‘WTO terms’ apply in any future UK-EU trade relationship. But how much? Part 1 ‘WTO terms’

A lot has been said about Britain trading with the EU on ‘WTO terms’. But a fundamental misunderstanding needs to be cleared up. It’s not just about ‘no deal’. Part 1 of 3

Unavoidable: Some future UK-EU trade will be on WTO terms; how much depends on the deal

By Peter Ungphakorn
POSTED MAY 27, 2020 | UPDATED MAY 27, 2020

This first of 3 parts looks at the meaning of “WTO terms” for UK-EU trade. Part 2 is on goods trade. Part 3 is on services, intellectual property and other issues.
A short summary is here
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They draw 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

And that scale determines how many trade barriers go up on trade between the UK and EU — from a starting position where their trading relationship is one of the freest in the world.

JUMP TO
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PART 1 MEANINGS
WTO RULES v WTO TERMS
WTO rules
WTO terms
What are the UK’s commitments in the WTO?
Non-discrimination
Free trade agreements
Rolling over EU free trade agreements
No one trades on WTO terms alone
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PART 2 GOODS
Tariffs
Tariff quotas
Level-playing field and line by line talks
Non-tariff barriers
Border checks
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PART 3 SERVICES AND MORE
Services
Intellectual property rights
Dispute settlement
To sum up

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.

Trade agreements cover a wide range of relationships, such as:

  • tariffs
  • quotas
  • services
  • intellectual property
  • investment
  • standards
  • regulations
  • customs cooperation
  • dispute settlement
  • institutional arrangements

If the deal is only on tariffs and quotas, then UK-EU trade will be on WTO terms — meaning new trade barriers — in all those other areas.

If it includes services, but only for 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.

Unavoidable: Some future UK-EU trade will be on WTO terms; how much depends on the deal
Unavoidable: Some future UK-EU trade will be on WTO terms; how much depends on the deal (Click the image to see it full size)

A second important point is that for UK-EU trade, moving to WTO terms isn’t just about shifting from one set of rules to another, or from one legal framework to another. The Single Market wipes out a lot of trade barriers that exist under “WTO terms”, from high tariffs on agricultural products to obstacles to trade in services. This is because trade liberalisation under the WTO is weak in some areas even though it’s strong in some others such as low or zero tariffs in developed countries on many industrial goods.

In other words, moving from the single market membership to WTO terms means raising trade barriers between the UK and EU. Relying heavily on WTO terms — as in the case of a modest agreement — means substantially increasing the difficulty and cost of trading between the UK and EU.

It also means there’s a trade-off.

  • No deal creates the most difficulties for UK-EU trade. 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 a hit of 7.6%
  • 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.

Thirdly, it’s also important to remember that this is not just about comparing two end states — either in the single market, or some degree of UK-EU trade on WTO terms.

It’s also about adjustment.

In other words, 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.

Finally, we have to be clear what we’re talking about. Then we can see the implications for Britain’s trade with the European Union and elsewhere, although most of the focus here is on the UK-EU trading relationship.

So, what are WTO terms?

Unavoidable: Some future UK-EU trade will be on WTO terms; how much depends on the deal
Unavoidable: Some future UK-EU trade will be on WTO terms; how much depends on the deal

WTO RULES v WTO TERMSBack to top

We often hear two phrases, “WTO rules” and “WTO terms”. They are not the same.

WTO rulesBack to top

WTO rules are actually agreements negotiated and agreed by consensus among WTO member governments. They are not created by the WTO as an institution, only by its members. They are part of 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 termsBack to top

AN ‘AUSTRALIA-TYPE’ DEAL?

The British government has tried to disguise “no deal” by calling it an “Australian-type relationship”.

It’s a fig leaf that doesn’t work.

Australia doesn’t have a free trade agreement with the EU.

But it does have some agreements, including access to tariff quotas that are specifically for Australian agricultural exports.

Without an agreement, some British exports would have no access to the EU market via UK-specific tariff-quotas.

For several important agricultural products such as lamb, that would mean the UK being unable to export those products to the EU because the duty would be too high.

In order to have “Australian-type” access, the UK would have to reach agreement with Brussels. There would have to be some kind of deal.

“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 — without any additional agreement. And within that rule-book they would have to observe the important principle of non-discrimination.

For example, if the UK and EU end up with no trade deal, they would have to charge each other the same import duties (or tariffs) as they charge other WTO members in general — their trade would be on “WTO terms”.

For cars, the import duty is 10% — for both the EU and the UK because Britain is keeping the tariff commitments it had as an EU member.

If they do end up with a free trade agreement most or all goods traded between them — probably including cars — would be imported duty-free.

Free trade agreements, a type of “preferential” trade, are a permitted exception to non-discrimination. They come under their own WTO rules.

For services, trading between the UK and EU under WTO terms would be much more restricted because countries’ market-opening commitments on services in the WTO are quite limited, including the EU’s and UK’s. Services are traded much more freely within the EU’s single market.

What are the UK’s commitments in the WTO?Back to top

During the transition period of the Withdrawal Agreement, Britain stays in the EU single market. 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 into a single set (more or less) for the whole EU.

