In an FT article on 25 May 2016, the head of the World Trade Organisation (WTO), Roberto Azevêdo, pointed out that the UK would also need to renegotiate its membership of the WTO once it left the EU. This important detail has been mostly forgotten in the on-going debate about our future relations with the EU. However, it is vital that agreeing the proposed terms of our WTO membership is added to the government’s to-do list as quickly as possible.
WTO membership underpins our trade not just with the EU, but with all 161 WTO members - the vast bulk of our trading partners. The UK joined the WTO as part of the EU, meaning its existing WTO membership is based on its use of EU rules, which will no longer apply, creating the need to renegotiate the UK’s membership agreement. This is not a situation the WTO has had to tackle before, so the exact procedures are unclear.
However, what is clear is that the list of issues that will need to be addressed will be significant, as WTO agreements cover all aspects of policy that might create barriers to trade - not just tariffs. Having torn up the old rule book, the UK will need to propose a new one. And the UK cannot simply impose new rules, as changes have to be agreed with other WTO members. This process will be complicated by the fact that changes to WTO membership terms that are detrimental to existing partners can lead to demands for compensation.
The WTO’s role in trade deals
The terms of the UK’s WTO membership will also be of interest to any country wanting to agree a bilateral trade deal with the UK, as they will form the starting point for negotiations.
WTO members agree to offer all other members the same terms for market access, which are known as the most favoured nation (MFN) rules. While it is up to the country what these terms are, countries are not allowed to discriminate between different WTO members. Therefore, WTO membership terms form the baseline for assessing new deals, making it hard for other countries to do this in the absence of agreed terms.
Furthermore, the WTO’s non-discrimination rules mean bilateral or regional trade agreements are only allowed under certain circumstances and are subject to WTO scrutiny to ensure they abide by the rules. This is something that could hold up any new UK trade deals, if there is no agreed baseline for the deals to be judged against.
The scope of the (re-)application process
Roberto Azevêdo characterized the UK’s situation post leaving the EU as being akin to the normal WTO application process in terms of scope and complexity and this process is neither easy nor quick. It covers not just tariffs, but also all the relevant laws and regulations that might affect trade in thousands of different goods and services. A full description of what is covered by the WTO application process can be found here, but the long list of issues includes:

• the structure of the agencies responsible for overseeing trade;
  
• tariffs and import quotas;
• the legal framework for non-tariff regulation;
• intellectual property rules;
• technical standards;
• licencing rules;
• transit rules;
• rule of origin rules;
• subsidies and tax incentives;
• agricultural policy;
• public procurement rules;
• foreign direct investment rules; and
  
• the rules that affect trade in services.
  

Tailoring a UK solution
UK trade has been covered by the EU’s rules for almost all these things. The easiest option might therefore be to adopt all the relevant EU rules and, where necessary, to create new agencies to replicate the work of EU bodies. This might make the WTO renegotiations easier, as our trading partners would experience more limited change. It could also make it simpler to negotiate a new trading arrangement with the EU, as some of the options being considered depend on following EU regulations.
But if we are leaving the EU in order to take back control of our regulatory environment, is this the right choice? Or should we look at each rule with fresh eyes, to see if the UK would benefit from a different solution? And in any cost-benefit analysis, how should we weigh the competing attractions of the greater speed and regulatory continuity that the wholesale adoption of EU rules would bring, versus the potential, but uncertain, benefits that might be available if we took the time to explore a UK tailored solution?
It is not a given that the other 161 WTO members will allow us to renegotiate significant changes to our membership rules, but if that is what we want, now is the time to try. Apart from anything else, as these rules will underpin our trading regime, potential partners will want to know what they will be before agreeing any bilateral trade deals.
It is time to articulate a vision for what we want our trade and regulatory environment to look like. The need to negotiate WTO membership raises a long and complex list of questions, and we have the option of redefining the rules. Existing EU solutions may well be the right ones, but we owe it to ourselves to at least assess the options fully, in order to give BREXIT the best chance of success.

