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Brexit: WTO Rules

Tuesday, 19 June 2018
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Whilst the UK government is aiming for a wide-ranging free trade agreement with the EU, it has also indicated that "no deal is better than a bad deal."   This raises the prospect of the UK leaving the EU without any form of agreement on its future trading relationship, leaving it reliant on World Trade Organisation (WTO) rules.  The FAQ below explains what the WTO is, how it works and what problems may arise from relying solely on WTO rules after Brexit.

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Commercial, IP & Technology

Richard Brown

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+44 (0)20 7295 3254

Richard started his legal career at Travers Smith in 1996 and became a partner in the firm’s Commercial, IP and Technology Department in 2006. He specialises in advising large UK and international businesses on key contractual, joint venture and outsourcing arrangements and his clients include household names in the media, leisure, utilities, financial and support services sectors.

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Q1: What is the WTO?

The World Trade Organisation (WTO) is an international organisation designed primarily to facilitate trading arrangements amongst its 164 members, in particular 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 multi-lateral 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/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" or NBTs.

In relation to services, tariffs are irrelevant and the WTO's focus has been on NBTs such as restrictions on who can provide certain services or the manner in which they can be provided. However, as NBTs are more difficult to identify than tariffs, it is generally felt that the WTO has been less successful in this area (both for goods and services) and has not been able to go as far as the European Union (which has sought to harmonise standards so as to provide a "level playing field" across the Single Market, regardless of the nationality of the goods or service provider).

The two key WTO agreements are:

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, it has recently negotiated a new treaty on trade facilitation (see Question 7) and is also responsible for important agreements on intellectual property (TRIPs) and public procurement (Agreement on Government Procurement or GPA).

Q2: What do WTO rules cover?

On entry to the WTO, each member negotiates a schedule of concessions setting out specific commitments on trade that it will provide to other WTO members. For example, it may commit to impose maximum tariffs of x% 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.

The UK is already a member of the WTO but its commitments are set by the European Commission acting on behalf of all EU member states; this is because (a) EU member states agree 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 UK-specific set of commitments when it leaves the EU (see below).

Each member of the WTO agrees to provide equal trading terms including lower tariffs and customs duties to all WTO members in the areas covered by its commitments; this is known as the most-favoured-nation (MFN) principle. In reality, many nations use their MFN tariff commitments as an import duty ceiling and the actual tariffs imposed on WTO members in practice are often set at a lower level.

National treatment is the obligation to accord the same treatment to goods/services of other WTO members as the WTO member accords to goods/services provided by its own nationals (again, in the areas covered by its commitments).

However, 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 such as agricultural produce.  In relation to services, the GATS provides for commitments to be made in relation to 4 different "modes" of service provision (see below);  these too are often subject to significant derogations.  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.

Free trade agreements (FTAs) are an exception to the usual MFN rule. They allow WTO members to go further than their WTO commitments but without having to offer that preferential treatment to all other WTO members (it would only be extended to the other party to the FTA).   It is also increasingly common for countries to have bilateral trade facilitation agreements relating to issues such as customs formalities (see below).

Q3: How are WTO rules enforced?

The WTO has its own dispute resolution procedure, with a set timetable, which can be used if a WTO member fails to adhere to its obligations.  A WTO member must have incurred harm as a result of the non-compliance to initiate proceedings.

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 (but not obliged) provide compensation to the aggrieved member, which could take the form of lowering trade barriers in other areas not subject to the dispute (but which would benefit 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.

Q4:  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.   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 current position, where UK firms can use their passporting rights to provide many types of financial services throughout the EU, without having to establish themselves in other Member States.  In other sectors, the EU has made commitments 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).

Q5: 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 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 e.g. it may have committed to Mode 1 access, but not Mode 4:

  • Mode 1: Cross border supply:  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/advice provided by email, phone etc or banking services provided electronically.
  • Mode 2: Consumption abroad:  applies where a customer in Member State Y has to move to Member State X to use/obtain the service from a provider in Member State X. This includes tourists, students or patients.
  • Mode 3: Commercial presence: 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:  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/permit requirements, duration of stay, quotas, training requirements and residency.

