The UK will cease to be an EU Member State on 29 March 2019, on the expiry of its two-years notice under Article 50 of the Treaty on European Union.
If the UK and EU fail to conclude a Withdrawal Agreement, there will then be no immediate prospect of a future EU/UK relationship or trading agreement and the transitional arrangement provisions, which are part of the draft Withdrawal Agreement, will not come into effect. There will then be a "cliff edge", i.e. an abrupt end to the UK's participation in the single market and to any favourable terms of access by the UK or the continuing EU Member States to each other's markets. At the same time, the UK will cease to benefit from all of the existing bilateral free trade agreements between the EU and third countries. The so called "fall-back" position will be the WTO arrangements.
This note reviews the impact of a hard Brexit on the UK's trading relationships with EU Member States and also third countries.
The WTO is a multi-lateral and inter-governmental trade agreement. Its key principles and rules are ultimately limited in scope compared with the EU single market. Business and individuals cannot themselves enforce the WTO rules; enforcement is State-led through the WTO's Dispute Settlement Body (with a right to appeal to an Appellate Body).
The obligations on WTO member countries for trade in goods are contained in the General Agreement on Tariffs and Trade ("GATT"), and are principally the following: the obligation to grant most favoured nation ("MFN") treatment to all member countries without discrimination, to abide by maximum tariffs as set out in the member country's schedule of commitments; to confer national treatment i.e. equivalent treatment as between national goods and imported goods; and prohibitions (with limited exceptions) on quantitative restrictions on exports and imports. State subsidies of specific enterprises in respect of trade in goods are also controlled, especially export subsidies and import substitution subsidies.
In relation to services, the General Agreement on Trade in Services ("GATS") likewise imposes an unconditional MFN obligation, and also requirements concerning national treatment and market access, subject to the member country having made relevant concessions in its schedule of commitments. Also certain types of market access barriers are prohibited unless they are made the subject of a reservation in the member country's schedule of commitments.
Under the WTO rules, UK exports to the EU would be subject to the EU's schedule of tariffs. The UK and EU could not grant any favourable trading terms to each other for specific sectors without being prepared to grant equivalent terms to other WTO member countries, based on the MFN rules. Whilst the GATT allows member countries to provide more favourable treatment to each other in accordance with a free trade agreement or customs union between those members, this is only the case where the trade agreement or customs union covers substantially all sectors of industry, but it is not permissible in the case of sector-specific free trade agreements.
At present, the UK is a member of the WTO both in its own right and as an EU Member State. It is unprecedented for a member country to make a transition from participating in the WTO through the EU (or any other union) to participating solely in its own capacity. The UK will need to establish its own schedules of commitments under both the GATT and the GATS. The UK government intended to take over the existing EU schedules of commitments and replicate these in its own national capacity, using the rectification procedure as opposed to the modification procedure. A rectification covers amendments or rearrangements which do not alter the scope of a concession and other rectifications of a purely formal character, whereas a modification implies a more substantive change. Moreover, the modification process requires prior notification with, and possibly payment of compensation to, affected WTO members.
The government submitted the UK's draft goods schedule to the WTO members for formal approval under the rectification procedure on 24 July 2018. However, approximately 20 member countries are reported to have objected to this draft schedule, including Australia, New Zealand, China and the USA. The UK Secretary of State for International Trade has since stated that the UK intends to enter into formal negotiations with relevant WTO member countries under Article XXVIII of the GATT.
The Permanent Representatives to the WTO of each of the UK and the EU sent a joint letter to all WTO member countries on 11 October 2017 stating that the UK and the EU will follow a co-operative and transparent approach aiming to minimise disruption to trade as the UK leaves the EU. Specifically, the letter stated, the EU and the UK intend to maintain the existing levels of market access available to other WTO members. The letter stated an intention that the future EU27's and the UK's quantitative commitments in the form of tariff rate quotas (i.e. the quantities of each type of product that can be imported duty free or with a duty discount) be obtained through an apportionment of the EU's existing commitments, based on trade flows under each tariff-rate quota. The letter further stated that the EU and the UK would work together on establishing the UK's own separate services schedules; on the UK's objective of continuing to be a party to the Government Procurement Agreement subject to the same rights and obligations as at present; and on apportioning the EU's commitment level for agricultural support between the EU and the UK.