“New EU trade deal raises admin burden for UK exporters”. Cue gasps of outrage from Eurosceptics, but, if we leave the EU, this headline will be entirely of our own making. The EU could offer us the best trade deal on the planet and it would still increase the cost of regulation for UK exporters, reducing their ability to compete. As exporters are typically our most productive and most innovative firms, and more than 80% of them trade with the EU, this could be bad for our long-term prosperity.
The reasons for increased regulation are simple – the EU is structured precisely to keep the costs of crossing a border down. This means that taking away even one component of that structure raises the regulatory costs of trading with the EU. As highlighted below, examples of this are how EU structures deal with tariff evasion, as well as reducing regulatory costs through passporting.
Tariff evasion
Governments oppose tariff evasion, meaning any trade deal needs a mechanism to ensure it cannot happen. Under the EU’s common trade policy, the tariffs due on imports from third countries are the same throughout the EU. Therefore there are no opportunities for firms to avoid tariffs, so goods can move freely throughout the EU without the need for special documentation.
However, this is not the case for the movement of goods between the EU and countries with a trade deal allowing them preferential access to EU markets (such as Switzerland and Norway), because the existence of separate trade deals with third countries creates opportunities for tariff evasion. For example, if following a vote to leave the UK and EU introduced a free trade agreement, but the EU also had separate deals with third countries that did not have agreements with the UK, then exporters from those countries could ship their goods to the EU first (to take advantage of tariff free entry to the EU) and then from the EU across the border to the UK, so avoiding UK tariffs. This is not something the UK government would allow, and governments in the remainder of the EU would be similarly concerned.
For this reason all preferential trade agreements contain what are known as rule of origin regulations. These set out how companies must demonstrate that enough of the production of the goods they are shipping originated in their home market and are therefore eligible for the reduced tariffs.
Rule of origin regulations are complex and depend on the product. There are several different ways in which the rules can be specified and for some products more than one type of rule will apply. ‘Notice 828: tariff preferences – rule of origin for various counties’ sets out the rules for imports and exports covered by the trade agreements between the EU and Albania, Norway and Switzerland amongst others (including some parts of trade with Turkey). In other words, it covers the main alternatives to EU membership, at least if we do not want to pay tariffs.
Notice 828 runs to 140 pages and is extremely detailed. For example, if you are a bicycle manufacturer, whoever is responsible for administration will need to understand the manufacturing process, because the rules set out in Chapter 87 include a separate set of rules for bicycles without ball bearings, including what materials are allowed and the maximum share of non-originating materials.
Complying with rule of origin regulations is therefore costly, particularly as you may need to keep track not only of what you are doing, but also where inputs from all of your suppliers come from. Furthermore, as the EU is the biggest cross-border market for intermediate inputs in the world, costs could be increased at multiple stages in the value chain.
Estimates suggest that the rule of origin regulations for EU trade deals increase compliance costs by 8% and general administrative costs by 6.8%. The cost of these rules will be particularly high for small and medium sized firms, who typically lack the scale to justify sophisticated tracking systems, meaning some may conclude that it is simply easier pay any tariffs due, rather than fill out the paperwork. Either way the increased costs of trading will undermine the competitiveness of UK exporters and push up the cost of UK imports from the EU. As over 80% of UK exporters export to the EU, the impact on some of the UK’s most productive firms will be widespread. The CEPR has calculated that the increase in costs from having to apply rule of origin regulations to trade with the EU will reduce UK exports by 1.3% of GDP per annum.
Reducing regulatory costs through passporting
For exporters one of the big costs is the need to meet different standards and talk to different regulators. The EU aims to reduce these costs through the Single Market, by ensuring that standards are common. Common rules mean that governments do not need to worry about whether different standards create risks, including the risk of unfair competition. Therefore a firm regulated in one part of the EU can operate elsewhere under the same rules.
While the Single Market is not complete, many of the gaps reflect our preferences. For example, enabling a UK pension provider to sell the exact same product in both the UK and Germany would require the harmonisation of pension tax regimes across EU states, and this is something that politicians have preferred not to tackle. However, in other areas the Single Market has had a significant beneficial impact on how markets function. This is particularly true in sectors such as financial services, where passporting rights can allow firms to serve multiple EU markets while only dealing with one regulator.
The use of passporting is pervasive. Almost 50% of authorisation requests for firms’ activities received by the Prudential Regulation Authority between March 2014 and February 2015 related to passporting, roughly two-thirds of which were requests from UK financial services firms wanting to passport their services elsewhere in the Single Market.
Over 60% of firms operating in the UK’s general insurance market are headquartered in another European market and passport in under the EU Third Non-Life Directive and almost 50% of those operating in the UK’s life insurance market do the same under the EU Third Life Directive. If passporting did not exist, then these firms would have to decide whether they can still compete in the UK after the additional expense of dealing with two sets of regulators, the relevant UK regulator and their domestic regulator. The alternative will be for them to withdraw from the UK market, reducing competition and choice. The same will be true for UK firms currently operating in the rest of the EU under passporting rules.
Passporting rights are associated with the Single Market, and are possible because membership of the Single Market depends on applying an equivalent set of regulatory rules. If the UK did not want to be part of the Single Market after it left, these rights would not be available. Without passporting UK financial services firms would need to set up a separate entity, domiciled in the EU, to handle any EU business, with all the inefficiencies entailed in duplicating regulatory processes and increasing the costs of managing capital requirements. It is not hard to suspect that the UK’s withdrawal from the Single Market could bring significant disruption.
Summary
Historically the 11% of UK firms that export have been responsible for 60% of our productivity growth – hardly surprising as in general they are our most productive and most innovative firms. Unfortunately for our future prosperity, leaving the EU would increase costs for these firms, reducing their ability to compete. While a depreciation of sterling might help compensate for these cost increases, it will do so at the cost of rising import prices, with the associated fall in living standards, and a reduction in the value of our assets. Politicians may bemoan its structure, but the reasons that the EU is structured the way it is are precisely to keep the cost of crossing internal EU borders down. It is one case where the maxim “rules are there for a reason” holds true.