The ‘no deal’ option leaves the UK weak in the WTO and vulnerable to EU claims

Introduction
Theresa May’s position that no deal is better than a bad deal may or may not work as a winning negotiating tactic in achieving an acceptable deal for the UK in its bi-lateral relationship with the EU.  But in no sense is it clear what it means in relation the UK’s relationship with the other 163 members of the WTO. The option to fall back on the WTO is not straightforward. It entails obligations for the UK and rights for the WTO members (including the 27 EU Member States) which trade with the UK.

This note examines, in layman’s terms, one essential aspect of what being a stand-alone member of the WTO means for the UK. The UK must draw up a WTO Country Schedule. A Country Schedule sets out the terms under which goods and services may legitimately enter a market. The Country Schedule must be ready the moment the UK exits the EU even if it is only applied on a temporary basis.

The four UK options are: an empty Country Schedule; going back to the 1973 Country Schedule; cutting and pasting the EU’s Country Schedule; or a completely new Country Schedule. None is easy to achieve or leaves the UK in a position of strength.

Different WTO members, including the EU, will gain rights which, if not respected, would over time allow them to block trade from the UK into their markets

A UK stand-alone Country Schedule
The UK is a stand-alone member of the WTO. But it does not have its own stand-alone external commercial policy or, in simplistic terms, a Country Schedule defining access to the market. The UK is currently part of the EU single market and operates within the EU’s external frontier, the details of which are set out in the EU’s Country Schedule.

The EU’s Country Schedule determines the tariffs, if any, that goods must pay on entering the EU market and determines the conditions under which the EU including its individual Member States, is open to services from third countries.

Only if the UK choses to stay within the EU’s customs union would there be no need for the UK to draw up its own stand-alone Country Schedule. In the recent Queen’s Speech, the UK government has made clear that it does not intend to negotiate to stay within the customs union.

Thus, on the basis of present government policy, when the UK exits the EU’s single market it will have to develop its own external commercial policy and draw up its own stand-alone Country Schedule determining how goods and services may enter the UK’s new stand-alone market.

Negotiating a Country Schedule
Normally Country Schedules are negotiated between all WTO Members in Rounds of Negotiations. The last Round of Negotiation, the Uruguay Round, was completed in 1994. All WTO Members agreed to allow the EU to protect its market according to the commitments set out in the EU’s Country Schedule and the EU agreed to allow each other WTO Member to protect their market as set out in their Country Schedule. The overall result is considered a balance of concessions of mutual benefit to all parties.

Since 1947 there have been eight successful Rounds of Negotiations, which have massively reduced tariffs and created the possibility of just-in-time supply chains and manufacturing of single goods in multiple sites. In other words, the Rounds have allowed the development of globalisation.

The current Round of Negotiations is the Doha Round. There has been very little progress achieved in 16 years of negotiations started in 2001. Members cannot agree on how each other’s Country Schedules must be drawn up. There has been no agreement on what a new balance of concessions might look like. This shows the extent to which negotiations on Country Schedules are difficult.

When, on the other hand, countries apply to become members of the WTO, a key aspect of the negotiations is the content of the Country Schedule of the acceding member. These negotiations are just as difficult as in Rounds of Negotiations. The negotiations on China’s Country Schedule took from 1986 to 2001.

Country Schedules do not necessary stay fixed between Rounds of Negotiations. Existing WTO members, like the UK, are entitled to adjust or modify their Country Schedules between Rounds of Negotiations. This happens relatively frequently. When negotiating the modifications, the WTO Member making the changes must try and maintain a general level of reciprocal and mutually advantageous concessions (reflecting the overall balance of concessions achieved in a Round of Negotiations) no less favourable to trade than the situation before the changes.

Normally modifications are made for a single good or service and, should the modifying Member seek to increase protection for a particular product or service market, that Member will normally have to offer a compensating reduction in protection for another product or service market. These negotiations can be complex in relation to a single product let alone a particular service (where negotiations have been particularly slow).

What could a UK Country Schedule look like?
The UK has not indicated what sort of Country Schedule it wishes to negotiate with its WTO partners. There is much talk of going back to a WTO position. But to date this idea is always mentioned in the context of not agreeing a bi-lateral deal with the EU. Now that the Queen’s Speech has made clear that a stand-alone Country Schedule is needed this issue needs to be fully addressed in its own right.

The options available to the UK would seem to include:

1. Having a completely empty Country Schedule by which the UK would not impose any tariff or quantitative restrictions on the entry of goods into its market and, by being empty, not allowing any services to entry is market (the services Country Schedule is an opt-in schedule and thus if it does not include any service all services are excluded);
2. Going back to the stand-alone Country Schedule that the UK had in place prior to the entry into the European Economic Community in 1973;
3. Cutting and pasting the EU’s Country Schedule as its own stand-alone Country Schedule;
4. Negotiating with all WTO members a new Country Schedule.

All of these options raise a series of practice difficulties as well as triggering a series of rights and obligations among the WTO membership. None is straightforward. And given the number of interested parties it is not clear that agreement can be reached in the short term.

If time is needed, can the UK rely on a transition period?
The WTO is familiar with, and the WTO rules provide for, the idea of transition periods. For example, when the EU expanded from 15 to 25 members (with the entry of the 10 new mainly Eastern European states) the negotiations to modify the EU’s Country Schedule to satisfy the needs of the Union and to ensure that the other WTO members were satisfied with the new balance of concessions took many years to complete.

Another WTO example is the creation of customs unions or free trade areas. The rules not only allow the final result but also interim arrangements leading to the final result. Of course, there are procedures to be followed so as to ensure that rights are respected and obligations complied with. These procedures are complex and have required the drawing up of an understanding between the WTO Members on their correct interpretation.

