Cecilia Malmström, the EU Trade Commissioner, gave an interview to BBC Newsnight in which she said, “First you exit then you negotiate”. She meant that, in the view of the Commission, there will be a gap between the UK exiting the EU, following the two-year deadline given in Article 50 TFEU (absent unanimous agreement to extend this amongst the other Member States), and negotiating a new agreement.
Whether or not this is a political reality is another question, but it is at least a theoretical possibility. If it were to materialise, the UK would have to trade with the EU on World Trade Organisation (“WTO”) terms. But what does that mean?
The WTO is essentially an amalgamation of multilateral agreements between states. These provide certain baseline rules for international trade in three key areas: goods, services and intellectual property. The WTO Agreements have been signed by the majority of global trading nations. The United Kingdom has been a WTO member since the WTO was created on 1 January 1995 and was a member of its predecessor, the General Agreement on Tariffs and Trade (“GATT”) since the creation of that in 1948.
However, giving a quick overview of the WTO Agreements is no mean feat: the table of contents for the currently applicable agreements (known as “The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts”) is a list of approximately 60 agreements, annexes, decisions and understandings and the texts themselves run to some 550 pages.
These Agreements fall roughly into six parts:
- The umbrella agreement (the Agreement Establishing the WTO)
- Multiple agreements for each of the three broad areas of trade. Each of these can be split into roughly three types of agreement:
- Broad principles (for goods this is the General Agreement on Tariffs and Trade 1994 (which must be read with the GATT 1947), for services it is the General Agreement on Trade in Services (“GATS”) and for intellectual property it is the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”))
- Extra agreements and annexes dealing with special requirements for specific sectors or issues
- Lengthy schedules of commitments made by individual countries allowing specific foreign products or service-providers access to their markets. For GATT, these take the form of binding commitments on tariffs for goods in general, and combinations of tariffs and quotas for some agricultural goods. For GATS, the commitments state how much access foreign service providers are allowed for specific sectors, and they include lists of types of services where individual countries say they are not applying the “most-favoured-nation” principle of non-discrimination
- Dispute settlement (the Understanding on Rules and Procedures Governing the Settlement of Disputes)
- Reviews of governments’ trade policies (via the Trade Policy Review Mechanism (“TPRM”))
It is important to understand that these agreements do not in and of themselves create a free trade area in the sense that we are used to in the EU. The main focus of the WTO rules is on non-discrimination. Essentially, trading on WTO rules alone means that the trading countries must apply to each other the tariffs and other trade restrictions that they apply to the rest of the world. Discrimination is only permitted in limited circumstances, including when a bilateral trade agreement has been concluded between two states. This is why the one of the key principles is described by the WTO as being not “free trade”, but “freer trade: gradually, through negotiation”.
So, if the UK does not enter the EEA or fall back on the EFTA position (see my previous post), it would need to conclude a bilateral agreement with the EU in order to benefit from trade conditions over and above the WTO safety net. See the EU’s guide to how it conducts such negotiations here. To give some idea of what concluding a deal with the EU might involve, the negotiations between the EU and Canada took five years to produce the EU-Canada Trade Agreement (CETA), an agreement running to over 1,500 pages. This still needs to be approved by the European Council and Parliament, as well as the relevant Canadian bodies, before it can come into force.
However, it is not simply the UK’s trade with the EU that will need to be rewritten. Currently, the UK benefits from the bilateral agreements that the EU has negotiated with a huge number of “third” countries and regions (see this map). In order to continue to have preferential arrangements and tariff-free trade with any of these States or regions, the UK would have to negotiate a bilateral agreement with each State or region concerned. Until the UK could conclude such agreements with each and every State or region, it would be trading with them on the WTO rules alone.