Types of a possible future UK-EU trade deal

All you need to know about customs unions, free trade areas, rules of origin, the single market and agriculture

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By Professor Alan Swinbank, University of Reading
POSTED JANUARY 10, 2017 | UPDATED JANUARY 10, 2017

This excellent summary is an annex in a new paper by Professor Alan Swinbank, “World Trade Rules and the Policy Options for British Agriculture Post-Brexit| Briefing Paper 7 | UK Trade Policy Observatory (Sussex University and Chatham House) | January 2017.

Reproduced with permission.

Containers at Antwerp

Customs unions, free trade areas, rules of origin and the single market

Both the terms Customs Union and Free Trade Area (FTA) have specific meanings in the WTO, as regulated by GATT Article XXIV (Similar provisions apply with the General Agreement on Trade in Services: GATS). A customs union involves the abolition of tariff barriers and ‘other restrictive regulations’ on ‘substantially all the trade’ between its constituent members. Quite what is meant by the word ‘substantially’ has never been entirely resolved. The Turkey-EU Customs Union excludes agriculture for example; but it is difficult to believe that WTO Members would now agree that a new agreement was WTO-compatible if it excluded a major sector of the economy such as agriculture. Similarly all of the members of the customs union apply ‘substantially the same duties’ on trade with Third Countries. The EU is itself a customs union, with complete product coverage, and a common external tariff, meaning that goods once imported into the EU are in free circulation and can be transferred to other EU states without further payment of customs duties.

A Free Trade Area (FTA) is rather different. This involves the elimination of tariffs and other restrictive regulations of commerce on ‘substantially all the trade’ in products originating within the FTA. Many FTAs have only partial coverage of agricultural, food and drink products. Thus the European Commission (2014: 3-4) has reported that the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada will eliminate tariffs and quotas on 91.7% of agri-food tariff lines on EU products entering Canada, and on 93.8% of EU tariff lines faced by Canada. TRQs will apply on imports of beef and pigmeat into the EU, and on some dairy products into Canada, whilst some poultry products will be excluded from the FTA altogether.

The parties to a FTA still determine their own trade barriers against Third Countries. Consequently rules of origin (which can often be extremely complex) have to be negotiated to determine what constitutes an originating product (what minimum level of processing is required?). Moreover border controls are still needed at the FTA’s internal borders to differentiate between originating products (entitled to duty-free access) and non-originating products (on which duty is payable). If this did not happen, trade deflection would be an issue, as traders tried to import their goods into the FTA via the country with the lowest external tariff. The problem becomes more acute when commodities (such as bulk sugar) are involved, where product substitution could readily occur. Thus if the EU maintained its very high tariffs on sugar and negotiated an FTA with the UK that did include sugar, but left the UK to freely import sugar from the world market, the outcome might be that the UK would source all its supplies for domestic consumption from world markets, while exporting all its domestic production (produced from sugar-beet grown on British farms) to the EU.

It is not just tariffs that can restrict trade. Divergent regulatory provisions (e.g. covering food safety, animal and plant health) can do so too. Although the WTO has attempted to provide a framework within which such provisions can apply (the Agreement on the Application of Sanitary and Phytosanitary Measures for example) many FTAs now include agreements that go beyond the WTO rules. The European Commission has talked about Deep and Comprehensive Free Trade Area (DCFTA) agreements. However its ambition has on occasion proved deeper and more comprehensive than can be readily delivered. Thus the proposed Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU has had difficulty with a number of regulatory issues, including US reluctance to accept the EU’s policy on Geographical Indications (GIs) of origin on many food and drink products, and EU concerns about the chlorine washing of poultry carcasses to reduce pathogens (Josling & Tangermann, 2015: 241-6).

The EU’s Single Market goes beyond regulatory convergence on selected topics. A key element in achieving the free movement of goods —one of the ‘four freedoms’ for goods, services, capital and workers— is that the same regulatory regime applies in all the Member States (or the principle of mutual recognition results in products legally produced in one Member State being accepted throughout the Single Market). With a customs union covering all goods, and regulatory harmonisation or equivalence achieved, there is no need to apply border controls within the EU.

Norway, through the European Economic Area (EEA), applies EU regulatory provisions enabling it to participate in the Single Market;[1] but paradoxically it is not in the Customs Union as the EEA is built on a series of FTAs (and nor do its FTA provisions apply to agriculture). Consequently, border controls are still necessary to apply rules of origin. Turkey, despite its partial customs union with the EU, is not in the Single Market, and so border controls are needed to ascertain that traded products do fall within the remit of the customs union, and that the EU’s regulatory provisions are met.


[1] Of the various Directives regulating agricultural production (the Nitrates Directive, the Water Framework Directive, etc.) the National Farmers Union (2016: 32) identified only two — the Habitats and the Birds Directives — that Norway is not obliged to apply for it to participate in the Single Market.


Photo credit: Containers in Antwerp, public domain CC0 via pexels.com

Six things I’ve learnt since the Brexit referendum: seeing both the wood and the trees

This is long, self-indulgent, and largely a memo to self. Brexit is unprecedented. The past few months have been a huge learning opportunity for all of us, in my case even within the narrow (but important) field of WTO rights and obligations. What have I learnt?

