‘Leaving on WTO terms’ – lifting some of the fog

Stuart Harbinson clarifies what leaving the European Union on ‘World Trade Organization terms’ means. He delves into issues such as market access to the EU, the border in Ireland, the relationship with the divorce bill with the EU, ‘mutual recognition’, and Britain’s ability to quickly sign new free trade agreements with other countries.

Global Britain and Labour Leave recently published 30 Truths about leaving on WTO Terms.  Two thirds of the paper deals with the state of preparedness on both sides of the Channel for trade in the event that the UK leaves the European Union the without an agreement.  The focus of this short article is on the remaining third, concerning the World Trade Organization framework relevant to the ‘no deal’ scenario, in an attempt to lift part of the fog which surrounds this issue and to add a little more detail.

The GBLL paper makes a number of salient points about the benefits of trading on WTO terms.  The WTO is indeed the bedrock of the international trading system – a role which is too often overlooked or taken for granted.  However in other respects the paper may lead to misunderstandings about the relationship between multilateral and preferential trade and gloss over some of the complexities of the WTO.

Multilateral and preferential trade

As GBLL rightly acknowledges, the UK is already a member of the WTO.  Whether it is inside or outside the EU, whether or not it has a free trade agreement – FTA – or is in a customs union with the EU, the UK has rights and obligations under the WTO with respect to all other members of the organisation.  The UK currently benefits from the WTO’s rules on non-discrimination and dispute settlement and will do so in future whatever the circumstances.  Multilateral and preferential trade are complementary rather than alternatives.

Dispute settlement

Taking dispute settlement, GBLL overlooks the EU’s – including the UK – active role as a complainant in WTO disputes, with 100 cases lodged against other members since the WTO was established in 1995.  Not all have may have been of direct interest to the UK but the great majority were.  Issues such as anti-dumping and countervailing duties, aircraft subsidies, patent protection, export and other quantitative restrictions, sales of wines and spirits, customs duties and transfer of technology have been raised, often successfully.  Arguably, the EU acting together has carried much more weight in these disputes than the UK would have been able to muster on its own.

WTO +++

The GBLL paper equates a ‘no deal’ Brexit with what it describes as ‘WTO +++’.  To avoid misunderstanding, there are no grades of WTO membership.  The whole point is that all members are on the same level.  Non-payment of the £39 billion ‘divorce settlement’ with the EU is cited as one of the elements of ‘WTO +++’.  This may or may not be so but it is important to realise that the divorce settlement is nothing whatsoever to do with the WTO.  The UK’s membership of the WTO will be no different in terms of rights and obligations whether it pays the EU nothing or the full amount.  In this respect there is no such thing as WTO plus.

The WTO and borders

As regards the possible ‘hard border’ on the island of Ireland in the event of a no deal, the GBLL paper quotes Irish Prime Minister as saying that “under no circumstances will there be a border”.  More recently however, Leo Varadkar said at Davos that it would “involve people in uniform and it may involve the need, for example, for cameras, physical infrastructure, possibly a police presence, or an army presence to back it up”.  It is not clear why the Taoiseach may have changed tack – possibly it could reflect the fact that the border in the island of Ireland would also be an EU border.  This is an area in which a spectrum of outcomes is still possible.

The applicable WTO rules relating to borders are those of the GATT – or General Agreement on Tariffs and Trade – which are now 70 years old.  In general they implicitly recognise there will be controls and the emphasis is more on the reduction of unreasonably burdensome or unnecessary obstacles to trade.  The GATT does not deal with undoing an FTA or customs union.

In general GATT says what tariffs may be imposed and what enforcement mechanisms may be used, but it does not require specific measures in terms of border mechanisms.  However, if the UK or the EU does not enforce any particular WTO obligations at the ROI/NI border, there could be some MFN – in other words non-discrimination – issues under GATT as well as, for example, the Agreement on the Application of Sanitary and Phytosanitary Measures also known as SPS.

