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The default solution for world trade

Would World Trade Organisation trading rules cause even more headaches for the UK? It’s certainly possible…

By Crona Brady

Should all other trade arrangements fail, setting tariffs and quotas under the World Trade Organisation (WTO) trading model might prove tricky for the UK.

There have been a host of uncertainties throughout the Brexit process, but one thing is certain: if the UK fails to remain in the Customs Union with the EU, or doesn’t negotiate a free-trade agreement, trade under WTO rules only will be the default position for the UK post-Brexit.

The WTO has 164 members including Ireland and is responsible for 95% of world trade. It is essentially a forum for countries to negotiate trade agreements with the aim of liberalising trade and settling trade disputes. To free up trade of goods, services and intellectual property, countries agree to lower customs tariffs and other trade barriers using agreed schedules. Such schedules set members’ tariffs, quotas and limits on subsidies. Under these schedules, tariffs in many cases have been cut to zero and an increasing amount are now bound, which means that a WTO member has committed to not increasing the tariff beyond that amount.

Lots of countries including China, the United States and Australia trade with the EU under WTO rules as they haven’t agreed formal free trade agreements. Sound simple? Let us explore what this will mean for the UK and the island of Ireland…

UK membership of the WTO

Like Ireland, the UK is already a member of the WTO but at the moment, when it negotiates trade deals, it operates through the EU. This means that the UK operates in the WTO under the EU’s set of schedules. Post-Brexit, the UK will need to agree its own set of schedules with the WTO. These may mirror the EU schedules, or the UK may in fact decide to create their own. To completely change the schedules could result in lengthy negotiations and wrangling, so it is very likely that the UK will keep its schedules mostly as if they were still in the EU.

The UK could implement certain ‘carve outs’ to gain some form of competitive advantage over the EU in terms of tariffs – in the area of agriculture, for example.

In terms of trade, WTO members apply the same tariffs to imports from each other and must (mostly) grant the same most-favoured nation (MFN) market access to all members. There can be no discrimination. So on Brexit, Ireland would have to apply the EU tariffs to imports from the UK and the same is true on the UK side. For example, the MFN principle would not allow the UK to levy a customs duty of 5% for imported motor vehicles from the EU, while levying a higher customs duty of 8% for imported vehicles from the United States. If the UK is anxious to ensure that their exporters do not suffer from Brexit, the WTO rules may prove a sticking point. The UK cannot have a side agreement with the EU to set lower or zero tariffs on certain products without WTO rules forcing the UK to offer the same attractive offer to other countries. Furthermore, the national treatment principle bans a member from favouring its domestic products over imported products of other member countries. So imported products cannot be taxed in excess of domestic products and even small infringements could attract large penalties.

Quota restrictions

There are also restrictions in terms of quotas. A member cannot discriminate when imposing limits on the quantity or value of goods from another WTO member. Quotas need to be imposed across the board based on expected market share and should not distort ordinary trade flows.

Tariff-rate quotas (TRQs) are different to tariffs. They are predetermined quantities of goods, which can be imported at a preferential rate of customs duty (which is generally the MFN rate). Once the TRQ has been filled, the country can continue to import the product without limitation at a higher tariff rate. For example, say 1,000 tonnes of oil are allowed in under TRQ. These imports would be charged at 10% and any oil being imported outside the tariff-rate quota would be charged 40%.

What about agriculture?

Looking at agriculture, which is of particular interest to Ireland, the UK has to decide what agricultural trade policy it wishes to pursue outside the EU. If the WTO model is adopted, the UK’s freedom to pursue an independent agricultural policy will be constrained by its commitments under the WTO agreements.

Agricultural tariffs are generally much higher than those on manufactured goods. In addition, there are quotas for many products. Therefore, non-tariff barriers will be far more important than tariffs in the medium-term.

The UK may inherit the EU’s bound tariffs in agriculture initially. In future, the UK might choose to set its applied MFN tariffs below this level but cannot exceed them. TRQs may cause some problems. Some EU import TRQs are very important for the UK because a significant portion of in-quota imports are destined for the UK market (butter from New Zealand, for example). As part of the negotiations, the EU would need to examine whether they want to share these quotas.

This dividing up of quotas could be quite difficult as different countries have different dependencies on the UK and other EU markets. Third countries might feel that their exports to the UK or the EU will face more market access difficulties. If agreement is not reached at the WTO, these third countries could put forward a formal dispute case.

Not as straightforward…

Membership of the WTO brings its benefits, but it can in some instances place additional complications on a country’s trading mechanisms. So while the WTO option appears simple on the surface, there are sticking points and it may not be the straightforward option it first appeared.

When the United Kingdom leaves the EU, the controls of the EU Customs Union will in effect be replaced by the controls of the WTO.

This article was originally published in the October 2017 issue of Accountancy Ireland.