permit requirements, duration of stay, quotas, training requirements and residency.
Will the UK be able to rely on WTO rules after Brexit?
The UK is already a member of the WTO in its own right, so it does not need to "re-join" the WTO. However, the UK will need to make the transition from the current arrangements – whereby the EU negotiates its schedules of concessions/commitments on its behalf – to a position where the UK has its own separate schedules.
The certification process
The UK is in the process of seeking to have its own independent schedules "certified" by the WTO, which will give them full legal effect. However, this can only take place once any objections from other WTO members have been resolved. For reasons explained below, this process is not straightforward.
PROBLEMS WITH THE CERTIFICATION PROCESS
The obvious "shortcut" for the UK is to reproduce the existing EU schedules, as this would be expected to maintain the status quo in most areas, which should minimise scope for objections from other WTO states – and for the majority of products and services, this is what the UK is proposing to do. However, when it comes to products where measures such as quotas apply, the UK – being a smaller market than the EU as a whole – will not wish to simply replicate the EU quota (since this could seriously disadvantage UK producers that the quota is intended to protect). As a result, there is scope for substantive objections by other WTO members to the UK's revised schedules. In February 2020, the UK provided an update on progress in which it admitted that it was still in negotiations with an unspecified number of WTO members on quotas relating to its goods schedule and one WTO member in relation to its services schedule.
Does it matter if the UK cannot get its WTO schedules certified by 31 December 2020?
If the UK cannot get its WTO schedules agreed before the end of the transition period on 31 December 2020, most commentators do not think this would present insurmountable problems. Although it is unusual for a country to trade on the basis of uncertified schedules, it is not unheard of; indeed the EU has done so (although it is a much larger market than the UK, which gives it greater bargaining power). The risk is that a WTO member could seek to take advantage of the UK's technical non-compliance. For example, if it objected to a UK measure, it could argue that it was illegal (on the basis that the UK's schedules have not been certified), which would then open the way for it to retaliate by raising its own trade barriers in response.
In practice, it is likely that the majority of WTO members will wish to continue to trade with the UK on WTO terms – and even with certified schedules, trade disputes are still a risk. Nevertheless, it is arguable that a lack of certification tends to weaken the UK's position at the WTO generally, notably when it comes to getting its way in negotiations with other WTO members.
Do other countries rely solely on WTO rules?
EXAMPLES OF TRADE FACILITATION AGREEMENTS
The EU has a number of trade facilitation agreements with other countries, designed to reduce red tape at borders. Examples include agreements relating to:
- the mutual recognition of product testing whereby parties to the agreement agree to accept testing carried out by recognised providers in the other party's jurisdiction. The EU currently has these types of agreements with Australia, Canada, Japan, New Zealand, USA, Israel and Switzerland.
- the streamlining of customs formalities, such as the possibility for businesses to obtain Authorised Economic Operator (AEO) status, allowing them to benefit from simplified and fast-tracked custom procedures. The EU has agreements with numerous third countries (including the US, Japan and China) covering this aspect of trade. It also has agreements with Switzerland and Norway removing the need for safety and security declarations, thus reducing the amount of paperwork that traders have to deal with at the border.
In practice, the impact of trade facilitation agreements can often be quite significant, both in reducing costs and in ensuring rapid movement of goods, particularly given the extent to which modern supply chains are reliant on "just in time" delivery. For example, on costs, it is estimated that the cost of complying with customs red tape can be equivalent to an additional tariff of 2-15%, depending on the goods in question and the level of bureaucracy involved.
Will the WTO trade facilitation treaty help?
The WTO has negotiated a trade facilitation treaty, which has recently come into force. Whilst this may help the UK with post-Brexit trade arrangements to an extent, much is likely to depend on practical arrangements and levels of voluntary cooperation, particularly as regards how the EU and the UK implement new border red tape necessitated by the UK's decision to leave the EU Single Market and the Customs Union.
WHAT DOES AN AUSTRALIAN-STYLE DEAL MEAN?
Exiting the transition without a trade deal with the EU is sometimes described as an "Australian-style deal". This is meaningful only in so far as Australia has no free trade deal with the EU (although it is at a reasonably advanced stage of negotiating one). However, the characterisation is misleading in the following respects:
- Australia has been able to trade on this basis with the EU for many years because it is thousands of miles away and its trade "profile" is very different from that of the UK, as it is a major global supplier of commodities such as iron ore, coal and gold.
- Historically, trade with the EU has only accounted for 11% of Australian goods trade and 19% of its services trade; the equivalent percentages for UK-EU trade are 52% and 44% respectively. Whilst the UK is effectively downgrading its trading relationship with the EU as regards about half its trade, Australia is looking to upgrade its relationship (despite being far less dependent on that trade).
- Although much of EU-Australia trade is on WTO terms, Australia benefits from a mutual recognition agreement on product conformity (which UK businesses will not have the benefit of in a no deal scenario). There is also a wider framework agreement (from 2008, updated in 2017) providing for cooperation on a wide range of issues of common interest. Such a framework is significant in the sense that it promotes trust and goodwill, which are also important in practice when it comes to the trading relationship.
Can the UK negotiate free trade agreements with other countries?
As noted above, many countries seek to improve upon WTO terms by negotiating bilateral (or occasionally multi-lateral) trade agreements with other key trading partners.
The UK's approach
Following the coming into force of the Withdrawal Agreement on 31 January 2020, the UK Government is now able to reach trade agreements with third countries (although it cannot bring them into effect until 1 January 2021). It has stated that it is focussed on ensuring that it reaches new trade agreements with its main trading partners (the EU, the US, Australia, New Zealand and Japan). These trade agreements could open up new opportunities for UK firms. However, for reasons explained below, this process is unlikely to be straightforward and the economic benefits may prove to be more limited than some supporters of Brexit would suggest.
NEGOTIATING TRADE AGREEMENTS: A SLOW PROCESS?
Trade negotiations are complex, time-consuming and resource-intensive. Moreover, before signing up to a new trade deal, most countries will want to know what the UK's trading position with the EU is likely to be. As a result, it may be some time before the UK can point to a raft of significant new trade agreements.
The impact of trade agreements in practice
Even if the UK is able to negotiate ambitious free trade deals with key trade partners within a relatively short timeframe (which will be challenging in itself), a substantial positive impact on UK GDP is far from guaranteed:
- Firstly, the benefits of trade agreements typically take some time to emerge and businesses do not always take full advantage of the preferential treatment on offer. By way of example, analysis of the EU's recent trade deal with Canada indicates that in its first full year of operation (2018), fewer than 40% of EU exporters were taking advantage of lower tariffs. In some cases, this may be due to lack of awareness; in other cases, it may be due to the costs and administrative burden of producing the extra paperwork to demonstrate that the goods originated in the EU.
- Secondly, turning to the bigger picture, the UK Government's own analysis has nevertheless predicted that the impact on GDP in the long term would be small (an increase of between 0.2% and 0.7%). This may not be sufficient to offset the probable reduction in the UK's GDP from effectively downgrading its trading relationship with the EU as a result of Brexit.
Can the UK continue to benefit from EU-negotiated trade agreements?
After the end of the transition period, the UK will no lose the benefit of EU-negotiated agreements unless it has managed to negotiated a separate, bilateral "rollover" arrangement with the country in question. For more detail, see question 8 of this Q&A.