By Peter Ungphakorn
POSTED JANUARY 9, 2017 | UPDATED JANUARY 12, 2017

I started writing almost a year ago (in AgraEurope) about what the UK needs to do in the World Trade Organization (WTO) as it leaves the European Union. The analysis was always somewhat tentative, even though it was based on experience of how the WTO has functioned over the decades, both legally and politically.

To a large extent it still is. The three major unknowns are still unknowns: what the UK will seek, how the EU will respond, and how the rest of the world will react.

Woodland in snow

One expert (and I mean a real expert, unlike me) prefaced a discussion about Brexit and WTO “scheduling” by more or less throwing his arms wide and exclaiming: “Nothing like this has ever been done before. No one knows what will happen.”

But some parts of the picture are sharper. Statements, analysis, leaked information, argument and counter argument — particularly since the referendum — have clarified some of the options.

This is what I’ve learnt:

Have I changed my view of how difficult the challenge facing the UK in the WTO will be? Very slightly. Here goes.


Book and WTO logo: learning

1. Most of the uncertainties are still uncertainBack to top

The three uncertainties — what the UK will seek, how the EU will respond, and how the rest of the world will react — will probably remain uncertain at least until Article 50 is invoked and talks on the UK leaving the EU really start.

We do have more clues now than before, from statements by British ministers, EU officials and others, even members of Donald Trump’s team (on a UK-US trade deal). But on the whole they are still more like brain-storming, with lots of contradictions, than actual policy in the making.

Much has been said about how some Brexit claims still assume other countries will just accept whatever the UK demands.

Bob Hancké has even examined it theoretically using two-level game theory. The UK, he says, approaches Brexit armed with the knowledge that it pays a recalcitrant member state — when operating within the EU — to remain stubborn, “and with, perhaps, a misplaced arrogance about going it alone in the turbulent world we live in”. So,

the UK draws up its plan for Brexit and seems to assume that the EU will take that as the parting shot. The EU may do that. Stranger things have happened in the past twelve months. But the EU is more likely to look at this as a psychodrama in which it doesn’t really want to participate (that seems to be the prevailing mood elsewhere in Europe since David Cameron’s fated call for a referendum).”

At the same time, there is a better recognition now that other countries’ responses will indeed be important.

True, we still occasionally hear the disingenuous “they need us more than we need them”. But the fact that the organisation Leave Means Leave, which campaigns for a hard Brexit, felt it had to lobby chambers of commerce in EU member states, is a sign that at least some Brexiteers are taking nothing for granted.

And so to the WTO. The uncertainty allows the full spectrum of opinion to persist on how easy or difficult it will be to re-establish the UK’s status as a WTO member independent from the EU. One end asserts the UK should just claim its legal rights with a minimum of negotiations; the other that the UK will face a near-impossible task of bringing on board all the 163 other WTO members. I am not convinced by either.

As I have said before, it all depends on the assumptions, including how well the UK crafts its case (politically and diplomatically as well as legally) and how other countries react.

“That’s a lot of assuming,” wrote Mark Leonard in a piece on why the false confidence of Brexit optimism (at least the most simplistic forms) might prove disastrous. There’s an awful lot of assuming everywhere.

Much also depends on how stretched the UK’s bureaucracy is forced to be by all the negotiations and adjustments to laws and regulations that Brexit will require. That includes negotiations within the UK itself on what policies to adopt and which options to pick.

For example, the Department for Environment, Food and Rural Affairs (Defra) will be the bridge between farmers, government policy and a raft of negotiations on agricultural issues as Britain leaves the EU. Alan Swinbank has described the options and implications in an excellent new paper (pdf).

Defra should have a key role in negotiating agriculture — probably the most challenging Brexit subject facing the UK, in the WTO at least — but its own staff and budget have been depleted (see also this), most recently because of the new departments set up to deal with Brexit.


Seeing more clearly

2.      I can see (a bit more) clearly nowBack to top

WTO rules are essentially about disciplining trade policies. For Brexit, there are five linked aspects:

FIRST, the small but potentially disruptive question of establishing what the UK’s commitments in the WTO are
The commitments are listed in negotiated and legally binding documents known as “schedules”. These will define the limits on how protectionist the UK can be — its tariffs, tariff quotas (duty-free or low-duty trade on limited quantities), agricultural subsidies, and barriers to entry for services and service-providers.

They can largely be copied and pasted from the EU–28’s current (but uncertified) schedules although negotiations with a wide range of countries, including the EU, will be necessary in some cases.

Cambridge University lawyer Lorand Bartels (@Lorand_Bartels) says that in the scheme of things this is a minor Brexit task. He is right. His comment has been a useful reminder to keep WTO schedules in perspective. But they might still have a wider impact.

Sorting out Brexit as a whole will involve complex negotiations (and other work) on a wide range of subjects, from trade relationships to security.

The WTO schedules are a small but fundamental part of the trade side. And within the schedule for goods, most of tens of thousands of tariffs ought to be settled quickly. Most people think converting the EU’s schedule for services into the UK’s is pretty straightforward too.

