By Fergus Colquhoun, Trainee Solicitor

The Prime Minister Theresa May and the President of the European Commission, Jean-Claude Junker, met on 4th December to try to agree on major issues around the United Kingdom’s (UK) exit from the European Union (EU).

They were unable to do so, and attempts to reach such an agreement continue.

It is hoped that by reaching an agreement on important technical matters (the rights of EU citizens living in the UK, the UK’s so-called ‘divorce bill’, and the Northern Irish border), the UK and EU could begin, in early 2018, negotiations over a future trade deal. The aim would be to have in place a free-trade deal between the UK and the EU from the day on which the UK ceases to be a member state.

In the event that a deal is not reached in time, trade will not cease between the UK and the EU, but it will instead proceed on the less favourable terms agreed with the World Trade Organisation (WTO). Here, we discuss what this might mean for the UK.

The History

The WTO was set up in 1995 as a replacement for the earlier General Agreement on Tariffs and Trade (GATT), a treaty set up to regulate world trade in the aftermath of the Second World War. The GATT had facilitated eight ‘rounds’ of trade negotiations between 1947 and 1994, with the effect of greatly liberalising the trade in goods around the world. GATT was not an institution like the World Bank or the IMF, but rather a mechanism for facilitating multilateral trade deals between the states party to it.

Early rounds of GATT focussed on reduction of trade tariffs; later rounds covered topics such as anti-dumping rules (preventing a country from manipulating the price of a commodity by dumping large amounts of it onto the world markets), and non-tariff measures (preventing countries from using internal regulations instead of tariffs to discourage trade).

The final round (known as the Uruguay Round) of GATT concluded in 1994 with an agreement to set up the WTO (the Marrakesh Agreement), a new international organisation to supplement the work that had been achieved under GATT. The GATT itself still exists in an updated form as the umbrella treaty for trade in goods under the WTO. In addition, the Marrakesh Agreement contained around sixty further agreements including the ‘Agreement Establishing the WTO’, the ‘General Agreement on Trade in Services’ (GATS), and the ‘Agreement on Trade-Related Aspects of Intellectual Property Rights’ (TRIPS).

The structure of the WTO

The WTO sets a framework of rules within which trade agreements can operate, but does not specify the outcomes of those trade agreements. Thus, it forbids members from implementing systems of agricultural subsidy above a certain maximum level, but goes no further than that. A number of basic principles are at the heart of the WTO structure:-

  1. Lack of Discrimination: WTO members should not discriminate between their various trading partners: the Most Favoured Nation (MFN) rule. A favour or concession extended to one member (e.g. a lower customs tariff) must be extended to all, and all trading partners are treated equally as ‘most favoured nations’. Allied to this is the National Treatment rule, which states that members should not discriminate between their own products and those of other countries.
  2. Freedom: The purpose of the WTO is to lower trade barriers and to increase trade.
  3. Predictability: Businesses require knowledge that trade barriers will not arbitrarily increase in order to plan for the future. Thus the WTO requires members to ‘bind’ their commitments, so that once they have opened up their market to a particular good, they may not increase trade barriers without negotiation with trade partners.
  4. Promotion of fair competition
  5. Encouragement of development: The WTO allows for favourable arrangements to be made between developed and developing countries. These agreements are called ‘special assistance’.

The WTO today consists of 164 member states, representing well over 90% of global trade and GDP. Each member has ratified all of the WTO agreements, and has submitted to the WTO documents called ‘schedules’. These schedules set out in detail the commitments that a country has made allowing foreign sellers or service providers access to their markets. For GATT commitments (i.e. trade in goods), these are binding commitments to charge tariffs only up to a particular level. The schedules are drawn up to comply with the overall structure of the WTO rules, but the commitments within them are unique to each individual country.

The WTO rules allow for countries to draw up free-trade agreements in respect of particular goods or classes of goods, and to then discriminate against countries which are not party to the agreements, but even these must be in accordance with general WTO rules in order to avoid falling foul of the MFN rule.

The UK’s Position

The UK is a founding member of the WTO, and has been a member of GATT since it was established in 1948. It is currently represented however by the European Union, and it makes use of the single set of schedules annexed to the agreements by the EU on behalf of all EU member states.

As part of the Brexit process, the UK will leave the EU’s common customs area. The current EU schedules do apply to the UK independently, but they contain shared quotas that apply to the whole of the EU. In order to correctly apportion the quotas, and to allow for the UK to begin to trade on its own terms, new schedules will require to be drawn up.

The Government’s stated position is that a straightforward replication (so far as is possible) of the current EU joint schedules is the simplest approach. In many areas, especially tariff levels, this should be uncontroversial: the UK will end up with tariffs on goods at levels the same as, or lower than, currently.

There will be greater difficulty in agreeing the UK’s quota levels and subsidy limits. New Zealand, for example, may currently import 230,000 tonnes of sheep meat tariff-free to the EU every year: the UK and EU have proposed simply apportioning this quota between them in the new schedules after Brexit. The problem with this solution is that the apportioned quotas are worth less to New Zealand than the sum of their parts: if demand falls in the UK, but the EU’s quota has already been exhausted, New Zealand would not be able to simply sell the surplus meat to Europe.

Future plans

Objections to the UK and EU plan have already been raised by the USA, Canada, and New Zealand, and further negotiations will almost certainly be required. Similar difficulties are likely to be encountered with agricultural subsidies, where the EU currently enjoys very favourable terms. Once the schedules have been drafted by the UK, they will require to be submitted for certification, a process which (theoretically) gives all members of the WTO a veto.

On the other hand, the UK arguably has a strong hand. It is already an independent member of the WTO, and is seeking merely to rectify the existing EU schedules to make them better fit the UK’s altered circumstances. Whilst the draft schedules could be vetoed by other countries, their scope for doing so is (in practice) limited to arguments that the new schedules materially disadvantage them. Furthermore, the UK will be able to trade on the basis of its declared schedules even without certification, as indeed the EU has been doing for many years.