World Trade Organisation

The basic terms of trade worldwide are set by the World Trade Organisation under its key multilateral agreements. The World Trade Organisation like the United Nations and IMF is an international body which was established after World War II to set the ground rules for international trade. It also provides the institutions through which disputes can be resolved and the commitments given by members may be enforced.

The WTO system is based on the rules in the key agreements which are binding as between states. The decisions of the various WTO panels are binding and have precedence value. In effect, there is a large and growing body of WTO law which defines the terms of international trade.

Background to WTO

The World Trade Organisation’s predecessor the General Agreement on Trade and Tariffs was entered in the wake of World War Two. It sought to establish a basis for international trade freed from the conditions and restrictions which characterised the post-depression and pre-war period.

The General Agreement on Trade and Tariffs is the basic agreement on trade in goods to which all WTO members are a party. It succeeded in reducing and eliminating most trade barriers and quotas between member states which had characterised the pre-World War II protectionist period.

Initially, it had been proposed that there would be an international trade organisation (ITO) to accompany the General Agreement on Tariffs and Trade. Although the  US government strongly advocated the International Trade Organisation and produced a suggested charter in 1946 it did not come into being as it could not be ratified by the US Congress. Instead, the developed market economies entered into the General Agreement on Tariffs and Trade (the GATT) which was based in large part on the failed ITO charter.

Almost every country in the world (including Russia and China) is now a member, while most of the remainder are in the process of joining it. Various customs unions are also members. A very small number of states including North Korea and some micro-states are non-members and have chosen not to join. The European Union is a member as are its individual members. The European Union feels the most trade matters exclusively on behalf of the entire EU.

The World Trade Organisation now includes almost all countries either directly or as observers. China joined in 2001 and Russia joined in 2012, each after a long accession process. The EU member states are also members of the WTO and the EU participates on behalf of its member states in those areas of trade where it has exclusive or shared competence with the states

Like international law, WTO law is not binding in the same way as domestic law and in particular much of the key elements of European Union law which is directly effective and applicable as between governments, citizens and businesses throughout Europe. It is enforceable as between states. The consequences of non-compliance are usually by way of permitted countermeasures and possibly sanctions.

Apply to No-Deal and Built on in Deal

The WTO rules are both relevant to an old deal so-called hard Brexit and to a free-trade agreement Brexit. The WTO rules and commitments of the EU define the consequences of a hard Brexit. Each of the UK and EU would commence treating each other as third (no trade agreement) countries for trade purposes. They would undertake towards each other, the obligations that they have with countries with which they do not have a trade agreement. These obligations are defined by the WTO commitments of the EU at present.

The UK commitments are part of the EU’s commitment so in effect, these schedules are also the present UK trade baseline position with third countries. Therefore, the default position in a hard Brexit without any trade agreement is that the EU and UK would apply to each other the treatment that the EU now applies to third countries with which it does not have a trade agreement.

In practice, very few countries trade with each other, only on WTO terms. Even if there is no comprehensive free trade agreement there may be agreements in relation to particular matters on a bilateral or multilateral basis. It is distinctly possible that there will be a series of agreements between the EU and the UK. In the event of a hard Brexit may be that there is some very basic thin agreement on some essential matters if there is no substantial,  significant or comprehensive trade agreement.

GATT Framework

GATT and later The WTO has provided a framework for the negotiation of tariff reductions on a multilateral basis. They are dynamic agreements under which participating states negotiate ever more reductions in customs tariffs and other impediments to trade Successive rounds of negotiations from the 1950s through to the beginning of the 21st-century have progressively reduced customs tariffs to relatively low levels on most goods in most sectors.

During the same period, the organisation grew from just 23 members to encompass almost all countries worldwide. There is a generalised system of preferences that seeks to benefit developing states. Developing states are admitted on unilateral preferential terms that they are not required to reciprocate; they have greater freedom to assist their domestic industries.

