In Case of No Deal: What Does Trading Under WTO Rules Mean?
If the United Kingdom and the European Union don’t agree on a trade deal before the transition period ends on December 31st 2020, the United Kingdom will become a third country and there will be no more free movement of goods between the United Kingdom and the remaining member states of the European Union.
Trade Agreements are used to streamline trade between nations or group of nations. With a trade agreement parties, for example, agree to lower tariffs on imports or eliminate them completely, to lower quotas or eliminate restrictions. When there is no trade agreement between countries, these countries usually trade under what is called WTO Terms.
What Are WTO Terms?
WTO stands for World Trade Organization. The WTO is an organization that governs international trade.
The WTO deals with regulation of trade in goods, services and intellectual property between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements, which are signed by representatives of member governments and ratified by their parliaments. The WTO prohibits discrimination between trading partners but provides exceptions for environmental protection, national security, and other important goals. Trade-related disputes are resolved by independent judges at the WTO through a dispute resolution process. (Wikipedia)
Both the United Kingdom and the European Union Member States are members of the WTO.
If no deal is reached and the European Union and the United Kingdom start trading under WTO rules it means there will be tariffs on most goods traded between the two.
For those that want to read about the World Trade Organization and WTO rules in more detail, please visit the WTO website.
The Australian Model
Boris Johnson has said that he prefers the Australian Model for trading with the European Union. While it has a nice ring to it, it is not as great as it sounds. Australia and the European Union have no trade agreement in place. The past years Australia and the European Union are working on one, and the negotiations are still ongoing. So Australia prefers to have a trade deal with the European Union as well. Currently, they have several smaller agreements in place on a product level, like for the import and export of wine. Please keep in mind that the United Kingdom will have none of these smaller agreements.
What Does This Mean for You?
Companies need to make sure they take these new tariffs into account when re-calculating their cost structures, after January 1st 2021. The Loadstar writes on this:
It will also be important to determine whether any products or parts will be subject to Tariff Rate Quotas (TRQs). TRQs allow a lower rate tariff on imports of a given product up to a specific quantity and require a higher rate on imports exceeding that quantity. These TRQs are frequently seen in FTAs but are also relevant under the WTO rules.
If you have any questions on importing or exporting, you can contact one of our customs specialists. They are happy to help take the load off your mind.