That leaves only 100-or-so contentious tariffs and tariff-quotas. But resolving those will at the very least be time-consuming; they could also have knock-on effects on other trade negotiations:

  • The schedules are where the UK and EU land if the 2-year Art.50 period ends with no transitional or final trade deal. They would also apply if any UK-EU trade deal broke down in the future, an incentive to get it right. Importantly, this applies to the revised schedules of both the UK and the EU–27
  • Once the UK is outside the EU, they are the default for the UK’s trade relationships with Australia, Canada, US, South Korea and all other WTO members (as well as the EU) so long as no free trade or other form of economic integration deal is struck with them. It’s an open question whether any other country would be willing to explore the terms of a free trade agreement with the UK before it knows what the schedules are — it may first need some idea of how much better preferential trade will be, compared with normal trade
  • There is no guarantee that the UK’s and EU–27’s schedules will be completed within Art.50’s 2-year period. If the UK leaves the EU without re-established WTO commitments, the potential for disruption is massive. But that can be avoided if the UK (and EU) can use the time efficiently to sound out trading partners so that draft schedules can be prepared to accommodate others’ needs and to sort out their own positions. These things can take a long time. Revising the EU’s goods schedule for its enlargement from 12 to 15 members in 1996 took 14 years. But with enough resources and expertise they don’t have to take that long

Someone asked me recently when the UK should start sounding out other countries about its schedules. My answer: “Now. Or even better, it should have started already.”

But when in early December I asked a couple of UK trade officials at a discussion on trade and Brexit how long they had been in the job, the answers were something like “since the beginning of the month” and “since Monday”.

SECOND, establishing what the EU–27’s WTO commitments are after the UK leaves
The EU and UK trade with each other and therefore have interests in each other’s commitments. In other words, the UK will also need to watch what happens to the EU–27’s commitments in the WTO as well as preparing its own.

Take lamb and mutton for example. Simply using the EU–28’s present tariff quota leaves no guarantee that the UK and EU–27 would continue to have duty-free access to each other’s markets, whereas New Zealand and several other suppliers would keep their duty-free access to both.

In some subjects, negotiations over the UK’s and EU–27’s quotas may become inseparable, and other countries would also demand a say because any UK-EU arrangement could affect their own competitiveness (or their expected “rights and obligations”) in the two markets. (More below and here.)

THIRD, WTO rules will govern the UK’s future special trade relationships with everyone
That includes both with the EU–27 and with the rest of the world, whether through customs unions, free trade agreements or any other form of economic integration. Talks to set these up could also have a bearing on the negotiations over the schedules, and vice versa.

FOURTH, “leading” world trade liberalisation means hard work in the WTO
Theresa May’s government has ambitions to be a “leader” in global liberalisation. Unless that’s just another meaningless slogan, it would require an active, constructive and leadership role in the WTO. And that, in turn, means having the knowledge, skills, staff and other resources in London and Geneva for the task.

It means active participation in the 25-or-so WTO committees that oversee implementing the present agreements, and in the tortuous negotiations that continue to take place, albeit on a smaller scale than the full, beleaguered Doha Round.

And it means having a stance. Take agriculture. Would the UK join the Australia-led Cairns Group, which includes Canada, New Zealand, Brazil, Argentina, Uruguay, Thailand, Malaysia and others, pressing for agricultural trade liberalisation through WTO negotiations?

Or would it prefer the more protectionist agricultural trade alliance, the G–10, which includes Switzerland, Norway, Japan, South Korea and Taiwan? Or would it be a loner like the US and the EU?

How would UK leadership work in a forum that already has a number of experienced and active leaders? (British public debate seems to be ignorant of that last fact.)

In any case the UK also needs to be prepared to deal with its own WTO legal disputes, both when facing challenges and when challenging others.

FIFTH, will the UK want to be more liberal than its WTO commitments?
The schedules set legally binding limits on protection. Countries are free to open their markets more than in those commitments, but have to renegotiate if they want to be more protectionist.

Some debate continues on whether the UK should be more liberal. For example critics who accuse the EU of being “protectionist”, advocate slashing tariffs on agricultural products in order to make food cheaper.

Farmers protest in Brussels
Farmers from Belgium, France, Germany, Italy and other EU nations protested outside the EU Council building, seeking regulation to shield them from volatile milk prices (Teemu Mäntynen CC BY-SA 2.0, October 5, 2009)

Inevitably, British farmers will resist that. But if the government decides to defy them, it will be free to set tariffs below the legally binding ceilings it has committed in the WTO, to widen its tariff quotas to any size, and to reduce or eliminate farm subsidies. (The same applies to opening wider its services markets.)

This could be done freely within the limits of UK schedules “replicated” from the EU’s so long as it was applied equally to all WTO members. Trying to lock it into the schedules would unnecessarily increase the Brexit workload.

But there is another WTO angle that some have pointed out: countries tend to use their trade barriers as a bargaining chip to secure better access to their trading partners’ markets.

In other words, “I’ll cut my tariff on X if you also cut your tariff on X”; or “I’ll cut my tariff on X if you cut your tariff on Y”.

If I don’t have a tariff on X, it’s more difficult to pressurise you to cut your tariff. But in this case I could say, “I might not have a tariff on X but my WTO schedule allows me to restore it up to the binding ceiling, so I’ll offer to lower that ceiling if you reduce yours.” (Believe me, the success or failure of some apparently complex WTO negotiations have essentially boiled down to that.)

How the WTO affects the UK is summarised in this table (pdf) covering the UK’s basic position in the WTO, its special relationships, and its future role in the WTO.


One against all

3.      Time has helped the debate become more realistic …Back to top

“This is likely to be the most complicated negotiation of modern times. It may be the most complicated negotiation of all times. By comparison, Schleswig-Holstein is an O-level question.”

