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With Theresa May seemingly set to say the UK is prepared to quit both the EU’s customs union and its single market, people are toying with halfway houses. These won’t fit with WTO rules.

One such idea – keeping membership of the customs union for certain products – was mentioned by Greg Hands, a trade minister, in an interview with Bloomberg last month. This has been followed by suggestions that sectoral agreements with the EU might be possible for certain goods (such as cars).  

It has also been proposed that the UK would be able to “buy” a level of access to the single market, say by making a contribution to the EU budget or by allowing EU citizens partial access to its labour market. British exporters would enjoy less access than they do at present but would avoid problems at the border due to checking on the origin of goods and compliance with regulations.

New ideas have also developed around the notion that the UK has only to escape from the EU customs union and the single market to be free to negotiate a future trade deal with the EU on practically any basis that would suit British purposes. One of the strangest suggestions was that the UK could seek to establish mini customs unions for particular products. If the EU and the UK decided on such a course, the WTO might have to put up with it, economist Andrew Lilico wrote in the FT last week.

This approach would not just be a blatant violation of WTO rules. More importantly, it would run counter to the firm support that the EU and the UK have given to the multilateral trade system for half a century.

So what are the facts? Customs unions and free trade areas are a well-established exception to the WTO’s Most Favoured Nation rule, which guarantees same treatment for all. Article XXIV of GATT, the WTO’s predecessor, specifies that free trade with no customs duties is permitted among members of a group of countries provided that “the duties and other types of restrictive regulations are eliminated …[on] substantially all the trade” between them.

This requirement that “substantially all the trade” between countries should be covered by a customs union or free trade deal has never been quantified precisely. It is also true that it has been often honoured in the breach in the past and even more recently when many deals were not reported to the WTO. One example is the original European Free Trade Agreement from 1962.

What’s more, the WTO has never enforced these rules, although breaches of them have often been challenged. Cracking down on non-compliant behaviour depends on timely reporting and a consensus view among members which has been as rare as ice cream in the Sahara. Long ago agreement to disagree was the usual outcome of such disputes. 

But with Donald Trump already threatening to undermine global free trade, would Britain and the EU really concoct an illegal scheme which blows a huge hole in the rules-based system they themselves have done so much to create and support? That seems both unlikely and unwise.

by Roderick Abbott | 16.01.2017

Roderick Abbott is a former deputy director general of the WTO

Edited by Hugo Dixon


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