The UK in the WTO after Brexit

If the UK fails to reach a trade deal with the EU after Brexit, it will have to fall back on WTO rules. Lorand Bartels, University Reader in International Law and a Fellow of the Lauterpacht Centre, spoke to Lauterpacht Centre News on 16 November 2016 about the legal implications of Brexit.

WTO Director General Roberto Azevêdo (left) and Liam Fox, UK Secretary of State for International Trade, at the WTO Public Forum, September 2016. Photo: © WTO/Studio Casagrande, reproduced under a CC BY-SA 2.0 licence via Flickr account world_trade_organization

Lauterpacht Centre News: There’s been some debate about where the UK stands after Brexit in terms of its trade agreements, especially with the World Trade Organization (WTO). What’s your opinion on this?

Lorand Bartels: In my view, one has to look at the UK’s current position in the WTO, and that current position is that the UK is a full WTO member. Nobody has challenged this: it’s an original member under Article XI of the WTO Agreement. What is in dispute is the extent of the UK’s obligations in the WTO. As an original WTO member, one had to have what are called schedules of concessions and schedules of commitments, which are formally annexed or deemed to be annexed to the main WTO agreements: that is a requirement for original membership in Article XI of the WTO Agreement. Now the question is: what happens if the UK leaves the WTO? Does it have those schedules of concessions and commitments? And the complicating factor is that — at least for trade in goods under the GATT — the document which contains the concessions that apply to UK territory has ‘European Union’ written at the top. And so there are a number of people who think that that means, when the UK is no longer part of the European Union, that this document no longer applies to the UK.

The second step is that a number of people have thought there is also a continuing obligation to have schedules of concessions as a member. The problem with that is that there isn’t: there is only an obligation to have schedules at the time of original membership. And that’s for a very simple reason, I think, which is that the schedules that were submitted for original members, including all the EU member states, are theirs, and are enforceable as theirs.

The reason I am convinced that these are the UK’s schedules is that the wording of Article XI, the original membership article, is very peculiar: ‘The contracting parties to GATT 1947 … which accept this Agreement and the Multilateral Trade Agreements and for which Schedules of Concessions and Commitments are annexed to GATT 1994 and … GATS shall become original Members of the WTO’. It’s the ‘for which’ bit that’s important, because it doesn’t say that the UK had to submit schedules for itself. There are two ways in which schedules can be submitted: you can do it for yourself, or another entity can do it for you. And this provision is clearly written with the EU in mind: everyone knew that submitting schedules in goods was an exclusive EU competence, so the UK depended on the EU to do this job for it. And the reverse is true in the area of services — in fact, the ECJ case [Opinion 1/94 re WTO Agreement [1994] ECR I‐5267] actually said that the EU didn’t have exclusive competence in services. That’s why the schedule in services has everybody’s name on: the European Communities and their member states.

So, the way to understand all of this, I think, is to say that the UK had these scheduled obligations as of 1 January 1995. The role of the EU was to accept responsibility for performing these obligations. Elsewhere in the WTO, the EU also stands in for the UK in the exercise of rights, so this is at the level of exercising rights and performing obligations. The underlying rights and obligations are the UK’s.

In GATS it’s even simpler because Article XX of the GATS says that WTO member ‘shall’ annex a schedule. If the UK didn’t do that, then it can’t have become a member in the first place. So I think, in general, there’s a confusion with some people between the autonomy attribution level (which is who does the grunt work of speaking, essentially) and the actual underlying rights and obligations (which are those of the member states and the EU). And this has the advantage that there’s no need for renegotiation. There is one problem: some concessions in the goods schedule are expressed in quantified terms. There are tariff rate quotas, which is an obligation to allow in a certain product at a lower tariff rate than the normal one, and there is also a right to subsidise agriculture up to a certain amount. And both of these quantified commitments obviously aren’t split up between the member states and the EU in any way. And some people then say, ‘well, because we don’t know what to do about apportioning these quantified rights, it means that the schedule can’t be that of the UK’. But the thing about law is: maybe there isn’t an express rule, but you make one, you find one. There are plenty of principles for figuring this out — third parties shouldn’t be harmed, no one should benefit unduly, you look at the last 3 years of trade to get a sense of a baseline that needs to be protected… if there are negotiations, it’s negotiations on this question of law, a point of principle. The fact that one doesn’t know quite how to interpret the UK’s obligations doesn’t mean that it doesn’t have them.