So said Brexit Secretary David Davis to the House of Lords EU Select Committee on September 12, 2016, almost three months after the referendum. (The full transcript is here, pdf, from page 56; the video is here.)

To many who had been studying Brexit’s implications, this was not news. But it was a breakthrough, probably the first time a key government minister and leading advocate of leaving the EU acknowledged so clearly that the process would not be simple.

This has allowed Davis, at least, to move on from the cop-out of “we won’t give a running commentary”, to the more reasonable position that the government is still studying its options, and consulting interested groups, and that Parliament will be informed at least to some extent when the government itself has a clearer picture.

Two months later, International Trade Secretary Liam Fox followed up with a written statement to Parliament on December 5 saying: “In order to minimise disruption to global trade as we leave the EU, over the coming period the Government will prepare the necessary draft [WTO] schedules which replicate as far as possible our current obligations.”

The decision to “replicate as far as possible” current obligations means the UK aims to ensure that re-establishing its schedules is as simple as possible, and to minimise the areas that need to be negotiated (see above). This is welcome realism.

There is still room to debate what “replicate” and “as far as possible” mean in practice. For those who care, it’s about “rectifying” (pdf) versus “modifying” the UK’s commitments, which are currently merged with the EU’s.

However, one expert familiar with these processes says the distinction is unimportant since in practice, either way, some tough negotiation may be unavoidable.

The telling point is that it took Fox almost five months from his appointment — including two visits to the WTO in Geneva — to reach a decision that was blindingly obvious to most people familiar with WTO schedules. That is a measure of how much learning is needed, including among the officials advising ministers.

We also now have serious discussions of interim or transition periods, better recognition by some ministers that at least some immigration will probably be needed (some of it unskilled) for the economy and for health and other services, and better awareness of some other issues such as the constraints on arrangements such as customs unions and free trade areas.

Nevertheless, many of those who want to leave the EU still think the break can be quick and clean.

Those who point out that the process will be lengthy and complex are often accused of undermining the “will of the people”.

At least they can now reply: “You don’t need to believe us. Just listen to the Secretary of State for Exiting the European Union.”

Coach and claims
Click the image to see it full size
4.      … but the notorious “bus” is alive and well with added featuresBack to top

One low point of the referendum debate was the infamous £350m-a-week Brexit bus, symbolic of the misinformation and shoddy analysis feeding a discussion that was particularly bad considering the referendum was about to propel the UK super-tanker into a juddering momentum-breaking U-turn away from Europe. (Another was the racism and xenophobia the debate stoked.)

Both sides share the blame, but those on the “Leave” side were worse.

Any hope that the debate would improve after the referendum was dashed when Change Britain, which campaigns “to make a success of Britain’s departure from the EU”, released “new research” the day after Christmas, claiming the UK would gain £450m a week (over £23bn annually) by leaving the EU Single Market and Customs Union, and providing numerous “calculations”.

I don’t need to examine the claim in detail. Others have already done a better job than I could. If you do want detail, the calculations have been torn to shreds by Sam Bowman of the Adam Smith Institute, Essex University’s Steve Peers, and others.

I’ll just note that Change Britain does not see any fall in UK trade, GDP and government revenue from ditching what one group of economists calls “the most integrated bilateral/regional trade relations on the planet”.

“The results mean nothing. It isn’t research, it’s junk,” said former Cabinet Office chief economist Jonathan Portes (now at King’s College London).

Bowman concluded: “I say this not to trash Change Britain but to highlight just how weak some of the numbers and claims that are floating around, and being given very kind press coverage, can be. Change Britain has some heavyweight backers — they can do better than this.

“Whether you’re a hard or a soft Brexiteer, a continuity Remainer or a die-hard Leaver, you should expect better than this.”

Red lines and UK-EU options
Click the image to see it full size
5.      New Sussex and Switzerland models refine the optionsBack to top

The standard options for post-Brexit UK-EU trade and economic relations are:

  • staying in the Single Market (the Norway/Iceland or Switzerland models)
  • staying wholly or partly in the customs union (CU — the Turkey model is partial), with an additional agreement for services since a customs union only deals with goods
  • a free trade agreement (FTA — the South Korea or Canada model)
  • reverting to WTO commitments (sometimes called MFN or most-favoured nation treatment, the archaic WTO term for normal, non-preferential trade)

In November, Sussex University’s UK Trade Policy Observatory published a paper (pdf) by Michael Gasiorek, Peter Holmes and Jim Rollo looking at the options and asking whether the UK and EU have too many “red lines” (defensive negotiating positions that cannot be crossed).

The UK has four red lines, they observe:

  • No free movement of people/labour
  • Independent trade policy
  • No compulsory budgetary contribution
  • Legal oversight by UK courts only and not by the European Court of Justice

The EU has one: no cherry picking — choosing which parts of the Single Market to keep and which to drop.

“It is easy to be lost in pessimism given the four British red lines and EU equivalent on cherry picking on the EU–27 side,” the paper says.

Its antidote is a hybrid: a broad free trade agreement with some sectors in a customs union (the UK and EU would charge the same tariffs on imports within those sectors from the rest of the world) and regulatory arrangements based on the Single Market for those sectors.

A prime candidate would be the car industry whose complex value chains would avoid costly rules of origin requirements and other red tape, as parts and assembled cars criss-cross the borders between the UK and EU–27. Another would be aerospace.

