A real beginners’ guide to tariffs and the WTO

‘Can someone explain to me international tariffs and WTO law as if I were a six year old? Seriously. I don’t get it. At all. No frame of reference whatsoever. Any takers?’

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By Peter Ungphakorn
POSTED JULY 28, 2018 | UPDATED JULY 28, 2018

All too often we assume people know what we’re talking about. A question someone asked recently on Twitter showed how wrong those assumptions can be.

One of the assumptions is that everyone knows what “tariffs” are. The BBC prefers “trade tariffs” in case we confuse them with energy rates or other prices.

Tariffs are part of the Brexit debate, and are central to Trump’s trade war. But the fact is, most of us never had to deal with this before.

So for the benefit of Dr Dominic Pimenta and six-year-olds everywhere, here goes.

What are tariffs?Back to top

JUMP TO
What are tariffs?
Why are there international rules on tariffs?
How were the rules on tariffs created?
What does this mean legally in the WTO?
1. They are ceilings
2. They are the same for imports from all countries
Follow-up questions

SEE ALSO
What is the WTO? And is it undemocratic?

When goods are imported into a country, the government charges a customs tax or duty, often also called a tariff. For example the EU charges 8% of the price per pair on some types of shoes.

So does the UK until it leaves, because all EU members have the same tariffs.

Here, the EU is a special case, a “customs union”. EU members (such as the UK) collect the tax, hand it over to the EU because it’s an important part of the EU budget (and a lot of that is spent in the member states), but they are allowed to keep about 20% to cover administrative costs even though the actual costs are much smaller.

Most countries don’t have that complication. Their governments just collect the tax, full stop.

The UK says that after it leaves the EU it will stick to the EU tariff rates in general, and has now officially confirmed that with the World Trade Organization (WTO).

Extract of the EU's WTO commitment on tariffs for some shoes
Click the image to see it full size
Why are there international rules on tariffs?Back to top

Once upon a time there were no disciplines on tariffs. Countries could set them at any rate, and raise or lower them at will.

Then came the depression when countries complained about imports unfairly hurting their producers and workers. So they raised tariffs against each other to protect their producers, first one, then another in retaliation. It was a trade war.

Sounds familiar? ’Fraid so.

Rather than protect jobs, the trade war just slowed down trade and worsened the depression everywhere. And that meant jobs were lost.

To cut a long story short, the Second World War followed, and afterwards world leaders decided they needed to do something about it.

One thing they did was to negotiate to get rid of the free-for-all in tariffs, and to reduce them gradually.

(They felt the whole international economy needed sorting out so they also set up the World Bank and the International Monetary Fund.)

How were the rules on tariffs created?Back to top

The negotiations produced agreements, in which each country agreed to set limits on its tariffs.

From 1947 until now more products were brought into these agreements, and the ceilings were gradually lowered. That’s how the EU’s tariff for those shoes has ended up at 8%

In other words, the EU’s 8% import duty on shoes was the result of negotiations with other countries in what is now the WTO. The others agreed in return to set lower tariffs on products the EU (and UK) wanted to sell to them.

Because it was the result of a negotiation, the 8% tariff on shoes is part of an agreement. All the negotiated rates are legally binding commitments in the WTO.

Each WTO member has lists of tariffs on thousands of products, and they are different for each country except those in groups like the EU.

What a world trade agreement looks like
Click the image to see it full size
What does this mean legally in the WTO?Back to top

To keep it simple, the tariff rates have two legal implications in the WTO.

1. They are ceilingsBack to top

The 8% tariff on shoes (and all other agreed tariff rates) is a legally “bound” ceiling. The EU can reduce it to, say 5% or scrap it completely without breaking its promise.

But to raise it to 20% would be breaking its promise, or violating the WTO commitment. Except …

… except it could go back to WTO members to renegotiate the ceiling in order to raise the tariff above the 8% ceiling.

It might have to give something in exchange such as a lower tariff on another product.

(There are rules about which WTO members would have the right to negotiate, but I won’t go into that here.)

2. They are the same for imports from all countriesBack to top

Secondly, the legal obligation is for that 8% tariff to apply to imports from all other WTO members, equally, without discrimination.

MFN
Most-favoured-nation (MFN) treatment is probably the most important WTO rule.It means not discriminating between one’s trading partners

Article 1 of the General Agreement on Tariffs and Trade (GATT), for trade in goods
Article 2 of the General Agreement on Trade in Services (GATS)
Article 4 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

But in each agreement the principle is handled slightly differently

Trade specialists talk about “MFN”. This stands for “most-favoured-nation” treatment and it’s so important that it’s the very first article of the WTO agreement on trade in goods.

