Brexit (11): International trade with non-EU countries – the UK as a WTO member in its own right

Key points:

• The WTO is a rules-based system of trade, which is based on consensus and requires the agreement of all 164 members for any amendment to existing rules or new rules.
• WTO rules are based on the principle of trading without discrimination. This is a much more limited concept than the free movement principles of the EU single market and customs union. The WTO regime is particularly limited in relation to the services sector.
• The EU currently represents the UK at the WTO and the UK does not have its own schedule of commitments and concessions setting out how it would treat foreign products and service providers. These would have to be negotiated with the consensus of all WTO members. Such negotiations have been likened to (typically long and complex) accession negotiations by the Director-General of the WTO and the UK will have to ensure it has the resources and expertise for such talks
• There are legal difficulties with the UK being able to negotiate these concessions prior to its exit of the EU and this would require goodwill on the EU’s part. The UK should provide for this possibility in preparatory talks with the EU ahead of triggering Article 50.
• The UK must ensure that after giving notice and whilst negotiating Brexit, the UK can conduct ‘parallel negotiations’ of its post-Brexit WTO status and schedule (as well as PTAs) and bring this into effect at the Brexit implementation date (BID).

The WTO: what is it?

The World Trade Organisation (WTO) is an international organisation governing world trade. It describes itself as a rules-based organisation liberalising trade but also a forum for member governments to negotiate trade agreements and settle disputes. It was established in January 1995. However the system of trade rules on which it is based is not new. These were set out in the General Agreement on Tariffs and Trade (GATT), a multilateral instrument governing international trade which came into force in 1948.

The WTO’s primary purpose is to promote the free flow of international trade and reduce barriers to trade to stimulate economic growth and employment, and to integrate developing countries. Unlike other international organisations, powers are not delegated to it: it is run by member governments who decide by consensus of all members.

What does the WTO do?

The key aspects of the WTO’s mandate include trade negotiations, implementing and monitoring WTO agreements and dispute settlement, all of which are discussed further below. In addition the WTO has an important role supporting development and the trade capacity of developing countries and ensuring cooperation and dialogue with other international and national actors.

The WTO provides an important forum for the conduct and conclusion of trade negotiations to establish the rules of international commerce in the form of WTO agreements binding on all its members. It then implements and monitors the application of these rules as well as member countries’ trade policies, which are required to be notified to it and are periodically scrutinised by various WTO committees. The WTO also provides a dispute mechanism to resolve trade disputes between member countries: countries who consider their rights to have been infringed are entitled to bring the dispute to the WTO which will resolve these by appointing a panel of independent experts to determine the issue based on an interpretation of WTO agreements and the countries’ schedules of commitments and concessions.

The WTO Agreements

The WTO agreements are negotiated and signed by member governments and provide the legal rules for international trade. Although they are essentially contracts binding governments, they are intended to benefit producers, exporters and importers while allowing governments to meet their social and environmental objectives. The legal texts are long and complex and include about 60 agreements, annexes, decisions and understandings, covering a wide range of activities. They are also re-negotiated from time to time and new agreements can be added as rounds of negotiations continue (e.g. under the current Doha Development Agenda).

In brief the WTO Agreements comprise:

(a) the agreements on the broad principles covering the three key areas of goods, services and intellectual property. These are set out in GATT (the version revised in 1994 and commonly referred to as “GATT 1994”), the General Agreement on Trade in Services (GATS) and Trade-Related Aspects of Intellectual Property Rights (TRIPS) for goods, services and intellectual property respectively;

(b) additional annexes and understandings dealing with specific sectors; and

(c) the detailed schedules of concessions and commitments of each individual country which set out each country’s commitments regarding tariffs imposed on foreign goods and access granted to foreign service providers.

Difficulties and delays in getting all WTO members to agree negotiations has resulted in a proliferation of other agreements, including “plurilateral agreements”, which currently cover trade in civil aircraft and government procurement, as well as bilateral or multilateral preferential trade agreements (PTAs).