“We have demonstrated that the most attractive outcome, from the UK government’s point of view and given its red lines, would be an FTA with a variety of special sectoral arrangements. If that reduced or abolished non-tariff barriers on a wide range of goods and services, much trade would be saved,” the paper continues.

“Whether this is acceptable to the EU side is unclear, but the alternative of going from the most integrated bilateral/regional trade relations on the planet to MFN [no preferences in UK-EU trade] ought to be deeply unpalatable to all concerned, and an incentive to find an FTA-based least-cost alternative.

“The debate, however, is heated on both sides, and mistakes and accidents are all too possible. MFN may be the only answer unless both sides shift from megaphone diplomacy and start explaining to their own constituencies that the cost of the most extreme versions of the red lines is unnecessarily high.

“Moreover, such extreme versions of Brexit do not exclude trade and investment subsidy wars as governments try to compensate footloose multinationals for the consequences of policy failure.”

The hybrid proposal sparked a debate among experts as to whether it would violate WTO rules.

They were already debating to what extent WTO agreements would limit the UK’s and EU’s ability to be selective in including or excluding certain sectors in a free trade agreement or customs union.

These are  Art.24 (actually XXIV) of the General Agreement on Tariffs and Trade (GATT, the WTO treaty on goods), and Art.5 (actually V) of the WTO’s General Agreement on Trade in Services (GATS). GATT Art.24 says this would have to cover “substantially all the trade” in goods; GATS Art.5 requires “substantial sectoral coverage” in services.

Lawyers have told us that there is WTO case history to show a free trade deal in cars alone would be illegal (disputes DS139 and DS142).

Some have also reminded us that there is a large grey area of inclusions and exclusions in customs unions and free trade agreements that could allow the UK and EU to escape litigation. The debate is about how large the grey area is, and whether there would be significant reactions from other WTO members.

The Sussex paper expanded the debate to how those two articles would apply to the case where a partial customs union is superimposed on a broader free trade agreement. Opinion among lawyers and other experts is equally divided.

Meanwhile, the “Swiss model” is also changing. Bern is optimistic it can preserve its various agreements with the EU and the Single Market — including funding for research and student exchanges — after its Parliament passed a bill on December 16.This watered down a 2014 referendum vote to curb EU immigration by giving priority to Swiss job seekers instead of setting quotas.

So far, the move has attracted little interest in the UK even though it provides a possible model for Britain to remain in the Single Market. To be sure, the various red lines would become a smudgy grey, but that’s how the Swiss, with decades (if not centuries) of experience in direct democracy and political compromise, are dealing with their conundrum.

Sheep on horison

6.      Lawyers versus practitioners? It pays to look at the dataBack to top

Ask a lawyer what the UK can do to keep food safe and protect animal and plant health, and the answer will likely be based on the case history of disputes involving the WTO’s Sanitary and Phytosanitary (SPS) Measures Agreement.

Ask a practitioner (official, delegate, diplomat) and the first point of reference (after the SPS Agreement itself) may be the WTO’s SPS Committee with its lengthening history of discussions on specific trade concerns, and where a main aim is more pragmatic: to resolve conflict and keep trade flowing by talking and establishing voluntary good practices instead of prosecuting.

To some extent this explains the difference of opinion over what the UK may face when it re-establishes its WTO commitments (the schedules) as a member in its own right, independent of the EU.

One side argues that the UK can carefully craft its case legally, table its commitments, probably escape litigation and almost certainly escape trade disruption.

The other believes that WTO processes are more complicated than that and that more can be achieved by talking.

Other countries will want to scrutinise at least some parts of the schedules and may even challenge the UK’s legal case. This could lead to the kind of arguments that are heard over and over in the WTO — on both the content (in this case the commitments) and the legal approach, and even about which are the most suitable base years for making crucial calculations.

So, according to this view, if the UK wants to avoid disruption, it should listen to its trading partners and draft schedules that accommodate their legal and commercial concerns as much as possible.

That, after all, is how the EU has seen trade continue untroubled even though its commitments have not been certified (accepted by consensus) by WTO members, since it expanded first from 15 members to 25, then to 27 and most recently to 28.

Which view is right? Time will tell.

A closer look at the details might shed some light. For example the EU’s present tariff quota for lamb and mutton gives some clues as to where purely claiming a legal right might break down as the UK and EU become entangled in each other’s revised (or “rectified”?) commitments, and as other countries weigh in.

The tariff quota is examined in detail in this five-step analysis. Even if we accept that the first two steps are straightforward (they divide the EU–28 quota into UK and EU–27 portions), the simplicity may still unravel in steps three and four, when current UK-EU trade is brought into the calculation.

The conclusions are:

  • The volume of UK-EU trade is likely to be added in some way to the tariff quotas of the UK and EU. The negotiations could expand the combined UK and EU quotas considerably — by as much as one third or more in the case of lamb and mutton, if farmers are allowed to keep their current trade volumes.
  • The talks could therefore become messy, merging two sets of negotiations over the UK’s and EU’s schedules, Each side could use a tariff quota in its schedule as a bargaining chip, for example the UK offering a smaller quota to the EU if it believes the Brussels is not offering enough, and vice versa. There is no guarantee that the UK and EU will adopt compatible approaches to their respective tariff quotas.
  • With such large scale changes, it could also be difficult for the UK to argue that it was simply “rectifying” its schedule (the key legal point seems to be whether a “concession” granted to WTO members was being altered or not). In other words, other countries might take the view that what is needed is more than a simple legal construction. They could claim the right to negotiate. It would be difficult but they might even challenge the proposed quotas for upsetting (as they see it) the balance of “rights and obligations” that was negotiated before Brexit. And the same applies to the EU–27’s schedule.
  • Back home, the UK and EU member states’ governments could also be dealing with pressure from their farmers, and perhaps in the opposite direction from their consumers or the manufacturers who use agricultural products as their inputs. This could add more time and need more resources in order to complete the negotiations.
  • Perhaps most important of all, the EU, whose latest schedules have not been certified, has shown that the key to avoiding disputes and disruption is spending time talking, listening and taking on board other countries’ concerns. Simply insisting on a legal right might not achieve that. It might even be counterproductive.

