A year ago, two-thirds of the WTO’s membership had ratified the Trade Facilitation Agreement, activating it in the ratifying countries. What’s happened since then?
By Peter Ungphakorn FEBRUARY 22, 2018 | UPDATED FEBRUARY 22, 2018
A year ago today, the World Trade Organization’s Trade Facilitation Agreement took effect in the ratifying countries amid a blaze of publicity, two decades after it was first proposed.
It was the first new WTO agreement since the late 1990s and its potential benefit was huge, particularly for implementing countries and particularly if their own procedures for handling imports and exports at the border were cumbersome.
It was also the first agreement to allow developing countries to link what they were prepared to do with receiving assistance from richer countries and donor organisations.
But the promise of the streamlined customs and other processes was conditional. For the full effect to be felt, the agreement had to be implemented in full. And a year ago that was still a long way off.
There are three main areas of work: for the countries that hadn’t yet ratified to do so; for all countries to implement it including developing countries saying what choices they were going to make; and for the promised assistance to be delivered — the way aid is handled here is a unique feature among WTO agreements.
This is a brief look at what has been achieved since then.
1. The need to keep ratifying
As soon as the two-thirds figure was reached on February 22, 2017, the pressure was off, and the flow of ratifications has eased off too.
NOT YET RATIFIED
The agreement will not apply to these countries until they ratify it, although other countries will apply the trade facilitation measures equally to all WTO members (9.2.18) Angola, Benin, Burkina Faso, Burundi, Cabo Verde, Cameroon, Colombia, Cuba, Congo (Democratic Republic), Djibouti, Ecuador, Egypt, Guinea, Guinea-Bissau, Haiti, Kuwait, Liberia, Maldives, Mauritania, Morocco, Papua New Guinea, Solomon Islands, Suriname, Tajikistan, Tanzania, Tonga, Tunisia, Uganda, Vanuatu, Venezuela, Yemen, Zimbabwe See the TFA Facility website
Up to that date, the WTO had campaigned vigorously for countries to ratify and the ratifications accelerated from late 2016 to February 2017.
Immediately afterwards, the campaign stopped and the numbers tailed off. Countries have continued to ratify, but slowly, except for a mini-peak around the December 2017 WTO Ministerial Conference in Buenos Aires.
What the WTO’s campaign never clarified is that even after the two-thirds was reached, the agreement still hadn’t “entered into force” everywhere, only in the ratifying countries.
The remaining members also have to ratify it if it is to apply to them, and for them to receive any aid under the agreement.
Since February 22 a year ago, 18 members have ratified it, but 32 still have not.
The number has fallen gradually bit significantly a large number of countries that have not yet ratified are in Africa, the continent that is forecast to benefit most from the agreement.
There may be other reasons why the 32 still haven’t ratified. But it would be a pity if the end of the campaign on February 22, 2017 meant that outside the limelight, some countries might consider ratification no longer to be a priority.
That said, those that have not ratified will still be able to trade more easily with other countries because each applies the provisions to all-comers. But larger countries that have not ratified might not implement the agreement, and may cause problems for their trading partners.
2. The need to notify and implement
The agreement requires countries to provide information on what they intend to do, including the aid they intend to provide, and on details of the trade facilitation measures they have implemented. The information is gradually being submitted but progress continues to be slow.
On trade facilitation itself, the requirement includes: governments providing information and allowing consultation on laws and regulations, how rulings and appeal are handled, impartiality and non-discrimination, fees, release and clearance of goods, cooperation between border agencies and between customs authorities, various formalities, and freedom of transit.
Developed countries simply have to implement everything. Most had already done a lot unilaterally.
But for developing countries, ratifying the agreement says nothing about what each country is going to do. They can choose how they want to handle its provisions, under three categories. They have to tell other members, and the world at large, what they have chosen to do and under which category. The information is shared through notifications to the WTO:
Category A — measures they will implement immediately (or one year later for least-developed countries). Some, such as Egypt and Indonesia, have already notified under this category even though they have not yet ratified the agreement itself, suggesting their ratification process ought to be underway (107 notifications submitted, 44.9% of all notifiable items)
Category B — measures that will be phased in over a notified period (47 notifications, 7.6%)
Category C — measures that will be phased in so long as assistance is provided (37 notifications, 8.9%)
The figures are broad and hide crucial detail. Even if a country has handed in notifications in all three categories, the content might not cover all the provisions, so further notifications will be needed.