The government will need a system for businesses and individuals to be able to petition the government to act on their behalf in enforcing the WTO rules through the WTO Dispute Settlement Agreement, where disputes arise. At present, the EU Trade Barriers Regulation provides a channel for EU businesses to raise such disputes with the European Commission and for the Commission to take action before the WTO. The UK government has proposed legislation on trade (the Trade Bill) that will, inter alia, provide for the establishment of a UK investigating authority that will (pursuant to the Customs Bill) conduct trade remedy investigations and make recommendations for the protection of UK interests. For a summary of this planned regime, please see our briefing note on the subject: The UK Government's Planned Regimes on Trade and Customs. The WTO rules allow the application of trade defence measures where dumping or state subsidies damage domestic business. The Customs Bill sets out a new system that will include the use of such duties, but their application would need to be within the WTO rules.
As from Brexit, the UK will no longer be covered by trade defence measures which have been adopted under the WTO rules in favour of the EU, for example countervailing (anti-subsidy) duties and anti-dumping duties. The UK government stated in an October 2017 white paper on future UK trade policy, that it would seek to continue EU trade remedy measures that apply to UK industries. However, WTO members that are subject to the EU's defence measures might object to the UK taking over the EU's existing measures.
Trading under the WTO rules will involve a significant burden on businesses, especially when compared with trading in the EU single market. Import tariffs will obviously increase costs to business even though EU tariffs are relatively low for many manufactured goods. Customs checks and import declarations will be required on the importation of goods into the EU from the UK and vice versa, and business will have to certify the origin of those goods. Customs clearances may be accelerated by using software tools and, possibly, "trusted trader" arrangements, but it seems clear that, overall, the requirements will not only impose tariff costs but also increased costs of employing and training the necessary personnel to fulfil these requirements.
The UK's economy is more dependent on services than on goods, and there is much less liberalisation for services under the GATS than for goods under the GATT. In relation to services, tariffs and MFN treatment are not the main issues, but rather internal non-tariff barriers. In practice, WTO member countries are often more liberal in relation to trade in services than is indicated by their schedule of commitments, but absent such commitments there is no certainty or predictability of arrangements on which businesses can rely. For example, regulated business services are not to any significant degree liberalised by the GATS. Moreover the GATS does not liberalise the flow of data across borders, which is seen by industry as a critical aspect of the provision of digital services. Creative industries will need comprehensive intellectual property rights coverage, but the WTO intellectual property arrangements (the TRIPS Agreement) involve a relatively low level of intellectual property protection. Further, a large part of the audio-visual media services generated in the UK are transmitted to the EU, but the EU's schedules of commitments are silent with regard to audio-visual media services, so adoption of the EU's schedules would not facilitate liberalised trade in this area.
As a related matter, the UK government has stated in its October 2017 white paper on UK trade policy that it strongly supports the Trade in Services Agreement ("TiSA") negotiations and that it will participate actively in this as the UK works towards becoming a member of TiSA in its own right. The TiSA is being negotiated outside the WTO framework. The main aim behind the TiSA is to extend the liberalisation of trade in services.
Various studies have been produced of the effects on the levels of the UK's trade, of the UK's withdrawal from the EU. A World Bank study of January 2017 predicts a fall-off of UK trade with the EU of -50% for goods and -62% for services if no UK-EU preferential trade agreement is concluded. These negative figures are reduced to only -38% and -48% respectively if such an agreement is put in place.
Such predictions and consideration of the position under the WTO indicate the importance of the UK concluding a new trading agreement with the EU. However, this would first require the approval and conclusion of the proposed Withdrawal Agreement and (as part of this Agreement) the implementation of the planned transitional agreement for continued UK participation in the EU single market to the end of 2020.
This article is part of our Brexit series