By Peter Ungphakorn
POSTED FEBRUARY 8, 2017 | UPDATED FEBRUARY 15, 2017
Now that the UK is about to start negotiating its departure from the European Union, it’s important to understand the meaning of World Trade Organization (WTO) “rules”.
Why? Because people are talking about WTO rules as if they only kick in if the UK and EU fail to reach agreement on their future trade relationship — that only then would the UK and EU “fall back on WTO rules”. They are wrong.
The truth is: WTO rules already apply to the UK’s present trade relationship with the EU.
They will also apply to any future trade relationship between the two, whether there is a deal of some kind, or no deal at all — so long as the UK and the EU and its member states are members of the WTO.
So what will the UK and EU fall back on if they cannot agree and the UK still leaves the EU?
They will fall back on commitments they have agreed in the WTO for trade with all other WTO members — except for those with whom they have a special (or “preferential”) trade arrangement, such as a free trade agreement.
This is sometimes called “WTO terms”, a better shorthand description than “WTO rules”. Some speak of “WTO tariffs”, which is more precise but doesn’t include services and agricultural subsidies.
Without a special deal between the UK and EU, trade between them will face import duties according to their WTO commitments for normal trade (without any free trade agreement).
The import duties (or “tariffs”) they charge on each other’s products will have to be the same as they charge on products from all WTO members except partners in free trade agreements. WTO non-discrimination rules would apply.
Limited amounts of some products — mainly agricultural — will be traded at low tariffs, with volumes outside those quantities facing much higher tariffs, so high that it might be impossible to import them. These are called tariff quotas.
British and European service industries are now relatively free to trade across the EU or to set up in other EU countries. Without a special deal, services trade between the UK and EU will revert to the much less liberal commitments they have made in the WTO on opening their markets to foreign services.
The commitments are explained in more detail here.
Even now, while the UK is a member of the EU and its single market, it is governed by WTO rules. These mainly deal with how the EU and its member states relate to the rest of the world. They also discipline how the single market and customs union themselves are set up.
The WTO rules affecting the UK and EU cover a large number of issues. They include:
- how regulations can deal with food safety and animal and plant health
- product standards and labelling
- industrial and agricultural subsidies
- actions taken against dumping cheap products and against other countries’ subsidies
- public procurement
- various customs issues
- principles of services liberalisation (including exemptions for government services)
- minimum standards for protecting intellectual property such as trademarks, copyright, patents and geographical indications
- and much, much more
WTO rules are actually negotiated agreements. The full package is here.
The EU’s member states have agreed to go beyond those WTO rules for much of their trade relations. Therefore when disputes arise between the member states, they are handled within the EU, for example if the UK objects to French restrictions over foot and mouth disease.
After Brexit, the UK and EU aim to have some kind of free trade agreement. This will have to come under WTO rules including one that says a free trade agreement in goods or a customs union must cover substantially all trade.
Another says an agreement in services has to have substantial sectoral coverage.
Even though they are both members of the North American Free Trade Agreement, the US and Canada have taken some disputes to both the WTO and NAFTA
In other words, WTO rules will prevent the UK and EU from having a free trade agreement only for the auto industry, aerospace and banking.
That long list of all the areas covered by WTO rules will also govern UK-EU relationships even if they have a comprehensive agreement.
Depending on the type of arbitration set out in their agreement, they could also find themselves facing each other at the WTO dispute settlement court.
The US and Canada have taken each other to WTO dispute settlement even though they have an arbitration mechanism within their North America Free Trade Agreement (NAFTA). Some cases have been taken to both the WTO and NAFTA.
Failure to understand this would mean a failure to understand the future UK-EU trade relationship.
To complete the picture, the WTO is a system of negotiated multilateral trade agreements. The whole package must now run close to 30,000 pages. It consists of two parts.
First is a rule book of about 500 pages. Among the key principles running through its wide-ranging coverage is non-discrimination in trade — between a country’s trading partners, and between foreign companies, products and people and its own.
The remaining 20 to 30,000 pages are the lists of commitments made by each of the WTO’s 164 members, the limits they have agreed on tariffs on tens of thousands of products and on agricultural subsidies, and the minimum market opening they have promised for various services.
Under those agreements, WTO members have rights (for example not to face discrimination, and to have access to other countries’ markets) and obligations (for example not to discriminate, or to keep markets open at least as much as they have committed).
The agreements come from negotiations. The WTO dispute settlement system is about whether those agreements are being implemented as promised or how they should be interpreted. All decisions are taken by the membership, almost always by consensus (meaning no one objects).
The clichés are: the WTO operates a rules-based trading system; and it is member-driven.
Updates: Februay 15, 2017 — adding link to WTO legal texts
Photo credits: WTO via Flickr; Marrakesh signing by Peter Ungphakorn