( A Twenty-minute read)
The UK is now stepping up plans to trade with the EU under WTO terms in the
the event of a no-deal Brexit.
The Brexiteers can’t see the huge damage that trading on WTO terms would
inflict on the UK economy. I don’t blame them.
Because we all have a superficial understanding of the rules of WTO.
Because the UK’s terms at the WTO are enshrined in its membership of the
Well, you only have to look at what is involved to realise why very few if any understand the operations of WTO.
One of the WTO’s key rules is that countries should treat their trading partners equally. In WTO jargon this is called most-favoured-nation treatment (MFN) — favour one; favour all.
So what is the WTO:
It’s a system of trade agreements, which discipline governments’ trade policies so that international trade is not a free-for-all — the rule of law rather than the law of the jungle.It’s 164 member governments (the present total).
Decisions among those 164 member governments are by consensus, if anyone among them, big or small, cannot accept a decision, there’s no deal.
In fact, each country may have more than one opinion on a particular issue, but let’s not get into that here.
Some people think the WTO Secretariat is the WTO, but strictly speaking, that’s not correct. The Secretariat is a bureaucracy set up to help member governments operate the trading system.
It’s true that the head of the Secretariat is called the Director-General of the WTO, because the WTO is also an international organisation, like the United Nations, UN Environment Programme or the World Bank.
But the WTO DGs are still the servants of the members, a cause of frustration for some of them.
When the negotiators get down to specific subjects such as agriculture or fishing subsidies, those sessions are chaired by ambassadors or other delegates.
It is sufficient to say that Brexiteers misunderstand Britain’s past when it comes to trading under WTO.
They believe that Britain has a “special relationship” to world trade, this narrative ignores the prologue to the story, in which the British empire first accumulated wealth through gunboat diplomacy and enforced markets over the 18th and early 19th centuries.
Britain only embraced unilateral zero tariffs once its geopolitical power had been built up, and it would quickly depart from free trade and move towards protectionism at the start of the 20th century through the policy of imperial preference, encouraging trade within the empire.
All of this has long passed, with the result that the Brexiters are now unable to fathom the damage that relying on WTO terms to govern trade with our largest trading partner will do to the economy.
While other countries struggle to understand why any nation would willingly leave the world’s largest trading bloc to trade on WTO terms, we must understand their attraction to the myth of how in centuries past, Britain became rich through “global free trade”.
Even if it is obvious to the rest of the world it is not possible to ring up the WTO and say, “Hey, WTO! We’re negotiating a free trade agreement. It may take 10 years. While we’re doing that, we might violate some of your non-discrimination rules.”
The UK is currently a WTO member in its own right.
The issue is it does not have an independent schedule of concessions for the WTO – that’s the menu upon which Britain trades with the rest of the world.
So any future agreement has to contain details, including a plan and timetable for concluding the final agreement. This means that any formal WTO agreement between the UK and EU would obviously mean that the EU would have to be on board too.
In fact, there is no WTO definition of an interim agreement. No country wants to go through all the above unnecessarily, which is why interim agreements are never notified to the WTO.
In theory, the transition customs union and the Protocol on Northern Ireland / Ireland (the “Backstop”) in the Withdrawal Agreement could qualify as an interim agreement.
The attached non-binding political declaration on the future relationship would not, since it’s not an agreement.
On the face of it, this is about protectionism versus access to markets (or to imports)
So what the problem?
The EU has around 100 tariff quotas:
Tariff quotas have emerged as part of the UK’s need to re-establish itself as a WTO member independent of the EU. In particular, the UK has to separate its own tariff quotas from those of the EU’s, and even if the UK wanted to take this complicated route, there’s little chance the EU would agree.
Under the WTO agreements, countries cannot normally discriminate between their trading partners.
Grant someone special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.
Britain says it will stick to the EU’s tariff commitments, which are currently its own too, as an EU member.
Britain referendum on the left side was sold on many lies with one stating that the EU is non-democratic.
Is the WTO Democratic?
This is a difficult one: The short answer is yes and no like the EU.
With the WTO if a country is a dictatorship, then I’m afraid the representative is probably not elected (allowing for multiple shades of grey over what those words actually mean)
In the WTO world no wants to interfere in that, so it just accepts whatever each country’s domestic system produces.
The WTO is definitely democratic among its governments.
The consensus rule means all members have equal say. Voting is available as a fallback, but so far members have rejected that option.
But does it represent the people?
At least as much as any other international organisation. Some governments are democratic; some are not.
One of the problems is that in the Brexit debate people are comparing the WTO with the European Union, which has an elected parliament as well as a council of member states meeting regularly at ministerial or head-of-government level.
The comparison is false.
The EU has a bureaucracy with executive power and a legislature which handles laws.
The WTO’s bureaucracy — the Secretariat — has no executive power.
The closest equivalent to legislation in the WTO is its trade agreements and they are negotiated by all the governments together.
Is it a good idea for the WTO to be run by directly elected representatives?
Only if you believe that directly elected politicians are better at negotiating some pretty technical and complicated trade agreements than our trade ministers and their officials. Or if you believe in world government.
Then we come to the question of Tariffs:
Tariffs remain a feature of trading under WTO rules and the EU charges a range of tariffs depending on the product or service.
For example, the tariff on food products and beverages imported into the EU is 21% of the value of a shipment. The UK’s fishing exports to the EU would be subject to a 9.6% tariff under WTO-only rules. Clothes manufactured in the UK and exported to the EU would be subject to an 11% tariff.
WTO rules on non-tariff barriers (things like regulations on product safety, rules of origin and quotas) are very limited and not recognised universally.
For example, they do not prevent the EU requiring certification for a whole host of goods and services that originate from outside the EU.
Things such as medicines, product and food safety standards in the UK are currently recognised as EU ones. But when the UK leaves the EU, UK manufacturers may need conformity assessments from the EU recognised body, which is a legal responsibility of an EU importer.
This would mean that UK exports would take longer to reach the EU markets and the UK products would be more expensive in the EU.
Under WTO-only rules, the UK will not be able to have a frictionless border with the EU.
Exporters would have to prove they meet all of the EU’s product standards and regulations, which will be costly and slow down business.
One suggestion has been that the UK scrap all tariffs and regulations for EU imports and continue to accept all products from the EU without checks. But, according to the WTO rules, the UK should extend this approach to products from all other WTO members (it has to treat everyone equally).
WTO rules barely cover trade in services, including financial services and transportation.
So, trading on only the WTO terms would mean no deal on air transport. Access to the EU single aviation market requires airline companies to have their headquarters and majority shareholdings in the EU so airlines would have to relocate.
There is also nothing in WTO rules that would allow UK-based banks to keep trading across the EU. This is why the government has said banks could set up subsidiaries in the EU.
Under WTO terms, the EU should treat the UK like any other country without providing any preferences and applying WTO tariffs – a big change from the zero tariffs that the UK has now.
FINALLY: Where are we now.
The EU is the UK’s biggest trading partner.
In 2017, 44% of UK exports went to the EU and 53% of all UK imports came from the EU.
Both the UK and the EU filed documents in Geneva outlining the terms they will use to trade with the rest of the world after Brexit – and the two submissions are fundamentally different.
A major sticking point for them is the fact that the EU and the UK share a quota system that limits imports of sensitive goods like beef, lamb and sugar.
The UK cannot simply replicate these quotas and has proposed to split them with the EU based on historical trade flows.
All of this means that if and when any country object and ask for a better deal, Britain will be simultaneously be negotiating a trade deal with the EU and the WTO.
All human comments appreciated. All abuse and like clicks chucked in the bin.