Often overlooked is how notification also plays an important role domestically. It means the country’s government is getting its act together and is prepared to tackle any vested interests that might resist reform. The agreement also encourages cooperation between various agencies.
It’s an open secret that customs procedures in a number of countries are prone to corruption and inefficiency, although procuring expensive computer systems creates its own temptations. Change can also threaten officials’ sense of security.
Ultimately the country streamlining its procedures gains the most. Its imports and exports enter and leave the country quickly and at lower cost.
The agreement does not commit donors to give assistance. On this, it’s a statement of intent. Donors said they could not legally bind their budgets.
But although implementing this side of the deal has only just begun, in general, aid for trade-facilitation has been around for some time. For example, the EU says its latest data shows over €700m provided in the period 2008–12. That’s before the WTO deal was struck.
The TFA Facility website’s list of donors includes 17 developed countries (including the EU and some of its members), eight international organizations, 12 regional organizations, five transport organizations and five others, with links to their programmes.
It will still take time and effort for the agreement to achieve its potential. In some countries, probably a long time — longer than the economists’ simulations assumed. As Azevêdo said, it’s only just begun.
After Brexit, ‘Global Britain’ will want free trade agreements with the rest of the world. But it already has some 37 agreements with over 60 countries through the EU. Rolling them over into the UK’s own agreements will not be automatic. A look at the actual text of the EU-South Korea deal shows why
By Peter Ungphakorn FEBRUARY 13, 2018 | UPDATED FEBRUARY 15, 2018
Leaving the EU means the British government will either have to convert the EU’s free trade agreements with other countries into UK deals, or risk losing them, when Brexit is supposed to be about to allowing Britain more freedom to enjoy trade agreements with the world outside the EU.
At the very least, the UK should continue with the deals it already has through the EU, with Norway, Iceland, Switzerland, Canada, South Korea, Japan (in the pipeline) and many others. Academics at Sussex University say there are over 60 other countries. The UK government says there are over 100. It depends on what kind of agreement is counted.
Even then, the “rolled over” free trade agreements could be less valuable to the UK outside the EU than inside, unless talks can be set up with all three parties leading to something called “diagonal cumulation of rules of origin”.
As with much about Brexit what some fancied was a simple task is actually pretty complicated.
Many had thought that the UK could more or less copy and paste the agreements.
Few thought that the other countries involved might want to negotiate this with the UK — until news broke that some might seek just that, even during a transition period.
Much of the complexity is shown in a paper (pdf) by Michael Gasiorek and Peter Holmes of Sussex University and published by the UK Trade Policy Observatory (UKTPO). They say something that few had considered: that what appears to be a set of bilateral talks will turn into a threesome — the EU will be involved too. This is one of their summary points:
“Grandfathering existing EU free trade agreements is unlikely to happen without some engagement or negotiation with the EU. Hence what you might think is a bilateral issue between the UK and a given Free Trade Agreement (FTA) partner, becomes a trilateral issue which also involves the EU.”
“Grandfathering” means continuing with an older arrangement (here the existing EU free trade agreements), which might lapse or be superseded when a new arrangement is introduced (the UK leaving the EU). The Sussex paper is a comprehensive account of the various issues that could be raised in the talks.
The British government too is learning that this is going to take longer than it had first thought.
“I hear people saying ‘oh we won’t have any [free trade agreements] before we leave’. Well believe me we’ll have up to 40 ready for one second after midnight in March 2019,” International Trade Secretary Liam Fox told a fringe meeting at the Conservative Party Conference only last October.
Is grandfathering difficult or impossible? No, for the most part, it shouldn’t be. But there’s a lot to copy, adjust and check. And the number of negotiations the UK will be involved in for Brexit is huge.