Within that package, the EU’s commitments on services and government procurement include some commitments made only by the UK. They will remain in the UK’s own commitments after the transition.

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 it will stick to commitments it made as an EU member.

‘BOUND’ VERSUS ‘APPLIED’

The commitments countries make as a result of negotiations in the WTO are legally binding. They are included in the WTO’s legal treaties.

So if the UK promises to keep tariffs on cars at 10% or less, then 10% is the UK’s “bound” tariff rate for cars.

Because the bound rate is a maximum, the UK would be free to charge import duty that is in practice less than 10%. The rate it actually charges is the “applied” tariff rate.

So long as the applied rate is at or below the bound rate, there are no legal issues. The applied rates are not part of the legal treaties, but for transparency and statistical analysis countries are supposed to inform each other through the WTO.

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 up to 10% duty on cars they import from each other, for example, except when a free trade agreement applies or when they lower duty unilaterally for poorer countries’ exports.

The UK and EU continue to negotiate with other WTO members on how to split tariff quotas (zero or lower than normal duty for limited quantities of imports) between them.

WTO commitments are ceilings on tariffs and more generally 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.

On May 19, 2020, the UK announced revised “applied” tariffs to be used after the end of the withdrawal transition. Some stay high to protect agriculture, fisheries and the ceramics and auto industries (still 10% on cars), some are simplified, euros are converted to pounds, and some drop to zero to help consumers, producers and supply chains and to encourage use of environmentally-friendly products.

So long as these tariffs remain below the commitment rates “bound” in the WTO, the UK is on secure legal ground.

Under WTO terms, these applied rates are the ones EU exporters would face when selling to the UK. British exporters would face unchanged EU tariffs.

(On February 1, 2020, the day after Brexit, the UK circulated to WTO members a comprehensive account of its situation in the WTO after leaving the EU.)

Non-discriminationBack to top

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. (Some exceptions are allowed)

Trade on terms that are better than that basic non-discrimination condition is called “preferential”.

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, some exceptions are allowed.)

Free trade agreementsBack to top

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).

Most countries have several free trade agreements. Most have deals with their closest neighbours or within their geographical region. (You can explore free trade agreements in a WTO database.)

The EU’s single market itself is the most developed international free trade agreement in the world.

The EU also has, by a large margin, the most free trade agreements with other countries around the world — about 43, depending on how they’re counted. Runners up are Switzerland and Iceland with 31, Norway with 30 and Liechtenstein with 29, in all four cases, almost all negotiated through their membership of the European Free Trade Association (EFTA),

Although it has left the EU, Britain effectively stays in the single market during the transition period of the Withdrawal Agreement. After that, 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 agreementsBack to top

The EU’s 43 free trade agreements include deals with most of its neighbours and with major trading countries such as Canada, Japan, Mexico, Singapore and South Korea.

Since the UK currently enjoys preferential trade with those countries through the EU’s free trade agreements, Britain’s trade with them would also go back to WTO terms, unless those agreements were “rolled over” to apply to Britain outside the EU.

The UK has negotiated transferring the provisions of those EU agreements into bilateral deals, but in several cases the rollover is incomplete and may need further negotiation. So far 20 agreements have been rolled over with individual countries or regional groups. Some countries are holding back, most notably Canada and Japan. They 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 British government measures the importance of the rolled over agreements by the size of total trade between the UK and those countries. However, the rolled over agreements do not affect all of that trade. Nor do they necessarily cover everything in the original EU agreements. For example the UK-Swiss agreement does not cover services, an important part of Britain’s trade with Switzerland, while some Swiss-EU provisions on goods have been “disapplied” for UK-Swiss trade.)

No one trades on WTO terms aloneBack to top

Trading on WTO terms alone may be the theoretical default position for WTO members, but in practice no country does. Every single WTO member trades preferentially with at least one other country either through free trade agreements or unilateral preferences offered to poorer countries, or both.

Many also have additional agreements, covering such issues as customs cooperation, recognition of each other’s regulations or methods of applying standards and a host of other issues that are non-tariff barriers. These are improvements over simply trading according to WTO rules and commitments.

Even without a free trade agreement, the EU (and therefore, for now, the UK) does not trade solely on WTO terms with countries outside the EU. With the US—the UK’s biggest non-EU trade partner—some non-tariff barriers are lowered by agreements on a range of subjects such as customs cooperation and mutual recognition of certification of some standards. Trade is made a bit easier, but not as much as under a proper free trade agreement.

As UK-EU negotiations began, the British government declared it would be prepared to walk away from the talks and trade with the EU on “WTO terms”. In that case, the whole of UK-EU trade would be on WTO terms.

But even if an agreement is reached, any area of trade not covered would also be on WTO terms.

Next: details, in Parts 2 (goods) and 3 (services and more).


Updates: None so far

Credits: Photo of Marrakesh agreements by the author


Author: Peter Ungphakorn

I used to work at the WTO Secretariat (1996–2015), and am now an occasional freelance journalist, focusing mainly on international trade rules, agreements and institutions. (Previously, analysis for AgraEurope.) Trade β Blog is for trialling ideas on trade and any other subject, hence “β”. You can respond by using the contact form on the blog or tweeting @CoppetainPU