The UK was a founding member of the General Agreement on Tariffs and Trade (GATT) in 1948. Like all other EU members, it retained its GATT membership after joining the EU and then became a World Trade Organisation (WTO) member when the latter was founded in 1995. As such it must respect general rules that apply to all WTO members as well as specific commitments made by individual WTO members.
These specific commitments are listed in documents called “schedules of concessions”, which contain specific tariff concessions and other commitments that WTO members have given during multilateral trade negotiations. For trade in goods, these concessions consist mainly of import tariffs, referred to as “most-favoured-nation” (MFN) tariffs. Members must apply these tariffs equally to imports from all WTO partners.
Generally, members of the WTO are only allowed to deviate from this non-discrimination rule and apply lower than MFN tariffs in two situations. One is where a WTO member participates in a free trade agreement (FTA) or a customs union (CU) with one or several trading partners. Both FTAs and CUs imply reciprocal free trade between participants, but customs unions also require a common external tariff vis-à-vis third-countries. The other situation where WTO members can deviate from the MFN rule is in the case of unilateral (i.e. non-reciprocal) trade preferences to foster economic development. For example, Generalized System of Preferences (GSP) schemes allow developed countries to grant preferential tariffs on imports from developing countries.
Although it is a WTO member, the UK does not have its own schedule of concessions. Instead it is part of the EU’s schedule, by virtue of the fact that the UK belongs to the EU and that the EU is a customs union enjoying a special status at the WTO. The EU is the only customs union which is member of the WTO.
The reason for this special status is that the EU is a special customs union. EU members share much more than a common external tariff. They share a common commercial policy that covers the full range of trade policy instruments which they have delegated to the EU, although they are all also WTO members.
Accordingly the UK’s current trading arrangement stands as follows:
- it trades freely with all EU countries and with all non-EU countries with whom the EU has an FTA or CU;
- it imports at lower than MFN tariffs from all developing countries that belong to the EU’s GSP scheme;
- it trades on a MFN basis with all other WTO members, the MFN tariffs being those of the EU for the UK’s imports and of the partner countries for its exports to them.
At the moment the EU is a signatory to 30 FTAs and two CUs, with 56 partners that belong to the WTO as members or observers. These 32 arrangements cover roughly one-third of EU trade. The EU is also currently negotiating FTA agreements with a number of other WTO members (including Japan and the United States), which would cover another one-third of EU trade. Note that customs union arrangements are the exception. All the existing or currently negotiated trade agreements between the EU and WTO partner countries are FTAs, except EU-Andorra and EU-Turkey.
It is important to underline that free trade areas, rather than customs unions, are the typical trade arrangements between the EU and its partners, including those with whom it shares the European single market: Iceland, Liechtenstein and Norway, which belong to the European Economic Area (EEA); and Switzerland.
Hence, despite extremely close economic ties with the EU, these four countries, which together form the European Free Trade Association (EFTA), are outside the EU customs union. They trade freely with the EU and with each other, but do not belong to the EU’s CU and are therefore free to negotiate trade deals with third countries as they wish. For instance, Iceland and Switzerland each have a free trade agreement with China, which has been operational since 2014, while the EU is not even considering a similar deal at the moment.
Table 1 shows the current trading arrangements among the 28 EU countries, and between the EU and the other 19 European countries that also belong to the Council of Europe. The table highlights that membership of both the European single market and the EU customs union is presently reserved for EU members only (plus Andorra, Monaco and San Marino, the three micro-states geographically inside the EU). All non-EU countries either belong only to the single market (Iceland, Liechtenstein, Norway and Switzerland), to the customs union (Turkey) or to neither (all the others).