“Article 24 of the World Trade Organisation treaty allows us to continue to trade with Europe on zero tariffs while we negotiate a free trade arrangement.”

Statements
like this keep returning to the political debate: in the media, among constituents
and in Parliament. However, trade law experts have repeatedly and
authoritatively dismissed the view that the relevant rule – General
Agreement on Tariffs and Trade (GATT) Article XXIV – offers an easy
solution to UK trade with the EU in the case of ‘no-deal’.

The Prime Minister has also said:

“The question of GATT 24 is perhaps not quite as simple as some may have understood it to be. […] expectation that it is simply possible to leave with no deal and immediately go into that situation does not actually reflect accurately the situation that the United Kingdom would find ourselves in”.

This Insight will look at what Article XXIV says and what this means for any future trade relationship between the UK and the EU.

No-deal means trade under WTO terms

There is no debate on this issue: if there isn’t a withdrawal agreement the UK and the EU will trade with each other solely under the rules-based trading system of the World Trade Organization (WTO).

By default it means the end of tariff-free trade between the UK and the EU. However, some politicians have suggested that Article XXIV GATT allows for an (interim) agreement which – while the UK and EU negotiated a free trade agreement – could maintain the existing arrangements with the EU for 10 years. This has also been referred to in the so-called ‘Malthouse Compromise’, which puts forward a “WTO-compliant standstill on trade with no tariffs, no quantitative restrictions and no new barriers” as part of a no-deal “triple safety net”.

Why can’t the UK and EU simply remove tariffs if there’s no deal?

The UK could choose to apply zero tariffs to the EU unilaterally in order to keep barriers to imports from the EU low as before. However, the WTO’s Most Favoured Nation (MFN) rule prevents discrimination between WTO members. So, in this scenario, the UK would have to apply the same zero tariff to imports from all other WTO members, or else it would be in breach of the MFN rule. Moreover, the EU would not be able to reciprocate, unless it was happy to give imports from all other WTO members tariff free access to its market.

How do EU Member States trade tariff free then?

Article
XXIV (5) of GATT permits
countries to form trade blocs in the form of a customs union or a free trade
area and thereby makes an exception to the MFN rule. They may (indeed must)
maintain tariff-free trade with each other for “substantially all” their mutual
trade, without offering the same access to their markets to all other WTO
members.

Any free trade arrangement, however, may not worsen the terms of trade for the non-participants, and lead to higher duties or more restrictions on trade than before. Therefore any customs union or free trade agreement has to be notified to the WTO, giving other WTO members the opportunity to air their concerns.

If the UK is outside the Single Market and Customs Union, how might Article XXIV be relevant?

Article
XXIV (5) also permits the adoption of an interim agreement necessary for the
formation of a customs union or a free-trade area. The intention for allowing
this is to have a full free trade agreement by the end of a reasonable period
of time. This recognises the fact that a customs union or a free-trade agreement
cannot be concluded rapidly and might need gradual implementation. It is this
idea that those promoting Article XXIV have in mind.

An
interim agreement:

  • Can
    be in force for a “reasonable length of time,” which WTO members have
    agreed
    should not exceed 10 years.
  • Needs
    to have a “plan and schedule” towards an end-state.

Interim agreements have been avoided

Similar
to customs unions and free trade agreements, the WTO must be notified of an
interim agreement, but the rules are more stringent: members can demand changes
if they are not convinced that the interim agreement will in fact lead to the
planned full agreement within the proposed time-frame.

The
possibility that other WTO members can block an “interim agreement” has proven
to be enough of a deterrent that no
WTO members have notified an interim agreement since 1995. Instead,
many notified (non-interim) customs unions and free trade agreements include
time-limited transitional arrangements.

If
the UK and the EU agreed an arrangement which would qualify as an interim
agreement under the GATT Article XXIV, it would therefore follow standard
practice for the UK and the EU to notify it to the WTO as a full free trade agreement, rather than an interim agreement. Such
an agreement would be in force until a future relationship is agreed.

Is a temporary agreement a possible solution?

Trade law experts point out that a temporary agreement is possible while the UK is negotiating any type of a final trade deal with the EU. Indeed Dr Lorand Bartels of Cambridge University has drafted a short, bare-bones trade agreement to show that this is technically possible. The draft Withdrawal Agreement would also qualify.

The
UK cannot do this alone though. Under GATT Article XXIV, a WTO member would not
be able to act unilaterally, in other words both parties to this future trade
agreement would have to agree to it for it to apply.  

Moreover,
GATT Article XXIV only applies to forming a customs union or a free trade area
for goods. In talks of a future UK-EU relationship many other aspects of trade
have to be settled such as the level of regulatory alignment, mutual
recognition of standards, and crucially, trade in services, for which the
equivalent to GATT Article XXIV is GATS
Article V.

Article
XXIV is key to any preferential trade relationship between the UK and the EU.
However, it is unlikely that the option of an ‘interim agreement’ will be of immediate
use. Article XXIV is much more likely to be used for a full free trade
agreement.

Further reading

About the author: Ilze Jozepa is a Senior Library Clerk at the House of Commons Library, specialising in trade policy.

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