LCN: Roberto Azevêdo, Director-General of the WTO, has suggested that there will need to be negotiations because other WTO members will disagree about the UK’s scheduled commitments.

LB: This is a little different from saying that they can block the membership of the UK and they get a veto over something fundamental. It is true that any submitted schedule of concessions can be rejected by any other WTO member, depending on whether it’s just a formal change (called a rectification), or it’s a more substantive change (called a modification). In these situations, all of the affected parties — which is, the member with the schedule and the other specially-affected WTO members, so not all of them — are obliged to enter into a process of negotiation, the idea being to reach an agreement that will compensate the third countries for any loss of market access. So, this does not mean that there will be any loss of market access; it all depends on what the UK does.

Prof Lorand Bartels

It’s worth noting that the EU has never — going back to 1974 at least — traded under agreed schedules of concessions. Not once. It’s always some years behind, and it’s always in the process of renegotiating because of enlargement, beginning with the UK and Ireland and Denmark [in 1973]. So, it’s clearly not a big issue. Now, if the other side thinks that it’s getting a worse deal, it can retaliate. But if it retaliates and the UK thinks that it didn’t have a right to retaliate because the other country is in a better situation anyway, the UK can bring a case. And this has happened before, and the other country will have to reduce its amount of retaliation — probably to zero, depending on what the UK has done. So, I think the difficulties consequent upon the UK taking the initiative and saying ‘these are our schedules’ are much exaggerated.

The first thing to do is to establish the current legal situation — so the will UK say, ‘these are our commitments’. There was a long practice under the GATT of newly-independent states doing exactly that. They would become independent, and you crossed out ‘United Kingdom’, and you wrote in ‘Jamaica’. This happened 64 times. Now, there was a specific rule for that in the GATT, which is no longer applicable. But at least this shows that the idea that you can cross out the name of a party formerly responsible for a trade schedule that applies to your territory and write in your own name when you have autonomy now and are able to accept responsibility for the performance of those obligations — that is doable, because it has been done, 64 times. None of those times involved tariff rate quotas or other quantified commitments, but that then just becomes a question of dividing up the obligations. It doesn’t touch on the fundamental principle. I don’t really think this is going to be a major issue.

This doesn’t of course mean that the outcome is good for the UK overall. The WTO is a less liberalising agreement than the EU, and so the UK is going to be faced with the standard non-discriminatory tariffs that the EU applies to all third countries unless it can reach agreement with the EU on a free trade agreement, which of course politically depends upon accepting some measure of free movement of persons, because that’s what the EU wants.

LCN: And on all of the remaining member states agreeing as well…?

LB: Well, actually not really, because it’s interesting times for EU trade agreement law and policy. It has been the practice that these quite elaborate free trade agreements like TTIP and CETA have been treated as so-called mixed agreements, in which the member states and the EU conclude the agreement together, the member states as member states, importantly. But there are only a couple of controversial areas — and by ‘controversial’, I mean whether these areas of regulation fall within the EU’s exclusive competence or not. Firstly, there’s going to be a court case relatively soon which is going to figure this out; and secondly, you can just cut them out. And if you cut them out, that means you don’t need the agreement to be ratified by all of the EU member states: it’s a decision taken by qualified majority voting, and no parliamentary ratification — so the Walloons don’t get a say! But this would be a departure in the EU’s practice. It’s just a possibility. And there’s a difference between getting agreement by the governments of the EU member states, and getting the consent of the people, because sometimes the people can feel differently.

LCN: There’s a perception that the UK is ill-equipped to enter into these sorts of negotiations, and that we don’t have enough people with the expertise necessary. Do you see this as a likely problem?

