Second bite — how simple is the UK-WTO relationship post-Brexit?

The first bite at the cherry is here

By Peter Ungphakorn
POSTED AUGUST 17, 2016 | UPDATED AUGUST 20, 2016

Since the June 23, 2016 referendum, the debate about the UK’s post-Brexit status in the World Trade Organization has become more intense.

Back in March, AgraEurope’s first and detailed look at it attracted little attention (part 1 and part 2 are for subscribers; additional facts, free to view).

WTO Director General Roberto Azevêdo’s comments before the referendum did raise a few eyebrows — but not much.

IN THIS ARTICLE

ASSUMPTIONS SCRUTINISED
● Nothing simple: UK revising commitments, some transposed from EU’s | tough negotiations to keep entitlements to protect agriculture | current EU commitments not known | trade continues but possible disruptions

● Not complicated (one or several of these): “let’s be Singapore” — UK to be a free unilateral free trader (easier WTO talks) | “we need you” — other WTO members willing to accommodate UK’s demands in order to keep trading | “call my bluff” — little risk of legal challenge so UK has legal grounds to go ahead and submit its own WTO terms

● Even more complicated (one or both): “the blank paper” — UK renegotiates everything from scratch, nothing transposed automatically from EU | “accession route” — UK negotiates new commitments as if a new WTO member

PLUS What Azevêdo said

All that has changed. Demand has risen for what is now part of a special report for AgraEurope subscribers, and a debate has developed in academic and media comment, and on social media.

The WTO is more than the default set of rules in a UK-EU bilateral trading relationship after Britain leaves the single market or customs union.

The WTO will be the basis for all of the UK’s trade relations as a non-member of the EU — with the EU itself in any form, with any other country signing a free trade agreement with the UK, and with just about anyone else.

A key question is how easy it will be for the UK to extract its own WTO commitments currently bundled with the EU’s, essential if the UK is to be a WTO member in its own right.

The replies range from “sorry, it’s not complicated at all”, to “actually, this could take years to sort out”. Like the various economic forecasts of Brexit’s impact, much depends on the assumptions.

My own view is somewhere between the two. A lot remains uncertain, but there is evidence from past experience in the WTO to assess the competing assumptions.

Time for a second bite at the cherry.

Nothing simple

UPDATE
The goods schedule for the EU’s enlargement in 2004 to 25 members (EU–25) was certified and circulated in December 2016. Details are here

My original argument in this blog post (reproduced by ICTSD) was that it would not be simple, briefly, because of:

the possible need to spend time sorting out the legal basis for establishing the UK’s status — new or revised commitments? They would come under different WTO legal provisions. Incidentally, one would be top secret, the other more open
the prospect of tough political negotiations with other WTO members (including the EU) with conflicting interests, particularly over agricultural tariff-rate quotas (discussed in detail here) and subsidies.
the huge volume of work even in areas where UK commitments and regulations would simply be transposed from the EU’s without any negotiation (described here)
the EU having to renegotiate its own revised commitments as it loses a member state — these talks will be tied to the UK’s. It will be difficult to conclude one without the other
the absence of current approved EU commitments meaning the UK would not know what it was extracting its own commitments from

The assumptions are, briefly:

the UK will not be creating new commitments but working to extract its own from the EU’s — an assumption based on what a majority of lawyers seem to believe
many EU commitments can be transposed to the UK’s even if a lot of work is involved — again, a majority view
the UK will not unilaterally become a free trader, although it might tone down some of the protectionism it inherits from the EU — this assumes some strength in domestic lobbying for protection, but the outcome is still unclear
other countries (EU and non-EU alike) will not accept UK demands quickly even if they want to because of their own special interests — based on past experience with the EU’s tariff-rate quotas, and more generally in WTO negotiations, particularly in agriculture
the UK will face lengthy talks with uncertain outcomes — based on the EU’s past struggles. It took 15 years for WTO members to agree on the EU’s 1995 enlargement from 12 to 15 members. Adjustments for the 2004, 2007 and 2013 enlargements to the present 28 remain in limbo
trade can continue nevertheless, as it has with the EU, but it could be disrupted, and some deals could be struck behind the scenes — again based on the EU’s experience

Union flag_2nd crop_Corner_of_Downing_St_and_Whitehall,_London_-_May_2008

‘It’s simpler than you think’

Three points of view challenging the complexity of those arguments are worth considering. (A fourth is ignored: “Brexit is Brexit. Live with it.”)