The key WTO principles

The cardinal principle of the WTO system of trade is the principle of trading without discrimination which encompasses the principles of most favoured nation (MFN) treatment and of national treatment. Under the MFN principle, countries cannot discriminate between their trading partners and if they grant a special treatment (e.g. a lower customs duty rate) for one partner, this must be extended to all other WTO members. Exceptions are allowed and include setting up a free trade agreement, in which case preferential treatment of matters covered by the agreement is allowed. Under the principle of national treatment, foreigners and locals must be treated equally. This applies to goods, services and intellectual property (trademarks, copyrights and patents). However national treatment only applies once a product, service or intellectual property right has entered the market. It therefore does not prohibit charging customs duty on an import, even if locally produced products are not charged an equivalent tax.

The 1947 GATT was concerned essentially with trade tariffs. The focus of the WTO is gradually shifting to non-tariff measures (NTMs) (e.g. quantitative restrictions on imports) and other possible barriers to trade. This has resulted in other agreements tackling some of these issues, including e.g. the WTO Subsidies and Countervailing Measures (SCM) Agreement and the WTO Technical Barriers to Trade (TBT), to provide just some examples.

The WTO seeks to ensure predictability in world trade, both in respect of current trade terms but also future terms, hence the binding nature of each member country’s commitments set out in the schedule of concessions, which can only be amended with the agreement of all other WTO trading partners. It also seeks to encourage transparency. This is ensured through the requirement for WTO countries to notify laws in force and measures adopted and these are periodically scrutinised through the WTO’s trade policy reviews.

The EU and the WTO: how does it currently work?

The UK is a member of the WTO and was a founding member of GATT. The European Union joined as a member in its own right when the WTO was established and, particularly with the broadening of the scope of its competence in respect of trade following the Lisbon Treaty, has played a central role at the WTO on behalf of EU Member States.

The EU, and in particular the European Commission, generally represents EU Member States at the WTO. This means it acts on behalf of the UK in negotiations at the WTO and in WTO committees. It also represents the UK and other Member States in trade defence and other WTO disputes, whether as applicant or respondent, and coordinates views on WTO accessions and trade policy reviews. The UK and other Member States engage directly at the WTO in areas where there are elements of Member State competence. In areas where both the EU and Member States have competence, they can agree for the European Commission to represent their interests, such as in development aid for trade.

Whether an area falls within EU and/or Member State competence is frequently a matter of legal dispute. In Opinion 1/94, the Court of Justice of the European Union (CJEU) found that all WTO agreements on trade in goods came within the exclusive competence of the EU. However it disagreed with the European Commission regarding TRIPS and GATS and found that the EU and Member States shared competence. They were therefore concluded as “mixed agreements”, signed and ratified by both the EU and Member States.

The EU is a key player at the WTO, along with the US and China. It has the power to influence negotiations (such as gaining China’s accession) and norms in world trade, for instance EU harmonisation has formed a working example for certain international agreements. It is also a frequent user of the dispute mechanism and can wield considerable power with the threat of trade defence measures given the size of its market. The UK has been able to benefit from these terms to date.

WTO issues on BID

Assuming the UK has not been able to negotiate and have in place both a new agreement with the EU and with other WTO partners on the Brexit implementation date (BID), there are a number of issues it is likely to face.

The first of these is that, while the UK is a member of the WTO in its own right, it does not have its own schedule of commitments and concessions. These are currently covered by the common schedules which the EU submitted on behalf of all its Member States. This raises the very practical question of how the UK will treat foreign service providers and goods on BID (and vice versa).

It has been suggested the UK would be able to copy and paste the EU’s terms into its own schedule of commitments. While some WTO trading partners may be happy to accept this, it is unlikely that all other WTO members will, without at least some discussion, or at best delay, given the much smaller market which the UK represents. This idea has also been dismissed by the WTO’s current director-general, Roberto Azevêdo, who likened the likely complexity of the UK’s post Brexit negotiations at the WTO to “accession” negotiations.