So, a transition period could theoretically be considered for the UK. But during the transition period some sort of interim Country Schedule will still be needed. Thus, a transition period does not remove the need to put into place some form of temporary Country Schedule applicable from the moment the UK exits the EU’s Country Schedule. The transition period will only operate to allow all WTO Members to determine if the new (or temporary) UK Country Schedule infringes on their trading rights and to negotiate with the UK for some sort of compensation.

UK Option I: an empty schedule
An empty Country Schedule would have different consequences for goods and services. For goods, it would mean that the UK chooses not to protect any of its markets for any particular good, thus exposing all UK manufacturing, agriculture and fisheries to full global competition. Taking this step would require deep evaluation of the economic consequences, something which the UK does not appear to being doing. It also has the consequence that the UK would have no leverage in which to negotiate bi-lateral free trade agreements in goods with the EU or any other WTO Member as it would not be in a position to offer privileged (or better) access to the UK market in return for better access to its export markets.

For services the situation would be more complex. Services are an opt-in system. As a EU Member State, the UK has opted to allow access to its services markets on the terms and conditions set out in the EU’s Country Schedule. If the UK emptied its Country Schedule it would have no opt-ins and would be restricting access to certain services markets which are currently open. This in turn would trigger complaints from those WTO members currently exporting those services to the UK that trade barriers had been raised.

UK Option 2: going back to the 1973 schedule
Subsequent to the UK joining the EU there have been two tariff-lowering Rounds of Negotiations (Tokyo round from 1973 – 1979 and the Uruguay Round from 1986 – 1994) which have not only substantially reduced tariffs for many goods but moved the global market from the GATT to the WTO with its commitments on services and investment and intellectual property and standards and the like. The consequence of a return to the 1973 Country Schedule would be to significantly increase the level of market protection not only in services (as in Option 1) but in goods as well.

This could provide a starting point for a temporary Country Schedule. But it would automatically trigger the need for the UK to enter into negotiations with all those WTO trade partners that considered that the exports to the UK, which their traders had established in the period after 1973, had been cut off or restricted.

UK Option 3: cutting and pasting the EU schedule
The cutting and pasting of the EU’s Country Schedule into a stand-alone UK Country Schedule appears at first sight to be the easiest choice available to the UK. The 135 WTO Members who are not EU Member States could not argue that new market access barriers had been erected thereby triggering the right to negotiate to get compensation so as to rebalance the concessions.

But cutting and pasting is not so simple. The EU’s Country Schedule contains provisions which the UK is unlikely to want or are simply not appropriate for the UK. As an example of what is not appropriate, the EU’s services Country Schedule contains a series of Member State specific provisions that limit the rights of third country service providers in specific Member States. These provisions would, at a minimum, need to be cleaned out. This, in turn, could be considered an alternation of the balance of concessions.

In addition, the EU’s Country Schedule contains a series of agricultural tariff rate quotas (TRQs) which if included in the UK Country Schedule would allow the flooding of individual agricultural markets as the tariffs are low and the volume limits are high.

The apparent unpreparedness of the UK in relation to WTO negotiations might, in relation to TRQs, be saved by the EU. The EU will want to negotiate with its WTO partners to reduce these TRQs which from the EU’s point of view would suddenly become too generous as the EU market will have been reduced from circa 500 million consumers to circa 440. It is likely that the EU will negotiate with its WTO partners to try and split these TRQs between the EU and the UK taking one negotiating burden from the UK.

But the real and most dramatic problem for the UK is that in relation to the 27 EU Member States, the UK will be erecting new frontier tariffs and other barriers to trade which were not present up to the moment of exiting the EU.

Absent a bi-lateral trade deal, the EU will be in a position to claim that the UK has modified its Country Schedule in a way that has interfered with established EU trade patterns. This would give the EU the right (at the end of the appropriate procedures) to block equivalent amounts of trade from the UK into the EU.

So, the cut and paste option could mean that the EU has significant bargaining rights in relation to the UK. This weakens the negotiation position of the UK and in practice probably means that no deal mentioned by Prime Minister May is not a real option. It would simply give too many WTO rights to the EU.

UK Option 4: a wholly new schedule
Crafting a totally new UK Country Schedule will in practice require that the UK opens negotiations will all WTO Members to agree a new balance of concessions in a way not dissimilar to a country acceding to the WTO. The situation would not be completely similar, as the UK is already a WTO Member, but the Country Schedule negotiations would not be any less complex. In any event, it is clear that these negotiations would be all consuming and, form a manpower point of view, not allow for any bi-lateral negotiations with individual third countries. In any event those countries would want to know what the base line market protection for the UK would be before wanting to negotiate mutually beneficial privileged access to each other’s markets.

Conclusions
Even with the best will in the world from all the parties involved the scenarios set out in this note will give rise to complexities that are only now beginning to be explored.

I have purposely not entered into the details of the rights and obligations of Members of the WTO when changing Country Schedules so as to avoid seeing only the trees and not the wood. But there is one fundamental legal issue which needs addressing. Can the WTO accommodate what the UK wants to achieve?

As mentioned previously, customs unions and free trade areas are exceptions to the WTO’s fundamental non-discrimination principle. The WTO allows the discrimination on the basis that, overall, these agreements tend to increase trade. The problem is that a free trade agreement or even a Turkey style customs union between the EU and the UK will, almost by definition, result in a lessening of trade (trade can only stay the same if the UK remains in the single market). Can an EU-UK deal ever come within an exception designed to increase trade when in practice it might restrict trade or at best only maintain the level of trade?

What is clear is that the no deal is better than a bad deal slogan is severely limited and, given the rights that a cut and paste approach to the UK Country Schedule would automatically give to the EU, the threat of no deal is a very weak negotiating starting point for the UK.