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What does trading under WTO rules really mean?

by Roderick Abbott | 22.11.2017

Roderick Abbott was a senior trade negotiator for the European Commission and deputy director-general at the WTO.

If the UK quits the EU with no deal, it will trade with a market currently responsible for half its trade under the World Trade Organisation’s rules. Brexiters such as Nigel Lawson, the former Tory chancellor, think that would be just fine. But what exactly are WTO rules? And what would trading on them actually mean?

There are, in fact, two different sets of rules: one for goods and another for services. In each, there are two components: the core disciplines and obligations found in the legal texts, which are binding on all members; and the commitments each member makes towards others in its so-called Schedule.

Both goods and services are based on applying similar principles. Two core principles are: “most favoured nation”, under which countries cannot normally discriminate between their trading partners; and “national treatment”, under which imported and locally-produced goods should be treated equally, at least after the foreign goods have entered the market. Although these principles apply to both goods and services, the rules are far from identical.

Trade in goods

The basic rules are set out in the General Agreement on Tariffs and Trade, 1994 and the other multilateral agreements.

The principle of non-discrimination means no country can offer to trade with another on preferential terms, except in two situations: where it is a party to a free trade area or customs union; and where there is a general framework of special tariff treatment for developing countries.

This immediately underlines the important difference between WTO rules and EU membership, which involves both a free trade area and a customs union. It means that, absent a free trade agreement (FTA) with the EU, UK exports to the bloc would face tariffs – making our manufacturers less competitive.

The UK is proposing to copy the tariffs in the current EU schedules as far as possible post-Brexit. This means it will maintain tariffs on imported goods at rates similar to current levels. These tariffs will be applied to EU imports, too, unless the UK agrees an FTA with the bloc. This would push up the prices paid by UK consumers, in particular for food where tariffs are high.

WTO rules prohibit quotas on imports and exports while regulating the misuse of licensing procedures to create a similar effect. Its agreements encourage the use of agreed international standards while establishing a process to avoid unreasonable use of such measures for protective purposes. What’s more, its rules encourage impartiality in the way countries apply “rules of origin”, which determine whether a product is considered to be made in a particular country.

Such rules limit the extent to which non-tariff barriers could rise post-Brexit. But they do not allow for fully-flowing trade because the WTO does not tell members what their technical standards or rules of origin should be.

What’s more, post-Brexit many manufacturers’ supply chains could be gummed up. This is because in order to assemble a final product, such as a car, components currently criss-cross the EU’s single market and customs union. If there’s no deal, there will be tariffs on some of these components. There will also be delays at borders as consignments of goods are checked.

Trade in services

The basic rules for trade in services are set out in the General Agreement on Trade in Services. Compared to goods, market access is defined more in terms of the specific commitments WTO members make in their Schedules rather the formal rules. Article XVI says market access will be “under the terms, limitations and conditions agreed and specified in the Schedule”. This essentially means the WTO specifies very little on services.

Although a country’s Schedule may open up its services markets to foreign suppliers, there is no commitment against future policy change. Market access is therefore not guaranteed. It is also subject to reservations, especially if individual service suppliers need to be present in the foreign country as is very often the case.

The degree of access also critically depends on a nation’s regulations – and countries are totally free to set their regulations. Indeed, Article VI authorises member authorities to “maintain or institute” such measures, subject merely to some administrative requirements such as transparency.

Services account for four fifths of the total UK economy. After Brexit, the UK will lose open access to the EU’s vast single market. There is nothing in the GATS rules or WTO specific commitments which would offer a full replacement.

In other words, quitting the EU with no deal and relying simply on WTO rules would be a hard landing indeed for both goods and services.

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Edited by Hugo Dixon

Tags: , , Categories: Economy

2 Responses to “What does trading under WTO rules really mean?”

  • “If there’s no deal, there will be tariffs on some of these components”

    Depends what you mean by that, if you are not using Inward or Outward processing regimes then true but if you are then you aren’t as long as all the ‘paperwork’ is in order, that does mean a lot more work but not tariffs.

  • The claim that life will be just dandy under WTO rules is simply another lazy brexit lie that must be nailed; a likely outcome is that the UK will become embroiled in trade disputes with other members. Brexiteers choose to ignore the WTO’s Dispute Settlement Body with the power to award (large sums of) compensation to a wronged party. So much for being free of foreign judges. Sheer mendacity.