GARY P SAMPSON. BREXIT: A Pandora’s Box awaits the UK at the WTO

Sep 5, 2018

Whether the U.K. crashes out from the E.U. or retains some residual connections with the Customs Union it will need to negotiate ab initio  its position as an independent, free-standing member of the WTO. Indeed the U.K. is placing much reliance on the WTO for facilitating its future global trading arrangements. What difficulties will face the U.K. in achieving its post-E.U .trading status?

The United Kingdom was a founding member of both the General Agreement on Tariffs and Trade (GATT) in 1948, and the WTO in 1995 by way of its membership of the E.U. It is not, however, an independent member of the WTO and needs to become one if it is to negotiate trade agreements with Australia or other countries. For example, the U.K. must have a national tariff schedule (i.e. a legal instrument showing tariffs and other measures applied to imports) rather than its current schedule which is common to all E.U members. This “new” U.K. schedule requires the acceptance of all 164 WTO members. No WTO member can unilaterally decide what its rights and obligations are.

The U.K. submitted its draft schedule for trade in goods to the WTO in July 2018. According to U.K. officials it is close to the schedules it applied as a E.U. member. How easily WTO members will accept the schedules depends on whether they consider the draft schedule to be a ‘modified’ or ‘rectified’ version of the E.U. schedule. In WTO terms, a schedule is modified if the ‘scope of concessions’ (i.e. market openings) is not maintained. In this case, negotiations are required to re-establish a balance of interest where compensatory adjustment may be required for those whose interests have been adversely affected.

Negotiations would not be necessary if WTO members considered that the E.U. schedule did not alter the ‘scope’ of concessions and the changes amounted to rectifications of a ‘purely formal character.’  If that were the case, a simpler and (usually) faster procedure would be followed.  For rectifications, WTO members have three months to review the schedule, which is approved (i.e. certified) if there are no objections from other members.

The United Kingdom announced loudly and clearly that their draft schedule is a rectification, not a modification of the EU schedule; the Government claims the schedule largely replicates the commitments currently applicable to the U.K. as an E.U.

But Is life that simple?

Nothing is given away free in the WTO and the U.K needs something; the approval of other countries. Some governments have already made it known that they will be looking for improved market access from the UK before approving its schedule. Irrespective of whether it is a modification or rectification, the reality is that all WTO members now have the right to negotiate its content. The WTO Director General once described the U.K process of becoming a standalone member of the WTO as ‘akin’ to accession negotiations. The five most recent WTO accession negotiations took 15 years on average to complete; to modify schedules has taken more than 10 years on average. The devil is certainly in the detail.

The EU goods schedule contains tariffs and other measures relating to 9,379 individual product lines; the U.K trades with the 164 WTO member countries. Countries exporting to the UK will certainly use the opportunity to negotiate improved access to the UK, particularly as the structure of trade with the U.K. will probably not be the same as for the EU. On the domestic front, there is no guarantee that UK companies, unhappy with the protection the EU schedule affords, will forgo the possibility to make modifications in their interest.

Other negotiations are inextricably linked to the market access negotiations. In the case of agricultural products, for example, there are around 500 products imported into the E.U. subject to ‘tariff quotas’; duty-free access to the E.U. market up to a cut-off point after which restrictive tariffs are applied. These are administered by the E.U. Commission on a ‘first-come, first-served’ basis for the 28 E.U. importing countries. The future allocation of these quantitative limits between the E.U. and U.K. will determine which imports receive duty free access and the origin of those imports. This will require negotiations of considerable commercial significance.

There is also the question of how to deal with the 502 anti-dumping actions taken by the E.U. against 54 countries; 132 of which target China. Of the total, 193 are in the steel sector. The investigation to justify anti-dumping action – selling at less than ‘normal value’ and ‘injuring’ domestic producers – has been conducted by the European Commission for the E.U. countries as a group.  It is hard to imagine China will accept that the U.K. imposes antidumping duties on imported steel in the absence of a U.K inquiry as required by the WTO.

And what about trade disputes? To date the E.U. has been involved in 337 WTO dispute settlement cases: 97 as complainant, 82 as respondent and 158 as a third party. How will Panel and Appellate Body rulings bear on the U.K. as an independent member? Who bears responsibility for what? The Appellate Body rulings on the Boeing Airbus dispute (E.U. versus US), for example, involve billions of dollars of penalties. Airbus spends around £4 billion annually with suppliers in the U.K. supporting around 110,000 high value and highly skilled jobs. How can the tight and integrated value chains between the U.K. and the E.U. be maintained when the U.K. has its own schedules and manufacturers will have import duties imposed twice; once for parts exported to the E.U. and again for the final products imported from the E.U.

If the trading relationships between the U.K., E.U. and non-E.U. member-state are not settled prior to April 2019, my guess is that the dispute settlement process of the WTO will be doing a lot of business. Of course, trade will still take place but the conditions of trade are sure to be uncertain. And the biggest non-tariff barrier to trade is uncertainty. There is no precedent for a WTO member leaving an economic union to become a standalone member of the WTO. It seems to me that if nothing else, BREXIT can lay claim to having opened a real Pandora’s Box.

Gary P. Sampson is a former Deputy Director-General of the WTO and is currently a professor on world trade matters at the Melbourne School of Business when not lecturing or advising in this area at various European centres more widely.





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