Given the short time-frame and the difficulties involved in negotiating a trade deal with the EU before we leave, the possibility of having to revert to WTO rules, if some sort of transitional agreement cannot be reached, is very real and may even be quite likely. David Davies has warned the Cabinet that they must be prepared for EU exit without a trade deal in place and Theresa May has said that “no deal is better than a bad deal”.
But what does reverting to WTO rules mean? It is spoken of as if this is an easy default position that we can adopt without any problem. This is not the case.
The WTO – World Trade Organisation – regulates trade in goods and services between member countries on the principles of equal treatment between nations on a “most-favoured-nation” basis and providing safeguards against some unfair trading practices, like dumping.
Trade in goods is more highly regulated than trade in services, which is a drawback to the UK which is heavily dependent on its services sector.The UK is a member of the WTO in its own right and as a member of the EU and it is unprecedented for a country leave an economic union like the EU whilst both are members of the WTO.
The director-general of the WTO has said that “Britain… will continue to be a member of the WTO. But it will be a member with no country specific commitments… It is very likely that both the EU and the UK will have to negotiate with all WTO members”
The UK would have to agree “schedules of commitments” in respect of tariffs and commitments on goods and services with the EU and other WTO members by consensus.
If that sounds like it could take a while, it could. For example, it took 5 years to integrate Bulgaria and Romania into the EU WTO schedules of commitments after they joined the EU.
Under WTO rules trade in goods is governed by the General Agreement on Tariffs and Trade (GATT) and trade in services is governed by the General Agreement on Trade in Services (GATS).
GATT prohibits discrimination between member countries and requires that all member nations should treat each other equally, but there are exceptions, for example being a member of a custom union, as EU members are, or having a Free Trade Agreement with another country means that those countries can enjoy beneficial treatment over other WTO members. This is why countries seek trade deals rather than rely on WTO membership.
Theresa May has already ruled out being a full member of the EU customs union.
If we were to leave the EU without a trade deal and must rely on our WTO membership to trade with the EU we would be subject to a tariff of 10% on the export of cars to the EU.
GATT seeks to reduce tariffs on goods through successive rounds of negotiations between the members but the current round, the Doha Development Round, is deadlocked at the moment.
GATT does seek to prevent dumping and subsidies that distort the market and prejudice a member or particular industry sector within a member nation but it is not always straightforward to identify what might be an actionable subsidy, for example, and it is up to the government to take action because businesses have no right to take action directly.
GATS is similarly based on a principle of no discrimination between members of the WTO but it does not have the same protection against dumping or subsidies as GATT does.
Theresa May has said that she wants a deal which will allow trade to be as “frictionless” as possible but if we cannot reach a deal and revert to WTO not only would the UK be subject to the EU common external tariff (albeit the tariffs are generally quite low) it would also be subject to nontariff barriers, for example product standard requirements and customs checks. This is likely to generate a fair amount of friction in movement of goods.
If we are entering a phase of greater protectionism globally then countries are likely to find ways and means of protecting their domestic industry and disputes within the WTO will become political rather than legal and we can expect some of the principles by which the WTO operates to start breaking down.
Reverting to WTO rules is not simple or straightforward and certainly not as beneficial as having a trade deal but may end up being all that is on the table 2 years from now.