1. The WTO sets the global rules of trade.
The WTO currently has 164 members which between them are responsible for 95% of world trade. It is a negotiating forum for its members to create international trade rules, and an organisation to oversee how they put the rules into practice. For example, WTO agreements place limits on tariffs (which tax imports) and prevent the spread of disease by establishing sanitary standards on agricultural products.
2. The UK is already a WTO member but will need to extricate itself from the European Union (EU) ‘schedules’.
The UK is a member of the WTO in its own right, having cofounded the General Agreement on Tariffs and Trade (GATT), the WTO’s predecessor, with other 22 countries in 1948. It does not have to reapply to join the WTO once it leaves the EU.
But at present the UK operates in the WTO under the EU’s set of ‘schedules’ – a list of commitments that sets the terms of the EU’s tariffs, its quotas and its limits on subsidies. The UK will need to agree its own set of schedules at the WTO.
3. The UK aims to ‘copy and paste’ its EU schedules into new UK schedules.
The Government says that it plans “to replicate our existing trade regime as far as possible in our new schedules”. This is a sensible approach. It involves minimal disruption and so reduces the scope for other WTO members to object to the UK’s new schedules. For tariff levels in particular, copying and pasting should be straightforward.
But the copying and pasting approach will not work for all aspects of the schedules. There are some areas, notably on quotas and subsidy limits, where the UK must reach an agreement on what share of the EU figure it takes. This will in truth be a three-way negotiation, between the UK, the EU and other WTO members, because it will also lead to a reduction in the EU’s quotas and subsidy limits (covered in more detail below).
4. Copying and pasting EU tariffs means that the UK will have the same, or lower, tariffs as it does now.
The EU’s schedules contain the ‘ceiling’ for tariffs on a range of goods, such as 10% on cars or 3.7% on Christmas trees. Once the UK has copied across these tariff ceilings, it could apply lower (but not higher) tariffs rates in the future.
5. If the EU and UK cannot agree a deal, both will have to place tariffs on the other.
A key principle of the WTO is that countries do not discriminate against one another. If the UK does not have a Free Trade Agreement (FTA) with the EU, the EU will have to treat the UK in the same way that it treats all other WTO members in that position, such as Russia, the US or Brazil. This means that EU tariffs would have to apply to the UK. It would be WTO-illegal for the EU not to place tariffs on the UK after Brexit if there was no FTA.
The same is true on the UK side. If it wants to apply any tariffs on any country, these will also have to apply to the EU if there is no deal.
6. Quotas will be difficult, because a divided quota is worth less than the sum of its parts.
Dividing the quotas in the EU’s schedule between the UK and the EU is not straightforward. For example, New Zealand is currently able to export just under 230,000 tonnes of sheep meat into the EU each year without any tariff, as compared to the 57% tariff, which includes a specific duty, for exporters that aren’t part of the quota. The UK and the EU would need to decide how to divide up this quota.
Countries that currently benefit from quotas will not want to see their quotas simply divided between the EU and the UK, as this will reduce their flexibility about which market they can sell to. If UK demand falls, it is useful for New Zealand to simply shift its sales to the continent, and vice versa. It is therefore likely that the UK will offer quotas that are slightly larger than the share of the EU quota that it currently consumes.
7. And subsidies may be difficult to divide if the UK does not inherit the EU’s generous, bespoke arrangements on agriculture.
The WTO’s Agreement on Agriculture (AoA) limits agricultural subsidies. It caps trade-distorting agricultural subsidies at 5% of the country’s total agricultural production.
The EU, however, has negotiated a bespoke, larger subsidy cap at the WTO that amounts to €72.4bn. Some people have raised questions about whether the UK could inherit a share of this bespoke subsidy cap. If it does not, there is a risk that its current level of subsidy paid to farmers in the UK could breach the WTO’s rules.
8. Once the UK has a draft of its schedules, it can declare them and start trading.
Once the UK has a draft of its schedules, and once it has left the EU, it can start trading off them. The WTO does have a formal process for approving schedules – known as ‘certification’ – which requires unanimous approval from every WTO member, i.e. 164 countries.
However, WTO members can still trade off schedules that have not been certified. The EU, for instance, has not certified its schedules since 2004, but in the meantime, has altered its schedules to reflect successive waves of enlargement.
At some point the UK will want to certify its schedules, requiring the consensus of all WTO members. But the certification process does not pose an immediate threat to the UK’s ability to trade post-Brexit. We can trade without certification.
9. Other WTO members might challenge the UK schedules, but these challenges would take time to process.
Once the UK has declared its schedules and started trading, other countries in the WTO may object, particularly if they can demonstrate that the UK has in some way reduced the level of market access on offer.
If there are challenges, these could be lengthy and expensive for the UK to contest. However, the disputes are likely to take several years to resolve, during which time the UK would be able to continue trading off its schedules (whether or not they have been certified). This means that potential disputes are a medium- or long-term challenge to the UK at the WTO, and not an immediate threat to our post-Brexit trading arrangements.
10. When the UK does move to certify its schedules, this will not be straightforward.
Other countries’ willingness to certify the UK’s schedules will be driven by several different factors.
Countries that have recently joined the WTO have had to place tougher limits on tariffs than the UK currently does as an EU member. For example, Russia had to limit itself to a 6.5% agricultural tariff, whereas the EU sets higher tariffs on most agricultural goods. Countries like Russia may not be content to see the UK get a more favourable deal than they achieved. Other factors (such as international political disputes or powerful domestic interests) may affect the willingness of countries to agree new UK schedules. Certifying the UK’s schedules is likely to take years.
This Brexit Explained was updated on 22 June 2017.