Having said this, there is a specific provision of the GATT – Article XXIV:3(a) – which states that the agreement should not be construed to prevent advantages accorded to adjacent countries in order to facilitate frontier traffic.  This seems to suggest that there is a degree of flexibility when it comes to controls.  A reading that defined all NI/ROI cross-border trade as “frontier” would perhaps be convenient.  However literature on the history of negotiations on this provision suggests that it was intended to refer to a limit of 15 km from the border.

The WTO and tariffs

GBLL asserts that “we can continue to trade with the EU on zero tariffs while negotiating a Canada +++ deal.  This is permitted by Article 24 of the WTO treaty”.  It is not quite so simple.  If the UK wished, unilaterally, not to impose any tariffs on imports from the EU, it would have to apply the same regime to imports from all trading partners, because of the principle of non-discrimination.

There is, it is true, a provision under GATT Article XXIV which allows the formation of an “interim” FTA or customs union.  Under such a scenario the parties to an interim FTA or customs union must make available all information relating to the proposed agreement. If, after studying the plan and implementation schedule, the other WTO members feel that these are unreasonable they may make recommendations to that effect.  The parties to the interim agreement may not put the agreement into force until the recommendations are accepted.  In any case, it goes without saying that it would take both the UK and the EU to agree to follow this procedure and, in the event of the UK refusing to pay the divorce bill, the EU may be less amenable.

It is also argued that, even if the UK had to trade with the EU under WTO terms – in other words the EU’s ‘MFN’ tariff regime – UK exporters to the EU would face an average tariff of only 4 per cent.  This is a simple average which refers only to industrial products.  The EU, in common with almost all other trading entities, provides tariff-free or minimal tariffs for items it needs to import, while tariffs are higher for products deemed to be sensitive.  This has the obvious effect of bringing the simple average down.

In industrial products, 27 per cent of the EU’s tariff lines have applied MFN (i.e. WTO) tariffs in the range of 5-10 per cent and 7 per cent are in the 10-15 per cent tariff range.  For agricultural products, 18 per cent of tariff lines are in the 5-10 per cent range; 13 per cent in the 10-15% bracket; while 12 per cent of tariff lines are at 15-25 per cent duty.  Moreover, 13 per cent of the EU’s agricultural tariff lines are covered by tariff rate quotas.

Quotas on UK beef and lamb

Beef and lamb are among the EU’s agricultural imports covered by tariff rate quotas. Known as TRQs, these are effectively quantitative restrictions that are lodged in its WTO schedules of commitments.  In the event of a ‘no deal’ Brexit, the EU would be obliged under WTO rules – because of the principle of non-discrimination – to subject imports from the UK to a similar regime.  It is not clear on what basis this might be done.  WTO rules indicate that agreement should be reached with all substantive supplying countries on the sharing of the quota – a tough task.  Failing that, quotas should be based on a previous representative period – but in the case of the UK there is no ‘representative’ period because trade has been distorted by its membership of the EU.  The outlook for UK beef and lamb exporters to the EU could therefore be highly uncertain.

‘Mutual recognition’

The GBLL paper asserts that “WTO Agreements impose obligations on countries to agree mutual recognition where it is objectively justified”.  Again, in practice it is not quite so simple.

Relevant WTO agreements on trade in goods refer to concepts such as conformity assessment (which can in some circumstances include mutual acceptance thereof), equivalence, and compliance with international standards where these exist.

The Technical Barriers to Trade Agreement encourages WTO members to enter into negotiations with other members for the mutual acceptance of conformity assessment results. It also recognises that prior consultations may be necessary to arrive at a mutually satisfactory understanding regarding the competence of conformity assessment bodies.

Somewhat similarly, the SPS Agreement provides that countries shall, on request, consult with the aim of recognising the equivalence of measures.  The onus is on the exporting country to objectively demonstrate that its measures achieve the importing country’s SPS standards.

