WHAT WILL HAPPEN to trade relations if there’s a no-deal Brexit?

Pro-Brexiteer politicians tend to argue that we can keep trade free (as it is now) after a no-deal Brexit, citing the General Agreement on Tariffs and Trade (GATT) Article XXIV of the World Trade Organisation treaty, also known as Gatt 24.

“There will be no tariffs, there will be no quotas because what we want to do is to get a standstill in our current arrangements under Gatt 24, or whatever it happens to be, until such a time as we have negotiated” a free trade agreement, Johnson had said in a televised debate on 21 June.

This weekend, Johnson’s views on how Gatt 24 could be used as a work around has been probed by the media and his opponent for the leadership, Jeremy Hunt. 

Other British politicians have also suggested that Gatt 24 allows for an interim agreement which – while the UK and EU negotiated a free trade agreement – could maintain the existing arrangements with the EU for 10 years.

This type of solution has also been referred to in the Malthouse Compromise (more on what that was here), which puts forward a “WTO-compliant standstill on trade with no tariffs, no quantitative restrictions and no new barriers” as part of a no-deal “triple safety net”.

But Bank of England Governor Mark Carney, among other trade and economics experts, have dismissed claims that there would be a “standstill” trade arrangement, in the event of a no-deal Brexit in a BBC interview:

The Gatt rules are clear… Gatt applies if you have an agreement, not if you have decided not to have an agreement or have been unable to come to an agreement.

The BoE chief added that if the EU didn’t want to apply tariffs to British goods, then it would have to lower tariffs also to the rest of the world.

“We should be clear that no deal means no deal – it means there is a substantial change in the trading relationship with the EU.

That may be the choice that the country takes but it should be a choice that is taken with absolute clarity in terms of what that means.

The British Attorney General Geoffrey Cox, a supporter of Boris Johnson’s, has has advised the government in private that it would struggle to keep the UK’s existing tariffs with the EU in the event of a no-deal Brexit.

Things have become even clearer this week, as the director of the WTO himself weighed in on what would happen – having remained largely out of the debate up until now. 

What is Gatt 24?

There are a number of aspects to the Gatt 24 principle that you need to know in this great Brexit debate of what’s possible in a no-deal scenario, and they are: that it can only be invoked if both the UK and the EU agree to do it; both sides would have to map out a rough idea of what a free trade deal between the two would look like; and even after all that, it only applies to goods.

Let’s start with the agreement bit: the crux of the Gatt 24 rule (written as Article XXIV in the treaty itself, as if it’s not complicated enough) is that in order to use it, you need to have decided to go into this agreement and to indicate that both parties intend to negotiate a Free Trade deal.

A rough sketch of the future trade deal is needed for this – and the EU has said it won’t discuss trade until the £39 billion divorce bill, EU citizens’ rights, and the Northern Ireland border issues are settled – which are contained in May’s Withdrawal Agreement, which has been resoundingly rejected by the UK parliament.

So as it stands, if the UK leaves the EU outside of the Withdrawal Agreement, that means it would revert to the basic trading rules of the WTO – not Gatt 24. This automatically means high tariffs between the UK and the EU. 

Another element of the Gatt 24 rule is the Most Favoured Nation principle (which is kind of ironically named). Although the UK could choose to continue to apply no tariffs with the EU in the event of a no-deal, under this MFN principle it would mean that it would need to apply the same terms to the rest of the world, too. No favourites.

It would also mean that the EU would be under no obligation to reciprocate the no-tariff approach – and probably wouldn’t if they can avoid it as a way of deterring other countries from leaving the EU. 

A group of pro-Brexit lawyers have argued that this can be worked around if the UK and EU agree that they intend on negotiating a Free Trade Agreement in future, then they could arrange a temporary free trade area that would last only until the full FTA is agreed, citing Dr Lorand Bartels’ one-page draft of such a short-term arrangement. 

This would be a work-around to the latter MFN caveat, but would still require the former – for there to be some sort of agreement between the EU and the UK.

At the moment, getting to a point where the EU and UK would both agree that they intend to negotiate a free-trade deal in the future seems far off. The agreement on divorce proceedings – or the UK’s exit from the EU, cutting legal, custom and regulation ties – has ended in the UK’s parliament thrice refusing those conditions.

The EU has said that until those conditions are agreed, they will not discuss future trade deals (the most we have on this is the Future Relationship document, which has also proved divisive for elected British representatives). 

What about the WTO?

So far, the WTO have stayed out of the debate on what kind of trading relationship is possible between the EU and the UK in the event of a no-deal Brexit.

Former TWO officials have sporadically appeared in news stories, like Peter Ungphakorn, who said in absolute terms: “No deal means there is no agreement with the EU and therefore Gatt Article 24 doesn’t apply.”

He also argued that choosing Gatt 24 isn’t the end of the discussion – you’d still need to decide what kind of temporary FTA you’d want.

But this week, Director General of the WTO Roberto Azevêdo gave an interview to Prospect magazine, in which he made things a bit more clear. 

Her said that in a no-deal Brexit scenario, “you could expect to see the application of tariffs between the UK and EU where currently there are none”.

Specifically on the topic of Gatt 24, he answered: “Article XXIV of the Gatt is simply the provision of global trade law under which free trade agreements and customs unions are concluded.

If there is no agreement, then Article XXIV would not apply, and the standard WTO terms would.

The former director of the WTO Pascal Lamy has been more frank about claims made by Brexiteers about WTO regulations in a no-deal Brexit.

“Affirmations such as ‘WTO terms would be painless, after all many countries do that’ are one of the many Brexit unicorns flying around,” said Lamy.

If that were the case, why would all developed countries have negotiated free trade agreements, which provide a higher bilateral level of openness than the multilateral WTO regime?

“Jumping brutally from trade league one (the internal market without borders) to trade league three (a WTO) would certainly hurt.”