LB: I think it’s not nearly as bad as people say. There’s this concept of trade negotiators being thrown around, and apparently the European Commission has thousands of them and the UK doesn’t have enough. But what is a trade negotiator? It’s someone who sits on the front row, brandishing a text at the other side, the lead negotiator … then behind this person you have the lawyers, and behind them you’ve got the policy people and the economists, and then behind them, you’ve got the whole backroom show that puts this into action. Now, I think that the first job is a generic job of negotiating and that someone who gets the brief will be able to master the it and be able to do the job. That’s a negotiating job. If you can negotiate nuclear weapons, you can negotiate trade concessions. If you know what your constraints are and you have instructions, that is assisted by trade lawyers, who tell you what the legal implications of your offers are.

And before that ever happens, you’ve got the economists and the policy people, who formulate your position for you. I think the UK has plenty of policy people and economists. That is easy: it is a matter of understanding the UK economy, figuring out what the import-export system is — and of course, it’s now complicated with services and passporting and all this, but essentially this is the sort of job that a government should be able to do, to work out what its interests are, it is doable. After all, the UK is involved in EU regulation all the time, and when it comes to financial services, it has a big hand in writing those regulations. So I think that formulating position is really not going to tax the system very much. And so if you’ve got the negotiators, the actual negotiators which are not that many, who are negotiators, who can come up to speed on what they’re negotiating about — that’s OK. And if you’ve got all the political and economic analysis, which is think the country is capable of doing today, that’s OK. What is left, where there is almost nobody in the country, is the lawyers. Because lawyers are all in Brussels. And that is obviously a bad thing, I’m sure all our readers can agree. Now, over the period of time, it’s possible to train up the lawyers that exist in the departments in trade law, so that is a possibility, but it’s certainly true that, as of today, this sort of knowledge is quite rare, scarce, in all four departments that are involved in trade negotiations one way or another. Which is EGIS [European and Global Issues Secretariat], DExEU [Department for Exiting the EU], DIT [Department for International Trade] and the FCO [Foreign and Commonwealth Office]. Because the country’s never had to do it. So that, I think, is the gap. But it’s a temporary gap because people will learn. But given that there’s a 2-year timetable for the negotiations with the EU, assuming the EU’s even prepared to start talking about trade, then it’s not much time. It’s not that thousands of people need to be hired, but certainly you’d expect some people to be hired — and where are they going to come from? That’s a problem. They can’t come from other governments, because the primary allegiance of anyone on secondment from another government is going to be that person’s government, and that is likely to be a government that will be talking to this government, and you’ve just got a major conflict of interest problem there. They can’t come from the European Commission: that’s in the same position, even for British nationals — and, in any case, there’s an embargo on them doing other work for a year after they leave. There are law firms who can help, none really very well equipped at the moment in the UK, but that could be done. And that really leaves academics.

LCN: There has been a backlash against globalisation and multilateralism, and in particular against regional trade agreements such as TPP. How will this affect the UK’s ability to forge new agreements?

LB: I think one has to distinguish between different reasons that these agreements are unpopular. Trade agreements are unpopular in the US for very old fashioned reasons, which is that trade liberalisation means that people lose their jobs. So it’s directly linked to protectionism in a very old-fashioned sense. It’s going to be almost impossible to negotiate a free trade agreement with a country that takes that position. So we don’t know what Trump is going to do.

That’s a different type of objection from the objection that trade agreements are an assertion of corporate power over public interest. And the focal point for that objection is investment, because typically — and this is the case in TTIP and CETA — investment protection provisions come with tribunals to which the investor has direct access, and the payouts for government regulation that undermines the value of the investment can be very, very high. I would predict that investment agreements are not going to be bundled with trade agreements any more, because that is too much of a hot button issue. And the two issues don’t actually have anything to do with each other. If anything, you are more likely to have foreign investment when there is trade protection, so that the companies jump over the tariff wall, that gives them a head start. So there’s actually an inverse correlation between trade liberalisation and the need for investment protection — or maybe not the need for investment protection, but let’s say the attractiveness of investing in a country. You are much more likely to invest in a country that’s protected by high tariff walls because, once you’re in the country, you get all the benefits.