The phrase sounds weird, but it means not discriminating between trading partners, treating them equally. Favour one, favour all.

There are exceptions.

You can have a free trade agreement (such as the EU-Japan deal, which recently took effect), or even the EU single market, which is a very sophisticated and far-reaching free trade agreement.

Or you can discriminate in favour of poorer countries by cutting tariffs on their products or allowing their imports to enter duty-free without doing the same for other countries.

The EU has numerous “preferences” schemes for developing countries allowing their products to be imported duty-free or at lower than normal duty. So does the UK so long as it’s an EU member — and it’s already announced it will continue with the preferences after leaving the EU.

There are other exceptions in special circumstances but those two are the basics.

Follow-up questionsBack to top

Q. When you say 8% on shoe imports, is that the agreed rate for all WTO members to import shoes at or just a ceiling for that one country on all WTO imports?

A. Each WTO member has its own tariffs. So this 8% is charged by the EU on shoes imported from all other WTO members (except under a free trade agreement, such as EU-Japan, or preferences on shoes from developing countries). The import duty rate in other countries will be different. The US’s import duties on shoes vary from duty-free to around 10% or higher. Japan charges 20%–30% duty on many shoe imports

Q. Can you explain a bit more about free trade agreements (FTAs)? That exempts you from WTO rules?

A. Not exactly. It’s about being exempt from the non-discrimination rule (MFN). WTO rules allow pairs or groups of countries to set up free trade agreements subject to certain conditions. When they trade among each other duty-free, they can still charge duties on imports from others.

So free trade agreements are within WTO rules provided the conditions are met. For example a free trade agreement has to cover all or most trade. You can’t have a free trade agreement in cars alone

Q. So essentially the UK already operates on WTO rules — the EU single market is like a big free trade agreement for us and acts like a single entity for making other FTAs? How does being an EU member now affect trade with WTO countries? Eg, the USA?

Correct. Even the single market is under WTO rules.

UK trade is currently

  • within the EU internal market (or single market)
  • on terms the EU has negotiated in the WTO — on tariffs that includes with the US
  • though free trade agreements (eg EU-Canada, EU-Japan)
  • through unilateral preferences for developing countries

I’m sticking to tariffs because the question asked for a simple explanation, but there are many other important issues such as product standards and food safety, which also come under WTO rules.

Note that until the referendum the UK was active and influential in EU trade policy.

Chart showing range of depths of free trade agreements and integration
The spectrum of free trade agreements and integration. Click the image to see it full size


Updates: None so far
Photocredits:
• School children: Bill Wegener on Unsplash, CC0
• Other images by the author 


Does the WTO require countries to control their borders?

Among the arguments that politicians are making about the Irish border are the claim either that WTO rules require countries to control their borders, or that the UK can drop border controls and wait to see what Ireland does. One is partly false, the other totally.

By Peter Ungphakorn
POSTED JULY 18, 2018 | UPDATED JULY 19, 2018

On Monday (July 16), MP Anna Soubry launched a vigorous attack in the House of Commons against hard-line Brexiters. There was a lot of truth in what she said, except on one point.

She turned to the likelihood that if the UK simply trades with the EU on WTO terms, and without an adequate form of free trade agreement, it will have to impose border controls on trade between the Republic of Ireland and the North.

WTO “rules say every member must secure their borders,” she said.

It’s a commonly-held view.

 

Two days later Independent.ie reported that the Irish government was “gearing up for a major confrontation with the World Trade Organisation (WTO) over the commitment to retain a soft Border in Ireland in the event of a no-deal Brexit”.

It went on: “Government sources say they are prepared for major confrontation with WTO officials, who will insist on a Border with the North as part of strict trade laws.”

The truth is that whatever happens, there will be no confrontation with the WTO or its officials.

Soubry’s comment was partly a reaction to some Brexiters claim that when trading purely under the WTO rules, the UK can simply decide not to check trade crossing the land border into Northern Ireland. It would be up to Ireland, according to this argument, to decide whether to set up its own checks, add friction and infrastructure to the border and put the Good Friday Agreement at risk, or to follow the UK.

Soubry was right in one respect. There is a problem with those Brexiters’ claim. Time to look at the rules.

WTO Agreements
Member-driven: the WTO agreements are administered by the members themselves
What WTO rules sayBack to top

First, a fact:

There is no rule in the WTO requiring its member governments to secure their borders.

After Brexit, the UK could drop all border controls for traded goods and services and it would be perfectly within its WTO rights.