Note that lamb and mutton is an issue that affects politically sensitive trade across the border of an EU member state: Ireland.

Is the analysis correct? Again, time will tell. But it’s hard to see a solely legal process working. Will trade be disrupted? Not if the UK plays its cards right. It’s an “if” that has to be taken seriously.

Some more food for thoughtBack to top

Updates: January 10 and 12, 2017 — adding links to new papers by Alan Swinbank and Alan Matthews

Photo credits:
♦ Generally: public domain/Creative Commons CC0 via pexels.com, pixabay.com
♦ Dairy farmers protesting in Brussels by Teemu Mäntynen via Instagram. “About 1000 farmers from Belgium, France, Germany, Italy and other EU nations protested outside the EU Council building on 5th of October 2009. Farmers want regulation to shield them from volatile free markets that have collapsed milk prices.” (CC BY-SA 2.0)


The limits of ‘possibility’: Splitting the lamb-mutton quota for the UK and EU–27

An exercise in applying the “latest 3-year average” rule to the tariff quota on lamb and mutton. International Trade Secretary Liam Fox has announced the UK will “replicate as far as possible” the EU’s commitments in the WTO. This is a sound approach. But how far is “as far as possible”?

By Peter Ungphakorn
POSTED JANUARY 6, 2017 | UPDATED JANUARY 6, 2017

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

Expert opinion differs over whether re-establishing the UK’s WTO commitments will be little more than reproducing, as a legal right, those of the present 28-member European Union.

For thousands of legally binding ceilings on tariffs and access to services markets, this is true.

The limits of possibility

The main differences are over “tariff quotas” and possibly some tariffs, and whether these will drag the UK and EU into lengthy and messy negotiations. This even raises the prospect that the “schedules” (essentially lists) of commitments might not be ready at the end of the 2-year Article 50 process of leaving the EU.

JUMP TO

Lamb and mutton — the EU’s tariff quota
Step by step
What does this tell us?
See also
Annex: the data

To keep this as simple as possible, International Trade Secretary Liam Fox has announced the UK will “replicate as far as possible” the EU’s schedule.

The exact meaning of the statement is debated, but essentially it recognises that straight “replication” is possible in many cases but not in some others.

Where it won’t be possible includes almost 100 tariff quotas (pdf) (where limited quantities can be imported duty-free or at a low tariff). It may even include some tariffs.

The EU’s present tariff quota for lamb and mutton (“meat of sheep or goats, fresh chilled or frozen”) offers some clues as to where purely claiming a legal right might work, and where it might break down, dragging the UK and EU into entangled negotiations on each other’s revised commitments, with other countries weighing in.

Incidentally, lamb and mutton are important for trade across the Irish border, which is a particularly sensitive issue in Brexit.

We can walk through the process step by step, remembering that the WTO schedules are default binding commitments in the event there is no free trade between the UK and EU, or between either of them and the rest of the world.

Lamb and mutton — the EU’s tariff quotaBack to top

The EU’s current certified WTO commitment on goods (tariffs, tariff quotas and agricultural subsidies) is for the 15-member EU that existed from 1996 to 2004. It was certified by consensus among all WTO members in 2010, 14 years after the enlargement to 15 members. Commitments for when the EU added new members since then (to 25, 27 and 28 members) have not yet been certified. But, crucially, trade continues.

The EU's WTO certified and EU regulation lamb-mutton tariff quota
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The EU–15’s certified WTO schedule has this commitment for lamb and mutton:

  • It has promised to allow at least 283,825 tonnes to be imported duty-free.
  • Quantities outside the quota can be charged a mixed tariff of up to 12.8% of the price, plus up to €902 to €3,118 per tonne (mostly between €1,000 and €2,000) depending on the cut, whether it is chilled or frozen and so on. The highest rate is on boneless meat.
  • The EU has also reserved the right to apply an additional “special safeguard” tariff on the out-of-quota rate, triggered by a sufficient surge in imports or fall in price.

The tariff quota is almost entirely allocated among 15 countries (some now EU members). New Zealand has almost 80%, with 200 tonnes left over for “others”. When it leaves the EU, the UK will count among those “others” unless the EU sets up a specific quota for the UK. The same applies to the EU in the UK’s commitment.

In practice the quota is now 285,910 tonnes (an increase of 2,085 tonnes or 0.7%) allocated among nine countries, according to an EU regulation from 2011. The regulation says the latest adjustment expands the allocations for Chile and New Zealand, the latter specifically because of the EU’s enlargement to include Bulgaria and Romania (when the EU became 27 members).

