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.
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; 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.
 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