The issue is to do with the perceived limits on public regulatory power that these agreements impose: the scare stories of Frankenfoods, and chlorine chickens, and hormone-fed beef. I doubt that feeling is very strong in this country. But it will make negotiations on an agreement with the EU — and with any other country that is sceptical of what trade agreements do in terms of affecting countries’ abilities to regulate in the public interest — more difficult. At the moment there is perfect free trade, in theory, between the UK and the rest of the EU, so it would be odd for this set of objections to then arise in the context of a free trade agreement that can’t be more liberalising than what’s already there. The only difference would be enforcement: is it a court that you trust, is it a tribunal that you don’t trust, that sort of thing.

I think that both problems can be fixed, either by not dealing with some of the especially controversial topics like investment arbitration, or by making sure that there aren’t any problems (for example, CETA’s not bad on that, talking about rights to regulate environmental protection and so on). As for protecting the workers… well, that is a problem. So I don’t know what the US is going to do now. Because trade agreements also have a political dimension, and I think it probably suits the new US government to have a trade agreement with a country like the UK. You can always sell a trade agreement by focusing on the export markets that it opens up, as opposed to the imports. But the problem is that the import-affected voters are very, very prominent right now in the US, in the rust belts. That’s how Trump got in. And that’s going to be a big constraint for the US on any trade agreements; usually you can balance these interests against each other, but that is going to be so sacred now for the new Trump administration that I can’t see that much balancing going on.

LCN: Do you feel the UK is different in this respect?

LB: Yes, very. People are much more polite here! But also … I think this is a very interesting country because public perception has been conditioned ever since the Corn Laws — and because of the nature of imperial economics over a hundred years — I think people are very much in favour of the concept of free trade. The British Empire was quite free-trading in its own terms, and I think that’s stuck. So the idea that the government should step in and protect your job is something that I don’t think resonates as much here.

LCN: And yet, that’s precisely what the government is reported to have done with Nissan…

LB: It’s funny because now you have a Conservative government behaving like a Labour government in the 1960s! But it’s very odd: I don’t think they’ve actually done anything. There is nothing they could have done that is of any material value to Nissan that would be legal, by definition. That’s why we don’t know what they’ve done. They can’t give them money. They can only promise that they will put their interests at the forefront of any future negotiations. But that doesn’t mean sectoral negotiations, because there’s no such thing in the WTO. A free trade agreement has to cover substantially all the trade. That means 90%, 95% of all the trade. What can be done is non-sectoral generic subsidies, so a 10% corporation tax is OK, but that’s because it applies to all. You are allowed to divide up on a non-sectoral basis — for example, large companies versus smaller companies — so there are non-sectoral subsidies that are possible. But even then, you can’t have a subsidy which has the effect of leading to greater exports compared to local sales than before. And by before, I mean in the absence of a subsidy, not just timeline before. So again, if the idea is that money was offered to Nissan and, let’s say the domestic market is already exhausted and so necessarily production will mean that there will be a higher proportion of exports than there would have been in the absence of the subsidy, then that would be illegal, even if it weren’t specific. Whereas otherwise subsidies are illegal if they are specific to a sector, an industry or a company and they displace imported products, because that’s discriminatory, you can’t do that either. So the government’s hands are really quite tied.

LCN: This interpretation is at odds with — or rather, more nuanced than — what’s been reported in the media. Are you encountering misinformation and poor public understanding of these issues?

LB: I spend a lot of time writing to journalists! For instance, there’s a level of optimism, an idea that the UK can just have trade agreements with other countries [to replace trade with the EU]. The real problem there isn’t legal, it’s that other countries don’t want trade agreements with the UK. And there are various reasons for that. Until they know what is happening between the UK and the EU — it doesn’t apply to all countries, Caribbean countries I think would be well off to have a trade agreement — but for a lot of countries, that’s just a political reality. And for some of those countries, like Australia and Japan, that’s because the EU’s saying: well, if you do that, then we’re not going to have a trade agreement with you. And they get a choice. So some of this is really hard-nosed politics.

