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The Mystery Surrounding GATT Article XXIV. The Crash-Proof Exit Option

free trade
Written by Michael Burrage

There is a mystery why the obvious and mutually advantageous route to free trade with the EU has been given so little attention. Michael Burrage describes the use of the GATT XXIV rule which would allow the UK and EU to continue with tariff-free trade arrangements until they can agree a formal free-trade agreement.

Article XXIV of the General Agreement on Tariffs and Trade  (GATT 1994), the treaty which ended the Uruguay Round of trade negotiations and is the core of the current WTO rulebook on trade in goods, provides a way of leaving the EU in a calm and orderly manner on March 29th.  Its para 5 provides for the suspension of the WTO’s most favoured nation and other rules for a ‘reasonable length of time’ while two countries are negotiating a new trade relationship, providing that no other members are adversely affected. Its later services counterpart, the General Agreement on Trade in Services (GATS), has an analogous provision.

Without such a suspension, the most favoured nation rule would make it impossible for the newly -independent UK to grant tariff-free access to the EU, or for the EU to reciprocate, unless they granted the same to all other WTO members, and in effect therefore simultaneously declared universal unilateral free trade overnight. With it, they are not obliged to apply the CET or any other EU rules against each other for a ‘reasonable length of time’, which has, by authoritative WTO commentary, come to mean that it ‘should exceed ten years only in exceptional circumstances’.

The article was first applied to India and Pakistan after independence, when they wished to abandon the CET equivalent of the Raj, and to establish their own trade relationship with each other and with other countries. It has since been used by dozens of countries when entering into free trade agreements, and on 24 occasions by the EEC/EU to set up interim agreements to handle the accession of new countries to the customs union, when both the EU and the incoming members change their relationship with all other trading partners and do not wish to be trapped by the MFN rule. The EU archive of Treaties and Agreements shows that in December 2012 it finally notified other members of the modification of its schedules relating to the accession of Bulgaria and Romania eight years earlier.

On the face of things, it looks almost tailor-made for Brexit since the main purpose of Article XXIV is to prevent rules which all WTO members support, especially Article 1, obstructing the attempts of a pair or regional group of members to extend free trade amongst themselves.  One has to say almost because the UK and the EU will be endeavouring to prevent imposition of the CET on each other, and preserve as much free trade as possible rather than extend it, and to convert the procedure used in the accession of a new EU member, including the UK in 1973, for the secession of an old one. On the face of things, it appears to have no adverse consequences for other members, and is therefore unlikely to raise objections under paras 5 (a)(b) of Article XXIV. For other members it would appear to be a choice between the status quo and the unpredictable disruption and knock-on effects of no deal which, according to Shinzo Abe, the PM of Japan, the whole world wants to avoid.

It would not be accurate to describe it as a no deal exit, and therefore raise objections from members of House of Commons adamantly opposed to a ‘no deal’ exit,  since it requires a mini-deal or agreement between the EU and UK to submit a joint application under Article 24 to the WTO, including a plan of negotiations, and an estimate of the ‘reasonable length of time’ required, so that other WTO members have time to make observations and reservations. The considerable obstacle of EU and other members’ consent is therefore required before it can be applied. Assuming, for the sake of the argument, their consent was forthcoming, it is not difficult to see its many advantages for the UK.

It would be able to leave on the appointed date, without the backstop or any other preconditions, knowing that trade would continue, for the period agreed for negotiating an agreement with exactly the same exemption from ‘tariffs, quotas, rules of origin and customs processes’ as now. All the metaphors of crashing out, over a cliff edge and of chaos will be seen to be empty rhetoric and abandoned. Mrs May will, at long last, be seen have kept her word without crossing any of her red lines, and would probably obtain widespread support from both Leavers and from Remainers who are not campaigning to overturn the referendum.  Intra-Cabinet and cross-party plots to postpone or cancel Article 50 will be abandoned, along with the campaign against no deal, and the PR campaign for a second referendum, though the latter might become a campaign to return to EU membership at some future date.  UK political life would begin to return to normal, though since the arguments have, in the final analysis, been about the past, present and future identity of the UK, bitter antagonisms may well continue for years, even decades.

Trade negotiations between the UK and EU under Article XXIV would be scheduled to begin immediately as between two equal parties, in place of the supplicant stance that Mrs May and Mr Robbins have chosen to assume, as if these negotiations could only begin if the UK met preconditions set by the EU, and after large payments were made to it. They might well be expedited if they were preceded or accompanied by UK negotiations with non-EU countries. Since these other agreements will no doubt incorporate the WTO’s long-established dispute procedures, there will be no grounds for negotiating an exceptional role for the CJEU in any UK-EU trade deal.  In the 1600 pages of CETA, the Canada-EU trade agreement, the CJEU is not once mentioned.