Then there are the more complex areas such as “tariff quotas” and agricultural “safeguards” and “rules of origin”. It becomes even more complicated if the other countries want to negotiate additional adjustments.
Then, on February 8, the government admitted for the first time that this will not be possible. It released a position paper (pdf) calling for the EU’s free trade agreements to continue to apply to the UK — as if it were still an EU member — during the proposed two-year transition period after March 2019.
To keep life simple, this would probably mean EU institutions continuing to handle various aspects of the free trade agreements on Britain’s behalf, such as managing the allocation of tariff quotas among importers (including British companies), confirming that imports into the EU (including Britain) meet EU standards and “rules of origin”, and participating in committees set up under the agreements and in disputes.
What happens after the transition period remains to be seen. The quickest approach would be to convert the EU’s agreements into the UK’s. The alternative would be for the UK to negotiate new agreements from scratch. But since it may want to do that with other countries such as the US, China, Australia, New Zealand and so on, the load on UK trade negotiators would be immense.
Michael Gasiorek’s and Peter Holmes’ paper actually speaks of “great-grandfathering”! But more importantly, it refers to complex supply chains, which are important for a number of reasons:
“Clearly the UK will want to and needs to establish the nature of its relationship with the existing FTA [free trade agreement] partner countries on a long-term basis. However, this will be more difficult to achieve without the partner countries knowing what form of trade agreement the UK has with the EU.
“For many products this is because we are in a world of more complex supply chains and for many FTA countries, their exports to the EU may be indirect via the UK. For some agricultural products where tariff-rate quotas apply, changing access to the UK may impact on their access to EU markets.
“It is therefore likely that both the UK and the partner countries may seek to roll the agreements over on a temporary basis for the duration of the transition. In turn, that means that during the transition period the UK will need to renegotiate these agreements, or at a minimum, renegotiate the grandfathering, hence greatgrandfathering the agreements” (page 5)
Overall, Gasiorek and Holmes suggest renegotiation might be needed because of rules of origin, most-favoured-nation (MFN) or non-discrimination clauses, mutual recognition of standards and regulations, and tariff quotas. I will look at a couple of those issues, but I’m not going to repeat their excellent work. Their paper speaks for itself.
Possible to do; impossible to do quickly
What I am going to do here is to dip into the EU-South Korea free trade agreement — and I really mean “dip in” because it’s over 1,400 pages long — to highlight a few issues that attracted my attention. They are intended as examples to illustrate some important points. This is also developed from an older Twitter thread.
The bottom line. Is grandfathering difficult or impossible? No, for the most part, it shouldn’t be. But even where it’s relatively straightforward, the task is time-consuming. There’s a lot to copy, adjust and check. If there were only one agreement to deal with, it could be completed quite quickly. But the number of negotiations the UK will be involved in for Brexit is huge.
Then there are the more complex areas such as “tariff quotas” and agricultural “safeguards” (there aren’t many in the EU-S.Korea agreement but there are a lot more in the agreement with Canada) and “rules of origin”. It becomes even more complicated if the other countries want to negotiate additional adjustments.
Grandfathering: more than CTRL+C, CTRL+V
You don’t have to go very far into the text to see that there are references to the EU which will have to be replaced by the UK’s equivalents.
Numerous references to EU procedures and regulations will also have to be changed.
The endless lists of regulations will have to be replaced with UK versions. This is just a small part of a long table of regulations for vehicles.
All of this is also bound up in how the UK sorts out its own post-Brexit arrangements.
And provisions such as this would have to go:
And then there are services. The EU-S.Korea agreement has long lists describing where their services markets are opened up to each other (pages 1165-1250 for the EU’s commitments). Much can be copied for the UK. There are also lots of provisions which don’t apply to the UK and will have to be removed, and a lot that refer to the EU as a whole, which will have to be changed.
This is what the agreement says for mining and quarrying services. It’s complicated, technical stuff, but even if we don’t understand it fully, at the very least “5% of the European Union’s oil or natural gas imports” will have to be changed to “the United Kingdom’s”. You have to be an expert in the field to know if that “5%” will stay unchallenged.