Q6:  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 "re-joining" the organisation should not be an issue. However, the UK will need to make the transition from the current arrangements - whereby the EU negotiates commitments on its behalf (for the whole of the EU as a bloc) - to a position where the UK has its own separate, UK-specific commitments.

Critically, the UK would in principle need to get its own schedule of WTO commitments agreed by all 163 other WTO members.   This is a potentially time-consuming exercise.  The obvious shortcut would be to maintain the existing EU commitments – and for many products/services, this is probably the way forward. Indeed, there is a minority view amongst commentators that legally, this is all the UK needs to do. However, there are 2 main complicating factors:

  • Copying across the EU's commitments will not work for all products/services.   For example, the EU has agreed to allow imports of many agricultural products at a lower preferential tariff rate only up to the level of an EU-wide quota (beyond which a much higher standard tariff applies – in many cases effectively making it uneconomic to import).  Clearly, measures such as quotas will have to be divided up between the UK and the EU.  Agreement with the EU will therefore be needed on these issues before a UK-specific set of commitments can be presented to the WTO.   
  • The UK's commitments will need to be agreed to by all 163 other WTO members – and some countries may seek to exploit the situation in order to extract a better deal for some of their key exporters, particularly in relation to sectors such as agriculture. Trade experts giving evidence to Parliamentary Select Committees generally thought that, ultimately, these obstacles were capable of being overcome through negotiations – but that this could potentially take time.

If the UK could not get a schedule of commitments agreed, it is thought that many countries would still be prepared to apply WTO rules to the UK and trade with it on the basis of a draft schedule of commitments.  However, if other countries refused to allow UK exporters to benefit from their WTO commitments, there may be little it could do to enforce this (as the UK would be outside the WTO dispute resolution mechanism and in any event, such proceedings take years to resolve).  The UK's main option would presumably be to take retaliatory measures against imports from the country concerned – but that could be undesirable if, for example, UK consumers or businesses rely heavily on those imports.

Q7: Do other countries rely solely on WTO rules?

Very few countries rely solely on WTO rules in relation to their trade with the rest of the world.  For example, the EU has a number of trade facilitation agreements with other countries, designed to reduce red tape at borders.  Examples include agreements relating to:

  • 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. 
  • 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.

In practice, these agreements are often quite significant in ensuring rapid movement of goods, particularly given the extent to which modern supply chains are reliant on "just in time" delivery.  They also reduce costs, often by a significant amount (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).

Without trade facilitation agreements after Brexit, current UK testing and certification bodies may lose their authority and recognition from the EU. UK exports could be subject to additional testing at the point of entry to the EU. This could significantly increase costs for exporters.

The UK could also lose access to the EU's AEO system. UK businesses with AEO status would no longer be recognised in the EU or the other countries with which the EU has specific agreements with. This again could significantly increase the time and cost for UK exporters in complying with customs procedures.

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, it would not, for example ensure access to the AEO system.  Moreover, the key to avoiding delays and minimising costs at borders will be the actual implementation of trade facilitation measures in practice – and assuming the UK does not remain in any form of customs union with the EU, significant work will be required at Channel ports in particular to adapt systems and facilities for the introduction of customs controls on EU-UK trade.  See Brexit: customs arrangements .

Q8:  Can the UK negotiate free trade agreements with other countries?

Once it has left the EU, the UK will be free to reach trade agreements with third countries, such as the US – which could open up significant new opportunities for UK firms.  It will not be able to conclude any agreements before Brexit, although this would not necessarily prevent informal talks taking place.  That said, before they start to negotiate in earnest with the UK on trade, most countries will want to know what the UK's WTO commitments are and what its trading position with the EU is likely to be (at least in broad outline, if not in detail).  Trade negotiations are also complex, time-consuming and resource-intensive (Canada had about 100 staff working on its recent agreement with the EU);  as a result, it may be some time before the UK can point to a raft of significant new trade agreements.

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