1. ‘Let’s be Singapore’ — UK, free trader

It’s possible that the UK could unilaterally become a free trader. This would indeed simplify the UK’s WTO negotiations because a new set of low-tariff, low subsidy commitments would face little resistance from the membership.

The WTO is more than the default set of rules in a UK-EU bilateral trading relationship after Britain leaves the single market or customs union.

The WTO will be the basis for all of the UK’s trade relations as a non-member of the EU — with the EU itself in any form, with any other country signing a free trade agreement with the UK, and with just about anyone else

Farmers’ groups seem to be preparing for it, but have not given up.

Most observers discount the chances, even though some Conservative Party politicians might fancy the approach.

The government’s assurance that it will continue to foot the bill for EU-financed programmes suggests support for farming will continue, although further moves away from price and income support cannot be ruled out.

The National Trust, for example, has urged the government to replace these subsidies (many already “decoupled” from production) with support for environmental protection (known as “greening” in the jargon).

Meanwhile, vulnerable industries such as steel will probably continue to seek protection.

Some also argue that by taking the free trader route, the UK would be yielding bargaining leverage in a system where one country normally removes a barrier in return for another doing likewise (a bit like disarmament).

Unilateral liberalisation doesn’t seem to have handicapped countries like Singapore, although 21st century trade agreements tend to be more about streamlining regulation and recognising each other’s standards and procedures than lowering tariffs and subsidies.

It may depend on how quickly the UK wants a deal. WTO director general Roberto Azevêdo, a former chief negotiator for Brazil, warned in June: “If you need to complete a deal quickly when the other side can wait, you are negotiating from a very weak position.”

So the major question seems to be about the UK’s own trade policy. The jury’s still out.

2. ‘We need you’ — countries want to help UK

Will countries bend over backwards to make life easy for the UK in the WTO? The assumption is that they consider trade with Britain to be too important to disrupt. Some such as Australia might take that view.

But each of them — even Australia — will still have specific interests: access to dairy, beef and poultry quotas, visas for professionals — a priority for India — and so on.

Despite the best will in the world, the negotiations could eventually become complicated as the UK (and the EU) struggles to balance conflicting interests among its trading partners, as well as internally.

Others might be less accommodating. China, for example, could end up disgruntled if its investments in the UK are held up. It has already repeatedly complained about the EU’s attempts to revise a WTO commitment (on poultry).

Remember, we are talking about negotiations in the WTO, not bilateral free trade agreements. Consensus among all 164 WTO members would be needed.

History, particularly the EU’s experience, suggests this assumption is too optimistic.

3. ‘Call my bluff’ — UK simply submits its terms

Some lawyers argue that the UK should go ahead and announce its “schedules” (its lists of commitments) even if they have not been certified. The UK could justify these commitments, so long as they are no more protectionist than the EU’s.

The UK would be legally secure, according to this view. If other countries didn’t like it, they would have to prosecute the UK in the WTO’s dispute settlement system. There might be no litigation, and even if there was, the UK would stand a good chance of winning.

The legal basis is an “international rule applicable to succession of states, which is that obligations are inherited [in this case the UK inheriting schedules from the EU], especially where they affect the territory of the seceding country, and apportioned where necessary”, according to this summary.

There would be questions about allocating shares of the EU’s tariff-rate quotas and subsidy entitlements to the UK but if the UK gets the allocations right it will escape litigation, the argument goes.

If the strategy works, it will indeed be simple. There are two problems.

First, it’s an argument based on law, largely ignoring politics. (One expert quipped: “Btw: My interest in football is only and exclusively about the offside rule.”)

Or as the WTO’s Azevêdo said in a July 27, 2016 press conference, the UK will have to negotiate its commitments “with everybody else. You don’t unilaterally decide what your commitments are.”

Time and again countries have shown in WTO negotiations that they resent being presented with “take-it-or-leave-it” or fait accompli proposals.

So the UK would face a choice: build confidence and cooperation with other WTO members by being willing to negotiate, or risk alienating them — surely to be avoided for a country that would essentially be a novice in the WTO.