When compared with the certified WTO (EU–15) schedule, the figures show adjustments had also previously been made for Australia, Norway, Faeroes, Turkey and Iceland. Clearly the EU had been negotiating with its suppliers over the years and adjusting the quota accordingly, even if the revised schedules still have not been certified in the WTO.

That means it was listening to them as well as asserting its legal rights. It’s almost certainly why the quotas applied by the EU in practice have allowed trade to continue trouble-free.

So the first question is: should the UK’s tariff quota be based on the WTO-certified schedule for the old EU–15? Or should it be based on an uncertified regulation for the EU–28 (or pre-Croatia EU–27, the latest reference in an EU Commission regulation)?

The most pragmatic answer could be to start from the 285,910-tonne quota the EU is using in practice, even though the draft in the WTO is top secret, it’s uncertified and therefore legally uncertain, and it’s untransparent. So, here goes.

How will the lamb-mutton quota be split?
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Step by stepBack to top

STEP ONE: Out of the 285,910-tonne tariff quota, how much should be in the UK’s schedule? And how much in the EU–27’s? About half-and-half according to current data.

The common WTO practice for making calculations like these is to take an average over a recent 3-year period. Borrowing that method: according to EU figures, in 2015 the EU imported 202,271 tonnes from non-members. The UK imported 102,350 tonnes, or 50.6% of that. The figures for 2014 are 187,605 (EU) and 96,845 (UK = 51.6%) and for 2015 they are 199,936 (EU) and 103,718 (UK = 51.9%).

So, the UK’s average share for the three years is 51.4%.

Using that average, the 285,910 tonnes would be split:
146,862 tonnes in the UK’s tariff quota
139,048 tonnes in the EU–27’s tariff quota

STEP TWO: How should the individual supplying countries’ quotas be split between the UK and EU–27?

For New Zealand, which has almost 80% of the quota, the ratio has been similar, but not the same. For example in 2015 (pdf), the UK took up 48% of New Zealand’s exports to the EU. This suggests the quota shares should be calculated for each of the individual suppliers, rather than using the 51%-to-49% UK-to-EU split for the quota as a whole.

So far so straightforward (assuming other countries don’t demand a say — but they might).

STEP THREE: What about UK-EU trade in mutton and lamb? This is where the simplicity may well unravel.

First, accounting for EU-to-UK trade in Britain’s tariff quota. The UK imported an average of 10,917 tonnes from the EU in the three years 2013–2015. Over half was from Ireland. Other major EU suppliers were Spain, France and the Netherlands. The present EU–28 tariff quota does not account for this because the UK is one of the 28. After Brexit — without any additional change — in order to export duty-free to Britain, those EU suppliers would have to fight for a share of the 200-tonne allocation to “other” non-EU suppliers.

So we can expect the EU to demand an additional 10,917 tonnes or so in the UK’s tariff quota.

Ireland and the other EU member states might not be satisfied with that figure, even if it comes from the latest 3-year average. EU exports to the UK exceeded that figure every other year in the 11 years since 2005, except 2011 and 2015, reaching 14,208 tonnes in 2005 and surpassing 13,000 tonnes in 2006, 2007, 2008 and 2013. The average for the three most recent years is dragged down by an unusually low 7,611 tonnes in 2015.

EU to UK exports compared with latest 3-year average
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On the other side, we can expect British farmers to react if they think the additional quota allows too much to be imported, particularly if their ability to export to the EU–27 is hampered.

Cue haggling — within the UK, between the EU and UK, and among EU member states — over which years and which figures to use in the UK’s schedule. Bargaining over which base years to use in a calculation is common in WTO negotiations. It has sometimes produced an “Olympic average” over five or more years, a method that excludes the highest and lowest numbers.

Second, accounting for UK-to-EU trade in the EU’s tariff quota. On the other side, the UK will be interested in the EU–27’s tariff quota. Again the 200-tonne allocation to “others” could not possibly cater for this.

The latest three-year average for EU–27 imports from the UK is 82,576 tonnes, also depressed by an unusually low figure for 2015 — 74,851 tonnes. That average was exceeded every year in the past decade except 2007, 2012 (borderline) and 2015, peaking at 93,667 tonnes in 2009.

UK to EU exports and latest 3-year average
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Around two thirds of UK lamb and mutton sales to the EU goes to France, with significant quantities also going to Germany, Ireland, Italy and the Netherlands. They are the member states that will have to juggle the interests of their farmers against those of their consumers.

Cue more haggling — between the UK government and its farmers as well as the UK and EU, and within EU member states.

What this also means is that the UK will not only be dealing with its own WTO schedule of commitments. The UK and EU–27 will bargain with each other over the size of their respective quotas. In this case that applies even if the EU simply keeps for its 27 members the tariff quota it currently has for the present 28. Otherwise the UK would be forced to fight for a share of the 200-tonne “others” quota.

At this stage, the process has become pretty complicated. And it might not end there.

POSSIBLE STEP FOUR: So, the UK and EU have expanded their shares of the split quota to account for current trade between them. Taking the figures from Step One and adding the latest 3-year averages for UK-EU trade in Step Three would expand the combined UK and EU–27 tariff quota from 285,910 tonnes to at least 379,403 tonnes, an increase of 33%, around one third.)

Would other countries sit by and accept it? Maybe. Maybe not.

By now, the UK and EU would be hard-pressed to argue they are still only “replicating” or “rectifying” their schedules. The alternative, a “modification” (not least because a regional integration pact has ended), gives other countries negotiating rights. They could well demand a say.

