‘WTO terms’ apply in any future UK-EU trade relationship. But how much? Part 2 Goods

A lot has been said about Britain trading with the EU on ‘WTO terms’. But a fundamental misunderstanding needs to be cleared up. It’s not just about ‘no deal’. Part 2 of 3

New trade barriers: WTO terms means more obstacles in UK-EU trade

By Peter Ungphakorn
POSTED MAY 27, 2020 | UPDATED MAY 27, 2020

This second of 3 parts looks at UK-EU trade in goods under “WTO terms”. Part 1 is on the meaning of ‘WTO terms’. Part 3 is on services, intellectual property and other issues.
A short summary is here
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They draw partly on a paper from The UK in a Changing Europe

If the UK and EU fail to reach agreement, British goods imports from the EU and its exports to the EU will face tariffs and non-tariff barriers. That is not just the result of trading solely on WTO terms. Even with an agreement, some aspects of goods trade will still face the new barriers of trading on WTO terms.

TariffsBack to top

Freer trade and protection. The average import duty that the EU (and, for now, the UK) charges on goods is 3.2%. However, this is higher for agricultural goods (8.7%). Duties exceed 25% for more than one in ten agricultural products, sometimes by a large amount, whereas almost no products in any other sector have duties above 25%.

JUMP TO
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PART 1 MEANINGS

WTO RULES v WTO TERMS
WTO rules
WTO terms
What are the UK’s commitments in the WTO?
Non-discrimination
Free trade agreements
Rolling over EU free trade agreements
No one trades on WTO terms alone
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PART 2 GOODS
Tariffs
Tariff quotas
Level-playing field and line by line talks
Non-tariff barriers
Border checks
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PART 3 SERVICES AND MORE
Services
Intellectual property rights
Dispute settlement
To sum up

The highest tariffs are in fact way above 25% — the equivalent of 189% for some dairy products and 116% for some animal products.

These are rates at or close to the EU’s and UK’s WTO commitments, which continue to be the same during the withdrawal transition.

On May 19, 2020, the British government announced new “UK global tariff” for its post-transition applied tariffs — not, so far, the rates that are legally bound in the UK’s WTO commitments.

Since any changed applied rates are below the legally bound rates, this is not a problem. But raising the tariffs above the bound ceilings would require renegotiation. And since the rates expressed in pounds use a conversion rate of about £0.83687/€, an appreciation of the pound might be a problem unless the UK converts these new tariffs into WTO bindings.

The new rates, applying from the end of the withdrawal transition are available via a link here (in the original csv format), or here (pdf) and here (Excel). They do not apply to imports under free trade agreements or preferences for developing countries, only standard non-preferential, non-discrimination (MFN) trade.

Even though some of these new tariffs will be below the UK’s WTO commitments, they are WTO-terms tariffs for British imports because of the non-discrimination (MFN) rule. But British exports to the EU under WTO terms would face unchanged standard (MFN) EU tariffs at or close to the WTO commitment levels.

Predictability. Although lowering applied rates is legal in the WTO, it has implications for how the trading system works — for the predictability of trading conditions.

When tariffs were last negotiated comprehensively, in the 1986–94 Uruguay Round there were two objectives: to lower them; and to bind them at or close to applied rates, particularly in developing countries. This would give importers and exporters confidence that the applied tariffs would not be increased without renegotiation, helping trade to be more predictable.

Most developed countries still have applied tariffs at the bound rates, including the EU27, Japan and US. But as decades passed a few have cut some applied tariffs “autonomously”, including Australia, Canada, Iceland, New Zealand and Norway. The UK will join them.

THE UK’S NEW APPLIED TARIFFS

The British government announced a new “UK global tariff” in May 2020, to take effect after the Brexit withdrawal transition.

The new applied rates change tariffs on two thirds of over 11,800 products (defined as detailed “tariff lines”, and without taking into account the amount of trade in these products), according to Sussex University’s UK Trade Policy Observatory (UKTPO).

About a third stay at the ceilings bound in the WTO in order to keep protection for agriculture, fish, ceramics, and cars (still 10%).

Others are simplified (about 40% of products). Those in euros are converted to pounds using the exchange rate of £0.83687/€ (just over 10% of products).

About half of the tariffs are already zero. Tariffs on around 2,000 more products are cut to zero in order to lower costs for producers, consumers and supply chains, to get rid of “nuisance” tariffs that are already below 2%, or to encourage use of environmentally-friendly goods.

The Sussex University economists estimate that the new tariffs will increase the UK’s duty-free imports from countries without a free trade agreement (ie under WTO terms) from 51.5% to 70.3% of this part of UK trade.

For imports from the EU (or EU exports to the UK) trading on WTO terms would slash duty-free trade from 100% to 44.2%, whereas relying on UK/EU28 tariffs (essentially the rates bound in the WTO) would have left only 33.1% of UK imports from the EU duty-free.