Second, litigation is not the only action open to other countries. If they don’t like a tariff, a tariff-quota or a subsidy announced by the UK, they could declare the measure to be illegal since the UK’s schedules had not been certified, and raise their own trade barriers in retaliation.

It would then be up to the UK to prosecute the other countries, a lengthy and expensive process. The UK might win in the end (I’m not a lawyer but I wonder even about that), but trade would be blocked for years until the cases are settled. The disruption would be far worse than anything experienced while the EU re-negotiated its tariff quotas.

‘It’s more complicated than you think’

I think the “more complicated than that” argument is too pessimistic because other countries are in no mood to haggle over everything. They’ll pick the issues they really want to fight over. But I could be wrong.

It does have many implications, not least because lengthy and complicated negotiations in the WTO mean that the UK’s potential partners in free trade agreements — the US, Canada, Australia, New Zealand, etc — will probably wait until they see what the UK’s commitments in the WTO are, before negotiating bilaterally with London.

‘The blank paper’ — everything re-negotiated

Some argue that the UK would have to renegotiate its entire set of commitments on goods and services — or almost all of it — no matter what legal basis applies. That means nothing or almost nothing could be transposed directly from the EU’s commitments.

The WTO’s Azevêdo’s comments about Brexit have sometimes been interpreted this way.

In his July 27 press conference, he spoke of the UK having no commitments: “We have no precedent for this,” he said. “We would have a WTO member without a schedule of commitments.”

But perhaps that was not as firm (or legalistic) as it sounded.The fact is, the UK does not have bits of paper labelled “Goods Schedule of the United Kingdom” — whatever the legal situation — and one way or another those bits of paper will have to be written.

Azevêdo has repeatedly said the situation is uncertain. Earlier, on June 7 he told a conference in London: “Key aspects of the EU’s terms of trade could not simply be cut and pasted for the UK. Therefore important elements would need to be negotiated.”

In other words part but not necessarily all of the commitments would need to be renegotiated. He did not say which parts. “The only certainty is uncertainty,” he said.

At least three assumptions support the “even more complicated” argument, even if technically the UK were just “revising” the commitments it currently has embedded in the EU’s.

One assumption is that other countries could want the revisions to take into account the major changes in world trade that have taken place since the original commitments were crafted in the 1990s.

For example, new producers are now exporting. They would demand new or additional access to the UK and EU markets. And the composition of goods and services traded has also changed, also justifying adjustments.

This would reduce or eliminate completely the range of commitments that could be transposed from the EU’s to the UK’s. Everything would be up for negotiation.

Is the assumption valid? We don’t know.

A stock defence for the UK and EU would be that major changes to the commitments have to come from negotiations across the WTO such as the Doha Round. Other countries could counter that those talks are moribund.

A lot would depend on how much other WTO members would want to pick a fight with the UK and EU, or would find themselves under domestic pressure to do so. We’ll have to wait and see.

The second assumption is that the tools used to protect the 28-member EU’s producers cannot be defended for both the UK and the 27-member EU after Brexit.

For example, there is no justification to carry over to the UK the trade barriers that protect Mediterranean products, no reason to copy the EU’s tariffs on these products into the UK’s separate commitments.

The third assumption is more subtle. It’s the reverse of the sum being greater than the two parts — the separation into two makets leaves less than the original single maket.

If the UK leaves the single market (and customs union), new trade barriers are raised between the two. This may alter the access that the rest of the world has to the UK and EU.

For example, non-UK, non-EU financial services companies established in London would no longer have automatic access to the EU through the single market. The EU’s current market access commitment and the UK’s future commitments transposed from the EU’s would be less valuable to them.

Their parent countries could demand adjustments to both commitments because in effect the separation will have made both markets less valuable and more protectionist.

In other words, this assumption challenges even the view that the EU’s commitments on services can be transposed to the UK’s.

Again, we won’t know how valid this assumption is until the talks actually take place.

And if they take place under WTO provisions for revising commitments we still might not know until a deal is eventually struck, because WTO members have agreed that these negotiations must be top secret.

**‘Accession route’ — as if a new member**

Some lawyers argue that the UK would have to negotiate as if it were becoming a new WTO member because it does not have its own WTO commitments, only those of the EU. It will be creating entirely new commitments.