“EU: Unbound for juridical persons controlled […] by natural or juridical persons of a non-European Union country which accounts for more than 5 % of the European Union’s oil or natural gas imports. Unbound for direct branching (incorporation is required). Unbound for extraction of crude petroleum and natural gas”
Finally there are institutional arrangements, everything from committees and working groups to arbitration procedures, which will have to be set up for the new bilateral relationship
Article 15 creates a “Trade Committee”, which meets annually, plus at least six “specialised” committees and at least seven working groups:
The agreement includes procedures for settling disputes, including the creation of arbitration panels and references to international law including the Vienna Convention on the Law of Treaties and World Trade Organization dispute rulings. The procedure is similar to the WTO’s and adapting it for the UK would be relatively simple.
So, the task has moved beyond copy-paste to search, adjust, adapt, replace or delete. The volume is pretty large, and this is just one of the 37-or-so agreements. Still, what we have looked at so far won’t necessarily need any negotiation, just a lot of work.
Photocopier? Or negotiating table?
Where negotiations will be needed is on market access, particularly for goods, but only on some parts. (There may be no need to renegotiate services, but the technical detail is beyond me.)
For goods, the EU-S.Korea agreement lists tariffs on around 900 pages. They could be run through the photocopier — except that S.Korea is reported to be one of the countries that might seek unspecified concessions from the UK, according to Politico:
“South Korea has already indicated that it wants to address its trade deficit with the U.K., which was particularly high between 2012 and 2015, before granting Britain continued market access during transition, EU diplomats and business people said.
“‘Exports are South Korea’s credo No. 1, and trade balance is their credo No. 2,” said Christoph Heider, president of the European Chamber of Commerce in Korea, who is in close contact with the government in Seoul. “I expect that Great Britain will have to make concessions if it wants to stay in the trade deal during the transition.’”
In many cases, tariffs are not scrapped from the start: they are phased out over different periods depending on the product, from immediate (most products) to 21 years and in some cases tariffs are never eliminated (“staging category E”). So the UK would be stepping into an appropriate phase of the reductions (unless “rolling over” took more than two decades!)
What most people forget is the EU’s free trade agreements include tariff quotas as well. That’s where limited quantities of imports are allowed in duty-free or at lower than normal rates, also known as tariff-rate quotas or TRQs. And it’s where negotiations will probably be needed.
The EU-S.Korea agreement has a few, mainly on the Korean side. Here’s one for flatfish where the duty-free allowance increases from 800 tonnes in year 1 to duty-free for all imports from year 13.
Here’s another on various types of milk and cream. This time the duty-free allowance remains indefinitely at 1,512 tonnes after year 16 (“staging category E”), meaning quantities outside the quota will be charged import duty, which is 89% or 176% depending on the product. (The tariff rates are on page L127/102 of the EU’s version of the text (pdf).)
This is not exactly “free trade”. It’s an example of how trade agreements are not necessarily as free as they are made out to be, and a warning to those who argue that the value of the UK’s present access to the EU market can be replaced by trade deals with other countries.
What will the UK’s share of that 1,000–1,512 tonnes be? The answer is likely to come from talks among all three sides: the UK, EU and S.Korea.
Incidentally, The EU’s agreement with Canada (the Comprehensive and Economic Trade Agreement, or CETA) has many more tariff quotas for imports into both sides. The EU has them on some kinds of seafood, wheat, sweetcorn, bison meat, beef and veal, and pork. Canada has them on cheese.
This is part of the EU’s CETA tariff-quota on one category of beef and veal (there are more details than this):
And this is Canada’s tariff quota for one category of cheese, again ignoring a lot of additional detail:
Although Canada is apparently keen to use copy-paste as much as possible, there will almost certainly be renegotiations over the tariff quotas.
One type of tariff barrier that has received little attention is “safeguards”. These are temporary increases in import duty to protect producers from import surges or falling prices, the kind of raised duty the US recently imposed on washing machines and solar panels.
