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Countdown to Brexit: 52 Days - For the avoidance of doubt

6 Feb 2019

Despite the rhetoric, the conditions under which the UK and EU will trade in a no-deal Brexit are not a matter for discussion. There can be no debate on this issue: without a Withdrawal Agreement the UK and the EU will trade with each other solely under the “rules-based trading system of the World Trade Organization” – or WTO.

Statements have been made from many quarters – including the Prime Minister herself – to the effect that: “Article 24 of the World Trade Organisation treaty allows us to continue to trade with Europe on zero tariffs while we negotiate a free trade arrangement.”

We can now authoritatively dismiss the view that the relevant rule – General Agreement on Tariffs and Trade, Article XXIV – offers an easy solution to UK trade with the EU in the case of ‘no-deal’.

The Prime Minister then retracted saying that: “The question of ‘GATT 24’ is perhaps not quite as simple as some may have understood it to be…[the] expectation that it is simply possible to leave with no-deal and immediately go into that situation does not actually reflect accurately the situation that the United Kingdom would find ourselves in”.

What does Article XXIV mean for any future trade relationship between the UK and the EU under WTO terms in a no-deal Brexit?

No-deal Brexit means that from 23:00 GMT on 29 March the end of tariff-free trade between the UK and the EU. This week, a group comprising both ‘Remain’ and ‘Leave’ Tory MPs have been looking at the possibility that GATT Article XXIV allows for an interim arrangement that – while the UK and EU negotiate a future free trade agreement – could maintain the existing arrangements with the EU for up to 10 years.

We reported this in detail under the so-called ‘Malthouse Compromise’. It puts forward a “WTO-compliant standstill on trade with no tariffs, no quantitative restrictions and no new barriers” as part of a no-deal “triple safety net”. It seems unlikely to be possible.

The UK could, of course, unilaterally choose to apply zero tariffs to the EU in order to keep barriers to imports from the EU low as before. However, the WTO’s Most Favoured Nation (MFN) rule prevents discrimination between WTO members. In this scenario, the UK would have to apply the same zero tariff to imports from all other WTO members - or else it would be in breach of the MFN rule. More importantly, the EU would not be able to reciprocate - unless it was happy to give imports from all other WTO members tariff free access to its market. Although the EU has negotiated dozens of Trade Agreements – including after seven years negotiations, the World’s biggest trading partnership between Japan and the EU that came into effect last week.

EU Member States are permitted to trade tariff free under GATT Article XXIV (5). Countries may form trade blocs in the form of a ‘customs union’ - or a ‘free trade area’ as an exception to the MFN rule. They must maintain tariff-free trade with each other for “substantially all” their mutual trade – but need not offer the same access to their markets to all other WTO members.

Free trade arrangements, however, may not worsen the terms of trade for the non-participants - leading to higher duties or more restrictions on trade than before. Customs Unions or free trade agreements have to be notified to the WTO - giving other WTO members the opportunity to coive any concerns.

Once outside the Single Market and Customs Union – GATT Article XXIV does permit the adoption of an interim agreement to underpin formation of a customs union or a free-trade area. The intention is to allow a full free trade agreement to be in place within a “reasonable period of time”. This recognises the fact that a customs union or a free-trade agreement cannot be concluded rapidly - and might need gradual implementation. It is not a way of buying time to negotiate a move away from a single market and customs union.

In summary, an interim agreement:

  • Can be in force for a “reasonable length of time,” which WTO members have agreed should not exceed 10 years;
  • Needs to have a “plan and schedule” towards an end-state of a customs union.

The WTO must be notified of any interim agreement – and the rules are stringent. Any of the other 148 WTO members can demand changes if they are not convinced that the interim agreement will in fact lead to a full free-trade agreement within the proposed time-frame.

The possibility that other WTO members can block an “interim agreement” has proven to be enough of a deterrent that no WTO members have notified an interim agreement since 1995. And the Malthouse Compromise does not propose using a 10-year interim agreement to negotiate UK becoming a member of the EU Customs Union.

Trade law experts believe that the draft Withdrawal Agreement – negotiated between the UK and EU and agreed by all parties in November 2018 – will qualify as an interim agreement while the UK is negotiating a final trade deal with the EU – as set out in the Political Declaration.

The UK cannot effect an interim agreement unilaterally. GATT Article XXIV states that both parties to this future trade agreement would have to agree. The EU has made it clear that this is an integral part of the UK accepting the ‘deal’ as it stands – and securing both UK Parliament and European Parliament approvals before 29 March.

During the interim agreement – presently scheduled to run from 30 March to 31 December 2020 – the UK remains a full participant of the EU Single Market and Customs Union with free movement of goods, people and services.

GATT Article XXIV is key to any preferential trade relationship between the UK and the EU. The option of an ‘interim agreement’ will not be possible in a no-deal Brexit – but the UK should be gearing up to negotiation of bi-lateral agreements over the next decade to replace the dozens we will exit on Brexit.

References:

Malthouse Compramise: https://www.brexit-partners.com/blog/2019/1/30/countdown-to-brexit-58-days-as-the-prime-minister-is-sent-back-to-brussels-in-an-attempt-to-re-open-negotiations-with-the-eu-a-malthouse-compromise-has-emerged

Statement of Prime Minister on WTO Article 24: https://hansard.parliament.uk/Commons/2019-01-14/debates/694BA27D-566E-4F52-BC4B-8FC1ACA3F109/LeavingTheEU#contribution-E2011365-7307-42C7-BFF3-CD9D81658EFC

Follow up statement of Prime Minister on WTO Article 24: https://hansard.parliament.uk/Commons/2019-01-21/debates/0FBF8F8F-E4B4-47A2-BD0A-958EFC89BD7E/LeavingTheEU?highlight=article%2024#contribution-AFC0E354-C683-459A-9585-F4BE6E1708F3

Article XXIV (5) of GATT: https://www.wto.org/english/tratop_e/region_e/regatt_e.htm#gatt

This article first appeared on the website of Brexit Partners (www.brexit-partners.com). 

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