The GATT agreement was ultimately incorporated into the World Trade Organisation agreement in 1994 when the originally intended supra national organisation came into being. In addition, the dispute resolution mechanism was significantly enhanced at that time so that it can make decisions that are binding on member states

Basic GATT Principles

GATT and the WTO agreement provide a baseline of principles that apply to all members. The key principles are those

  • prohibiting discrimination in relation to foreign trade
  • requiring each member state to accord the same trading privileges and benefits to all other contracting states equally (most-favoured-nation status,
  • the principle that foreign goods were to be treated the same as national goods (once applicable tariffs et cetera paid)
  • the national treatment principle (national treatment)
  • the principle that states should levy only certain types of charges and levies on foreign goods (quotas prohibited subject to exceptions)
  • the principle that trade regulation should be transparent published and available to traders in other contracting states (transparency)
  • restrictions and measures are permissible for defined legitimate purposes only (safety valve)
  • the principle that states could enter customs unions and free-trade agreements between themselves for further liberalising trade provided they did not, on the whole, discriminate against third-party states that were also members of GATT

The principle of non-discrimination and most-favoured-nation treatment obligation are often said to be the most basic principles and obligations. They are deceptively simple in their terms, but thoroughgoing in their effect. The critical point in the context of negotiating a free trade agreement or customs union is that in the event of a no-deal exit, this minimal baseline which applies to all countries whatsoever is likely to define the terms of the EU UK relationship. The terms on which the GAT T agreement allows exceptions to this principle define the possible arrangements, broadly speaking free-trade agreements and/or a customs union liberalising trade across the board.

Interim Agreement

The UK and EU might enter an interim agreement under the WTO (World Trade Organisation) rules which allow that the terms of that agreement be applied to states which are negotiating under the agreement for a final agreement for up to 10 years. If this was the case, then that different treatment might be applied. It requires that the two states/trading blocs are in agreement by way of an interim agreement for a future trade agreement.

They may apply on a temporary basis zero or other unique tariffs as they wish between themselves. This arrangement would require the agreement of the EU and must provide for a program for a final agreement that could be contested by third countries under the WTO Agreements.

WTO Agreements Built on in Trade Agreements

The World Trade Organisation rules are a baseline minimal set of trading rules which apply when there is no bilateral or regional agreement between states for better terms. GATT the World Trade Organisation has promoted several further agreements to which some or most states are a party. Most trade agreements adopt templates precedents and principles reflected in the WTO rules and institutions. The WTO rules positively encourage regional trade agreements and free-trade agreements and areas.

Most trade agreements build explicitly under WTO agreements. This is because the handsets are well-established and internationally accepted. Accordingly, much of the language in free-trade agreements are taken directly from one or more of the WTO agreements. Often the majority of the text comes straight from the WTO agreement.

WTO Commitments of EU and UK

The principal multilateral trade agreements are binding on all members including the general agreements on trade in goods (including GATT 1994) the general agreement on trade in services, the agreement on rules and procedures governing the settlement of disputes, the agreement on trade-related aspects of intellectual property rights and the trade policy review mechanism.

The terms agreed by each state are set forth in their schedules which set out the extent of their commitment. Each state sets out its schedules which may be minimal or very extensive. Once the maximum tariff has been set out in the schedule, it is a promise that it will be applied to all parties or erga omnes as set out in the country’s tariff. The erga omnes treatment in the tariff is important as it shows the default treatment that would apply in an exit without a trade agreement.

Each party to the WTO/ GATT agreement whether a state or a customs union such as the EU is to apply to the commerce of the other states no less favourable treatment than that provided in the schedule concerned. This is the upper limit of the tariff the so-called found tariff. The state might choose to apply a lower tariff

The EU’s commitments are set out in schedules filed with the WTO  and represent the default position in relation to tariffs and terms of trade, where there is no trade agreement in place. After Brexit without a left trade agreement, these terms and conditions would apply to trade between the United Kingdom and the European Union.

It has been s assumed that the United Kingdom will succeed initially or replicate the EU’s schedules. This is the treatment that the UK applies to third countries outside the EU under the common EU trade policy at present. It is the logical point of departure in terms of negotiating future agreements with third countries. In the longer term,  it is inevitable that the UK would apply the same default treatment to trade with the EU as the EU would apply to it.

In the lead up to some of the critical hard Brexit dates in 2019, the UK unilaterally announced a temporary simplified tariff. Under this temporary tariff/customs duty were cut to zero for 87% of goods unilaterally. It was not clear how long this temporary unilateral treatment was to last. Absent such an arrangement,

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