For agricultural products and in bilateral trade agreements the rules are not quite the same as for industrial goods. Here, S.Korea has secured the right to impose an additional duty on beef imports of up to 40% for the first six years, the ceiling declining to zero after 17 years, if the “trigger level” specified is reached.
S.Korea has the right to use safeguard duties on pork, apples, malt and malting barley, potato starch, ginseng, sugar, alcohol, and dextrins.
For beef the right to impose a safeguard duty expires after 16 years. For pork it’s 11 years, for apples 24 years, and for other products somewhere in between.
The trigger volumes were for the whole of the EU-28. Copying the same trigger level for imports from the UK alone would not make sense for S.Korea. To do so would double the size of the import surge before Seoul could react. That means these volumes would be split between the UK and EU, requiring negotiations between all three sides.
In its agreement with the EU, Canada has dozens of products eligible for additional safeguard duty, but the EU has none.
The dreaded rules of origin
To qualify for lower duty or duty free access to the EU market, or for recognition of standards under the agreement, a product has to be shown to have been made in S.Korea. The same goes for EU products entering S.Korea, and for UK products under a future UK-S.Korea deal.
Anyone who has looked at these “rules of origin” knows they can be pretty complicated, to the extent that lower tariffs are not always worth the additional red tape. (You can find explainers by the Institute for Government here, and by Sam Lowe here.)
The criteria start with general rules on what qualifies and what proof is needed, covering 8 pages (1346–1354) in the EU-S.Korea agreement. For example, Article 6 lists 17 operations that cannot be cited — “sharpening, simple grinding or cutting” is not enough (item (i)). Nor is it enough if two ingredients from elsewhere are simply mixed together in the EU — they cannot be said to be “made in the EU” (item (m)):
But that’s just the start. A further 57 pages has tables of excruciating detail — like this on what is required for two types of “woven fabrics of man-made-filament yarn” to qualify with the right origin:
(Note that in that last paragraph, the product can qualify even if the value of the unprinted fabric exceeds 47.5%, so long as the fabric itself is also of local origin.)
Could these rules of origin just be run through the photocopier? Maybe. But remember right now exports from the UK to S.Korea only have to qualify as “made in the EU”, meaning components could be sourced anywhere in the 28 countries. A post-Brexit UK-S.Korea free trade agreement would only deal with products “made in the UK”.
In other words, from the point of view of qualifying products, a future UK-S.Korea agreement will be much less valuable for the UK than the present EU-S.Korea agreement.
Complicated? That’s just the start. Here’s what Gasiorek and Holmes say about duty-free imports involving the UK, EU and S.Korea:
“It is important to note that this could easily mean that, for example, a given intermediate input could be exported directly from Korea to the EU duty free, but if that input is used in the production of a UK good which is then exported to the EU, that input cannot count for UK originating status.
“The same could apply to UK exports of intermediates to the EU which are then used in EU exports to Korea; and EU exports of intermediates to the UK which are then used in UK exports to Korea. Hence bilateral flows between each of the three countries in this example (the UK, Korea and the EU) are likely to be affected.”
They then talk about “diagonal cumulation”, essentially a three-way deal that says if assembly, processing or other form of production in any two (combined) of the three meets the requirement, then the item can be imported duty-free into the third.
And a three-way deal needs a three-way negotiation.
Finally, how well does EU-S.Korea represent other EU free trade agreements? It depends. No two agreements are the same, but they can be similar. The Korean agreement is partly similar to the Canadian one but also has significant differences.
Norway and Switzerland are important trading partners of the UK. One of the most complicated agreements for the UK to grandfather is the one with Norway, Iceland and Liechtenstein — the European Free Trade Association (EFTA) countries, which form the European Economic Area (EEA) with the EU.
Developed from a Twitter thread from October 25, 2017. On February 15, 2018, I wrote this thread about the response to this article.
Updates: February 14, 2018 — added a link to Lorand Bartel’s article on various legal implications in Borderlex. Photos and drawing: Either CC BY 2.0 or CC0, “Grandfather” drawing by bamenny