Then there’s also quite a bit of basic misunderstanding about the legal issues. And some of that, I have to say, comes from people who are otherwise knowledgeable in the field of trade, and who are therefore referred to and quoted by journalists, but they don’t understand the law, and they make some mistakes. For instance, there’s a tendency to equate damage to third countries as a result of Brexit with them having a right to complain about it. It’s not true. The classic example would be: you’ve got some car parts being exported from, say, Japan. They go to Sunderland to be turned into UK cars (because the cars are UK cars even though they’re owned by a Japanese company). But those cars can’t be sold in the EU competitively any more because the EU now has a 10% tariff, which means that the car parts exports to the UK don’t happen any more. And there’s clear economic damage to Japan because of that. It’s quite common for people to assume that Japan has a right to be compensated for this — the UK has acted in such a way, via an Article 50 notice, that their economic interests have been damaged. Now of course they’re not saying that the UK can’t do it, they’re just saying that if the UK does, they need to be compensated — and compensation doesn’t take the form of money in the WTO or in trade agreements, it takes the form of market access in other areas. The problem with all of this is that the case law is quite clear, and there is no guarantee in trade law that there will be a market for, in this case, car parts. But what you’re guaranteed is that you get to export them to the UK, to a market that might exist — and if the market exists, that the market is not discriminatory. But if the market dries up because the government decides that it doesn’t want any more car parts, then that’s fine.

LCN: So your Japanese car manufacturer would be better off relocating to within the EU?

LB: Exactly, and I think that is what is going to happen. Rather than fight this out — because I don’t think there’s anything to fight about — the companies are just going to leave. And I can’t see any incentives that the [UK] government could offer — other than, say, a low corporation tax. Become Ireland. Just become a tax haven!

LCN: Last year, Ireland was asked by the EU to claim tax from Apple…

LB: Well, this is where the WTO can be useful because any negative ruling against you doesn’t require repayment of any subsidy, unlike in EU law. It just means you’ve got to stop doing it. There’d be no threat of paying back a huge amount of money to a company, so those promises could be made more freely.

LCN: The situation with Apple in Ireland was actually held up by pro-Brexit campaigners as an example of where the EU is stifling the ability of a country to make itself attractive to investment.

LB: Yes. But also the rules might be slightly different. What happened to Apple seemed to go a bit beyond just the standard low tax rate that Ireland’s got. So that sort of thing would be a problem under WTO law — with a different remedy — but fundamentally, the low tax that the Irish have is OK. And this country could go low-tax, as it was in the past.

LCN: So the suggestion that we can make up trade deficits by opening new markets is perhaps too optimistic?

LB: I think there was a tendency for [pro-Brexit campaigners] to think in terms of tariffs. I think they had a simplistic idea of what trade actually is about these days, that it’s about things that you make and then sell to other countries. Because most of what is made here, and is made anywhere, is made up of other things that come from other places. Even agriculture depends on imported fertiliser. You’re somewhere in a chain, and now the link’s been broken. You can’t just trade your way out of this by selling jam to the French or whatever it was. And even assuming you could, even assuming they wanted to buy jam or Marmite, that’s not really what’s at stake. The problem is really the — whatever the figures are — the 50% of UK production that goes to the EU. I don’t think that’s easily replaceable with other markets.

LCN: What next, as far as you can tell? The government has pledged to trigger Article 50 by the end of March 2017.

LB: Yes, I think they’ll have to. I suspect that, not only the government, but a majority in Parliament will feel the need to respect the Brexit vote, and so I think one way or another the Article 50 notice will be given within the course of the next year. What happens after that depends entirely on the EU.

LCN: How likely do you think it is that we’ll be able to conclude negotiations with the EU within two years?

