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The paradox of WTO rules

Blick Rothenberg customs duty partner Simon Sutcliffe examines the UK's potential relationship with the WTO in the event of a no deal Brexit,

Much has been espoused about the UK reverting to World Trade Organisation (WTO) rules in the event of a hard or no deal Brexit. However, should the real concern surrounding the UK’s post Brexit trading success be the potential lack of reciprocation of its interim UK tariff and/or the harmful trade disagreements between the US – Sino and US – EU?

In short, WTO rules mean that a country may impose any tariff (schedule).

This equality of treatment is the WTO’s cornerstone for creating a free and fair international trade in goods. In late 2018 the UK published its interim schedule. This document was to be used in the event of a no deal or hard Brexit and would replace the reliance on the EU schedule. The UK pasted the EU schedule into its own and then reduced many of the tariff ceilings to lower or nil levels. Many of the items listed in the UK schedule are free of all customs duty apart from certain commodities where the UK felt a particular sector or industry required a degree of protection. As a result, nearly 90% of items attract a zero rate of duty. This coupled with the adoption of postponed VAT accounting means that the cost impact on companies importing goods and the subsequent sale onto their UK customers would remain small (bar the additional costs of rendering customs entries and other additional customs formalities). The belief was that this would ease any inflationary pressure on goods entering the UK.

However, as the vast majority of customs duty is currently remitted to the EU any duty collected post Brexit could rightfully be retained by the UK. Although a largely tariff free trading model reduces this increased taxation revenue stream (albeit at the expense of consumers) there is no opportunity cost as the duty revenue would have been sent to the EU in any event.

Following this seemingly unilateral action by the UK, the EU and other nations have not indicated any intention to reciprocate with a corresponding reduction in their tariffs on UK goods. Hence, goods entering the EU with a UK origin will be liable to EU customs duty at a rate applied to a ‘third country’; which the UK will subsequently be. This means that many goods will be charged with a duty (and a higher duty rate at that) will increase real costs to UK exporters’ customers and make them appear less than competitive.

Further, recent trade disagreements between the US and China and the EU and the US has meant additional tariffs being imposed on US goods entering the EU and vice versa. Plus, Chinese trading uncertainty has impacted on EU-Sino trade. As a consequence of the tit for tat duty rate rises and threats of further tariff rates rises being extended to other goods certain key industries in the EU are facing tough financial constraints. For example, German steel being exported to the US and EU/UK food manufacturers who rely on imported US rice. These ‘removals of concessions’ (tariff rate rises) have had an immediate adverse impact on the cost effectiveness of business as customs duty in most circumstances is not reclaimable. Goods become less competitive and therefore orders lost.

Hence, the adoption of a predominantly zero-rated tariff by the UK although well intentioned for the general public throws up a host of other issues compounded by the current instability in international trading relationships and the lack of an indication of potential reciprocation. The lack of reciprocation and higher tariffs around the world mean tough times for UK exporters in certain sectors and means that the UK needs to ensure that its interim tariff stays just that, and meaningful FTAs are agreed as soon as possible. Aside from this, the final UK schedules may take years to agree (certify) and the UK may be faced with many years of expensively contesting its schedules at the WTO as it is challenged by other members. Many countries will not want to see the UK get more favourable treatment than they receive especially from the EU.

Therefore, what appeared to be a bold move may cause constraints and hardship for UK consumers and exporters that were not envisaged at first.

For more information, please contact Simon Sutcliffe.

 

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