What are World Trade Organisation terms and what exactly do they mean?

There is no more popular piece of jargon in the Brexit debate than “World Trade Organisation terms”.

Some cite them with approval, as a desirable destination for the UK upon leaving the European Union.

Others portray them as a disastrous outcome that we should avoid at all cost.

But what’s the truth about the WTO and its framework? And what precisely does it entail for the UK?

What is the World Trade Organisation?

It is an inter-governmental organisation with 164 members – a majority of the states in the world and certainly all the major economies.

Its central purpose is to permit goods and services to flow across borders with relative ease.

The key element of its agreements is that every member shall treat every other member equally in terms of tariff charges, meaning there shall be no arbitrary discrimination.

So if country X, say, offers a lower tariff on a certain imported product to country Y it also has to automatically offer that lower tariff to every other country too. This is the “most favoured nation” principle.

However, there is an exception. Where two countries enter into a free trade agreement that covers the bulk of their trade, they can offer each other lower tariffs without having to also offer them to everyone else.

So the countries of the EU free trade area can charge zero tariffs on cars imported from each other but can keep the levies in place on all cars imported from America.

Another function of the WTO is to arbitrate disputes. So if one country accuses another of breaking the rules of the system the WTO will examine the case and decide which party is in the right.

The party that is in the wrong will be rebuked and the party that is in the right is allowed to impose import restrictions.

If we leave the EU would we be able to trade on WTO terms with the rest of the world?

Yes. The UK is already an independent member of the WTO.

To trade in its own right (outside the European Union’s customs union) we would first need to notify the rest of the membership about our proposed tariffs and quotas, known as “commitments”. Other countries in the WTO could then raise objections to these – and indeed have already done so. But in truth this is a pretty minor obstacle.

A far more important problem is that many aspects of our economic relations would not be underpinned by WTO rules.

The WTO framework doesn’t cover extremely important aspects of a modern economy like the UK such as aviation, medicine export licencing, data flow and many other areas.

The UK would also, incidentally, fall out of the coverage of all the free trade agreements between the EU and states such as Mexico and South Korea.

This is the reason why it is misleading to talk about a “WTO deal”. The WTO is a patchy, minimum framework not any kind of substitute for a comprehensive free trade agreement such as we have had with the EU.

But doesn’t most of the world trade perfectly happily on basic WTO terms?

No. This is a fallacy. Even if countries are not in comprehensive free trade agreements, almost all have bilateral agreements with other states on top of their WTO relationship.

For instance, the EU does not have a comprehensive free trade agreement with the United States, yet the bloc does have over 100 sector-level agreements on various aspects of EU-US trade that go well beyond WTO terms, ranging from aviation to insurance.

Do the WTO terms say that if we agree with the EU to pursue a free trade deal we can keep tariffs at zero until it’s ready?

Another fallacy. This claim seems to be a reference to Article XXIV of the WTO rules.

But trade experts say this covers the circumstances of two countries forming a new trade agreement, not of them leaving one. And they insist that those who cite it as a reason why nothing has to change on trade after Brexit are labouring under a gross misunderstanding of the rule.

“The idea that Article XXIV...somehow obliges the EU to continue providing the full benefits of the single market for the next ten years, or even allows the UK to unilaterally offer the EU (and no one else) market access is preposterous,” says Dmitry Grozoubinski, a former Australian trade negotiator.

In any case the overriding concern of industry resulting from a no-deal Brexit is not actually tariffs but the negative impact of border checks resulting from leaving the EU’s customs union and single market.

Do WTO rules compel the EU not to impose trade frictions on the UK?

Yet another fallacy. Some have argued that the WTO “commits members to facilitate trade”, implying the EU would be breaking the law if it imposed any new border restrictions or tariffs after a no-deal Brexit, including on the Irish border.

But analysts say that, however onerous they are, tariffs and border checks are perfectly compatible with this WTO “facilitate trade” requirement.

“Both the UK and the EU already comply with this agreement, meaning any procedures they introduce on imports from each other will also comply, as long as the criteria are the same as for imports from, say, the US, China or India,” says Peter Ungphakorn, formerly of the WTO Secretariat.

As for EU tariffs, the opposite is the case. If the EU did not impose its common external tariff on the UK after a no-deal Brexit it would be breaking WTO rules by favouring a state with which it didn’t have a free trade deal.

So is the WTO really any use at all?

“The WTO is not useless. Its rules are an essential part of the architecture for a peaceful and prosperous world,” says Alan Winters of the UK Trade Policy Observatory.

“But they are lowest common denominator rules for trade between 164 separate and sometimes mutually hostile states, not the rules for deeply integrated, highly cooperative, sophisticated allies.”