WTO-terms applied tariffs. What do they mean for UK-EU trade “on WTO terms”?

For the UK, they only affect imports, including from the EU if the two trade on WTO terms — either because there is no deal at all, or for imports on any goods that are excluded from the free trade agreement.

But under WTO terms, British exports to the EU would still face unchanged EU tariffs for countries without a free trade agreement with the EU.

EU exporters to the UK would face lower or simpler tariffs on a number of products than without the new applied rates.

For example with trade on WTO terms, some shoes imported from the UK into the EU would see the duty rise from zero to 17%. Those same shoes, currently imported into the UK from the EU duty-free, would be charged 16% under the new applied tariffs.

Since food and other agricultural products have largely unchanged tariffs, they would be hit hardest both ways from UK-EU trade on WTO terms — both importers and exporters would be affected. The high tariffs on many products would be a serious problem for them.

That said, a 10% import duty is unlikely to mean a 10% increase in what we pay for those goods in the shops.

The exporter might lower their price to offset some of the impact, and the price rise in shops would be even less because the effect of the tariff would be diluted by transport costs and other overheads.

This is also affected by the value of the pound.

But if the tariff is high then trade in that product dries up completely. The imported product, from the supplying country facing the high tariff, becomes unavailable.

Tariff quotasBack to top

An additional complication is tariff quotas where the import duty is zero or low on limited quantities. Outside the quotas, the tariffs can be so high that trade is not possible. These quotas are often allocated to specific exporting countries.

The UK and EU are already facing a battle in the WTO because their proposed method for splitting the quotas between them is controversial. Exporting countries such as New Zealand, Brazil and the US complain that they will end up with less access to the two markets than when the quotas were for the whole EU including the UK as a member state.

But the way the UK and EU propose splitting the quotas does not take into account trade between them. British lamb, for example, would have almost no duty-free access to the EU market since the quota is almost entirely allocated to other WTO members.

(Britain has not yet announced the tariff quotas under its new applied tariffs.)

Unavoidable: Some future UK-EU trade will be on WTO terms; how much depends on the deal
Unavoidable: Some future UK-EU trade will be on WTO terms; how much depends on the deal

Level-playing field and line by line talksBack to top

UK-EU DEAL WITH SOME TARIFFS

Agreeing that all tariffs on UK-EU trade are going to stay at zero can be done quickly.

But if the UK and EU want non-zero tariffs on some of their goods trade, they will have to negotiate the tariffs item by item — or in the jargon, “tariff line by tariff line”.

That’s an awful lot of detail. There are tens of thousands of tariff lines.

Take one product: a shoe.

For customs purposes, the UK and EU subdivide footwear into about 70 different types (or tariff lines) in a list spread over three pages (308 to 311 here) .

One footwear group is defined just by the fact the shoes have a protective metal cap.

The duty rates range from 5% to 17%. Bafflingly, at the higher end the rates are 16.8%, 16.9% and 17% (the UK’s proposed applied tariffs would “simplify” these by setting them all at 16%, a slight reduction).

The negotiations would have to identify which ones are not going to be zero, what the final rates are going to be, and the steps to reach that level. It would take months if not years.

Is the duty on ski-boots (tariff line 6402121) going to stay at zero? Is it going to rise all the way up to 17% (EU imports) or 16% (proposed applied rate for UK imports), and if so, immediately or over a period of how many years? And if less than those figures then what will the rates be? For EU imports? For UK imports? Over what period?

Then on to the next type of shoe.

The UK and EU want their agreement to be duty-free on all products.

But there are conditions, particularly those set by the EU on fisheries and a level playing field on state aid and other areas, which Britain opposes.

If they cannot agree on the conditions (if either side cannot accept the price of the bargain), one suggested outcome is for some tariffs to remain on some products.

Those tariffs might be “WTO terms”, the standard non-discrimination (MFN) rates bound in the WTO.

Or they could be specific to the UK-EU agreement.

Tariffs would have to be negotiated product by product (or, in the jargon “tariff line by tariff line”).

For customs purposes, goods are subdivided in minute detail. There are tens of thousands of tariff lines.

There are 70 types of footwear defined by EU and UK customs. There are 14 different types of beef, each with its own import duty rate in their WTO commitments, according to whether frozen or not, with or without bone, and the type of cut.

For passenger cars, there are 26 different categories according to size, type, engine and whether new or second hand.

Suddenly the talks would become much more complex and require a lot more time.

Non-tariff barriersBack to top

Tariffs are not the only obstacles confronting trade in goods. Where tariffs are low, these other “non-tariff” barriers can also make trading significantly difficult. For example countries want to be confident that imported food is safe, animals and plants are free from disease or pests, and other goods meet safety or labelling requirements. This involves producing to satisfy importing countries’ requirements, and paperwork to show that the requirements are met.

