Nothing simple about UK regaining WTO status post-Brexit

27 June 2016

In the weeks that preceded the UK’s EU referendum, WTO Director-General Roberto Azevêdo broke his silence over the UK leaving the EU (Brexit), first with the Financial Times, followed by Reuters, the Guardian, and others. One of his key points was that the UK would face complex talks in the World Trade Organization. What did he mean?

A common assumption in the June 23 referendum debate is that after leaving the EU, the UK could “simply” operate as an ordinary WTO member. Eventually that’s true, but getting there would be far from simple.

Some experts believe that the adjustments would be little more than technical, and that any negotiations would be straightforward. They could be right. It would depend on whether the WTO’s membership is determined to accommodate the UK’s wishes.

But recent experience in the WTO suggests that is unlikely. A closer look at the details suggests some key issues could be politically contentious among the WTO’s members, currently 162 countries.

On top of that, recent negotiating experience suggests that willingness to accommodate each other’s interests quickly is a scarce commodity in the WTO and even a final agreement cannot be guaranteed.

If that is true, then post-Brexit, the UK can expect a long and rough ride.

Negotiating with diverse countries

To be clear, these negotiations would be about sorting out the UK’s legal status quo in the WTO. They would be separate from any free trade agreement such as with the US, EU or anyone else, although the complicated web of talks would feed into each other.

The UK is already a WTO member, but its membership terms are bundled with the EU’s. Re-establishing the UK’s WTO status in its own right means both the UK and the EU would negotiate simultaneously with the rest of the WTO’s members to extract their separate membership terms. Agreement on the UK’s terms is unlikely before those of the EU.

For its part, the UK would have to negotiate with the EU itself, the US, China, Russia, India, Brazil, and any trading nation or group of nations that matters, large or small, rich or poor. It would only take one objection to hold up the talks because the WTO operates by consensus, not voting, one reason why WTO negotiations take so long.

The UK government would have to balance conflicting interests domestically as well.

This is not an argument for or against Brexit. Proponents on either side can weigh up the costs and benefits and make their own cases. But they cannot assume that becoming an independent WTO member will be simple and quick for the UK.

The only way it could, would be if a post-Brexit UK became — as some propose — much more of a free trader, with low import duties across the board, and minimal subsidies for farmers. This would be simple to establish in the WTO, but domestic opposition would have to be overcome first.

Otherwise, much of the UK’s negotiations in the WTO would be tough, and could still be hotly debated domestically. For example, how much in subsidies for farmers would the UK want to negotiate? Since that would come out of the EU’s entitlement, how much would Brussels want to keep for itself? How much potential protection against imports would the UK want to reserve for its producers? Negotiating those would be complex, with almost all WTO members demanding a say.

Tricky subjects

The complexity comes from the EU’s strange situation in the WTO. The EU is 29 WTO members: the 28 member states plus the EU itself. They have combined “rights” (e.g. to be able to export to other countries, and not to be discriminated against), balanced against shared “obligations” (e.g. to open up to imports from them, and not to discriminate against them).

In the WTO, the EU has agreed to keep its import duties within certain limits. For example, for some types of shoes this is a maximum of 17 percent. That limit applies to all EU members when they import from outside the EU. The EU’s quotas — allowing quantities of certain products to be imported at special lower-duty rates — are for the whole single market, not any individual country such as the UK. Limits on agricultural subsidies are also for the entire EU.

To be an independent WTO member, the UK would be creating its own rights and obligations out of the EU’s. That’s not as simple as it sounds. One reason is because other countries with different interests would want to ensure the balance is also right for them.

Take just one hard-fought issue: low-duty import quotas for high-quality beef, just two of almost 100 EU quotas. The EU opened these beef quotas after lengthy negotiations with Argentina, Australia, Brazil, Canada, New Zealand, Paraguay, Uruguay, and the US.

Extracting UK beef quotas out of the EU’s would require negotiations with all of them, plus possibly other suppliers such as Botswana, India, and Namibia, and definitely the EU itself — Ireland, Germany and France have particularly strong beef lobbies.

While the exporting countries are pressing for the UK’s quota gates to be opened wider, and jostling with each other for paths through the opening, UK farmers would be pushing in the opposite direction. Remember, to reach agreement, the WTO’s consensus rule would apply.

The EU’s black hole

Now comes the surprise. We don’t know what most of the EU’s current commitments in the WTO are. The UK would be negotiating a share of key quantities that are unknown.

The only confirmed commitments on tariffs, quotas, and farm subsidies are from before 2004 when the EU had 15 member states. The EU has expanded three times since then, but in 12 years it has been unable to agree with the WTO membership on revised commitments.

That in itself is a warning. The UK will be negotiating a share of numbers that are unknown, with no guarantee of agreement. There may be practical solutions but again they will have to be negotiated.

Take agricultural subsidies that have a direct impact on prices or on how much farmers produce. The EU’s limit for its (pre-2004) 15 members is €67.2 billion. However, when informing the WTO about its subsidies, the EU says the limit is now €72.4 billion, perhaps from a secret updated draft that has not yet been agreed by the WTO’s membership.

Actual subsidies are currently way below the limits, so the UK might have room to manoeuvre. Unless the UK decided to scrap support for prices or production volumes completely, it might try to negotiate a percentage of the EU’s limit (whatever it is). A number of responses is possible.

The hardest bargaining would take place if Australia and others persisted with their desire for everyone in the WTO to scrap this type of subsidy — allowing only a minimal amount worth up to 5 percent of the value of agricultural production. UK production is currently around £10 billion, implying a £500 million subsidy ceiling, considerably less than the £3 billion some have mentioned for a post-Brexit UK. British farmers would react.

A mountain of work

Some issues would be simpler. Many EU commitments could be converted to the UK’s without the need to negotiate, although the WTO membership would still want to confirm the conversions. This would be the case where no changes are needed.

For example, the UK could continue to observe the EU’s ceilings on tariffs (such as the 17 percent on shoes), and its market-opening pledges in services sectors. It could also simply translate EU regulations — on food safety, animal and plant health, and product standards and labelling — into its own. And so on.

That’s still a mountain of work: the EU (and UK) has around 20,000 products listed for collecting customs duties, thousands of product standards and regulations, and extremely complicated limits on access to its services market.

Besides, the UK would still be applying EU rules. Moving away from them, one of Brexit’s objectives, would require further negotiation or at least peer review in the WTO. (See also BBC Reality Check on a possible “lifetime’s worth of Parliamentary legislative sessions” in order to separate UK law from EU law)

None of this is impossible, but it won’t be sorted out quickly.

This is a slightly updated version of a post that first appeared on the Trade β Blog. A comprehensive report on these issues was published by AgraEurope in March 2016: ‘Brexit’ and WTO — Part 1: The complex search for the UK’s WTO status quo (subscription required); ‘Brexit’ and WTO: 11 facts about the EU and its strange relationship with the WTO (free to view); ‘Brexit’ and WTO — Part 2: Hard bargaining over the UK’s ‘commitments’ (subscription required)

Peter Ungphakorn was a senior information officer with the WTO Secretariat until 2015. Since then he has returned to journalism, writing part time for AgraEurope, Intellectual Property Watch and other publications, focusing mainly on international trade rules, agreements and institutions.