This seems to be a minority view among lawyers. It does have the practical implication of a more open procedure in the WTO than revising commitments.

“There is no precedent for [Brexit] — even the process for conducting these negotiations is unclear at this stage,” WTO chief Azevêdo said in his June 7 speech.

The fact that this difference of opinion does exist means WTO members themselves might also spend time debating the question, delaying the start of the real negotiations.

The WTO has no independent procedure for sorting out legal questions like this, only agreement by consensus among all its 164 members.

This assumption still waits to be tested.

What Azevêdo said

First, an extract of WTO director general Roberto Azevêdo’s speech at the World Trade Symposium in London on June 7, 2016:

Azevedo HoDs Cropped square 25.7 — “Time will tell where all of this leads”

In addition, the UK would also need to re-establish its terms of trade within the WTO. The UK, as an individual country, would of course remain a WTO member, but it would not have defined terms in the WTO for its trade in goods and services. It only has these commitments as an EU member. Key aspects of the EU’s terms of trade could not simply be cut and pasted for the UK. Therefore important elements would need to be negotiated.

There is no precedent for this — even the process for conducting these negotiations is unclear at this stage.

I can say that negotiations merely to adjust members’ existing terms have often taken several years to complete — in certain cases up to 10 years, or more. However, as far as the UK’s case is concerned, it is impossible to tell how long it may take.

Upon leaving the EU, rights that the EU secured for its members would arguably no longer automatically apply to the UK. This includes the right to restrict certain aspects of the free movement of people and to protect public utilities from competition. The UK might need to negotiate with other WTO members to maintain these rights.

No WTO member can unilaterally decide what its rights and obligations are.

I don’t have a crystal ball to assess the outcome of these various different negotiations — and nor does anybody else. The only certainty is uncertainty. However, I have spent my life as a trade negotiator and now as WTO Director-General it is my job to broker trade deals between nations, so I can try to offer some insight.

To begin with, I would say that trade negotiations are highly complex. Conducting multiple negotiations simultaneously would bring a further level of complexity.

In addition, you need willing partners. Other countries already have their negotiating priorities and may not be ready to shift resources to a new negotiation overnight. Of course, speaking of resources, all of this presumes that your own resources and negotiating infrastructure are already in place and fully operational.

Moreover, if you need to complete a deal quickly when the other side can wait, you are negotiating from a very weak position.

So, on this basis, it could take quite some time before the UK got back to a similar position that it has today in terms of its trading relationships with other countries.

Time will tell where all of this leads.

●

And these are some quotes from his press conference at the WTO on July 27, 2016:

“We have no precedent for this,” he said. “We would have a WTO member without a schedule of commitments.”

He described membership as “a contract. Members have contracts with each other. We would have a member of the organisation without a very important part of that contract which is the list of commitments. That would have to be negotiated with everybody else. You don’t unilaterally decide what your commitments are.”

He went on: “How do you get there? It can be simple and straightforward or it could be very convoluted and complicated. It depends on a whole number of things.”

How long will it take? “I don’t know. Nobody knows.”

Updated
August 19–20, 2016: adding links to articles on EU farm support (CAP Reform.eu) and post-Brexit agricultural policy (Farm Futures) under “see also”; “The Watermelon” photo credit corrected

Photo credits
● Elyse Ashton in a scene from “The Watermelon”, romantic comedy written by Michael Hemmingson, produced by Lorenda Starfelt, and directed by Brad Mays, 2009 | Brad Mays | Creative Commons Attribution-Share Alike 3.0 Unported license
● Corner of Downing St and Whitehall, London, May 2008 | Wikimedia Commons | CC0
● Blank paper | Pexels licence
● Roberto Azevêdo chairing a heads-of-delegations meeting July 25, 2016 | WTO

Author: Peter Ungphakorn

I used to work at the WTO Secretariat (1996–2015), and am now an occasional freelance journalist, focusing mainly on international trade rules, agreements and institutions. (Previously, analysis for AgraEurope.) Trade β Blog is for trialling ideas on trade and any other subject, hence “β”. You can respond by using the contact form on the blog or tweeting @CoppetainPU View all posts by Peter Ungphakorn