By Peter Ungphakorn
POSTED MAY 27, 2020 | UPDATED MAY 27, 2020
This is a summary of a 3-part article looking at the meaning of “WTO terms” for UK-EU trade in goods, services and more.
The main article is here
The series draws partly on a paper from The UK in a Changing Europe
Now that UK-EU trade talks have begun, it’s important to recognise that “WTO terms” will unavoidably apply to the trading relationship — whether or not there’s a deal. It isn’t either/or. It isn’t either a deal or “WTO”, as some people describe it. It’s a question of scale.
The point is: the more the UK and EU trade on WTO terms, the more trade barriers they raise against each other — from a starting position where trade between them has fewer international trade barriers than anywhere else in the world outside the EU.
• WTO rules
• WTO terms
• What are the UK’s commitments in the WTO?
• Free trade agreements
• Rolling over EU free trade agreements
• Tariff quotas
• Level-playing field and line by line talks
• Non-tariff barriers
• Border checks
• Other differences
Main 3-part article
With no deal, all trade between the two will come under WTO terms. If there is a deal, then some trade will be covered and the rest will be under WTO terms. In other words, outside the Single Market — after the end of the post-Brexit transition — at least some parts of UK-EU trade will be under WTO terms. The question is: how much?
If the deal is only on tariffs and quotas, then UK-EU trade will be on WTO terms as far as regulations for goods, services, intellectual property, investment and a host of other issues are concerned.
This isn’t just about shifting from one set of rules to another. Moving from the single market membership to WTO terms means raising trade barriers between the UK and EU. The less the deal covers the more trade barriers are raised.
Where would those trade barriers be? On most of the subheadings on this page, and more.
The UK in a Changing Europe’s new paper estimates that with no deal, raising those trade barriers could knock British GDP growth back by between 3.3% and 8.1%. The British government’s estimate is 7.6%
Moveover, moving from one to the other is difficult. The bigger the leap, the more severe the hit to the economy, or parts of the economy, and the greater the adjustment needed.
In other words, there’s a trade-off.
- No deal creates the most difficulties for UK-EU trade.
- A quick deal is likely to leave a lot out, raising a significant number of barriers on UK-EU trade.
- A comprehensive deal with substantial content — so that a large amount of UK-EU trade continues with no new trade barriers, or low barriers — needs more time to negotiate.
So, what are WTO rules and WTO terms?
WTO rules are actually agreements negotiated and agreed by consensus among WTO member governments. They come in a negotiated package with two components:
- the actual rules, for example what kinds of subsidies are allowed and which are not, and how legal disputes are settled. The latest edition is around 550 pages
- commitments that individual governments make to open their goods and services markets and limit agricultural subsidies. These are different for every country. Richer nations’ market-opening commitments tend to be more generous than those of poorer countries. By now, the commitments of all WTO members probably run to around 30,000 pages
WTO rules always apply to all trading relationships between WTO members even if they negotiate additional agreements among themselves. For example, a UK-EU free trade agreement would still have to comply with WTO rules, just as the Single Market does.
“WTO terms” is an unofficial way of describing a trading relationship based on individual members’ commitments in the WTO, as well as the WTO rule-book — and without any additional agreement.
For example, if the UK and EU end up with no trade deal, they would have to charge each other import duties (or tariffs) so long as they charge duties on imports from other WTO members in general, because non-discrimination is a key principle in WTO rules. Their trade would be on “WTO terms”.
If they do end up with a free trade agreement most or all goods traded between them would be imported duty-free.
This is because free trade agreements, a type of “preferential” trade, are a permitted exception to non-discrimination. They come under their own WTO rules.
So what has the UK committed in the WTO?
What are the UK’s commitments in the WTO?
Britain is staying in the Single Market until the end of the transition. Until then, its WTO commitments on goods (tariffs, tariff-quotas and agricultural subsidies), services, and government procurement are still merged with those of the 27 remaining EU members.
All of these are in legally binding negotiated documents known as “schedules of commitments” — “schedules” because they include timetables for arriving at the final commitments.