LB: Well, I think there’ll be able to be negotiations on pensions and the citizenship process and all the rest of it. That’ll be fine. On the trade aspects, there’s probably two options the EU can offer, and possibly a third. One option is the same deal as now, which will be rejected here. The second option is nothing, which might have to be accepted here. And the third option — and I think this is really the only question — is something like what we’ve got now, but rebranded. So instead of talking about citizenship rights, we talk about labour rights. And the irony with this is that citizenship is a much-exaggerated concept in EU law and it essentially does boil down to labour rights anyway. So if that branding that the EU has been keen on recently can be stripped back, maybe a little bit on the flexibility side, some declarations about Jobseekers’ Allowance and so on, if the EU is prepared to help the UK on that rebranding exercise, and if the UK is willing to offer this to the people as a rebranding exercise, I think that’s the only other outcome. What’s highly unlikely to happen is something like a Canada agreement, because the EU doesn’t have sufficient interest in it. The EU does have an interest in an agreement on goods, but the UK has much more of an interest in an agreement on services. And the EU doesn’t have nearly that interest in services, and so it’s at that point that the EU is going to start talking about free movement of persons. So it might be possible to have a goods agreement, but I don’t think that’s going to help the UK. Once services come into it, which is what is important for the UK, then I think that’s going to be tied to free movement. And the analogy with Canada is wrong as well because the political context is entirely different. It’s very important to the EU not to make it seem possible to leave the EU. And the Canada agreement is not very strong on services, anyway.

LCN: What would be the best outcome for the UK?

LB: Economically the best outcome would be either remaining within the EU or finding some sort of agreement that preserves as much of the current arrangement as possible. I think what it would take to change the mind of government and parliament would be a significant shift in public opinion. The problem with that is that I think that might happen, but that is only going to happen if the economy really gets much worse, and by definition that’s only going to happen after it’s too late.

LCN: We’ve got no way of measuring this formally: a second referendum is highly unlikely to happen…

LB: I think that you’d need a super-majority — say, 65%, 70% — against. I don’t think saying, ‘well, if the referendum were held today, we’d have 51% the other way’ is enough. You really need a massive groundswell, and I think in terms of the politics of the country, that view would need a champion, someone to vote for. At the moment… well, that’s lacking a bit in most seats. Until Labour manages to be a credible alternative to the Conservatives, they can put up with a lot. And when’s that going to be? At least until after the next election. So I think [Brexit] will go ahead, and if the EU doesn’t offer a window-dressing alternative, or if the EU does and the government isn’t prepared even to accept that, I think two years after 2017 some time, it will be out. And we’ll be in a WTO world.

The EU obviously overstates its hand too. Fundamentally, you don’t need free movement in a customs union, it’s an add-on. But they see it as a cost. They know that it’s a cost, that’s why they impose it on the Swiss. It’s just part of the cost, it’s part of the price that rich countries pay.

LCN: Nationalist parties are gaining support all over Europe. Do you think we’ll see Frexit or Grexit soon?

LB: Yes, I think that it is likely. If it’s France then it’s pretty significant, as the originator of the whole project — but I think if that sort of thing happens then it’s much more likely that the EU will change from the inside. The alternative would be no EU at all — or at least, an EU with Germany and a few small states in it. So I think the French elections are going to be critical to all of this. The Greeks, not so much — it’s too small and the pain is already there. If they leave — pffft, it doesn’t matter. But the French… I think that’s important. I can’t imagine much change coming from the Germans. The Germans need the EU.

LCN: They have forthcoming elections too. But they don’t seem to have such a strong growth in nationalist, populist, anti-EU parties.

LB: Not so anti-EU, no it’s not as strong. I think the postwar mentality of the Germans is so ingrained in so many people that they know that the EU is a sort of apology. For the French, the EU is always a foreign policy vehicle, and if that’s not working out any more — and it hasn’t worked out for a while, actually, for them — if that’s not really working out then, OK. De Gaulle crashed the system before, a number of times. So they can play hardball.

On the upside, classes on EU law are going to be smaller. On the downside, classes in WTO law are going to be bigger…

LCN: So it’s always more work for the lawyers?

LB: Lawyers always win.

Lorand Bartels is a Specialist Advisor to the House of Commons Select Committee on International Trade and a Senior Counsel at Linklaters, where he advises on Brexit-related trade law issues.

Lorand Bartels takes part in a roundtable discussion regarding the trade implications of Brexit at the University of Notre Dame.