The EU’s Ambiguous Legal Position in the WTO Reduces the Uncertainty over Britain’s Post-Brexit Trading Relationships

November 19, 2016

The biggest uncertainty facing the UK after Article 50 negotiations with the EU is its position in the World Trade Organisation (WTO). It is now widely understood that the UK will continue as a member of the WTO in its own right. But the terms of trade between Britain and other WTO countries is a big unknown. Ironically, the answer to this may lie in the EU’s own unsettled legal position in the WTO.

All WTO members have ‘schedules’ of commitments to each other. These schedules consist of maximum tariff levels for trade in goods; limits on tariff-rate quotas for agriculture, which countries use to protect domestic producers from foreign competition; and limits on the level of agricultural subsidies. They also include rules that govern trade in services such as banking, telecommunications, tourism, and professional services. For a smaller number of WTO members the schedules also cover the procurement market for government services.

The UK will need to establish its own schedule of tariffs, tariff-rate quotas, and export subsidies with the WTO once it has exited the EU. The fact that this will have to be agreed between all 164 WTO members is the cause of present uncertainty.

The existing schedules reflect the balance of rights and obligations agreed between WTO members at the end of the Uruguay Round of multilateral trade negotiations in 1995. Members will have to decide whether the value of their access to the EU is adversely affected by the UK’s exit. This means that it is not just the UK’s schedule of commitments with the WTO that might need to change but also the EU’s.

The Director General of the WTO, Roberto Azevedo, has said that no one knows how a new schedule of agreements for the UK and most probably the EU will be resolved. It could require all 164 members to reach a consensus on new schedules for both. This could take a very long time. Some argue that getting agreement on this schedule is necessary for the UK to establish new trading relationships, including a bilateral free trade agreement (FTA) with the EU and third countries.

On initial inspection, it seems horrendously complex to sort out the new legal basis of both the UK’s and the EU’s schedules through the WTO’s formal processes. Fortunately, the WTO, reflecting its institutional roots in the treaty arrangements of the old General Agreement on Tariffs and Trade (GATT), is also a practical institution that does not rely solely on the letter of the law.

Since Bulgaria and Romania entered the EU in 2007, the EU itself has not had an official, certified WTO schedule of commitments for the EU28. The joining of two new member states changed both the population size and economic structure of the EU, which should have prompted a renegotiation of its schedules with the WTO. The absence of a new schedule has not however prevented the EU from entering into free trade agreements with other non-EU members of the WTO.

The UK could therefore carry on trading and negotiate new FTAs based on its existing EU schedule, provided that it does not make access to its markets any more restrictive than what is required under the WTO’s Most Favoured Nation (MFN) access. In fact, the UK could go further, liberalising access to its markets beyond current levels, including a reduction in domestic subsidies for agriculture that distort global trade.

As long as the UK does not make access to its markets any more restrictive than under the EU, it is likely that Britain can continue in the WTO as if it were an independent legal entity until a new schedule is agreed. If the broader WTO membership has accepted the “creative ambiguity” by which the EU has been able to live within the WTO since 2007, there is no reason why the UK should not be able to do so.

Potential free trade agreement partners of the UK post-Brexit could then just agree with the UK to take its existing levels of commitments pre-Brexit and treat them as if they comprised a certified WTO schedule. Formal legal certification should not hinder the UK from developing bilateral trade agreements with non-EU countries, so as long as Britain was credible in its assurances that the starting point for trade negotiations is its existing commitments under the EU schedule.

Curiously, it is the EU’s own legal ambiguity within the WTO with respect to its own schedule that shows how the UK might begin to craft its post-Brexit trade policy. The hurdles at the WTO that worry many may not be so insurmountable after all.

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