No, GATT Article XXIV will not save the UK from a no deal Brexit

Once the preserve of trade policy wonks, GATT Article XXIV has entered mainstream political discourse in the UK. Ever since the Withdrawal Agreement negotiated between the UK and EU was first voted down in parliament, various political figures (Dominic Raab being the latest) have referred to this Article as paving the way  for a “managed no deal exit”. By this they mean that it would be possible to maintain free trade between the UK and the EU, without there being a formal withdrawal agreement, possibly pending the negotiation of some sort of trade deal in the future.  The idea is  to avoid the disruption caused by the UK crashing out of the EU without a deal on 31 October 2019.

The short answer is that this is not correct. The longer answer is that it is not only incorrect but also misses the point. The even longer answer is that these invocations of Article XXIV are symptomatic of “zombie economics”: bad ideas that refuse to die, but that in their undead state, infest current political discourse.

What does GATT Article XXIV actually do (and not do) ?

Article XXIV is permissive, on certain conditions. It gives permission to WTO member countries to enter into free trade agreements with each other, a process known as preferential reciprocal liberalisation. The permission is needed because such preferential liberalisation is a deviation from one of the core principles of the GATT, namely the Most Favoured Nation obligation. Under MFN  any liberalisation measure (described in the jargon as a concession) undertaken by a member must be extended unconditionally to all other members.

The permission to enter into free trade arrangements (whether as free trade agreements or customs unions) was incorporated into the GATT (in part) because its drafters recognised that subsets of countries may be able to liberalise more quickly on a reciprocal basis than the membership as a whole. But they set various conditions, including: that such  arrangements liberalise substantially all trade between the parties;  that the arrangements do not increase trade barriers faced by other countries; and that such arrangements be notified to the GATT (and after 1995 the WTO) for the sake of transparency.

The central point is that Article XXIV creates a permission to enter into reciprocal free trade arrangements, but not an obligation to do so. It cannot be invoked to maintain free trade if one of the parties is unwilling to enter into an arrangement. If the UK rejects the withdrawal agreement, there is no agreement currently on the table for the UK and the EU to enter into. Hence, there is  nothing for Article XXIV to “work on”. It may be that in extremis, absent a withdrawal agreement, the UK and the EU may decide they wish to maintain free trade between them and sign an agreement to this effect. They could even sign a transitional or interim agreement pending the negotiation of a more comprehensive one. But the basic issue is that under any scenario, the key ingredient is an agreement on both sides. The existence of Article XXIV can do nothing to elicit that agreement. Of course if such an agreement were reached, care would be needed to ensure that the substantive provisions of Article XXIV are met.

So in sum, the UK cannot appeal to or invoke Article XXIV of the GATT to maintain duty free trade with the EU. It would need to appeal to the EU to consider alternative arrangements that comply with the requirements of Article XXIV. The EU has thus far said that it will not contemplate alternatives to the Withdrawal Agreement.

The bigger picture

Not only is Article XXIV not a silver bullet, the hand waving around it obscures more fundamental questions. Even if there were to be an alternative to the withdrawal agreement that complies with Article XXIV, what would go into it?  Duties are only one part of the issues that affect trade in goods. The agreement would also need to specify positions on things such as regulatory cooperation on matters ranging from health and environment to food and product labelling, and customs processes, including rules of origin.  The simplest thing would be to roll over current arrangements holus bolus, but the more that is done, the closer we get to the content of the current withdrawal agreement.

The other point to make is that Article XXIV of the GATT only covers goods. Services, which account for 80% of the UK’s economy and are the fastest growing component of UK trade, is covered by Article V of the General Agreement on Trade in Services (GATS). As we have pointed out elsewhere, services is the missing link in Brexit discussions. A no deal exit on services is likely to be severely disruptive not only for services trade,  but for goods trade as well. This is because goods rely heavily on services inputs (think about transport services, information and communications and finance).

Zombie economics

How do we explain the persistence with which Article XXIV is invoked as a solution to the UK’s Brexit woes, even though the idea has been consistently debunked? The Australian economic John Quiggin once wrote (in the aftermath of the global financial crisis) about the effects of Zombie Economics. He said,

“Erroneous economic ideas resemble the living dead (….) They are dangerous yet impossible to kill. Even after a financial crisis buries them, they survive in our minds and can rise unbidden from the necropolis of ideology.”

Something similar seems to be afoot here. A reflexive unwillingness to face up to the downsides of a no deal exit leads its proponents to advocate ideas that have no life to them. And rather like in Danny Boyle’s film “28 days later“, it seems that that not much can be done to stop their spread once your are bitten by them.

The issue is not confined to the arcana of trade law. It is also evident in much of the economic modelling purporting to show large Brexit dividends through, notably, the scrapping of regulations. As already argued elsewhere, many of these findings rely on assumptions that are wildly at odds with reality. So much so that they appear, to use Quiggin’s words, to have risen from the necropolis of ideology. Whether policy discourse in the UK can navigate its way out such a necropolis remains to be seem. Recent pronouncements do not give grounds for optimism.