The four options are well-known but their implications are not always understood. Some summary graphics
By Peter Ungphakorn POSTED SEPTEMBER 19, 2016 | UPDATED SEPTEMBER 30, 2016
This is a summary of the four main options facing the UK for its trade relationship with the EU after Brexit. The four options are well-known but their implications are not always understood. These are the options:
Full access to the single market (as the European Economic Area [EEA = Norway, Iceland, Liechtenstein] or Switzerland) — free movement of goods, services, capital and labour. The UK would apply its own tariffs on products from the rest of the world, not the EU’s (unlike a customs union)
In the customs union (as Turkey) — by definition a customs union only applies to goods. Access for services and anything else would be under separate agreements including the WTO’s. The UK would apply EU tariffs on goods from the rest of the world
A free trade agreement with the EU — this can cover considerably more than trade in goods, including services, regulations, “mutual recognition” (for example of standards and inspection), and dispute settlement. The UK would apply its own tariffs on goods imports from the rest of the world
No special relationship with the EU — the UK would apply its own tariffs on goods from the EU as well as the rest of the world
World Trade Organization (WTO) rules apply in all scenarios (including the present case where the UK is an EU member). It is not just the default when the UK has no special relationship with the EU. Here the focus is on integration and market access (but all other WTO rules apply as well):
The single market, customs union and any free trade agreement are disciplined by WTO rules (GATT Article 24 for goods and GATS Article 5 for services)
Any trade outside those is disciplined by WTO commitments, including access to services markets. For example, if the UK is in the EU customs union but has no other arrangements with the EU, then the UK’s WTO commitments on services would apply to EU services accessing the UK market
The UK’s WTO commitments on goods and services are currently those of the EU. Whichever post-Brexit option the UK chooses, it will have to negotiate in the WTO to extract its own commitments from the EU’s.
September 30, 2016 — “Brexit 1” revised to cover EEA rather than Norway alone
September 20, 2016 — “Brexit 2”, the part on “UK’s relationship with EU” revised to separate trade in goods (the customs union) from trade in services; explanation of GATT and GATS added; some other minor typographical corrections
The UK currently charges complex import duties on oranges thanks to the EU. Will they survive Brexit? And will other countries want a say? Exploring post-Brexit tariffs: part 3
By Peter Ungphakorn POSTED SEPTEMBER 10, 2016 | UPDATED OCTOBER 5, 2016
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
The UK can easily adopt the EU’s customs duties as its own after Brexit. That’s a common assumption, and for most of the thousands of traded products it’s likely to be true, both for the actual duties charged and for the commitments the UK will re-establish in the World Trade Organization (WTO).
But with many other products the UK might find that simply carrying on with the EU’s duty rates is not so easy, particularly in agriculture. A lot depends on how other countries react. Oranges are as good an indicator of their possible reactions as any other product.
This one looks at normal import duty rates (or tariffs) more broadly — known in trade jargon as “most-favoured nation” (MFN) or non-preferential tariffs. For many of these tariffs, the EU’s rates can still be pretty complex.
The common assumption is that these only require a straight conversion from the EU’s rates to the UK’s, but even here other countries might want a say.
For example, Richard Eglin, a former director of trade policy reviews in the WTO Secretariat, told a meeting of two House of Lords’ sub-committees on September 8, 2016 that the task would be straightforward. But negotiations would be needed on the “quantitative” parts of the UK’s “schedule” (lists) of commitments, particularly tariff quotas.
“It could take years before the schedule is actually certified by consensus […] but in that period we would continue to trade on the terms in which we proposed we should trade, as long as they were reasonable,” he said.
But he wanted to be clear that it would not be simple, particularly for agricultural products, and that some “clever” negotiation could be needed.
“I do not doubt that there will have to be a negotiation of some sort, but we do not have to renegotiate our membership. We need perhaps to renegotiate our schedules,” he said (See preliminary transcript, pdf.)
How other countries react will be key. That means it will be important for the UK to keep them onside. Eglin stressed the need to talk informally in the WTO with the most important countries, and to listen to them.
Another former WTO director shares that view: “The WTO can be a flexible institution, but giving rein to pragmatism will be hostage to the degree of goodwill the UK can generate among its trading partners,” writes Patrick Low, who was the WTO’s chief economist.
“Good sense, humility and the abandonment of amateur hour will be essential ingredients of success,” he concludes.
In other words, goodwill cannot be taken for granted. It would quickly evaporate if the UK just decided what it wanted to do and presented that to the rest of the world as “take it or leave it”.
Much will also depend on the pressure other countries face from their own internal interest groups. For oranges, that means the growers and exporters in Argentina, Egypt, Israel, Morocco, South Africa, the US and elsewhere, perhaps even China and India, which are also major producers but not yet exporters.
We are a long way from finding out how easy or difficult this will turn out to be. But we can examine the prospects.
EU orange tariffs
The import duties that the UK and EU now charge on oranges are pretty complex. They are designed to protect Mediterranean growers from competition during the harvest season.
