The WTO: the policeman of global trade

If the UK leaves the EU without a free-trade deal, it will have to trade under World Trade Organisation rules. What does that mean?

What does the WTO do?

The WTO sets the basic global rule book for trade and acts as a referee between its 164 member states when they need to resolve trade disputes. The Geneva-based organisation is relatively young: it was founded in 1995, with the aim of improving world living standards by committing members to “reciprocal and mutually advantageous arrangements” designed to reduce tariffs (import and export taxes) and other barriers to trade. Economic theory states that most people in most nations gain from freer trade – but because some businesses lose out to foreign competition, governments are often reluctant to lower trade barriers. The WTO process, which began decades ago, encourages countries to commit to freer trade on a fair, level playing field.

When did this process begin?

In 1947, when the WTO’S predecessor, the General Agreement on Tariffs and Trade (GATT) was signed by 23 countries in Geneva. It was part of the US and Britain’s blueprint for the postwar economy, aimed at encouraging world peace (and Western capitalism). GATT was based on the fundamental principle of non-discrimination: nations that signed up had to offer the same trade tariffs to all the other signatories, treating them all as “most favoured nations”; and once foreign goods had passed through customs, to treat them the same as local goods. The principle is still central to the WTO today, though there are important exceptions: members are allowed to offer preferential treatment to states with which they have negotiated free-trade agreements. Today, WTO rules reach far beyond tariffs to, for instance, regulations on food safety and rules on agricultural subsidies.

Has the WTO been a success?

If you think falling tariffs and vastly increased global trade are a good thing, then yes. When the WTO makes the headlines, it tends to be because a “round” of talks has stalled, or because the US and China are at loggerheads. In the long run, though, the complex horse-trading that the WTO and GATT have overseen has been immensely fruitful, contributing to rising prosperity around the world. In 1947, the average external tariff charged by GATT signatories was 22% – a massive disincentive to trade. By 1967, that average was down to 15% and by 1999 it was under 5%. Today, the weighted average tariff charged by the US and the EU is about 1.6%. Over the same period, there has been a massive boom in international trade: in the 1950s it accounted for 8% of the world economy; today it represents around 30% of a vastly bigger pie.

How has the WTO failed?

Recently, the WTO’S liberalisation of trade has stalled; the real progress has been made in regional and bilateral free-trade agreements. And it is criticised from two sharply opposed perspectives: critics either think it is too weak or too strong. Its rules override domestic laws, and where they have been broken there is a legally binding dispute settlement mechanism. In the 1990s, in particular, it was regarded as the remorseless agent of globalisation, overriding local democracies. But equally, its rules are fairly powerless against many modern forms of protectionism: those governing state subsidies, intellectual property and the trade in services are weak. The great bone of contention at the moment is its failure to rein in China’s protectionist industrial policy. For this reason, the US has vetoed appointments to its judging panel, the Appellate Body, and has threatened to withdraw altogether.

How would WTO rules work for us?

The UK’S plan, in the event of a no deal, is largely to adopt the EU’S “schedules”: the list of tariffs and quotas (limits on imports at specified tariffs) that it applies to all other WTO members. Currently, these are quite low: about 2.6% for non-agricultural goods. But in some areas they are much higher. If we traded with the EU purely on WTO terms, for example, cars and car parts would face 10% duties every time they crossed the border (which, with today’s integrated supply chains, is often several times per car). Agricultural tariffs are higher still, up to an average of 35%. So BMWS and brie would be likely to become much more expensive for UK consumers, while British carmakers and farmers would have to pay large tariffs to enter their largest export market.

But couldn’t new free-trade deals compensate for this?

Possibly. But in 2017, 44% of UK exports went to the EU on freetrade terms; so new trade deals, which take time to negotiate, would struggle to make up for the decline in EU trade. If it leaves with no deal, the UK will also lose the benefits of the 35 or so free-trade agreements that the EU has struck (Britain has so far negotiated no new deals to replace them). And even when the EU trades on WTO terms – with the US, for instance – these are guided by extensive bilateral agreements. The issue reaches far beyond tariffs. Under WTO rules, we would have to organise our own system of customs and regulatory border checks, including

on the Irish border ( see page 20).

So how bad would it be?

The latest Treasury forecasts suggest that the UK economy would be 9.3% smaller after 15 years if we exited the EU under WTO rules (and 2.5% smaller under Theresa May’s Chequers plan). This is rejected by many Brexiters as the latest iteration of Project Fear. Economists for Free Trade, for instance, calculates that a WTO Brexit would boost the economy by 6.8% over the same period, by bringing new trade deals and regulatory freedoms (see box). Mostly, though, forecasts suggest that WTO rules are not to be blithely embraced. At best they are deemed “suboptimal” – the think tank Open Europe predicts an annual drag on growth of 0.17% – while the IMF thinks that, even if short-term chaos can be avoided, the UK could face a long-term hit of up to 8% of GDP.