Brexit and the World Trade Organisation
The current absence of political resolution and the fast-approaching date for Brexit means that there is a heightened chance of a no-deal Brexit. If so, World Trade Organisation rules will govern trade with the UK so what does that mean for businesses in Ireland?
Currently, the UK is part of the Single Market and the EU Customs Union.
If there is a no-deal Brexit, EU law will cease to apply to the UK with the UK becoming a “third country” (i.e. a non-member of the EU) and as a result the UK would no longer be part of the Single Market or the EU Customs Union.
As a result, World Trade Organisation (WTO) rules would begin to apply to trade between the EU and the UK with the EU’s preferential trade arrangements with third countries ceasing to apply to the UK (in particular, Free Trade Agreements (FTAs)).
The WTO is a rules-based trading system, founded on a number of multilateral agreements between the numerous WTO Members and concerns trade in goods and (certain) services between the WTO member countries (WTO Members).
Trading under the WTO rules is based on principles of “most favoured nation” (MFN) treatment and “national treatment”.
The UK would need to change the terms of its WTO membership and the UK has submitted its own draft ‘schedule’ of trade commitments for goods (and most recently) for services to the WTO - these schedules determine the level of market access for imports of goods (i.e. tariffs) and services (i.e. the level of market access for particular types of services).
The issue then becomes what trading under the WTO rules with the UK in a no-deal Brexit will mean for businesses in Ireland as part of the EU 27 in relation to trade in goods and in services.
WTO - Trade in goods
The General Agreement on Tariffs and Trade (GATT) governs how tariffs are applied on goods and addresses certain non-tariff barriers on goods (e.g. product standards specifications, quotas and licenses).
Under GATT, WTO Members cannot normally discriminate against other WTO Members (i.e. the MFN principle) and therefore the UK would need to impose the same tariffs on goods coming from Ireland as from everywhere else – Ireland (as part of the EU) would also need to impose tariffs of goods from the UK according to the tariffs agreed by the EU with the WTO under its schedules (and again consistent with the tariffs it imposes on goods coming from other WTO Members such as the US and China).
While there are some exceptions to this principle (e.g. for FTAs (such as the EU/Singapore FTA) and customs unions (such as the EU Customs Union)), the MFN principle must apply to all WTO Members.
Under GATT, each WTO Member (e.g. the EU (including Ireland)) must accord national treatment to other WTO Members (e.g. the US and China) - this means that WTO Members (e.g. the UK in a no-deal Brexit) must treat goods coming from other WTO Members (e.g. from Ireland) in the same way as their domestic goods (once the appropriate tariffs have been paid on the overseas goods).
WTO - Trade in services
In a no-deal Brexit, the UK’s trade in services with the rest of the world (including Ireland) would be governed by the General Agreement on Trade in Services (GATS) – in broad terms, WTO Members have greater flexibility to restrict cross-border services under the WTO rules.
The MFN principle applies to trade in services just as it applies to trade in goods but there are more exceptions when it comes to services than for goods (e.g. WTO Members can tailor their commitments under GATS in line with their national policy and schedule their commitments to limit the level of market access that foreign providers of services are permitted).
Services are also subject to the national treatment principle under GATS meaning that a WTO Member should not operate discriminatory measures benefiting domestic services or service suppliers (though a WTO Member can choose to impose national treatment restrictions on certain imported services). One complication is that the demarcation between goods and services for WTO purposes is often not clear and this will add to the post-Brexit challenge for businesses in Ireland.
As a third country in a no-deal Brexit, the UK would face various non-tariff barriers in trading under the WTO rules, including technical barriers to trade, quotas, import licensing, standards and rules of origin requirements as well as administrative and bureaucratic delays (e.g. at customs) - given the substantial trade between Ireland and UK (including between Ireland and Northern Ireland), the impact on business in Ireland of such non-tariff barriers to trading should not be understated.
Implications for businesses in Ireland when trading with the UK post-Brexit?
In summary, implications for businesses in Ireland active in trade in goods or services with the UK in a no-deal Brexit include the need to consider how WTO rules affect: (i) customs and tariffs, (ii) supply-line issues, (iii) rules of origin (i.e. classification of goods for customs purposes), (iv) contracts, (v) regulatory issues (e.g. the validity and necessity for licenses and permits for trade with the UK), (vi) product standards and health and safety, (vii) employment, social security, healthcare and pensions, (viii) taxation/VAT, (ix) company law issues, (x) transportation effects, (xi) data protection and privacy, and (xii) competition law/public procurement.
In the absence of a FTA or other agreement, WTO terms provide a floor for world trade based on MFN and national treatment principles to avoid discriminatory treatment of goods and services being traded between WTO Members but the inadequacies of these arrangements allow WTO Members to seek preferential access for their own industries and therefore trading under WTO rules with the UK for Irish businesses will be more complicated and significantly less commercially advantageous than under the current EU rules.
For more information in relation to this topic, please contact Alan McCarthy, Partner, or any member of A&L Goodbody's EU, Competition & Procurement team.
Date published: 13 February 2019