Theresa May Faces WTO Trade Tangle as Brexit Lift-Off Nears: Q&A

  • British trade deals with some non-EU countries may be easier
  • Much of new framework for the U.K. depends on Brexit terms

U.K. Publishes Draft Law to Trigger Article 50 for Brexit

As U.K. Prime Minister Theresa May prepares to trigger negotiations on leaving the European Union in 2019, she’s also laying the groundwork for British talks with non-EU countries including the U.S. and China on post-Brexit trade pacts. All this will take place in the framework of the World Trade Organization, where what the U.K. plans to do is unprecedented, and in the wake of a protectionist tilt under President Donald Trump.

Here’s a guide to the central political and policy questions.

1. Does post-Brexit Britain need to reapply for WTO membership?

No. The U.K. is a member of the WTO independent of European Union membership. As a result, after leaving the EU, Britain won’t join the likes of Belarus, North Korea and Turkmenistan outside the WTO.

2. Will some new trade arrangements be easier for Britain?

Yes, in theory. After Brexit, the U.K. may be able to establish new trade arrangements relatively quickly with more than 60 countries and territories such as South Korea that have special commercial agreements with the EU.

That’s because the market-access accords between the EU and these partners go beyond what the WTO requires, enabling the U.K. simply to copy and paste the deals and notify the Geneva-based global trade arbiter.

This scenario assumes a country such as South Korea that has a special trade accord with the EU wouldn’t seek to re-open the pact as a result of Brexit. Canada is due to join this group of nations imminently.

3. What about new U.K. trade tries with other non-EU countries?

It’ll probably be trickier for Britain to work out new commercial relationships with countries such as the U.S., China, Japan, New Zealand and Brazil that have no free-trade accords with the EU. In these cases, some of the commitments that the EU has made to those nations under WTO rules may need to be renegotiated with the U.K., which would then have to win approval for those changes in Geneva.

“First, there’s a pitfall in all this within the EU during the Brexit negotiations,” said Jacques Bourgeois, a senior adviser at law firm Sidley Austin LLP in Brussels. “Then, in Geneva, there are bound to be cases in which WTO partners will unearth old grievances. That’s unavoidable.”

Generally, post-Brexit Britain will have to produce “schedules of commitments” regarding domestic-market access in the areas of goods and services for WTO partners that have no trade deals with the EU.

4. Is agriculture affected?

Yes. And farm policy is always politically thorny in Geneva. In coming up with commitments on agriculture for the WTO, the U.K. will have to:

  • set its own import tariffs
  • win the right to offer any trade-distorting subsidies 
  • work out with the EU the British share of any duty-free import quotas to which the 28-nation bloc is committed

One example that highlights the potential hurdles: the EU is committed to import annually from New Zealand 230,000 metric tons of lamb, of which the U.K. takes about half. Will Britain assume half this duty-free quota as part of its deal to leave the EU? If so, would New Zealand accept that?

Ditto on Thai chicken, 270,000 tons a year of which can be imported duty-free into the EU.

Then comes the question of politically sensitive farm subsidies. In Europe, the right to grant trade-distorting farm aid up to a limit lies under WTO rules with the EU rather than with national capitals. Britain will have to decide whether it wants to acquire a portion of these EU rights -- a step that could spark a fight with European agricultural powerhouses France and Germany.

5. What about industrial tariffs?

In the area of industrial goods, assuming it reaches a Brexit deal with the EU that falls short of a customs union, the U.K. will have to set its own import tariffs on 9,000 to 10,000 products. The smoothest option for Britain may be to replicate the EU’s tariffs, something the U.K. ambassador to the WTO has said the country will do “as far as possible.”

Setting higher rates could spark trouble with other WTO nations, while planning lower rates could complicate the Brexit talks. As an example, take cars, on which the EU applies a standard tariff of 10 percent.

Were Britain to try to apply a higher duty on autos after Brexit, Japan might object. Were the U.K. to seek to impose a rate below 10 percent, Germany, France and Italy might cry foul, especially if post-Brexit Britain and the EU continued to trade freely in cars.

Even if Britain replicates the EU’s goods tariffs, some WTO countries outside the EU could be disadvantaged in certain cases because the U.K. will no longer be a foothold in the European single market. As a result, exports to the EU from Britain could face a duplicate set of tariffs, according to Philippe De Baere, a trade lawyer at Van Bael & Bellis in Brussels.

For example, car components imported into the U.K. would face a British tariff and the autos assembled in the U.K. and shipped to the EU would then normally be subject to the bloc’s 10 percent duty.

6. What about services?

The U.K. will have to submit its own schedule of commitments to the WTO for services such as banking, insurance and telecommunications because, after Brexit, the EU’s commitments will no longer apply to Britain.

As with goods, the U.K. can opt to replicate the EU’s schedule. But winning approval for British services commitments from the WTO membership as a whole could be more difficult if Brexit denies foreign businesses in the U.K. such as banks full access to the EU single market.

In sum, with the Brexit talks being the first challenge, and with the rest of the EU accounting for about half of the U.K.’s trade, few experts will speculate about what Britain’s future commercial arrangements will look like.

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