08 November 2018

Alex Stojanovic argues that it is EU law, not WTO rules, that matters in the event of a no deal Brexit.

No deal optimists continually argue that falling back on World Trade Organization (WTO) terms minimises the threat no deal poses to the UK. They say the EU cannot treat products from the UK differently under WTO rules than it did before Brexit, because the UK’s rules are the same on day one. They also argue the EU is required by the Trade Facilitation Agreement to “maintain borders, which are as frictionless as possible, using all the modern technologies at its disposal”.

Both points overestimate the constraints WTO rules would place on the EU and fail to take account of the EU’s laws in the event of no deal.

WTO rules won’t prevent the EU from applying its laws to the UK

The EU’s notices on what EU law means for a no deal Brexit are very stark: on day one, the EU intends to treat the UK as a third country. That is the scenario that leads to headlines on a ban on animal food exports, UK banks no longer providing services in the EU as now and, yes, the grounding of planes.

The WTO is little help in this event. As former WTO negotiator Dmitry Grozoubinski points out, the rules are silent on major Brexit issues like certification for pilots, licensing for truck drivers, transfer of citizens’ data and foreign presence for banks – which is why the US has major bilateral agreements covering some of the gaps.  

But even where WTO agreements do apply, they don’t provide the kind of protection imputed to them. For both technical regulations and food safety, WTO rules require only that countries enter into consultations on recognising equivalence of similar rules. This leaves a lot of discretion to the importing country on what it will accept.

The Trade Facilitation Agreement is even less help. It is an aspirational agreement, mainly aimed at developing countries to embed good practice for customs clearance. It does not stop the EU treating the UK as a third country – losing all its privileges as an EU member overnight – which happens automatically unless the EU decides differently.

Taking the EU to the WTO will not offer quick – or useful – answers

If the UK wanted to make the case that these privileges should be maintained, it could trigger proceedings at the WTO right after Brexit.  

But it should not expect quick results. According to the WTO, an average case takes at least a year and three months with appeal. Many cases take a lot longer – there is a US-EU case on aircraft that is still ongoing after 14 years. The WTO has no mechanism to offer the UK instant respite from day one disruption.

Even if the UK did – eventually – get a ruling in its favour, the WTO would not be able to force the EU to give preference to the UK. The only remedy would be to allow the UK to apply punitive tariffs, adding to trade restrictions not removing them.

The hostile act of taking the EU to the WTO dispute resolution procedure would likely do more harm than good. This would jeopardise the prospect of reaching the sort of side agreement which the UK's no deal planning currently depends on.

The good news is that WTO rules would not prevent some helpful EU ‘contingency measures’

Michel Barnier, the EU’s Chief Negotiator for Brexit, says there will be no cosy side deals in the event of no deal, though the EU might take ‘unilateral contingency measures’. There is one example to date: allowing member states to use the UK’s derivative clearing services in London after Brexit to avoid a market disruption. More may follow, which would soften the impact of no deal.

But contingency measures might not apply to tariffs. The WTO’s Most Favoured Nation principle obliges WTO members to grant the same concessions to all trading partners without a preferential agreement.

The good news for the UK is that the WTO would not stand in the way on other regulatory issues. A country that challenges the EU for giving preferential treatment to the UK would face the same slow process of WTO bureaucracy. And the rules on regulatory issues give leeway to the EU to decide what it will accept.

The problem is that we cannot bank on the EU having the same incentives as the UK to minimise the impact of no deal. As former UK Permanent Representative to the EU, Sir Ivan Rogers predicts, the EU will ensure as little impact on itself and maximum impact on the UK.

This underlines an uncomfortable truth: it is the EU, not the WTO, which can limit the impact of a no deal Brexit on the UK. 

Further information

Comments

YOU NEVER MENTIONED THE EU"S IMPORTS INTO THE UK?
THEY SELL US MORE THAN WE EXPORT TO THEM, AND IF THEY DIDNT PLAY BALL IT WOULD PUT A BIGGER HOLE IN THERE POCKETS THAN YOU HAVE MENTIONED ANYWHERE IN YOUR PIECE HERE?
WE ARE ONE OF THE EUS LARGEST MARKETS , ARE YOU SURE THEY ARE GOING TO WANT TO CAUSE FRICTION AS THE UK COULD CHANGE DIRECTION AND IMPORT FROM OTHER COUNTRYS AS WE HAVE DONE IN THE PAST , TRADE IS TRADE AND TARRIFFS ARE TARRIFFS WHATEVER TARRIFFS WE PAY WE ALSO SELL AT SELL AT , I DONT SEE YOUR SCENARIO AS BEING PROBABLE , WE COULD ALSO UNDERCUT THE EU AND BECOME A LOW TAX HAVEN FOR THE WHOLE WORLD , HOW WOULD THAT AFFECT THE EU?

Actually currently the UK only makes up 8-18% of the EU's exports. The USA surpassed the UK in 2016 as the largest market for EU trade

That does not answer the question. We buy more from Europe than the sell to us? YES OR NO?

It does actually answer you question. It's not about who sells more or less it's the ability of one or the other to absorb the potential loss. The UK has a population of approx 64 million people, the EU 27, 460 million, the loss to the EU per capita is much less than to the UK, therefore the EU is in a much better position than the EU. This is how the sums are done.

You conflate the EU with individual member countries and industries/agriculture in the overall numbers on trade and the imbalance. The impact will not be "dissipated" across the 27 members. The EU would have to make large payments to countries to mitigate the impacts and you then have to ask where and who that would come from. This is not how sums are done. Its how the EU as a political construct wishes to operate which is to punish the UK and make sure no one attempts to leave again. As one of your commentators said in the article.

Quite righty you are looking at this from the UK's point of view but to make a judgement on what will actually happen you also need to consider the EU's position.

A balanced view would have concluded:

"It is the EU, not the WTO, which can limit the impact of a no deal Brexit on the UK and it is the UK which can limit the impact of a no deal on the EU".

The idea that other EU states sell more to us and therefore need us more is very odd. We are far more replaceable to them than they are to us. We need those goods they sell us and will have to continue getting them from somewhere, on worse terms. They could sell the same goods to other EU members and other EU free trade partners more easily than to us. They can also buy what they buy from us from any of those countries. Even if they needed us in the short term, as with some complex financial services, it’s only until a solution within the EU and partners is found.

It's interesting that derivatives clearing is brought up as an example. Everyone knows lch is the largest clearinghouse in the world. Banks all over the world, not just EU banks, clear trades thru lch, which is a private commercial entity just like lse or nyse. Thus I'm not sure if lch needs EU rules to perform this service. Meaning banks do not need EU approval to open an account with lch or submit trades for clearing. Everyone is clear that lch operates under UK law.

Hence, the idea that continued operation of lch post brexit is a contingency sounds rather strange.

As for air transport, it just shows how bureaucratic EU is. The idea that the moment brexit strikes, all certificates expire is crazy. In legislation most countries allow grandfathering. If your existing cert is valid till 2025, countries would allow the existing cert to be recognised till 2025 and only require you to apply for a new one upon its expiry. Hence one can see either the EU wants to punish the UK or it's run by crazy bureaucrats. Either way it shows why the EU is out of control.