At the end of the transition period, the UK will leave the single market. But it has said that in the WTO it will stick to commitments it made as an EU member. That means the unchanged tariff commitments (such as 10% on cars, 8% on some shoes, €9.4 per 100 kg for some types of sweetcorn), and the same commitments as before for services and government procurement.
It also means that both the UK and EU will charge, for example, up to 10% import duty on each other’s cars, except when a free trade agreement applies or when they lower duty unilaterally for poorer countries’ exports.
WTO commitments include ceilings on tariffs. More generally, they are minimum guaranteed access to the countries’ goods and services markets. Countries can actually charge (“apply”) lower tariffs or open their markets more than in the commitments, provided they do not discriminate between trading partners.
The British government has announced it will apply some tariffs below its WTO commitment levels, while keeping protection for agriculture, fisheries, ceramics and the auto industry.
Even though some of these new tariffs will be below the UK’s WTO commitments, they are WTO-terms tariffs for British imports because of the non-discrimination (MFN) rule (next section). But British exports to the EU under WTO terms would face unchanged standard (MFN) EU tariffs at or close to the WTO commitment levels.
The duty charged by the UK and EU outside free trade agreements is also governed by a key WTO principle: treating one’s trading partners equally, known officially as most favoured nation (MFN). If the UK charges 10% duty on cars from China, it has to do the same on cars from all other WTO members, except where there is a free trade agreement.
This non-discrimination principle applies to the full range of tariffs and regulatory controls. It also applies to services. (There are exceptions.)
The WTO has a second important non-discrimination principle called “national treatment”. This means giving foreigners or foreign companies the same treatment as the county’s own nationals or companies. It is also an issue in the UK’s trade talks for example on copyright, patents and other areas of intellectual property rights, or regulations in services. (Again, there are exceptions.)
Free trade agreements
Free trade agreements break the non-discrimination principle. But they are allowed in the WTO provided certain conditions are met. They can vary in depth and breadth, from simple (such as only on tariffs) to ultra-complex (including standards, regulations, services, intellectual property, investment, institutional arrangements, and more).
The EU’s single market itself is the most developed international free trade agreement in the world.
After leaving the single market any EU-UK trade agreement is going to cover less than the single market. Any areas that are no longer covered in a new agreement would revert to WTO rules or WTO terms. That’s why it’s not “either/or”.
Rolling over EU free trade agreements
On top of its own single market, the EU also has free trade agreements with, for example, Canada, Japan, Singapore and South Korea — it has around 43 agreements with countries or regional groups around the world.
After leaving the Single Market, Britain’s trade with those countries would also go back to WTO terms, unless the agreements were “rolled over” to apply to Britain outside the EU.
So far 20 agreements have been rolled over with individual countries or regional groups, but in several cases the rollover is incomplete and further negotiations will be needed. Some countries want to see what the UK’s trading relationships with the EU and the rest of the world are first, before discussing a deal with the UK.
The average import duty that the EU (and, for now, the UK) charges on goods is 3.2%. However, this is higher for agricultural goods (8.7%). Duties exceed 25% for more than one in ten agricultural products, sometimes by a large amount, whereas almost no products in any other sector have duties above 25%.
The highest tariffs are in fact way above 25% — the equivalent of 189% for some dairy products and 116% for some animal products.
Those are rates British exporters will face if trading with the EU on WTO terms.
Britain has announced it will scrap some applied tariffs completely, or reduce some to below ceilings it has committed in the WTO. This will make it cheaper to import from the EU under WTO terms than without the new applied rates. But tariffs will stay at or close to the ceilings for agricultural and fisheries products, and on cars and ceramics.
Those tariff rates do not apply to imports under free trade agreements or preferences for developing countries. But without a UK-EU deal, whatever the UK and EU charge on imports from countries without free trade agreements with them would have to apply to trade between the two.
Clearly, UK-EU trade in food and other agricultural products would be hit hardest. Both importers and exporters would be affected.
That said, a 10% import duty might not mean a 10% increase in what we pay for those goods in the shops. The exporter might lower their price to offset some of the impact, and the price rise in shops would be even less because the effect of the tariff would be diluted by transport costs and other overheads. This is also affected by the value of the pound
But high duty means the product is not available at all from the supplying country.
