Brexit Q&A: WTO Rules

The WTO is an international organisation designed primarily to facilitate trading arrangements amongst its 164 members 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 multilateral 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 and/or 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" (NTBs).

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

Upon entry into the WTO, each member negotiates schedules setting out specific concessions/commitments on trade that it will provide to other WTO members. For example, it may commit to impose maximum tariffs 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.

In practice, many nations use their commitments on tariffs as an import duty ceiling and the tariffs which they actually levy are often set at a somewhat lower level than set out in the schedule. In addition, 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 (e.g. agricultural goods). 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 of concessions. 

The need for changes to the UK's WTO schedules

Whilst the UK is a member of the WTO in its own right, its schedules of concessions/commitments are currently determined by the European Commission acting on behalf of all EU member states. This is because (a) EU Member States have agreed 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 schedules of concessions/commitments when it leaves the EU (see Question 6 below for further information).

The WTO has its own dispute resolution procedure, which can be used if a WTO member fails to adhere to its obligations. A WTO member must have incurred actual harm as a result of the non-compliance to initiate proceedings. Only WTO members (i.e. states) are able to initiate proceedings, not companies or citizens and the WTO itself does not actively monitor or enforce its own rules in the same way that the European Commission, for example, seeks to enforce compliance with EU rules (the WTO merely acts as a forum for the resolution of disputes).

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.

The challenge for the UK after Brexit

Currently, the EU conducts WTO litigation on behalf of all Member States and has considerable expertise and experience in doing so. Once the transition period comes to an end, the UK will need to handle this highly complex, long-lasting and costly litigation itself.

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.

Services

As regards services, there are many sectors where the EU has either made no commitments at all or has done so on a very limited basis.  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 position within the Single Market, where UK firms have historically been able to use their passporting rights to provide many types of financial services throughout the EU, without having to establish themselves in other Member States. 

The EU has made commitments in other sectors 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).

More information

For more discussion of the impact of Brexit on services, including how we can help you work out what level of access you can expect after the end of the Brexit transition, see this briefing.

For discussion of the impact of no deal generally (i.e. an exit from the transition period based primarily on WTO rules), see: Brexit: what difference does no deal make? 

You will need to examine the relevant WTO member's schedule of concessions/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.

Services

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. For example, it may have committed to Mode 1 access, but not to Mode 4.

The UK is already a member of the WTO in its own right, so it does not need to "re-join" the WTO. However, the UK will need to make the transition from the current arrangements – whereby the EU negotiates its schedules of concessions/commitments on its behalf – to a position where the UK has its own separate schedules.

The certification process

The UK is in the process of seeking to have its own independent schedules "certified" by the WTO, which will give them full legal effect.  However, this can only take place once any objections from other WTO members have been resolved.  For reasons explained below, this process is not straightforward.

Does it matter if the UK cannot get its WTO schedules certified by 31 December 2020?

If the UK cannot get its WTO schedules agreed before the end of the transition period on 31 December 2020, most commentators do not think this would present insurmountable problems.  Although it is unusual for a country to trade on the basis of uncertified schedules, it is not unheard of;  indeed the EU has done so (although it is a much larger market than the UK, which gives it greater bargaining power).   The risk is that a WTO member could seek to take advantage of the UK's technical non-compliance.  For example, if it objected to a UK measure, it could argue that it was illegal (on the basis that the UK's schedules have not been certified), which would then open the way for it to retaliate by raising its own trade barriers in response. 

In practice, it is likely that the majority of WTO members will wish to continue to trade with the UK on WTO terms – and even with certified schedules, trade disputes are still a risk.  Nevertheless, it is arguable that a lack of certification tends to weaken the UK's position at the WTO generally, notably when it comes to getting its way in negotiations with other WTO members.

Very few countries rely solely on WTO rules in relation to their trade with the rest of the world. In fact, all WTO members have better access to at least one market than that provided under WTO rules, either through an FTA or duty-free preferences for developing countries.

In practice, the impact of trade facilitation agreements can often be quite significant, both in reducing costs and in ensuring rapid movement of goods, particularly given the extent to which modern supply chains are reliant on "just in time" delivery.  For example, on costs, 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.

Will the WTO trade facilitation treaty help?

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 to an extent, much is likely to depend on practical arrangements and levels of voluntary cooperation, particularly as regards  how the EU and the UK implement new border red tape necessitated by the UK's decision to leave the EU Single Market and the Customs Union.

As noted above, many countries seek to improve upon WTO terms by negotiating bilateral (or occasionally multi-lateral) trade agreements with other key trading partners.

The UK's approach

Following the coming into force of the Withdrawal Agreement on 31 January 2020, the UK Government is now able to reach trade agreements with third countries (although it cannot bring them into effect until 1 January 2021). It has stated that it is focussed on ensuring that it reaches new trade agreements with its main trading partners (the EU, the US, Australia, New Zealand and Japan). These trade agreements could open up new opportunities for UK firms. However, for reasons explained below, this process is unlikely to be straightforward and the economic benefits may prove to be more limited than some supporters of Brexit would suggest.

The impact of trade agreements in practice

Even if the UK is able to negotiate ambitious free trade deals with key trade partners within a relatively short timeframe (which will be challenging in itself), a substantial positive impact on UK GDP is far from guaranteed:

• Firstly, the benefits of trade agreements typically take some time to emerge and businesses do not always take full advantage of the preferential treatment on offer. By way of example, analysis of the EU's recent trade deal with Canada indicates that in its first full year of operation (2018), fewer than 40% of EU exporters were taking advantage of lower tariffs. In some cases, this may be due to lack of awareness;  in other cases, it may be due to the costs and administrative burden of producing the extra paperwork to demonstrate that the goods originated in the EU.
  
  
• Secondly, turning to the bigger picture, the UK Government's own analysis has nevertheless predicted that the impact on GDP in the long term would be small (an increase of between 0.2% and 0.7%). This may not be sufficient to offset the probable reduction in the UK's GDP from effectively downgrading its trading relationship with the EU as a result of Brexit.

Can the UK continue to benefit from EU-negotiated trade agreements?

After the end of the transition period, the UK will no lose the benefit of EU-negotiated agreements unless it has managed to negotiated a separate, bilateral "rollover" arrangement with the country in question.  For more detail, see question 8 of this Q&A.