What would be the legal framework for the regulation of UK trade if we left the EU without concluding a trade agreement?

February 22, 2017

Posted by: Stephen Hockman QC, Christopher Badger and Stuart Jessop.

The position of the Government is that, if no trade agreement is agreed with the European Union at the end of the Article 50 process, or if Parliament rejects the trade agreement negotiated by the Government, the United Kingdom will automatically leave the European Union (“EU”) and fall back on World Trade Organisation (“WTO”) trading rules.

The above analysis makes the following assumptions:

  • That the UK will not change its mind on leaving the European Union (assuming that it can do so under the terms of Article 50);
  • That the deadline for leaving will not be extended at the end of the two year Article 50 process;
  • Negotiation of final trade agreements will not have been completed at the end of the two year period.

The UK is already a WTO member. It is highly unlikely that Brexit would have any effect on this fact. However, as a current member of the EU, the UK does not have any individual tariff agreements with the WTO. This has been recognised by the Government which has stated that they will try to replicate so far as possible the current EU obligations.

For the large part, this process should be straightforward. A large number of tariffs can be replicated. However, some current tariffs reflect volumetric calculations across the entire EU. Replicating these will be less straightforward.

The most interesting legal analysis will arrive if the UK and the EU aim to agree to a transitional agreement, to move on from a position of replicating EU agreed tariffs to a specific trade agreement that reflects the priorities and strengths of the UK – EU relationship. There is a risk that WTO rules would preclude such an agreement.

The rules of the WTO kick in at the moment that a WTO member attempts to agree a preferential trading arrangement whereby not all of the trade is “unrestricted”. The UK will not have the advantage of being able to agree a transitional agreement with the EU (relating to a period after its departure) whilst putting WTO rules to one side at the same time.

Consequently, the legal framework for the regulation of UK trade will depend on the restrictions that are placed upon it by the WTO. If the UK wishes to agree a temporary preferential trading agreement with the EU as a means of trading under a transitional arrangement until a permanent agreement can be reached, then this would be subject to WTO rules. To depart from the WTO rules would require some form of agreement with the other WTO countries. Given that there are 163 of those, such an agreement may require some significant political skills.

The alternative legal framework is for the UK to be subject to the WTO rules until a final trade agreement can be reached with the EU. It is generally thought that this will take some significant time, perhaps in the order of 10 years or more. Such an outcome may well be politically unattractive.

It is therefore critical that the Government understands the proper legal restrictions that may be put in place by the WTO in the event that no trade agreement is reached by the time the UK leaves the EU. A failure to do so may have the unfortunate effect of heavily restricting the UK’s trading ability for a considerable period of time.

Next weekWhen Article 50 is triggered, can the UK change its mind?


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