The UK would be required to negotiate the long list of commitments and concessions relating to its entire trade portfolio, with tariff lines running into the thousands, as well as access to other markets for its services, particularly its key export, financial services.

It has been suggested that the UK could avoid protracted negotiations by adopting a free trade approach, i.e. imposing no barriers to entering the country, such as duty free countries including Macau and Hong Kong. This would enable the UK to be compliant with WTO rules but is unlikely to be a palatable solution to UK industries or voters. It also does not mean other WTO countries would reciprocate by lowering barriers to entry for UK businesses, meaning the UK would have lost a significant lever in trade negotiations with trading partners.

This would also throw up the practical issue of a possible shortage of UK resources both to negotiate trade matters but also police and enforce existing measures, which the WTO director-general has also highlighted. The UK government will have to set up a body (or appoint an existing Government department, possibly the new Department for International Trade) to replace the current role of the European Commission regarding the WTO, including conducting negotiations, hearing and assessing trade complaints from UK traders, managing WTO disputes and trade policy reviews.

In addition, the UK will lose the benefit of the preferential trade agreements concluded by the EU. In practical terms this is likely to mean that to remain compliant with WTO rules, the UK would have to raise MFN tariffs on imports from those countries, and they would raise their own surcharges on British exports.

Of course the UK could choose to not comply with WTO rules, in which case it exposes itself to trade disputes brought before the WTO by WTO trading partners – a poor start to possible trade negotiations – and crucially the risk of retaliation measures which could be damaging to UK trade.

Furthermore, in terms of trading with the EU, which currently is the destination for nearly half of the UK’s exports, without a free trade agreement in place on BID the EU would apply to the UK its common external tariff and neither the UK nor the EU would be able to treat each other preferentially. In practical terms this would for example result in an approximate 10% tariff on UK car exports to the EU, the second biggest UK export to the EU.

Pending BID

Until BID, the UK will remain a WTO member as it is on current terms, i.e. with a schedule of commitments which falls under the umbrella commitments of the EU. The European Commission will continue to represent the UK in negotiations and disputes as it does now.

In practice, the European Commission should continue to defend the UK in any trade disputes at the WTO as it does now, although it is possible to wonder at the extent to which it will invest in preparing for and gathering evidence for such exercises, particularly if BID is imminent. The same question applies to its representation of the UK in ongoing trade negotiations and WTO committees.

The timing conundrum

It will be key for the UK to have at least a basic position regarding the WTO at BID. How it can achieve this raises further issues. As explained in the RegZone report Brexit (8): Bilateral and bespoke – a UK-EU deal?, there are legal issues regarding the UK’s ability to negotiate free trade agreements which might fall within areas of competence of the EU while it is still an EU Member State. Following CJEU rulings on the question, the WTO Agreements fall (or are very likely to) within exclusive EU competence, meaning that only the EU may intervene and any Member State doing so would be in breach of Treaty provisions. This means that any negotiation at the WTO and/or with third countries ahead of full withdrawal of the EU by the UK will require at least some goodwill on the part of EU institutions. This should be another point for the UK to clarify in its “preparatory talks” ahead of triggering Article 50 and formally beginning negotiations with the EU.

Next steps

Although the terms of the UK’s future trading relationship with the EU have been at the forefront of media reporting and speculation, equally important are the future terms of the UK’s membership of the WTO, and the UK Government has so far given nothing away in this regard. The common perception that the UK would be able to fall back on WTO rules in the absence of any other alternative membership model or agreement is far from simple as illustrated above.

The UK’s WTO terms will also be key to any future negotiations with other WTO countries, as illustrated with the example of the US above.

Thus the UK’s participation in the WTO is another highly relevant consideration to bear in mind when deciding on the terms of exit, the precise date of BID and avoiding the dangers of a bad transition (see RegZone report Brexit (5): Negotiating Brexit and the dangers of a bad transition). It will be crucial for the UK to at least have a basic position on the WTO, to avoid a limbo on commitments. Ideally, it would have a preferential agreement in place with the EU.