What you need to know about the WTO
25 January 2019
With the Brexit deadline looming, plenty of our members are asking about World Trade Organisation (WTO) rules and their potential impact on the ability for UK businesses to import and export goods. Following the UK’s exit from the EU, it is possible that the UK will have to trade with countries around the world according to WTO rules. This will only be until Free Trade Agreements (FTAs) are agreed that would then supersede WTO rules for trade to and from that country.
These changes could impact the tariffs and therefore the costs of sending and receiving goods and services from different countries. Depending on the outcome of the negotiations with the EU this could even affect the costs and duties involved in exporting and importing to and from our EU partners.
In this article, we’re going to explain 9 key things you need to know about how WTO rules work and their potential impact on the UK’s trading position. For further information, you can download our bitesize chunk on the WTO rules.
1. The WTO sets the rules for a lot of global trade
With 164 member countries, representing 95% of world trade, the WTO is the forum for negotiating trade rules where FTAs are not currently in place. These rules predominately look at halting protectionism and opening up market access by setting limits on tariffs and setting standards to help maintain responsible and safe trading.
2. The ‘Most Favoured Nation’ rule
Since the Uruguay Round of negotiations concluded in 1994, no single country can place less favourable tariffs for a WTO nation to do trade with it than stated in the rules set for the ‘Most Favoured Nation’ (MFN) within the WTO.
According to fullfact.org: ‘the principle of non-discrimination means that WTO members must not treat any member less advantageously than any other: grant one country preferential treatment, and the same must be done for everyone else’.
3. The UK is already part of the WTO but currently operates under the EU’s schedules
The UK will not need to reapply to become a member of the WTO as one of the organisation’s co-founders, but it will need to extricate itself from the EU’s set of ‘schedules’ – i.e. the tariffs, quotas and limits on subsidies the EU has set for other WTO nations.
4. The UK’s planned for process for creating its new WTO schedules
The UK government plans to replicate the existing trade regimes within the EU schedules so as not to disrupt international business and to reduce the opportunities for WTO members to veto the UK’s new schedules – though the UK will need to reach an agreement on what the figures for quotas and subsidy limits will be for the EU.
In terms of tariffs, the EU schedules contain ‘ceilings’ for tariffs on goods, meaning the UK could lower some tariffs but will not be able to increase them.
5. What happens if the EU and the UK don’t agree a deal
As mentioned before, if the UK does not agree a trade deal with the EU then MFN rules will apply, meaning the EU will treat the UK in the same way it treats countries like Russia or Brazil. EU tariffs would therefore apply to the UK – and UK tariffs to the EU – potentially increasing the costs of sending goods between the UK-EU borders significantly.
6. Certifying the new UK schedules
The UK will most likely want to draft its own schedules following its exit from the EU – even though replicated EU schedules will continue initially. Technically, a published draft of schedules needs to be ‘certified’ by the WTO, which requires unanimous approval from every WTO member – one member equals one vote. In reality, WTO members often trade off schedules that have not been certified – for instance, EU schedules have not been certified since 2004 but have been altered since then.
Other countries can object to the UK’s schedules – and have already done so– and these challenges could be expensive and time-consuming to contest. However, the UK would be able to continue trading off its schedules while these challenges are being issued.
7. For businesses, it will be important to understand how you determine tariffs for different markets
For UK businesses looking to determine the impact of WTO tariffs on selling into different markets, and the potential impact of new FTAs as and when they are agreed, it is important to know how to determine which tariffs the goods you’re selling attract.
Every business should first determine the Harmonized Code covering the product you want to export – something you can confirm with a customs broker or HMRC – and then check the tariff schedules for your target market in the WTO lists.
Currently the Market Access Database is a very useful tool for checking tariff schedules for trading within the EU and outside of the EU. Whether this tool will still be accessible or relevant upon the UK’s exit from the EU will be determined by the outcome of the UK’s negotiations with the EU.
8. Sometimes going by WTO rules may actually save you time and money
While FTAs can lower tariffs, making it cheaper to sell into a certain market, monitoring and researching FTAs and spending the time to ensure you have the appropriate proof of origin, or delivery to final destination, in additional to other compliance or regulatory documentation, can cost your business time and inevitably money too.
A recent Open to Export webinar on using FTAs advised that the time spent monitoring FTAs and completing the appropriate documentation to trade should be weighed against the potential cost saving of going straight to WTO rules and paying a slightly higher tariff.
9. Staying up to date with the latest developments in world trade is key
Following Brexit, the rules by which UK businesses can trade with the world will be subject to change depending on the deals it negotiates with the EU and the rest of the world, not to mention the schedules it drafts, whether certified or challenged in the WTO.
Staying up to date with trade deals and monitoring the changes to the tariffs, duty and documentation you are liable to pay and complete – by WTO rules or FTAs - will be an important aspect of the export process in the years ahead.
||The UK in a Changing Europe produced a very useful document setting out 'What trading on WTO terms would mean, you can download this here
We also have a Bitesize Chunk explaining:
- what the WTO does
- the General System Preference Donor countries and the different types of GSP categories
- the mechanics of Preferential Trade Agreements
- Rules of Origin
- cumulation in relation to Preferential Trade
- distinguish between Free Trade Agreement and Preferential Trade Agreement
- identify why companies use trade agreements
Find out more