14 September 2018

Verfassungsblog: WTO option in practice: How a no-Deal Brexit would seriously damage key UK industries

Necessary Steps for Trading under WTO Law

Under WTO Law, the UK has to submit schedules of concessions like tariffs and quotas on goods (Article II GATT) and market access commitments for foreign service providers (Article XVI GATS). As a Member State of the EU, it did not have to deal with these issues as the EU has combined schedules of concessions. In order to trade under WTO Law, therefore, the UK will have to establish its own schedules, which have to be accepted by all WTO members. This obligation implies some uncertainty for the UK, because it is not entirely clear what effect objections raised by WTO members would have. Whilst some believe that such objections would not be problematic at all, others are concerned that, given the diplomatic field, WTO rulings are uncertain. In order to reduce the risk of non-approval, the UK could simply replicate the EU’s schedules. Alternatively, it could risk a dance on the knife’s edge by proclaiming unilateral free trade. Whilst this could boost trade, economists warn that it could also destroy manufacturing in the UK and result in an income decrease of 1%-2.3%. Still, both options are suitable to prevent the UK from finding itself trapped in the transition from EU membership to trading on WTO terms.

Once schedules of concessions are agreed upon, trading on WTO terms has its very own difficulties. For example, it is impossible that the UK continues trading with the EU-27 on privileged terms, as the Most Favoured Nation (MFN) Principle (Article I GATT; Article II GATS) obliges WTO members to grant the same concessions equally to all trading partners. The exemptions from the MFN Principle in Article XXIV GATT regarding Customs Unions and Free Trade Agreements will not apply in case of a no-deal Brexit. Therefore the same tariff will apply, no matter if a product is imported from New Zealand or Belgium.

Another concern is that the EU may impose non-tariff barriers such as ‘antidumping, countervailing or safeguard measures’. Although, under WTO Law, the EU could not adopt such measures against the UK as punishment for Brexit, the possibility of restrictions remains realistic. Between 1995 and 2013, 8.1% of products imported into the EU were subject to trade remedies.  [...]

Trade in Services under WTO Law

With regard to trade in services, the UK faces even greater challenges as the GATS has less far-reaching substance than the GATT. Two sectors especially affected are the financial and aviation services sectors.
There is no country that exports more financial services than the UK. Its financial services industry earns approximately GBP 190-200 bn in revenues annually, of which GBP 40-50 bn are generated in cross-border business with the EU. Through its extensive global business, in 2013 over 6% of the UK’s GDP was generated by this sector. Under the GATS, the UK’s financial services sector would lose of a number of benefits it enjoys under EU Law, especially passporting rightsresulting from the financial services single market (Articles 56-62 TFEU). Passports allow UK firms to set up branches and do business in EEA Member States without the duty to obtain separate authorizations from each Member State. In contrast, WTO terms lead to significant limitations and regulatory requirements, which can be expanded at all times on the basis of ‘prudential reasons’ (Paragraph 2 (a) of the GATS Annex on Financial Services).

In the event of a no-deal Brexit, UK financial institutions could establish subsidiaries and apply for national licensing in the EU-27. The host country’s authorities would then supervise their EU-27 branches in matters of reorganization and winding-up. National licensing regimes are, however, more limited, complex and costly because of the differences between them. Alternatively, the UK could ask the Commission for equivalence treatment. However, the equivalence regime is very limited in its scope and can be withdrawn at any time. [...]

The UK’s Possible Reaction

The WTO solution is a tricky path the UK should not (want to) go, but will be forced to go if Brexit negotiations do not speed up. Whilst the most urgent issues of regressing to WTO Law can be solved through either replicating the EU schedules of concessions or unilaterally abolishing all tariffs, the UK will not be able to find easy solutions regarding its services sector. In order to compensate economic damage, the UK could intensify tax competition with the help of the crown dependencies (Guernsey, Jersey, Isle of Man) and its good relationships to tax haven countries like the Cayman Islands or the British Virgin Islands. Also, it will not be saved from granting generous subsidies where possible under WTO Law.
Regarding trade with non-EU countries, the UK will seek to conclude FTAs to compensate the loss of 36 agreements it enjoyed as a EU Member State. Yet, the UK market is small in comparison to the EU market. Therefore, it is unlikely that the UK will strike conditions as beneficial as those negotiated by the EU.

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