The UK under WTO terms in a “No-Deal” Brexit

With Boris Johnson recently becoming the Prime Minister of the United Kingdom both Goldman Sachs and Moody’s rating agencies raised the likelihood of a “No-Deal” Brexit. It appears that the approach of Mr. Johnson’s Premiership is to leave the European Union on October 31^st “whatever the circumstances”.

Introduction: “No-Deal Brexit” and the WTO

If there is no arrangement made between the EU and the UK, by the time Brexit is delivered, exporting goods from Germany to the UK will be much more difficult. In this event the UK will be deemed a “Third Country”. The UK will not only lose its membership of the European Single Market but it will also lose its place in the trade agreements made by the EU with other markets. A “No-Deal” Brexit will also result in there being no transition period, once the UK leaves, which would be the case in the case of there being a deal.

In the No-Deal scenario, the UK will be governed by World Trade Organisation Law when it comes to the export and import of goods to and from the UK. Thus, this will create complications that do not currently exist while both the UK and Germany remain members of the EU. In this piece we will examine some terms relating to WTO Laws that will be in place in the event of a No-Deal Brexit.

World Trade Organisation Terms: Schedule of Concessions

Following a No-Deal Brexit, and the UK operating under WTO terms, trade arrangements with the UK will change. Currently, under the conditions of the European Single Market Germany freely trades with the UK without the need for tariffs and other customs arrangements. However, as the UK appears to be pursuing a route that involves leaving the Single Market, tariffs and customs duties are likely to be brought back.

In the event of Brexit, the UK will have to submit schedules of concessions in order to outline their trade policy. In the area of tariffs and quotas on goods, this is done in accordance with Article II of the General Agreement on Tariffs and Trade (GATT), whereas when it comes to market access commitments in relation to services it is completed in accordance with Article XVI of the General Agreement on Trade in Services (GATS).

An Independent UK Trade Policy

These schedules of submission will grant the UK their own terms and conditions when it comes to the tariffs they choose to place on goods. This would then provide the UK with a trade policy independent of the EU’s. However, in order for the UK to have their own schedules of submission they not only have to design their own schedules but they will then also have to have them accepted by all members of the WTO. This will be easier said than done.

Alternatively, the UK could seek to replicate the EU schedules and thus aim to trade under the same terms they do now. However, this would negate the aims of many prominent Brexit leaders. For many of them, the Brexit process was one that was pursued with the aim of allowing the UK to decide their own trading relationships. As a member of the WTO, the EU would also have to give their approval for the UK to use the same schedules as them.

Recently, the UK has produced a temporary schedule of concessions in which over 80% of goods imported from the EU will not have to pay a tariff. However, some important goods will have tariffs placed on them. Cars are one example, and it appears that a 10% tariff on cars imported from and exported to the UK is planned for after Brexit. In the areas where tariffs will be placed at 0% there will also be further complications for German exporters due to the “Most Favoured Nation” clause.

World Trade Organisation Terms: Most Favoured Nation Clause

In the event of a No-Deal Brexit, the UK will be operating under WTO rules and exporting goods there will follow the Most-Favoured Nation clause. This clause means that a country that has been accorded “MFN” status may not be treated less advantageously by the promising country in terms of tariffs, customs duties and other trade barriers  than any other country with “MFN” status. The WTO requires all its members to give each other this status. To put this into context there are currently 164 members of the WTO and it includes most countries in the world.

Essentially, this means that any trade barriers set by the UK will impact EU countries just as strongly as it does any other member of the WTO. In the event of “No-Deal” there will be no discount for European exporters to the UK so German exporters will be operating under the same conditions as exporters from New Zealand and India. Some political voices have stated that there would be no requirement for tariffs between the EU and the UK but under WTO laws this would mean the UK would have to eliminate tariffs from all other WTO members. This would have a devastating impact on the manufacturing and agricultural industries in the UK.

Conclusion: What this means for German Companies

Trade between Germany and the UK will be majorly complicated in the event of a No-Deal Brexit. Should the UK enter WTO terms with no formal agreement and with no transition period in place there will soon be tariffs, customs duties and other complications arising for companies exporting to the UK.

In such an event, the UK may have different rules with regards technical safety standards, health requirements, labeling provisions. Such changes can result in great expense in the fulfillment of the performance obligation between the contracting parties e.g. through new testing and certification requirements. Consequently, companies with plans to export to the UK in a post-Brexit environment need to obtain legal assistance to ensure that they have the correct documentation in order. Legal assistance will also ensure that they are generally prepared for what may arise in the event of a “No-Deal” Brexit.

At Schlun & Elseven, we are here to provide you with legal assistance when it comes to Brexit. Our team will provide you with their knowledge concerning shipping and international transport law as well as in contract, corporate and commercial law to make sure you are Brexit-ready.