Mrs May’s attempts to negotiate ‘a deep and special relationship’ with the EU via the withdrawal and trade agreements might also fall by the wayside. They aroused suspicion that they were her way of keeping the UK in a long-term, dependent, customs union relationship with the EU. If there is, eventually, to be ‘a deep and special relationship’ with the EU, it will depend on the actions and decisions of many people over subsequent years, not on bilateral trade negotiations, and not by meeting the demands of the CBI and multinational corporations. Britain’s deepest and most special relationships are currently with countries with which it trades under WTO terms.

The Irish border problem will, of course, remain as the major problem to be solved but the prospect of tariffs on Irish exports to the UK if the border is again allowed to scupper a deal at the end of the negotiation period will probably encourage Mr Varadkar to resume the border discussions with the UK that he abruptly discontinued on becoming Taoiseach in June 2017. The two countries could then participate in joint full-scale field testing of administrative procedures, software and equipment to prove, or disprove, the claims of the CEOs of both HMRC and the Irish Revenue and of independent experts like Lars Karlsson and Hans Maessen, that customs checks on relatively small scale repetitive trade across the border do not require physical installations or the invention of some as yet unknown technology. They are to be resolved by the cooperative institutional apparatus established by the Good Friday Agreement.

Given all the advantages from a British point of view it is more than surprising that Article XXIV attracted little parliamentary or media attention following the referendum and did not, as far as we know, figure in the Brussels negotiations. None of the quartet of Dexeu ministers who resigned over one or other aspect of the Brexit process  -David Davis, Steve Baker, Dominic Raab and Suella Braverman- have mentioned it in their ‘de-briefing’ testimony to the European Scrutiny Committee.  It has recently attracted some notice after David Campbell Bannerman MEP reported his discussions with anonymous ‘senior EU and WTO trade representatives’ in the Daily Telegraph, and in more detail in Brexit Central.  Steve Baker MP referred to it, though almost in passing, on page 6, para 4 of the European Research Group’s A Better Deal and A Better Future.

It was raised explicitly in the Commons by Owen Paterson on Jan 21 2019 who, in a question to the Prime Minister, observed that ‘if we……did get to the point where we could trigger Article 24 of the GATT, we could continue for up to 10 years on zero tariffs and zero quotas.’  She responded by saying ‘The question of GATT 24 is perhaps not quite as simple as some may have understood it to be. My right hon. friend’s 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 hinted that she might, perhaps, have heard of this option, though evidently not understood it, since no one has ever suggested the UK would ‘immediately go into that situation.’ Article XXIV has since become an integral part of Option B of the Malthouse Compromise.  Nigel Farage has recently brought it to the attention of the European Parliament and Commission in his customary forthright manner.

If the appeal of Article XXIV is easy to see from a British point of view, it is no less obvious why EU negotiators, and diehard Remainers in the UK, and sympathetic publications like The Guardian and New Statesman, have rushed to dismiss it from consideration. Given an initial agreement with the EU it makes Brexit too damned easy, and does not obstruct or punish the UK in the least.  Some critics have, however, based their opposition to it on their own or others’ experience working at the WTO, or on their reading or recollection of its extensive jurisprudence. In their view, the idea that Article XXIV offers a simple route for UK withdrawal, is simply a mirage, and a ‘misrepresentation’ to portray it as a viable option, and just plain ‘nonsense’.

A Reuters correspondent, for instance, cited an anonymous WTO official who answered his questions about this ‘obscure’ article of GATT, by saying it requires ‘a plan, and a reasonable time frame’.  The Reuters correspondent decided that this was ‘a distant prospect’, and therefore the end of the matter. Alongside Mrs May’s draft Withdrawal Agreement, which consists of preconditions for trade negotiations which she found acceptable, a plan and a time frame seem trifling requirements. Campbell Bannerman’s informants did not mention them.

A critic on the Politico website triumphantly dismissed the idea by repeating that Article XXIV is ‘for forming not leaving’ trade agreements. Another ex-WTO official pointed out, in a similar manner, that the idea behind the Article XXIV transition is ‘to allow companies to adjust to the removal of tariffs… on the way to full tariff-free access. It has never been used to have tariff-free access and then transition to the reverse. That would not be in keeping with the spirit or the letter of Article XXIV.’ What, one wonders, did they think Bulgaria and Romania were doing, or India and Pakistan, or indeed what the UK will be doing, if not both leaving and forming a trade agreement? They are really making an argument for submitting a joint application on March 30th after the mutual imposition of the high CET has been in force for a day and the two sides could then be seen to be travelling in the normal direction.

