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What would WTO terms really mean for business?

This last week has seen a return of cautious optimism to the negotiations, but the looming threat of a ‘WTO terms’ exit has not disappeared from view. To have an agreement ratified in time for the beginning of 2021, a deal will need to be within touching distance by mid-November.

With so much in the balance, and businesses still trying to judge which scenarios to prepare for, we take a closer look at what ‘WTO terms’ really means.

What are WTO terms?

To keep global trade fair and as open as possible, all World Trade Organization (WTO) members are bound by the ‘most-favoured nation’ principle, which requires them to offer all trading partners the same tariffs without discrimination. Any advantage given to one country must be also made available to others.

The exception to the rule is where a free trade agreement (FTA) has been put in place. Under an FTA, trading partners decide to remove trade barriers such as tariffs – as has been the case between the UK and the 27 other European countries through EU membership.

Without an FTA, both the UK and the EU will be obliged to apply the same ‘default’ trading conditions to one another as they impose against all other countries with whom no FTAs are in place.

Put simply, this means introducing tariffs and quotas that have previously been eradicated. Additionally, some services suppliers will no longer be automatically eligible to trade cross-border.

What are the ‘known knowns’?

In many areas, the relative difference in economic impact between trading under the UK government’s proposed FTA and trading on WTO terms is actually minimal. The trading relationship envisaged by this government is a considerably less integrated arrangement than was proposed as part of Theresa May’s deal. In fact, roughly 75 per cent of what Brexit means for business is already known - the ‘known knowns’ - and can be prepared for. In summary:

  • The additional customs processes and paperwork that will be required at borders will be virtually the same in either scenario. Friction at borders has long been accepted by the UK government as a price of a ‘Canada-style’ FTA and businesses should change their import and export processes now, and anticipate some delays to the shipment of goods. This is especially true of UK exports destined for the EU in the early weeks of 2021.
  • From day one the UK will be treated as a third country for regulatory purposes whether there is a deal or not. In many cases, this will mean specific additional processes for getting EU and UK approvals. The UK has said it will temporarily accept some EU approvals – such as CE markings. This could develop in two ways over time. Either, the UK and the EU could reach mutual recognition agreements in an FTA (though the EU has rejected these so far) which may reduce the need for duplication of certain approvals. Or, the regulatory approaches on both sides could diverge further meaning not only a duplication of approvals, but also potentially different approaches to production needed for the UK and EU market.
  • New tariff barriers with third countries could arise on day one whether or not there is a deal agreed with the EU. The UK trades with a range of non-EU countries via EU-negotiated trade agreements. Since 2017, the UK has been in the process of ‘rolling over’ the terms of these agreements into new bilateral deals, but has not yet completed the process. There is still around 8 per cent of UK trade taking place under FTAs which have not yet been transitioned, including with Canada, Singapore, Vietnam and Mexico. The result could be price inflation and loss of UK competitiveness in foreign markets.
  • Financial services will not be included to any great extent in an FTA with the EU, so the sector stands to be impacted regardless of the outcome of negotiations. From 1 January, passporting rights will come to an end, so only UK banks also established in EU member states will be able to continue to service business from across the continent. However, contingency measures have been implemented by both UK and EU authorities to cushion any negative consequences, including transitional measures for clearing houses.
  • On day one, mutual recognition of professional qualifications is likely to look minimal even if there is a deal. The novel approach pitched by the UK in its draft FTA text – which would have provided a more automatic framework or criteria for recognition – has been firmly rejected by the EU. The only other realistic option could be the framework used in the EU-Canada Comprehensive Economic and Trade Agreement (CETA) – but it has never actually been used. An alternative outcome could be to instead allow for a patchwork of national regulator agreements on recognition to spring up (which could happen fairly quickly).

What happens if there’s no deal?

Businesses have been busy preparing for these areas over the recent months as a matter of priority. But consideration should also be given to contingency planning in areas most at risk if a deal isn’t struck in time. Areas to focus on:

  • UK goods sold into the EU will be subject to the Common External Tariff, which on average is fairly low, although it can vary greatly on individual products. For instance, a 10 per cent tariff is applied to cars, up to 12 per cent on some textiles items and higher rates of 30 per cent or more on some agricultural goods such as grains, meat and dairy products.
  • Goods originating in the EU sold into the UK would be subject to the UK Global Tariff (UKGT), which has the effect of maintaining the EU’s tariffs on some goods and reducing or eliminating them on others. However, currently UKGT is set to impose relatively high barriers on some goods which could produce a domestic inflationary effect. This is particularly true of agricultural imports from the EU. In a WTO terms scenario we could see the UKGT temporarily revised to manage inflationary effects and tariffs on some sectors suspended.
  • Those businesses relying on a highly mobile workforce could encounter new restrictions in their ability to travel to the EU to provide their services. So-called ‘mode IV’ provisions included in a deal are expected to allow providers to continue to operate on a ‘fly in, fly out’ basis for between 90 and 180 days per year. Without them, the rules of individual EU member states will apply, which could result in new requirements for visas and permits – and each member state would enforce different rules making it complex to navigate.
  • Equivalence of the UK and EU’s data regimes is much less likely without an FTA, and there is no fall back within WTO rules which could alleviate the situation. Businesses will likely have to rely on standard contractual clauses and/or binding corporate rules to ensure any transfer of personal data from EU to UK is in line with EU law. However, even these routes may be thrown into doubt if the EU finds the UK data protection regime is not adequate, for example due to concerns over the legal redress citizens have against data used for national security purposes.
  • It is possible some of the other potential agreements being negotiated alongside the core trade content could also be lost if the UK leaves on WTO terms, given the EU’s approach so far of wanting to negotiate all aspects of the relationship together. For example: failure to agree measures in the areas of energy and civil nuclear cooperation could cause disruption to operators and result in a reduced supply of nuclear fuel. Logistics providers could lose their existing haulage licences and instead fall back on the European Conference of Ministers of Transport (ECMT) permit system, which would significantly limit hauliers’ ability to transport large volumes of goods through the EU. The good progress made on an air transport agreement could be undone without an FTA, although it is highly likely both sides will take unilateral action to keep aviation functioning on similar terms to now. The UK could also potentially lose access to EU databases used for law enforcement and intelligence activities without an agreement on security cooperation.

What can I do now?

Given the very short timeframes, businesses are now seeking practical advice. There are a range of key actions that can be undertaken now to ensure firms are better prepared, which we have summarised here:

Whatever happens over the next month, change is coming. Our team of Brexit specialists can help assess all your Brexit-related planning and guide you through the process of implementing change.

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