WTO rules contain agreed basic requirements on how governments set standards and regulations, but often countries have additional deals to help trade flow more smoothly. They could align their standards, or accept that each other’s standards in some areas provide equivalent health and safety protection, or recognise laboratory inspections and certificates issued in the exporting country.

Modern free trade agreements try to deal with these non-tariff barriers more broadly. In the EU-Canada agreement (CETA), at least three of the 30 chapters (4–6), and large parts of the long Annex, deal with non-tariff barriers.

The more Britain wants to diverge from EU standards and regulations, the less coverage there will be in any EU-UK trade agreement. Anything left out, will rely on WTO rules alone.

This also applies to UK trade agreements with other countries, and can work in the opposite direction. The National Farmers’ Union (NFU) and others are afraid that in UK-US talks, Britain will be pressured into accepting food and other goods applying American norms, which the NFU considers to mean lowering British standards. It would also make trading these products with the EU more difficult.

Border checks*Back to top

* This section draws heavily on The UK in a Changing Europe’s paper

Any product crossing from, say, Somerset into Devon is assumed to be safe because the transaction takes place within the UK’s own internal market. Similarly, goods entering the UK from the rest of the EU are not normally inspected and are assumed to be safe because of common standards and checks in the EU’s internal market.

This will no longer be the case once the UK is outside this market, at least for Great Britain (England, Scotland and Wales) — the Withdrawal Agreement effectively puts Northern Ireland in the EU single market for goods.

Britain could unilaterally scrap checks on imports from the EU but it would have to do the same for imports from everywhere under the WTO’s non-discrimination rule. And it would lose control over imports, including of dangerous products such as contaminated food, animal and plant products carrying pests and diseases, dangerous electrical goods, unsafe cars and so on.

So goods traded between the UK and EU will unavoidably face new entry barriers and friction at the border. With no deal, the friction will be high unless specific agreements can be struck. Even with a deal there will be checks on some goods, and processing for paperwork even for goods that are not physically checked. Leaving the single market increases red tape and costs to business.

For British exports to the EU, all products of animal origin will have to enter via a veterinary border inspection post where documents, identity and the goods themselves would be checked. All consignments of milk for human consumption would also be subject to document and identity checks, at least half subject to additional physical checks. Currently, two of the UK agriculture’s main routes to market — the Port of Calais and the Eurotunnel — do not have veterinary border inspection posts.

The only examples of non-EU countries which can export food and agricultural products to the EU without going through inspection posts are Switzerland and the EEA/EFTA nations (Norway, Iceland and Liechtenstein). However, all have aligned their food safety and animal or plant health (sanitary and phytosanitary, or SPS) regimes with the EU. They follow any changes to EU rules to maintain this ease of access.

For technical regulations and standards more generally — technical barriers to trade (TBT) in the WTO — the EU requires goods placed on the market to meet its standards. UK exporters will continue to be able to self-certify that products conform. It would then be the responsibility of the EU importer to be liable for any mistakes.

Some products require approval by testing bodies, such as medicines and chemicals. The EU would no longer recognise declarations of compliance with EU standards by UK-based bodies, unless an agreement on recognition was reached. An agreement would reduce the administrative burden and avoid double testing in both the UK and EU. If the two sides cannot agree quickly there would at least be short-term disruption.

With or without a UK-EU deal we can expect risk-based inspections at the border, new import and export declarations, and other red tape. Without a deal this would be worse.

Contrary to some claims, the WTO’s Trade Facilitation Agreement would have no effect on how and whether the UK and EU check each other’s goods. They both already comply with most, if not all, of its provisions. And those provisions dealing specifically with streamlining at the border — such as electronic paperwork — generally ask countries no more than to do their best, so non-compliance is hardly easy to prove.

Nor, as some have claimed, would it be “illegal under WTO rules” for the EU to check imports from Britain. Without an agreement, at its border the EU will treat imports from the UK the same as for any other non-EU country without an EU free trade agreement — except on the island of Ireland, which in practice creates a trade border between Great Britain and Northern Ireland. The UK would still have to demonstrate to the EU, by some means, that its products comply with EU requirements.

Next: Part 3 services and more. Back to Part 1


Updates: None so far

Credits: Photos CC0 except where stated


 

Author: Peter Ungphakorn

I used to work at the WTO Secretariat (1996–2015), and am now an occasional freelance journalist, focusing mainly on international trade rules, agreements and institutions. (Previously, analysis for AgraEurope.) Trade β Blog is for trialling ideas on trade and any other subject, hence “β”. You can respond by using the contact form on the blog or tweeting @CoppetainPU