An additional complication is tariff quotas where the import duty is zero or low on limited quantities. Outside the quotas, the tariffs can be so high that trade is not possible. These quotas are often allocated to specific exporting countries.
The UK and EU are already facing a battle in the WTO because their proposed method for splitting the quotas between them is controversial.
But the way the UK and EU propose splitting the quotas does not take into account trade between them. British lamb, for example, would have almost no duty-free access to the EU market since the quota is almost entirely allocated to other WTO members.
Level-playing field and line by line talks
The UK and EU want their agreement to be duty-free on all products. But there are conditions, particularly those set by the EU on fisheries and a level playing field on state aid and other areas.
If they cannot agree on the conditions some tariffs could remain on some products. Tariffs would then have to be negotiated product by product to determine which products, split into tens of thousands of subdivisions, and how long the tariff increases would take. For example, UK and EU customs regulations split footwear into about 70 categories or “tariff lines” with different tariff rates.
Suddenly the talks would become much more complex and require a lot more time.
Where tariffs are low, other “non-tariff” barriers can also make trading significantly difficult. For example countries want to be confident that imported food is safe, animals and plants are free from disease or pests, and other goods meet safety or labelling requirements. This involves producing certificates to satisfy importing countries’ requirements, and paperwork to show that the requirements are met.
WTO rules contain agreed basic requirements on these but often countries have additional deals to help trade flow more smoothly.
Modern free trade agreements try to reduce at least some of these non-tariff barriers. In the EU-Canada agreement (CETA), at least three of the 30 chapters (4–6), and large parts of the long Annex, deal with non-tariff barriers.
The more Britain wants to diverge from EU standards and regulations, the less coverage there will be in any EU-UK trade agreement. Anything left out, will rely on WTO rules alone.
Any product crossing from, say, Somerset into Devon is assumed to be safe because the transaction takes place within the UK’s own internal market. Similarly, goods entering the UK from the rest of the EU are not normally inspected and are assumed to be safe because of common standards and checks in the EU’s internal market.
This will no longer be the case once the UK is outside this market, at least for Great Britain (England, Scotland and Wales) — the Withdrawal Agreement effectively puts Northern Ireland in the EU single market for goods.
Goods traded between the UK and EU will unavoidably face new entry barriers and friction at the border, either with checks on the goods themselves, or on certificates and other paperwork. Food and live animals are among the most controlled goods. Leaving the single market increases red tape and costs to business.
Services are complicated. There are many different types (banking, insurance, telecommunications, transport, architecture, etc).
How much services trade will be on WTO terms depends on what is covered by a UK-EU deal. For example, if the deal only covers telecommunications and transport, then all other services traded between the two will be on WTO terms: finance, insurance, construction, tourism, educational services, medical services, and professional services such as accountants, architects, lawyers, doctors, vets, musicians, actors, journalists — and much, much more.
Each type of service has several methods of delivery, from setting up a branch in a foreign country, to the customer travelling into the country (as with tourism) or flying an expert out to provide the service. Trade in each of them is liberalised or restricted by complex rules, the commitments and exceptions on market access, countries’ domestic regulations, and exceptions to both forms of non-discrimination (between trading partners and between nationals and foreigners).
The UK’s and EU’s liberalising commitments in the WTO — the WTO terms — are considerably weaker than within the Single Market.
Among the many other topics that could be covered by a UK-EU free trade agreement — or face the barriers and other differences of WTO rules and commitments — are intellectual property (including protecting the use of geographical names to identify products), and how disputes are settled.
More here. Details on all of this are in the main 3-part article.
Updates: None so far
Sao Paulo Stock Exchange by Rafael Matsunaga via Wikimedia and Flickr CC-by-2.0.
All other photos rights free (CC0). Known photographer credits: Aircraft by Binario on Pixabay | Beach hotel by Mohamed Ajufaan on Unsplash | Construction by Josue Isai Ramos Figueroa on Unsplash | Doctors by National Cancer Iinstitute on Unsplash