For example, they could argue that expanding the combined quota by one-third changes the nature of competition in the two markets. Or, that there is no justification to add into the schedules the figures for UK-EU duty-free trade under the single market, since that relationship will no longer exist — those figures would exaggerate the expected access for the EU and UK into each other’s markets.

Cue even more complicated haggling. And since we are now in schedule “modification” territory, it is conceivable that new suppliers not currently listed in the tariff quota will want their own shares. India, for example, is a significant exporter even if it does not currently sell to the EU.

EU member states’ shares of imports from New Zealand

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FINALLY: What about quota fill? Will the EU and UK seek larger quota allocations than the trade figures suggest?

There is an argument in favour of this since suppliers are rarely able to export their entire quotas to the EU. New Zealand did so from about 2006 to 2009 but is currently running at about 70–80%. If this “underfill” is caused by the way the quota is managed, then there is an argument for a larger quota than the actual traded amount.

What does this tell us?Back to top

So it seems likely that the lamb and mutton quota will lead to simultaneous bargaining over both the UK’s and the EU–27’s schedules, and that many countries will become involved directly and indirectly, including key EU member states as well as non-members.

Is this typical of all the tariff quotas? No. Most have fewer allocated suppliers (if any) and larger shares available to “others” or unspecified suppliers.

But most if not all will also involve steps three and four — expanding the combined quota to allow for UK-EU trade — casting doubt on whether any of these are simply “rectifications”, and allowing other countries to join the negotiations.

As I said when I started writing about this almost a year ago (in AgraEurope), it does not mean the task is impossible. But it does mean negotiations over the UK’s and EU’s schedules will be complicated and may take a long time, particularly since other Brexit activities will already be occupying resources in the four departments involved — Exiting the EU, International Trade, the Foreign Office, and Environment, Food and Rural Affairs.

Finally, will this matter if the UK and EU end up with a free trade deal of some kind anyway? Why not stop after Steps One and Two? If the UK and EU are confident that they will strike a bilateral deal, then including UK-EU trade in the tariff quotas will be less critical. But because the schedules are fall-back positions, it is in the interests of both to ensure the schedules are in a good shape for their own bilateral trade.

See alsoBack to top

Annex: the dataBack to top

This analysis assumes all the imports are via the tariff quota. Getting relevant figures is not easy. The ones used here are from data available on the EU website and from uktradeinfo. They should be seen as a way to approximate what might happen, rather than to give a precise account. Hopefully the officials dealing with this will have quicker means of getting more appropriate data.

The tariff quota in the EU’s latest EU certified goods schedule
WTO document WT/LET/666 (for the EU–15) of 22 February 2010, extract

Description of products Tariff item number(s) Final quota quantity and in-quota tariff rate Other terms and conditions
Meat of sheep or goats, fresh chilled or frozen  0204 283 825 t
(Carcase-weight)
0%
Allocated to supplying countries as follows:

Argentina 23.000 t
Australia 18.650 t
Chile 3.000 t
New Zealand 226.700 t
Uruguay 5.800 t
Iceland 600 t
Poland 200 t
Rumania 75 t
Hungary 1.150 t
Bulgaria 1.250 t
Bosnia Herzegovina 850 t
Croatia 450 t
Slovenia 50 t
Former Yugoslav Republic of Macedonia 1.750 t
Greenland 100 t
Other 200 t

Qualification for the quota is subject to conditions laid down in the relevant Community provisions.

The tariff quota in practice
Commission Implementing Regulation (EU) No 1354/2011, 20 December 2011 (also here)

Description of products Quota quantity and in-quota tariff rate Country allocations (and use 2015)
Meat of sheep or goats, fresh chilled or frozen
0204
285 910 t
(Carcase-weight)
0%
Argentina 23 000 t (534 t = 2%)
Australia 19 186 t (16 493 t = 86%)
New Zealand 228 254 t (174 540 t = 76%)
Uruguay 5 800 (1 785 t = 31%)
Chile 7 400 t (2 503 t = 34%)
Norway 300 t (0 t = 0%)
Greenland 100 t (0 t = 0%)
Faeroes 20 t (1 t = 5%)
Turkey 200 t (0 t = 0%)
Others 200 t (0 t = 0%)
“Erga Omnes” 200 t (195 t = 97%)
(= all origins, including the countries mentioned in the current table)
Iceland* 1 850 t (1 093 t = 59%)

Notes:
Regulation 1354/2011 is an update to previous regulations, increasing allocations to New Zealand and Chile, in New Zealand’s case specifically for EU enlargement to include Bulgaria and Romania
Quota-use is from market presentation available on
http://ec.europa.eu/agriculture/sheep-goats/presentations_en (accessed 11.12.2016) — Committee for the Common Organisation of the Agricultural Market, Market Situation for Sheep & Goats, 15 December 2016 https://circabc.europa.eu/sd/a/c23fa87f-fecf-45cf-91e8-223c5735cc4d/2016.12.15%20Sheep.pdf
* Iceland’s tariff-quota includes additional tariff lines 0210 99 21, 0210 99 29 and 0210 99 60 (processed products such as smoked, salted, cured)


Updates: January 6, 2017: correcting some minor errors
Photocredits
: All public domain CC0. (Flock of sheep close up from USDA Agricultural Research Service.)


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