Peter Ungphakorn, an ex-WTO official and a member UK Trade Forum, a group of 18 multi-disciplinary trade experts, decided that Article XXIV is ‘a red herring’ and ‘should die’, since there are fatal obstacles to its use post-Brexit. Three of them are, on the contrary, oft-repeated and trivial.  First, the parties have no plan. This is true, though since a comprehensive EU-UK free trade agreement has recently been drawn up unofficially to support the Malthouse compromise, almost every clause of which has been drawn from provisions of existing EU agreements, it hard to believe that jointly drawing up an official plan would be a significant obstacle. Second, WTO members might demand changes. Well, of course, they might, but what are their likely grounds? Is there any reason why such demands would prove unanswerable?  Third, the two sides don’t know ‘their final destination’, other we may add than lowering tariffs or preventing any increase in them. Did any trade negotiations conducted under Article XXIV ever have a different ‘final destination’?

To a non-lawyer, the WTO summaries of its jurisprudence, including the 70 fairly dense pages devoted to Article XXIV, suggest that it has been created by the deliberations of existing members coping with everyday problems and conflicts as they arise, in a somewhat haphazard manner. There is no career judiciary to enunciate definitive rulings or scholarly commentaries to help identify their direction and rationale, and one of the current American complaints about the WTO is that as their representative recently put, ‘there is no system of precedents’ in WTO. As a result, there seems to be rather more unpredictability and uncertainty in WTO decisions than critical categorical dismissals assert.

Since Brexit is unique, no critics have been able to cite decisions that expressly prohibit countries seeking to preserve or restore tariff-free trade, as opposed to extending it, under the exemptions of Article XXIV. None have been able to show why the 24 interim agreements under Article XXIV in which the EEC or EU have participated, including UK accession in 1973, might be expected to disqualify Brexit in 2019.  And none of these critical commentators have sought to discover, or anticipate, how the present members of the WTO Regional Trade Committee or the General Council might respond in the unusual circumstances of an emergency application to prevent a sudden breakdown in a sector of the world trading system.

The remarks of the WTO’s Chief Spokesman, Keith Rockwell, to Sky TV news on the 12th February do not suggest that an application under Article would be dismissed out of hand. He described the UK’s EU exit as ‘without any precedent at all in this organisation. Everyone is being pragmatic and wants to see trade to move as freely as it can as we get through this rather tricky stretch that might await us. We’ve never had a member, let alone a founding member, be in this position before, of having to renegotiate their position. When you examine this, it becomes devilishly complicated. Nobody expects this to be without complication. Let’s wait and see – there is a huge reservoir of goodwill for the UK within this organisation.’

No doubt a joint application would require some concessions by the UK, but that is hardly much of an objection since Mrs May and Mr Robbins have already made many, far too many in the view of most UK observers, in their draft Withdrawal Agreement. The key question is therefore whether concessions needed to secure a joint application under Article XXIV would have been any worse than those they have already made, which have not attracted the support of a majority of the House of Commons or of UK public opinion, and seem unlikely to lead to amicable exit on the agreed date.

Many questions about this option remain unanswered for no good reason. Was it considered at the start by the UK negotiators?  Was it ever discussed formally or informally with the current members of the WTO General Council? Was it dismissed before being the subject of negotiations? If so, by whom and why? And if it was taken to the negotiations, for what reason was it then discarded and forgotten?   Did it fall foul of Mr Barnier’s negotiating principle, ‘I’ll have done my job if, in the end, the deal is so tough on the British that they’d prefer to stay in the EU.’? If that was the reason, it is important that exporters in EU member countries who suffer from any inconvenience or loss of trade after a no deal exit should know that their own negotiators who rejected the easy tariff-free option offered by the UK until a trade agreement could be concluded. And if the disruption to their livelihoods continues, they should also know that that there is a simple way of ending it.

Likewise, the British people ought to be told if it was rejected by Mrs May and Mr Robbins because they thought that the Withdrawal Agreement they negotiated is preferable despite all the uncertainties of its ‘transition (or implementation) period’, of its backstop, of the CJEU state aid rulings with neither input or redress that it accepts, and of the trust it places in the EU’s ‘good faith’ and ‘best endeavours’,  as well the severe negotiating disadvantage it bequeaths to those who must negotiate the trade agreement, about Gibraltar and fishing rights.

Mrs May’s reply to Owen Paterson’s question in the Commons on January 21st did nothing to dispel any of the mystery surrounding Article XXIV. And the reply of Lord Callanan, the government’s spokesman in the Lords, to Earl Cathcart’s question on February 13th -‘This is of course not the Government’s preferred option.’- was no better.

If Mrs May tried and failed to negotiate an exit with the help of Article XXIV, she has much to gain, and nothing to lose, by telling the British people why it failed. Was she discouraged by legal advice or soundings at the WTO? Did the EU expect too much in return?   If she did not try because she was not aware of this option, or because she, or the CBI and her business informants, actually preferred the on-going dependent relationship and common customs territory with the EU specified in her draft Withdrawal Agreement, it is quite a different matter, but for another day. She might anyway consider trying an Article XXIV exit now. She is running out of alternatives and of time. After a no deal exit, it might well be the only option.

Michael Burrage Feb 17  2019

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Michael Burrage