By Peter Ungphakorn
POSTED MAY 27, 2020 | UPDATED MAY 27, 2020
This final of 3 parts looks at UK-EU trade in services
and other issues under “WTO terms”.
Part 1 is on the meaning of “WTO terms”. Part 2 is on goods trade.
A short summary is here
They draw partly on a paper from The UK in a Changing Europe
As with goods, if the UK and EU fail to reach agreement, or if the agreement has limited content, UK-EU trade will see new trade barriers in services. Also possible are complications in intellectual property and dispute settlement among other issues.
For example, if the deal includes services, but only for telecommunications and transport, then all other services traded between the two will be on WTO terms: finance, insurance, construction, tourism, educational services, medical services, and professional services such as accountants, architects, lawyers, doctors, vets, musicians, actors, journalists — and much, much more.
PART 1 MEANINGS
WTO RULES v WTO TERMS
• WTO rules
• WTO terms
• What are the UK’s commitments in the WTO?
• Free trade agreements
• Rolling over EU free trade agreements
• No one trades on WTO terms alone
PART 2 GOODS
• Tariff quotas
• Level-playing field and line by line talks
• Non-tariff barriers
• Border checks
PART 3 SERVICES AND MORE
• Intellectual property rights
• Dispute settlement
• In short
Services are complicated. There are many different types (banking, insurance, telecommunications, transport, architecture, etc). Each has several methods of delivery, from setting up a branch in a foreign country, to the customer travelling into the country (as with tourism) or flying an expert out to provide the service.
Specifically, these are the “modes of delivery”, each with different trading conditions for each type of service:
Mode 1. Cross-border supply — the supplier and customer are in different countries. The service is supplied across the border (for example a music streaming service in one country supplying listeners in another)
Mode 2. Consumption abroad — the customer travels abroad and receives a service from a service provider in the other country (for example a tourist staying at a hotel abroad)
Mode 3. Commercial presence — the supplier sets up business in the same country as its customers (for example a German bank setting up a branch in France). This is linked to investment policy
Mode 4. Presence or movement of natural persons — professionals and other service workers move to the customer’s country. Not to be confused with free movement of people. (For example, an aircraft maintenance company sending engineers to service planes in another country.)
The trade barriers in services fall into two main groups operating in three ways. The two groups are:
- Market access — whether the country allows foreign suppliers of a particular service in any of the four modes to operate at all
- Regulations — determining the conditions service providers have to meet — the bar they have to overcome — to be able to trade in any of the four modes. This affects market access and is a major issue in trade negotiations
The three ways that market access and regulations work in international services trade, in each of the four modes, are:
- Market access commitments — in the WTO, or additional commitments in a free trade agreement
- Exceptions to most favoured-nation (MFN) non-discrimination — where a country reserves its right to discriminate between other countries, written into its WTO services “schedules” of commitments
- Limitations on national treatment non-discrimination — also listed in the services schedules of commitments (eg, preserving some professions for one’s own nationals)
Each of these works differently in each of the many types of service. (More details are here.) Free trade agreements can lower these barriers preferentially.
Broadly speaking, the EU single market still has some internal barriers, but considerably less than in most free trade agreements and even less than under WTO terms — the EU’s own WTO commitments on services are incomparable with the single market. So are the UK’s.
Without an agreement, UK-EU trade in services will be under WTO terms, and in some cases it will be considerably more difficult than in the Single Market. Even with an agreement, any area of services left out will also be traded under WTO terms.
“While the EU’s single market for services is incomplete, it has liberalised services trade to a far greater extent than any comparable free-trade or regional agreement. In some sectors, trade in services between member-states is freer than between the federal states of the US,” writes Sam Lowe of the Centre for European Reform. (The details are in his paper, here.)
Of the main areas of trade, the least integrated in the single market is intellectual property rights — patents, copyright, trademarks, designs, etc. Even so, anything left out of the UK-EU agreement, or if there is no deal, will mean falling back on the WTO’s intellectual property rules, which set minimum standards of protection.
The biggest potential difference could be over geographical indications — names associated with specific places and defining the goods’ characteristics.
As an EU member, British names were all registered with those of the rest of the EU. Also registered in the EU are a number of other names from other countries. The British names will continue to be protected in the EU, and new registrations will continue to use the same EU criteria.
