Article XXIV (also referred to as Article 24) of the General Agreement on Tariffs and Trade (GATT) recently came into focus when Conservative Party leadership candidate and potential future UK Prime Minister candidate, Boris Johnson, claimed it could be a potential option for the UK in the event of a ‘no deal’ exit.
During the hustings for leadership of the Conservative Party, he appeared to be of the view that the UK can unilaterally invoke Article XXIV, whereby a ‘standstill’ provision would apply while the UK and EU negotiated a free trade agreement. He was also of the view that this standstill provision could apply for some 10 years.
This standstill provision is found in paragraph 5 Article XXIV GATT.
This idea simply will not work. The provision is actually irrelevant in the context of Brexit and will not apply so as to allow the UK tariff free access to the EU while it is negotiating a deal with the EU. For a full explanation, please see Gowling WLG’s discussion of Article XXIV with the BBC.
At the outset, we should also add that, even if it could work (which it can’t), the provision would be of limited use. It only covers tariffs on goods, not services where the UK has a balance of trade surplus. Nor does it cover so called ‘non tariff’ barriers, which is where the true impediments to trade lie.
What is Article XXVI?
GATT was agreed in 1948 and remains the main agreement that governs multi-national trade in goods. Before 1995 when the World Trade Organization was set up, the term ‘GATT’ also applied to the international organisation that administered the multi-national trading system.
The fundamental principle of GATT found in Article 1 is that there should be no discrimination as between contracting parties (currently some 164 countries). This is referred to as the Most Favoured Nation (MFN) principle. Any preference given one country by another must be available to all the other 163 countries.
Article XXIV allows an exception to this principle of MFN – which will apply where countries or regions agree a free trading agreement (FTA) which covers ‘substantially all the trade’ between them. The EU is an example of an FTA.
But – in order to protect the third countries that are not in the FTA from having higher tariffs and other restrictions put on them, paragraph 5 of XXIV requires the parties to the FTA to have a ‘standstill’ for their current tariffs and trade rules as between the participants in the FTA and third countries – and not as between the parties to the FTA – they will be busy implementing a free trade zone between them. This is known as the ‘standstill’ provision. It is found in paragraph 5(b) of Article XXIV. It is essentially aimed at protecting third countries that are not parties to the FTA. As such, it has no relevance to Brexit.
Boris Johnson admitted that he did not know what was in paragraph 5 (c) of Art XXIV in his interview with Andrew Neil on 12 July. This provision applies to ‘interim agreements’ – i.e. agreements where the parties had agreed that their FTA should introduce free trade (i.e. zero tariffs and no quota) gradually over time, to allow their respective industries time to adapt to the fresh competition from overseas.
GATT allows for such a period of implementation, as the full FTA is gradually implemented, but under paragraph 5 (c), the parties to the FTA must put a plan and schedule for full implementation before the other GATT contracting parties. And this is where the fabled 10 years comes in – (see the 1994 Understanding on Article XXIV), 10 years is treated as an appropriate transition period. Any longer should only be under exceptional circumstances.
Under the GATT rules with respect to an interim agreement, the other contracting parties then have a considerable degree of control.
Again, in order to protect those countries that are not parties to the FTA, the parties are required to notify to the GATT signatories “a full listing of each party’s preferential duties to be applied over the transition period”. If the WTO organisation or any of the third countries are not satisfied that an FTA will not be fully introduced within a reasonable period, they can make binding recommendations to ensure that this will happen.
It is due to this level of oversight by dozens of WTO members and the WTO organisation that, since the WTO was established in 1995, GATT Article XXIV has never been used for interim trading arrangements. Instead, countries prefer to adopt ‘full’ FTA’ s with an implementation period, in order to circumvent the high level of control that would apply to them.
The UK (with the EU’s agreement) could try a similar tactic – i.e. agree a full FTA – and circumvent the high level of scrutiny. This may be damaging politically to both the UK and EU. Such an FTA will take time, especially where the UK has indicated that it wishes to have different regulations to that of the EU.
But this is where the whole reliance on Article XXIV falls apart. The ‘standstill provision’ does not apply to relations as between the UK and EU. Microphone drop. It applies to trade with third countries, to protect them from protectionism and circumvention of the MFN principle by parties to a free trade agreement. It will not serve to give the UK a ‘standstill’ provision with respect to its trade with the EU.
In all of this, the UK remains at square one – in order to have tariff free access to the EU, it has to conclude an agreement with the EU. As many commentators have said, Article XXIV is but a red herring.
Alternatives to GATT Article XXIV
In a no deal scenario, the UK could choose to continue applying zero tariffs to goods being imported from the EU in order to minimise disruption to trade and prices. Under the ‘Most Favoured Nation’ principle, the UK would have to offer zero tariffs to all third countries.
Over the years, the WTO and GATT has been largely successful in bringing tariffs down to relatively low levels, save for agriculture and other sectors of strategic importance. In a modern trading environment it is ‘non tariff barriers’ i.e. rules on health and safety which are act as impediments to trade, rather than tariffs.
While zero tariffs would mean cheaper imports for some products, it could also put major pressure on a number of British companies by making them less competitive. What’s more, there would be no obligation on other countries to offer the UK reciprocal tariff-free access for products of UK origin. It also opens UK industry up to competition from countries which have unfair trading practices, such as unfair Government subsidies, or who dump products on foreign markets at prices below cost prices.
In March the UK issued the tariffs that it was going to impose if the UK left without a deal. According to the government, 87% of total imports would be tariff free – but tariffs would apply with respect to some agricultural products; finished vehicles; and certain products which were being dumped or subject to state subsidies such as certain ceramics, fertilizer and bioethanol.
Further information on GATT Article XXIV can be found in this useful explainer from the House of Commons Library.
Preparing for Brexit
Whatever the outcome of the Brexit negotiations will be, businesses need to be prepared for every eventuality. Gowling WLG’s Brexit Unit advises clients on planning for the future, offering expertise in areas such as strategic planning, contingency risk management and managing transactions.
You can contact our Brexit Unit at firstname.lastname@example.org.