Along with oranges, the EU has seasonal tariffs on cut flowers, potatoes, tomatoes, cauliflowers and broccoli, lettuce, celeriac, cucumbers, peas, beans, artichokes, avocados, mandarins (including tangerines, satsumas, etc), grapefruit, grapes, apples, pears, apricots, cherries, peaches, plums, strawberries, kiwi fruit, and sub-categories among them
But the UK has no commercial producers, so a key question is whether the UK can defend continuing with the EU’s tariffs after it leaves without being challenged by other countries — or whether it would want to.
An alternative would be for the UK to set much lower import duties (say, 3.2% all year), which would please non-EU exporters and provide UK consumers with cheaper oranges. However, it might cause concern among EU producers particularly if the UK continues to have duty-free access to the EU market.
(In legal terms, this would clearly be “modifying” the UK’s WTO commitments rather than the quicker and simpler “rectification” (pdf), and would definitely involve negotiation. Some experts argue that since the UK already has WTO commitments embedded in those of the EU, writing out the UK’s own commitments would only be rectification, which is a technical correction that does not alter the value of the market access provided.)
The EU’s import duties on oranges are designed to reduce the flow of imports at harvest time and avoid prices falling as Mediterranean orange growers put their produce on the market. They are complex in three ways:
they have two components: a percentage of the price plus an amount in euros per tonne
they change every few weeks or months
oranges also have a tariff quota
This is spelt out in the EU’s WTO “schedules”, its lists of commitments to keep tariffs within binding ceilings (the actual duty rates charged in this case are the same or close to these).
The tariff commitments for “sweet” oranges are:
April — 10.4% (of the price) + €71 per tonne
first half of May — 4.8% + €71 per tonne
second half of May — 3.2% + €71 per tonne
June to mid-October — 3.2%
mid-October to end of November — 16%
December to March — 16% + €71 per tonne
However, the EU makes a concession to countries wanting to export to it from February to April, part of the period with the highest normal duty. The door is opened a crack with a tariff quota allowing 20,000 tonnes of “high quality” sweet oranges to be charged only 10% duty.
South Africa dominates exports to EU Top 10 orange exporters to EU, tonnes, 2013
1. South Africa — 462,133 (51%) 2. Egypt — 186,976 (21%) 3. Morocco — 51,615 (6%) 4. Argentina — 50,369 (6%) 5. Uruguay — 49,561 (5%) 6. Israel — 26,814 (3%) 7. Brazil — 21,659 (2%) 8. Tunisia — 19,644 (2%) 9. Turkey — 16,200 (2%) 10. Peru — 10,047 (1%) TOTAL (all non-EU exporters) — 911,366
For the whole year of 2013, non-EU countries exported to the EU the equivalent of about 15% of EU production.
Globally, Spain is the largest exporter, supplying around 1.6 million tonnes. Next come South Africa and Egypt at 1.1m tonnes each, and the US at just over 0.5m tonnes, although US exports to the EU are miniscule.
Oranges are just one product in a long list — mainly of fruit and vegetables — also having EU tariffs that vary according to the season. Many of them have the additional complexity of tariff quotas.
They include cut flowers, potatoes, tomatoes, cauliflowers and broccoli, lettuce, celeriac, cucumbers, peas, beans, artichokes, avocados, mandarins (including tangerines, satsumas, etc), grapefruit, grapes, apples, pears, apricots, cherries, peaches, plums, strawberries, kiwi fruit, and some sub-categories among them according to their use or variety.
The actual tariffs charged by the EU are even more complex. The list of orange tariffs in an internal EU regulation from 2001 covers almost seven pages (pdf, pages 721–8)
Orange growers in Spain, Italy, Greece and Portugal are the main beneficiaries of the EU’s tariff protection. Their harvests are in winter and to a lesser extent spring, which is why the tariffs are highest from December to April or May.
After the UK leaves the EU, other suppliers might demand better access to its market, at least during those winter and spring months. This could be by the UK setting a lower all-seasons tariff in general, or through a free trade agreement with the UK covering almost all goods, not just oranges.
South Africa also top for UK UK’s top 10 non-EU orange import sources, $m, 2013
(FAOSTAT, excludes transhipments via Netherlands, Belgium, etc)
If the UK keeps the tariff quota, then it will face negotiations on how to split the quota between itself and the EU, discussed in detail here. But it’s hard to see how the UK could justify keeping the orange quota, or more precisely, the high out-of-quota tariffs.
How much of that is from Spain and other EU countries, and how much from the rest of the world?
The answer is unclear since the figures include $10.2m imported from the Netherlands, ranking second after Spain ($89.4m) among UK imports from the EU. But like the UK, the Netherlands does not grow oranges commercially.
Much of these shipments may have first arrived at Rotterdam port from outside the EU, but some could have come from within the EU. (No doubt better figures exist somewhere.)
As a rough guide we can conclude that around $100m of UK imports currently are EU-produced oranges. After Brexit, non-EU exporters might want a share of that since the UK would no longer be in the business of protecting Mediterranean EU producers.
