“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.
‘Interim agreements’ under Article XXIV GATT,
L. Bartels, World Trade Review (2009), 8:2, 339-350.
Peter Ungphakorn, a WTO expert, covers the Article XXIV discussion in detail in his blog, its recent update and a UK Trade Forum blog, Why claims about a ‘WTO Article 24’ interim agreement are a red herring, 26 January 2019.
Ilze Jozepa is a Senior Library Clerk at the House of Commons Library, specialising in trade policy.