, , , , , ,

In a previous post “Brexit can make us richer” I discussed the free-trade approach to ensuring economic success for all after Brexit. A friend asked about whether the UK could be subject to discriminatory tariffs. To cut a long story short the founding principle of the WTO is “Trade without discrimination“.

1. Most-favoured-nation (MFN): treating other people equally

Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.

This principle is known as most-favoured-nation (MFN) treatment (see box). It is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods. MFN is also a priority in the General Agreement on Trade in Services (GATS) (Article 2) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4), although in each agreement the principle is handled slightly differently. Together, those three agreements cover all three main areas of trade handled by the WTO.

Some exceptions are allowed. For example, countries can set up a free trade agreement [FTA ed.] that applies only to goods traded within the group —   discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries. And in services, countries are allowed, in limited circumstances, to discriminate. But the agreements only permit these exceptions under strict conditions. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong.

Therefore the purpose of import tariffs should no longer be grand politics but solely the protection of incumbent industries. This is important because “beggar your neighbour” policies were a major factor in triggering wars in the 20th Century.

Unfortunately the FTA clause above has been used in recent years to create bilateral agreements that substantially undermine the whole principle of MFN. Rather than FTA agreements having zero tariffs as was originally envisaged they are full of preferential tariffs. We are seeing the growth of hegemonic trade blocks, the EU, the USA, China that once again regard trade as an instrument of foreign policy.

It is clear that in the real world the UK cannot simply rely on WTO agreements but must play the FTA game. It is morally, practically and economically advantageous to do this in co-operation with other nations so as to reduce our divergence from the principle of non-discrimination, enhance our trade with like-minded nations and reduce the costs of negotiation.

Lawyers for Britain discuss options at length and suggest that the EFTA might form a strong partner for such negotiations.

In summary, Britain is going to needs lots of trade negotiators and lawyers for many years to come. Her role in international relations must be to push for freer trade and strong democracy. Perhaps Brexit will finally end the truism that “Great Britain has lost an Empire and has not yet found a role”