Well intentioned as they are, these provisions contain a number of grey areas which have given rise to disagreements and disputes.  The granting of mutual acceptance or equivalence is a decision to be taken in the final analysis by importing countries – who may have their own views on when the threshold of “objective demonstration” has been met.

Future FTAs

Looking more broadly at the UK’s and the EU’s trade, the GBLL paper points out that six of the EU’s top ten trading partners trade with the EU under WTO rules – the US, China, Russia, India, Brazil and Japan are cited.  There is one obvious error here in that an FTA between the EU and Japan has just entered into force.  The UK will need to play catch up.  Japan has indicated that it will need clarity on the future UK-EU relationship before proceeding.

It’s also worth noting that negotiations between the EU and Mercosur (including Brazil) are at an advanced stage.  In addition, the EU has ongoing negotiations with several ASEAN countries as well as Australia and New Zealand.

The fact that the EU trades with others on WTO terms does not seem to have prevented some EU member states – notably Germany – from forging strong trade partnerships well ahead of the UK.  This belies the argument that membership of the EU has prevented the UK from developing its trade on a global basis.

It is also argued that the UK should “take up Japan’s invitation to join the Trans Pacific Partnership” – TPP, now re-labelled as the CPTPP.  Reports following the recent inaugural CPTPP Commission meeting in Tokyo indicate that this may not be quite such plain sailing.  While the UK’s interest is certainly welcome, some have cautioned against expectations of quick progress.  Australian Trade Minister Simon Birmingham said “…from the feedback of the other TPP nations there is still a view of: let’s see the initial 11 [members] all get through their ratification process, all become party to it, let’s perhaps deal with some of the other nations of interest in the Pacific region”.  He suggested that striking bilateral FTAs with individual CPTPP members might be a more effective initial option for the UK, while CPTPP accession might be “slow going”.

The WTO in crisis

The GBLL paper makes a passing nod to the current crisis in the WTO which has been brought to a head by the US administration’s disillusionment with it: “President Trump’s disregard for WTO and other international agreements is regrettable but more likely to be aimed at the EU than at an independent UK”.  But the U.S.’s target in the WTO is clearly China, not the EU.  The US’s complaints against the WTO revolve around unsatisfactory (in its eyes) outcomes of some dispute cases with China and the feeling that WTO rules do not adequately constrain China’s state-subsidised model of development.  The EU is backing the US on this in the WTO: it is an ally, not a target.

The UK’s future role in the WTO

Rather surprisingly, GBLL make little or no play on the benefits of the UK being able to operate independently in the WTO in future.  Hot WTO topics of interest to the UK include digital trade, trade in services, fisheries subsidies and WTO reform.  As a strong supporter of multilateral rules-based systems, of trade liberalisation and of inclusive trade and development, the UK has the potential to make a real impact in the WTO, to its own and to the WTO’s advantage.  This may not come easily – indeed it would require a concerted effort – but there are opportunities.

The more the UK is seen as being independent from the EU, the more opportunities it might have in this respect.  Nevertheless, even if it were to be in a customs union with the EU, it would still have room for manoeuvre.

The example of Turkey is often cited as an illustration of the downsides of being in a customs union with the EU.  Turkey currently has little or no say in the formulation of EU policy on trade in goods (excluding agriculture) but is obliged to follow behind.  However the Turkey-EU arrangements date from an era when Turkey was on track to join the EU and are now widely, on both sides, seen as deficient.  There is no reason why the UK should have to follow the exact same formula.  Short of directly participating in internal EU decision-making, the UK could still have significant input into trade policy formulation.

Even in current circumstances, Turkey is an independent and constructive member of the WTO and speaks for itself.  Indeed, from time to time and as the mood takes it, it plays a leading role in WTO deliberations and activities.

Stuart Harbinson is a former ambassador of Hong Kong in the World Trade Organization.

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