And yet there was some truth in what Anna Soubry said. Independent.ie was much farther off the mark. And the hard Brexiters are completely at sea.

Here’s why:

  • The WTO does not tell countries what to do other than to keep their promises (abide by the WTO agreements and their WTO commitments)
  • Even when countries break their WTO promises, there is no “confrontation” with “the WTO” and least of all with “WTO officials”
  • The WTO is member-driven. If in the future other WTO countries believe the UK is violating an agreement, it is they, not the WTO bureaucracy, who will act. They can do so by complaining in a WTO meeting or filing a legal challenge in WTO dispute settlement
  • Since there is no WTO rule requiring governments to secure their borders, failing to do so would not break any specific agreement
  • Where the UK might run into trouble is under the WTO’s non-discrimination rules, particularly “most-favoured-nation” treatment (MFN), which means treating one’s trading partners equally

Suppose the UK and EU trade on WTO terms after Brexit. Suppose American apples arriving in the UK at an English port have to go through controls, but Irish apples crossing the border into Northern Ireland (also the UK) do not. Then the US could complain that its apples were discriminated against. They weren’t given equal treatment with Irish apples when they entered the UK.

MFN

Most-favoured-nation (MFN) treatment is probably the most important WTO rule.It means not discriminating between one’s trading partners

Article 1 of the General Agreement on Tariffs and Trade (GATT), for trade in goods
Article 2 of the General Agreement on Trade in Services (GATS)
Article 4 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

But in each agreement the principle is handled slightly differently

The US might seek a legal ruling in WTO dispute settlement. Months or years later, the ruling might conclude that the UK had discriminated. So either checks at the English ports would have to be dropped, or checks at the Irish border would have to be set up.

In other words, while no WTO rule actually says the UK will have to set up border checks, the non-discrimination rule may force it to.

That’s quite different from saying “every member must secure their borders”. In a system where nuance matters, the difference is important.

(Note the “might” and “may”. It’s possible that an in-depth legal ruling might disagree with the US’s claim in that example. After all, the difference is at the ports and not with the products themselves, although the US could counter that having to ship through Ireland in order to avoid checks adds to its costs. Until there is a real case we cannot say for certain. But legal opinion seems to take the view that the UK would be violating non-discrimination.)

Mexico-US border wall at Tijuana
National security: could the UK and EU legitimately cite it in the WTO?
National security?Back to top

There may be an alternative way to do this within WTO rules, only let’s not take this too seriously just yet, not least because there are conflicting opinions.

I’m not a lawyer but some trade lawyers have discussed the possibility. This is what I understand.

The idea is that the UK and EU could cite national security as a justification for breaking the non-discrimination rule at the Irish border.

London and Brussels (and Dublin) could seek a “waiver” in the WTO for the purpose, citing security exception clauses such as Article 21 of the General Agreement on Tariffs and Trade (GATT).

For this to be agreed in the WTO, at the very least both Britain and the EU would have to agree. It would probably have to apply only to Northern Ireland, not the whole United Kingdom, meaning there would probably have to be controls between Northern Ireland and the rest of the UK.

The national security argument would be undermined if controls were dropped only on one side of the border. The UK and Ireland would need to confirm that they were both acting in the security interests of the Good Friday Agreement, which they both signed. Otherwise, acting unilaterally would put the UK into conflict with WTO non-discrimination rules.

Some lawyers disagree. Shortly after this article was posted, Mark E Herlihy of Georgetown University challenged the idea that GATT Article 21 could be cited, although he said the UK and EU could obtain a waiver in the WTO.

“A waiver could be sought for what otherwise would be violations of non-discrimination obligations at the Irish/NI border, but that waiver could not be based on ‘national security’ under Art. XXI, which is narrow, and has no application here,” he tweeted.

Whether or not this is legally safe, there are a number of political problems. The most obvious is securing agreement from the EU and Ireland. Simply acting within WTO rules only the start. A number of other political and administrative complexities are involved, which are beyond the scope of this article.

And if the chosen route is “national security” then this is complicated by the fact that both the UK and EU are accusing the US of abusing the national security provision by citing it to justify tariffs on aluminium and steel.

Those political problems alone, particularly getting the EU and Ireland to agree, might prevent the idea from being considered seriously.


Updates:
• July 19, 2018 — comments from Mark Herlihy added, with minor tweaks to other parts of the final section

Photocredits:
• Southampton docks at night, by Geni GFDL CC-BY-SA

• WTO agreements: WTO publications
• Mexico-US border wall at Tijuana, Mexico © Tomas Castelazo, http://www.tomascastelazo.com / Wikimedia Commons / CC BY-SA 4.0