The DIT’s submission to the House of Commons on post-Brexit trade arrangements
1st March 2017
On 1 February 2017, the UK’s Department of International Trade (the “DIT”) outlined the issues that will affect the country's negotiation of post-Brexit trade agreements. The DIT’s submission to the House of Commons covers a range of issues including changes needed to the UK's WTO commitments, as well as the implications on relying on WTO rules when trading internationally after the UK leaves the EU.
WTO schedules of commitments
While the UK is a member of the WTO in its own right, the EU is also a member and has been representing the UK (and other EU Member States) at the WTO level. As a result, the UK’s General Agreement on Tariffs and Trade (“GATT”) schedules (i.e. the schedules of tariffs which apply when importing goods into the UK under WTO rules) are included in the schedules of the EU as a whole. Similarly, the UK’s schedule of commitments under the General Agreement on Trade in Services (“GATS”) (i.e. the market access commitments applicable to trade in services) are covered as part of the EU’s schedule. As such, once the UK leaves the EU, it will need to submit its own WTO schedules.
The DIT appears to suggest in its paper that the process for updating the UK’s WTO schedules of commitments should be relatively straightforward as “WTO Members frequently have a need to update their schedules”, either to effect a technical change (e.g. a change to the Harmonised System) or to make a substantive change, for example, as a new Member State joins the EU. However, the fact that the EU is still operating on the basis of an outdated schedule because it has been unable to agree a revised version since it became EU28 would suggest otherwise. It is also difficult to agree that the admission of new EU Member States is a frequent occurrence and it is also far from clear that the amendments to the UK’s schedules are ‘technical’ in nature, especially since the UK does not currently have its own schedules.
The DIT submitted in its paper to the House of Commons that the rectification process described in the GATT Decision dated 26 March 1980 on the modification of schedules of concessions would apply to the amendments which will need to be made to the UK’s GATT schedule after Brexit. The amendments to the UK’s GATS schedule will, according to the DIT, be implemented by following a similar rectification process set out in the GATS Procedure S/L/84. The DIT’s view is that the UK “will not be seeking to make substantive changes to its schedules”.
These two procedures, however, only apply to changes which are of a purely technical nature and that do not alter the scope of the existing commitments. The DIT does admit in its paperthat some of the UK/EU’s obligations which require amending are more complex in nature. Modifications of, for example, Tariff Rate Quotas (which set out lower tariffs for the import of certain categories of goods up to a specified level of imports, after which the applied tariff increases significantly) will depend on discussions with the EU 27 Member States as well as with other WTO Members. In this respect, there will necessarily be alterations to the EU’s commitments and therefore this process cannot properly be described as ‘rectification’. In addition, the rectification process can only work in so far as no other WTO Member objects to it. Any objections raised could lead to a renegotiation of commitments under Article XXVIII of the GATT or under Article XXI of the GATS.
If the proposed changes to schedules of concessions do not fall within the scope of the above rectification processes, the WTO Member proposing the changes is allowed to modify or withdraw concessions from their schedules through negotiation and agreement with all WTO Members – a very lengthy process.
The DIT stated that the UK will need to “work with the EU and with other WTO Members in order to ensure a smooth transition which minimises the disruption to our trading relationships with other WTO Members, including developing country Members and our closest trading partners, as well as businesses”.
It is prudent to expect that the process for implementing the changes to the UK’s WTO commitments will not be entirely straightforward. The UK’s position in this regard may be better if it wanted to improve on its current commitments (by, for example, offering concessions greater than the ones currently applicable under the EU schedules), because improvements can potentially be dealt with under the rectification procedures mentioned above. The UK may be minded to take this approach if it considers that objections are likely to be raised by other WTO Members. The DIT has suggested that Brexit “creates an opportunity for the UK to become a global champion for free and fair trade” and that the Government’s “future trade policy will promote tariff liberalisation as a means to boost exports, increase productivity and lower consumer prices”. However, some commentators argue that simple lowering of external tariffs will not boost exports on its own and that any unilateral action by the UK, in and of itself, is unlikely to create incentives for other countries to enter into free trade agreements with the UK (to the extent that such countries will be able to benefit from the UK’s lower import tariffs under the WTO Most Favoured Nation rules).
Free trade agreements
In order to truly boost exports to other countries, the UK will need to negotiate free trade agreements, which is something that the UK Government is exploring at the moment (preliminary discussions have already begun with Australia, New Zealand and India, and countries including the U.S., China, Brazil and the Gulf States have all expressed interest in striking a deal with the UK). Prompt negotiation of such agreements will be of particular importance post-Brexit, as the UK will no longer be able to take advantage of the EU’s free trade agreements.
However, as negotiations take time. and there is of course an argument that they cannot commence properly until the UK is outside of the EU, there will be a period of time post-Brexit where UK businesses will need to rely on the WTO’s Most Favoured Nation rules when exporting to their international customers.
The UK will of course also want to negotiate a free trade agreement with the EU, to ensure that – without being part of the Single Market – it continues to have access to it on the best possible terms.
At present, there are no tariffs on trade in goods between the UK and the EU Member States. The DIT acknowledged in its paper that, post-Brexit, in the absence of any other agreement, UK exports to the EU would become subject to the EU’s Common External Tariff.
EU average external tariffs are generally low, with a simple average applied tariff across all goods being 6.4%. Some EU tariffs are, however, substantially higher – e.g. clothing is taxed at 11.6%, sugars and confectionary products at 25.7%, and dairy products at 36.1%. As such, UK exporters in certain industries may face a substantial increase in costs post-Brexit.
Similarly, provision of services to EU customers after Brexit will, in the absence of a preferential agreement, be subject to the GATS rules, which set out the level of access to EU markets across various types of services. The DIT correctly stated in its paper that GATS does not completely remove barriers to trade, its rules offer limited commitments on movement of business professionals, and they do not have an efficient enforcement mechanism (with disputes being resolved at state-to-state level only). As such, trade barriers are likely to increase significantly if the UK needs to rely on the EU GATS commitments post-Brexit.
Commentary: The benefit of transitional arrangements
In light of the above, there are strong arguments in support of transitional arrangements for Brexit to be part of the UK’s negotiations with the EU.
Transitional arrangements could potentially prevent a cliff-edge once the UK leaves the EU and could provide a smooth transition for businesses, both in the UK and in the rest of the EU, to adjust to the new legal order.
The Treasury Committee has recently consulted on the EU exit and transitional arrangements which Eversheds Sutherland substantively commented on. Various industries have started lobbying for transitional arrangements to be put in place. For example, the Association for Financial Markets in Europe issued a report on 2 February 2017, arguing that banks will need three years after the end of Brexit negotiations to restructure their operations in a way that does not put the stability of European capital markets at risk.
Any transitional arrangements should arguably be broad in scope, extending not just the tariff-free trade arrangements currently applicable between the UK and the EU, but also providing for a continuing application of the current EU-UK import/export processes until such time as a preferential agreement is put in place. We will be publishing a separate briefing on the benefits of transitional arrangements relating to customs formalities.