How this works, would depend partly on what the UK offers and partly on the relationship the UK develops with the EU.
On the UK’s part, if it offered to scrap the tariff quota and apply a low or zero duty all-year-round, there might be little to discuss with non-EU members. But it’s possible to imagine a situation where, for example, Spain would seek some means of protecting its growers (eg via a higher UK tariff on non-EU trade) in return for agreeing that the UK could have privileged access to the single market.
Would that happen? We don’t know yet. What the speculation shows is that a lot depends on whether other countries want to accommodate the UK’s objectives or whether they will be tough.
As for the UK’s relationship with the EU, these are the options and the implications for orange tariffs:
Full access to the EU single market (as Norway, Switzerland or a variant): the UK would have its own tariffs for imports from outside the EU (as Norway and Switzerland do). Non-EU suppliers could demand lower UK tariffs for oranges via the WTO or negotiate it through free trade agreements. “Rules of origin” would apply to prevent non-EU oranges leaking duty-free into the EU market (perhaps more significant for products that the UK does grow, than for oranges).
UK still in the EU customs union: the UK would have the same external tariffs as the EU and it would simply copy the EU’s WTO commitments. Non-EU suppliers might negotiate lower-duty access to the UK through bilateral free trade agreements. Expert opinion differs on whether this is possible in a customs union. Addressing the House of Lords sub-committees, Professor Piet Eeckhout of University College London said Turkey does have its own free trade agreements with outsiders while being in the EU customs union. In this case, rules of origin would again be needed.
A free trade agreement between the UK and EU: for orange tariffs the situation would be similar to full access to the single market.
None of the above: the UK would have its own tariffs under the WTO, except for any bilateral (or small-group) free trade agreements with non-EU members. Pressure on the UK’s orange tariffs would come both within the WTO and through free trade talks. Importantly, Spain and other EU producers might also negotiate for a lower UK tariff on oranges. There seems to be no reason why the UK would object (unless its apple growers felt threatened by orange imports).
What does this mean? At the very least the UK and its trading partners would need to know which of those options was the target before serious negotiations could start on the UK’s orange tariffs and tariff quota (both within the WTO and as part of any bilateral free trade agreement).
However, as Eglin suggested, informal exploratory contacts with key players could take place before then.
For oranges, the key players would be the EU itself, and the other major producers and exporters of oranges such as Argentina, Egypt, Israel, Morocco, South Africa and the US.
Quick and easy?
All of this could be settled in just a couple of months.
Seriously. But only with goodwill, and only if orange tariffs were the only issue to be settled.
But there are also those cut flowers, potatoes, tomatoes, and other fruits and vegetables. Many of these are designed to protect specific groups of producers who may or may not be equally spread between the UK and the rest of the EU, raising questions about how much tariff protection the UK and EU need to keep for each of those products.
Meanwhile when the UK negotiates free trade with Australia, Chile, the US and anyone else, orange tariffs will only be a small part of a much larger task.
And then there are the negotiations with the EU itself, on the UK’s WTO commitments on top of any trading arrangement between the EU and UK after Brexit.
By now the number of person-hours, days, months, years needed is soaring — to consult domestically on that growing list of issues, prepare positions, research data, sort out legalities, coordinate between ministries (for oranges, it would include the departments of International Trade, Exiting the EU, Environment, Food and Rural Affairs, and the Treasury), and to negotiate with the EU and the rest of the world.
And other countries will also need time and resources. They may not be able to focus on UK orange and avocado tariffs and to consult their producers and exporters, while they deal with other on-going negotiations and a range of other issues including elections. On top of that, the EU also has to coordinate everything with its member states.
Suddenly two months has become a blink of an eye.
So establishing the UK’s WTO commitments won’t be quick but whether it will take more than, say, two years, depends on so many unknowns that it is impossible to tell right now.
On each of the three tests — the UK’s own position, and the reactions of the EU and non-EU countries — we still have to wait and see.
— Note that the EU’s commitments cited here are those of its latest certified goods “schedule”, which is for the 15 members up to 2004. Schedules for EU enlargement since then have not been certified. Details are here; the EU-15 schedule is here (Excel)
— The FAO’s data on oranges includes mandarines, tangerines, satsumas, etc. The standard tariff classifications put mandarines, etc in a separate category. The EU’s schedules follow the standard tariff convention
Updates: September 14, 2016 — added link to Institute for Government’s Brexit Brief on EU internal coordination on Brexit negotiations October 5, 2016 — link to House of Lords sub-committees’ hearings changed to go to page with all four sessions and preliminary transcripts; direct quotes from Richard Eglin added from transcript
Picture credits (from top):
— Orange tree, Ronda, Spain | Ronnie Macdonald | Creative Commons CC2.0 Generic
— Orange fruit pieces (chart background) | Evan-Amos | CC share alike 3.0 unported
— Oranges (graphic background) | Medjaï | public domain
— Orange grove | via pixabay | CC0