Trade in a no-deal scenario: WTO rules explained

04.04.19

At the time of writing, Brexit is scheduled to take place at 11pm on 12 April 2019. While the UK Government intends to ask for a further extension, the EU27 would have to agree to that. A no-deal Brexit on 12 April therefore remains a possibility, and unless and until something else is agreed, it remains the default option.

In the event of a no-deal Brexit, the right to move goods freely between the UK and the EU would be lost and trade would revert to World Trade Organization (“WTO”) rules and principles. But what does this actually mean? And what are the implications for your business?

 

A bit of background

The WTO was created on 1 January 1995. WTO rules and agreements form a large set of legal texts covering a wide range of industries, such as agriculture, textiles and clothing, banking and product safety. The WTO and most of its agreements are a result of the so-called ‘Uruguay Round’ of negotiations that took place between 1986 and 1994, which resulted in the Marrakesh Declaration of 15 April 1994. The three main WTO agreements, resulting from the Uruguay Round negotiations, are:

  • the updated General Agreement on Tariffs and Trade (“GATT”), the original version of which took effect on 1 January 1948;
  • the General Agreement on Trade in Services (“GATS”);
  • and the Agreement on Trade-Related Aspects of Intellectual Property (“TRIPS”).

A new round of WTO negotiations, the so-called Doha Round, was launched at the Doha Ministerial Conference in 2001. In this still-current round of negotiations, WTO member governments (currently 157) negotiate new agreements on matters such as agriculture, trade facilitation, geographical indications, dispute settlement and the environment.

WTO legal texts are complex and lengthy, but have simple fundamental principles in common: freer trade, predictability and transparency, fair competition, development and economic reform, and importantly, trade without discrimination. These principles are the foundation of the WTO trading system.

The non-discrimination principle in particular is at the heart of any no-deal Brexit outcome. The principle consists of two elements: (1) treating imported goods, services and items of intellectual property the same as locally-produced ones (the “national treatment” principle), and (2) treating trading partners equally. The second principle is better known as the Most-Favoured-Nation (“MFN”) treatment.

 

What is the Most-Favoured-Nation principle?

The MFN principle means that each WTO member treats all the other WTO members equally when it comes to trade. While the term “Most-Favoured” might suggest special treatment, it actually means the opposite: there can be no special treatment given to one WTO member over another (and the vast majority of the world’s economies are WTO members).

At its most basic, the MFN principle means that a WTO member cannot give better trade terms to another trading partner, or a group of trading partners, to the exclusion of other WTO members. All WTO members have to be treated equally so they all remain on “most-favoured” terms. All three main WTO agreements give priority to the MFN principle: it is reflected in Article 1 GATT, Article 2 GATS, and Article 4 TRIPS.

There are of course exceptions; in particular that WTO members can agree, among each other, bilateral or multilateral trade agreements. For the trade in goods, WTO members can negotiate free trade agreements (“FTAs”) that allow the parties to an FTA to treat each other’s goods more favourably than those imported from other WTO members. The principal condition for FTAs to displace the MFN principle is that the agreement must cover “substantially all trade” – i.e. it is not possible to strike narrow ‘sectoral’ deals without activating the MFN principle.

Further exceptions to the MFN principle include granting special market access to certain developing countries, or setting up barriers against foreign products from specific countries that are considered to be competing unfairly (e.g. by subsidising the production of certain goods and then ‘dumping’ them in other markets). Discrimination is also allowed for trade in services, though again only in limited circumstances.

 

On what basis would WTO rules and principles apply to the UK?

The UK was a member of the original GATT from 1 January 1948, and has been a WTO member since the establishment of the organisation in 1 January 1995. It is a member in its own right as well as through the EU.

Although the UK is a WTO member in its own right, it is party to current trade agreements only as part of the EU and its Customs Union. In order to fully re-establish trade autonomy from the EU after Brexit, the UK is required to re-join WTO agreements in its own right.

The UK Government has been preparing the UK’s accession for some time now. For example, on 7 December 2018, the UK submitted both its ‘schedule of commitments’ for goods (GATT) and services (GATS) for certification at the WTO. These schedules replicated as far as possible the UK’s current obligations under the EU’s own schedules, though the Government last month published its plans to vary tariffs in the event of a no-deal Brexit. On 27 February 2019, the signatories to the Government Procurement Agreement (“GPA”), another important WTO agreement, gave final approval to the UK’s accession once it leaves the EU.

 

What does this mean for the UK after Brexit?

Unless and until the UK enters into free trade agreements with individual WTO members, its trade relationships would be subject to general WTO rules and principles. In particular, the UK will be required under the MFN principle to treat all WTO members equally. In a no deal scenario this will include trade with the EU, unless and until a free trade agreement could be agreed.

In terms of trade with non-EU countries, the EU’s existing FTAs with third countries will cease to cover the UK post-Brexit (or after a transition period, if there is one). The UK is working to ‘roll over’ these existing trade agreements so they become bilateral agreements between those countries and the UK, and some agreements are already in place. Others remain a work in progress.

Businesses are advised to follow closely what is happening and to check their supply chains where necessary. Our no-deal Brexit checklist for businesses includes a section on the new trade requirements that will apply in the event of a no-deal Brexit. We have also recently published a short briefing on new procedures for importing goods from the EU after Brexit. Our briefing on Brexit and trade was produced in summer 2017, but (if only because there is still no clarity on what the future UK-EU relationship will be) remains largely relevant for anyone looking for a more detailed understanding of the issues.

Please do also visit our Brexit Hub for regular updates on Brexit related issues.