Brexit Bites, 29 March 2018

Mar 28, 2018

With the one year countdown to Brexit beginning today, the UK government has said that the UK Parliament will get a vote on the final Brexit deal.  In the next in our series of getting back to the basics of Brexit, we look at what trade might look like under World Trade Organisation (WTO) rules should the EU and the UK fail to reach an agreement.

Parliament will get a vote on Brexit deal

Theresa May’s spokesperson has said that the UK Parliament will get a meaningful vote on the final Brexit deal that the UK negotiates with the EU.

The spokesman said “The government’s position on this is very clear which is that there will be a meaningful vote on the Brexit deal where parliament can choose to either accept that deal or we can leave without a deal, but we will be leaving the European Union on March 29, 2019.”

A year’s notice needed on new trading arrangements

Sainsbury’s CEO Mike Coupe has reportedly said that they will need at least a year's notice to work out how it would deal with new trading relationship between the UK and EU when the transition period ends.

While Mr Coupe said he is confident that some form of agreement can be reached he said "anything that's not a Customs Union and anything that doesn't allow free movement of goods between the EU, as it will be, and the UK will add cost or reduce the freshness of the products we sell or both."

Depending on the time of the year, around a third of produce sold by Sainsbury’s comes from the EU.

Back to Brexit Basics

Last week we briefly touched on what would happen if the UK and EU did not agree a trade deal when the UK leaves the EU and trade defaulted to World Trade Organisation (WTO) rules.

Trading in this manner would mean that the EU countries will have to treat the UK in the same way that it treats all other WTO members in that position, such as USA or Russia.  This means that EU tariffs would have to apply to imports from the UK.  Ireland would apply the EU tariffs to imports from the UK.   It would be against the WTO’s principles for the EU not to place tariffs on UK imports after Brexit if there was no free trade agreement in place. The same is relevant on the UK side.

What exactly is the World Trade Organisation?

WTO is a forum for governments to negotiate trade agreements in order to liberalise trade and settle trade disputes.  The WTO currently has 164 members which between them are responsible for 95 percent of world trade.  The EU is a member of the WTO and Ireland and the UK have both been members since 1 January 1995 when it was founded.

WTO agreements, which cover goods, services and intellectual property, are contracts, binding governments to keep their trade policies within agreed limits.  A key principle of the WTO is that countries do not discriminate against one another when it comes to trade.  There are two main barriers to trade; tariffs and non-tariff barriers.

Status of the UK post Brexit

The UK is a member of the WTO in its own right, having co-founded the General Agreement on Tariffs and Trade (GATT), the WTO’s predecessor, with the other 22 countries in 1948. It’s understood that the UK does not have to reapply to join the WTO once it leaves the EU.

However, at present the UK operates in the WTO under the EU’s set of ‘schedules’ – a list of commitments that sets the terms of the EU’s tariffs, its quotas and its limits on subsidies. The UK has provisionally said that its schedules will largely mirror the EU schedules after Brexit.

What are WTO schedules?

WTO obligations known as schedules are a form of passport for taking part in international trade networks and map out a country’s tariff and subsidy regimes.  The schedules comprise of 22,500 pages listing individual countries commitments on specific categories of goods and services.

How does the WTO tariff system work?

Tariffs are duties applied as a percentage of value or per unit of quantity or weight.  In some instances, the two methods are combined, for example a 12.8 percent of the value of the product plus a fixed amount per kg.  Tariffs are payable by the importer.

What is the Tariff coding system?

All trade products are coded.  The broadest categories of products are identified by two-digit chapters e.g. 04 is dairy products, eggs and other edible animal products.  These are then sub-divided by adding more digits – the higher the number of digits, the more detailed the categories.

For example the four-digit code 0403 is a group of products derived from milk. At six digits, 0403.10 is the sub-heading for yoghurt; at the eight digit level, 0403.10.11 this could be low-fat yoghurt tariff line.

The codes are standard up to the first 6 digits.

What level of tariffs could apply?

The following are the EU bound tariffs on trade with third countries – these are the tariffs that could typically apply on imports into Ireland from the UK and vice versa (if the UK adopts the EU’s schedules)

  • Solid fuel – 0%
  • Electrical machinery (average 1-3%)
  • Live horses 11.5%
  • Frozen offal of sheep, goats, horses – 6.4%
  • Ham – 15.4%
  • Certain Fresh or chilled freshwater fish – 22% (most fish attract tariffs of 2% to 22%)
  • Natural honey -17.3%
  • Animal fats 3% - 12%
  • Fruit can be up to 26%

Most favoured nation principle

Under WTO rules, each member must generally grant the same ‘most favoured nation’ (MFN) market access, including charging the same tariffs, to all other WTO members.  There can be no discrimination. The MFN principle applies to trade in goods, services and some intellectual property. 

An example

So let’s assume that Chile, Columbia and Peru are WTO Members. The MFN principle would prohibit Chile's customs authorities from levying a customs duty of 10 percent for imported watches originating in Columbia, while levying a lower customs duty of 5 percent for imported watches originating in Peru.  The MFN principle requires that the WTO favourable treatment (5 percent) be granted automatically and unconditionally to imported watches originating from all WTO members. 

What are non-tariff barriers?

Non-tariff barriers include quantitative restrictions (quotas) among other things such as lack of transparency in trade regulation.

Quotas are in place to regulate the volume of trade between countries.  Quotas must be imposed on a non-discriminatory basis.  In other words, the Member imposing the quotas is not allowed to favour any country over another. The Member is expected to impose quotas across the board.

When imposed, quotas should not distort ordinary trade flows. Therefore quotas should be applied equally to goods from all origins and their allocations should correspond as closely as possible to the expected market shares that would have existed in the absence of quotas.

Finding more information on the WTO

In order to research tariffs, do the following:

  • Go to the database. For standardized tariff information at Harmonized System six-digit level, go to the WTO Tariff Download Facility.
  • To see a country’s tariffs in detail or to compile analytical reports go to Tariff Analysis Online, and its brief explanation and user guide
  • Links to this information are available on each WTO member country’s information page on the WTO website. To reach these, go to the list of members and click a country’s name.

Tune in next week for more information on how customs duties work in practice.

Read all of our Brexit updates on the dedicated Brexit section of our website.