The UK has agreed to continue to protect EU names already registered, but has made no commitment either on future EU names or the criteria that would allow the new names to be protected in the UK. Britain has simply said it will consider setting up its own system.
The EU’s system exceeds the requirements of the WTO’s agreement. Britain could decide to revert to basic WTO rules, which would please the US, Australia and like-minded countries, but displease the EU, Switzerland and some others. Whatever it does would have to comply with both forms of non-discrimination: most-favoured nation and national treatment.
What are “WTO terms” for geographical indications?
The WTO agreement distinguishes between wines and spirts, and other products including other alcoholic drinks, such as beer, and food.
Names of wines and spirits simply have to be protected if they qualify, particularly so long as the names have not become generic. Names of other products only have to be protected if there is a risk of confusing consumers. For example, no one would think that “American feta” came from Greece.
But the EU treats the names of cheese, beer and other products more or less the same as wines and spirits. So a cheese sold in the EU can only include “feta” in its name if it comes from Greece, even if it’s called “American feta”.
The EU is unlikely to revert to the basic WTO distinction because it considers geographical indications to be an important marketing tool, and its high level of protection is written into EU law. It could not discriminate against the UK by lowering the level for British names alone.
But the UK could change its criteria for new names, and the EU might object. In the negotiations the EU could seek agreement that its future names are protected. (See paragraph 43 of the Political Declaration accompanying the Withdrawal Agreement, and the section on geographical indications in the EU’s draft UK-EU agreement.)
Without agreement, this is one area where the UK could end up giving “WTO terms” to EU products, if it chose to go down that road. But if this crossed a red line for the EU, then both might end up with no deal and therefore WTO terms on everything. It depends on how the talks develop.
There are major differences between the EU’s and UK’s starting positions in the talks on how to resolve legal differences under the agreement they are negotiating. This matters for both sides since each would want an arrangement that would ensure the other keeps its promises in the agreement.
The differences are over what kind of joint institutional arrangement there should be, the role of the European Union Court of Justice in interpreting EU law (where it applies in the agreement), and perhaps whether some provisions might have no dispute settlement arrangement at all.
The bottom line is this. If there is no agreement, or for any areas of trade that are not covered by the agreement, the default is WTO terms and WTO rules. Any legal challenges on these would be through the WTO’s dispute settlement system. Although the system is handicapped because deadlock is preventing appeals, first stage rulings are still possible, and members are seeking other ways to get around the deadlock.
In short, trade between the UK and EU is going to be more difficult, in both directions. How much more difficult depends on what can be agreed. The more that can be agreed, the less the two will rely on trading on WTO terms. The more they trade on WTO terms, the larger the number of trade barriers that go up between them.
This is how The UK in a Changing Europe’s new paper sums up the potential economic impact of Britain trading with the EU only on WTO terms. GDP growth is knocked back by between 3.3% and 8.1%, with the government’s estimate at 7.6%:
We found that the direct impact would be to reduce UK GDP and income per head by 3.3% over ten years (in 10 years’ time GDP would be 3.3% lower than it otherwise would be). However, with plausible estimates of the indirect impacts — in particular, the hit to productivity resulting from reduced international trade — it would rise to 8.1%. This estimate is broadly consistent with the government’s own impact assessment, which estimated a negative impact of 7.6% of GDP.
This decline is dwarfed by the economic impact of the pandemic but whereas it is hoped that the impact of Covid-19 will be relatively short-lived, the impact of Brexit will not be.
Negotiating wider coverage needs more time. More time allows for less friction. But the British government has set an extremely tight deadline, suggesting it is willing to sacrifice lower friction in order to secure a quick deal.
Updates: None so far
Sao Paulo Stock Exchange by Rafael Matsunaga via Wikimedia and Flickr CC-by-2.0.
All other photos rights free (CC0). Known photographer credits: Aircraft by Binario on Pixabay | Beach hotel by Mohamed Ajufaan on Unsplash | Construction by Josue Isai Ramos Figueroa on Unsplash | Doctors by National Cancer Iinstitute on Unsplash | Beer by Michelle Riach on Pexels | Wine by Posawee Suwannaphati on Pexels