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Explainer

World Trade Organization

The WTO is a negotiating forum for its members to create international trade rules, and an organisation to oversee how they put the rules into practic

Trade

What is the World Trade Organization?

The World Trade Organization (WTO) is an international organisation that deals with the rules of trade between countries. It was founded in 1995 as a successor to the General Agreement on Tariffs and Trade (GATT), which came into force in 1948.

The WTO describes its principal function as being to provide a forum for its members to negotiate on trade issues. It operates a body of rules in the form of the WTO agreements. Finally, it provides a dispute settlement mechanism (DSM) to resolve disagreements over the rules between members.

What are the WTO agreements?

The WTO Agreements are a series of linked agreements dealing with different aspects of trade policy. The centrepiece of the WTO agreements is an updated version of the original General Agreement on Tariffs and Trade (GATT) from 1948. This deals with tariffs and other issues relevant to trade in goods. Alongside the GATT sits GATS, the General Agreement on Trade in Services, which sets out the obligations of WTO members relating to trade in services. Various other sectoral agreements, such as the Agreement on Agriculture, were negotiated as part of the Uruguay Round of trade talks (1986–94). The Doha Round, which was supposed to follow the Uruguay Round, did not lead to a comprehensive new WTO agreement, but some smaller agreements (such as the Trade Facilitation Agreement) were reached.

Who runs the WTO?

The WTO is run by its members, of which there are currently 164. Most of them are sovereign states, but some are not: for example, Hong Kong has been a member separately from both the UK (before 1997) and China (since 1997) because it has always operated a separate customs regime. The European Union (EU) is a WTO member, as are all of its 27 member states individually.

Unlike the EU, the WTO does not have a commission to enforce the rules. It has a small secretariat to provide administrative support and advise the membership on technicalities. In addition, the WTO cannot generally take decisions by majority vote: all of its members must be in agreement. Given the size of the membership, this is a challenge for the WTO’s effectiveness.

Is the UK a member of the WTO?

Yes. The UK was a leading player in the negotiations to set up the GATT in 1948 and became a founding member of the WTO alongside the rest of the EU in 1995.

Until Brexit, however, the UK generally operated under the EU umbrella. Almost all of the issues which the WTO deals with fall under the exclusive competence of the EU. For example, one of the cornerstones of WTO membership is a member’s ‘schedules of commitments’. A member’s goods schedule sets out (among other things) the maximum tariffs which each member promises not to exceed in trade with all other members. The EU, as a customs union, has a common external tariff and a single WTO schedule.

What does Brexit mean for the UK’s WTO membership?

The UK has already begun to represent itself in the WTO since leaving the EU on 31 January 2020. At the end of the transition period, the UK will begin to operate under its own WTO schedules. The UK presented its schedules of commitments for trade in goods and services in 2018. It presented these schedules as a ‘technical rectification’ of its commitments and replicated the EU schedules almost precisely.

The major exception was on agricultural tariff-rate quotas. Tariff-rate quotas (TRQs) are a system which allow goods to be imported at a reduced or zero tariff until a threshold quantity is reached. Not all TRQs are a consequence of the WTO agreements – for example, countries frequently grant TRQs when they sign FTAs with one another – but a large number of TRQs are found in the EU’s WTO schedule. Replicating the quantities in the UK’s schedule would have significantly increased other WTO members’ rights to access the UK market. For this reason, the UK and EU chose to split their TRQs based on how much of each type of product historically flowed into the UK and the rest of the EU. Other WTO members objected to this approach. Negotiations between those members, the UK and the EU continue. Until they conclude, the UK’s WTO schedule cannot be ‘certified’, but this would not affect the UK’s ability to trade on it if necessary.

What does ‘WTO terms’ mean?

In the context of the Brexit negotiations, ‘WTO terms’ is often used to mean a no-deal outcome: that is, the relationship between the UK and the EU is based purely on whatever multilateral agreements both happen to be signed up to. One of the most important of these would be the WTO. In this scenario, the UK and the EU would impose the same tariffs on one another’s exports that they do on all other WTO members. This is based on the WTO’s core ‘most-favoured nation’ (MFN) rule. According to the MFN rule, WTO members cannot reduce their tariffs selectively for some WTO members and not others unless there is a free trade agreement between them.

The EU’s MFN tariffs are available on the Commission website[1]. The tariffs the UK would impose in this scenario are not yet known. Before the UK’s membership of the EU was extended in March 2019, the UK published a new set of MFN tariffs that would apply if it left the EU without a deal. These tariffs were significantly lower than its commitments in its WTO schedule. This is perfectly legal: WTO members’ schedules set ceilings which they must not exceed, but a member can always choose to charge less than it has committed to. The government now says that the scenario for which it developed those tariffs is no longer relevant. It conducted a consultation on the UK’s new MFN tariffs in February 2020 and will release a new set of MFN tariffs later in 2020.

What is ‘GATT Article 24’?

Article 24 (Article XXIV) of the GATT provides an exception from the MFN rule. If two WTO members have signed a free trade agreement (FTA) or customs union, then they will be allowed to charge lower tariffs on imports from each other than they charge on imports from other WTO members. This exception is subject to a number of conditions: for example, the FTA must involve the elimination of tariffs on ‘substantially all trade’.

During 2019, it was suggested that the UK could use Article 24 of the GATT to preserve free trade with the EU, even in the event of no deal. This was untrue. A free trade agreement in line with Article 24 need not be long or complicated, but it does need both sides to agree to it.

Why are there concerns about the future of the WTO?

The WTO has been troubled since its beginnings: academic articles on the ‘crisis’ of the WTO began to be published as early as 2000. This has recently become more severe.

The US has long believed that the WTO dispute settlement mechanism has overstepped its bounds and threatens US sovereignty. Previous administrations sought to resolve this issue through negotiations. President Trump, however, has blocked the appointment of new judges to the Appellate Body of the dispute settlement mechanism. As judges’ terms expired, this meant that fewer and fewer judges were available to hear new cases. Since December 2019, the Appellate Body no longer has enough judges to hear new cases. It is therefore no longer possible to use the dispute settlement mechanism – sometimes called the "jewel in the crown" of the WTO – to resolve disputes finally.


 

  1. European Commission, EU tariffs, https://madb.europa.eu/madb/euTariffs.htm
Topic
Brexit

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