By Peter Ungphakorn
POSTED SEPTEMBER 18, 2020 | UPDATED SEPTEMBER 22, 2020
Here we go again. You’d have thought they would get it right by now. After all it’s over four years since the Brexit referendum thrust trade and World Trade Organization (WTO) rules into the British political consciousness.
And yet, there we were, on September 16, 2020, a few weeks before a UK-EU trade agreement was supposed to be concluded, listening to two leading politicians showing they still don’t get the most basic rule in international trade.
Prime Minister Boris Johnson was answering questions in the Liaison Committee, comprising chairs of various House of Commons committees.
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Nakedly not Australian | First commandment | Hardball, softball, all balls | Reciprocal? How? | Peston, ‘WTO tariffs’ and tariffs traders actually face
Parish’s response
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A real beginners’ guide to tariffs and the WTO
Here’s Neil Parish, chair of the Environment, Food and Rural Affairs Committee (see his response to this article below):
“Will you commit to putting reciprocal tariffs on EU imports if we do not make a free trade agreement with the EU?”
At first Johnson seemed to have the right answer:
“The tariff schedule has been published, and you will be familiar with it.”
But then he went and spoiled it all.
Parish: “And it will be reciprocal.”
Johnson: “Of course.”
Messrs Johnson and Parish ought by now to know what nonsense that is. Much of the non-trade Twitterati did, as they piled on with corrections. They also had a go at a strange tweet from ITV’s Robert Peston.
Let’s look at this bit by bit from the transcript, questions 67 to 71.
Let’s also assume that the UK is committed to complying with international law (I know, I know), in particular the agreements of the WTO, which the government has declared will be centre stage for Global Britain’s role in trade post-Brexit.
Nakedly not Australian
First, Parish’s questions are about trade without a UK-EU agreement. He called it:
“an Australian-type deal in January, with a basic no deal”.
That’s gobbledygook. What’s a “basic” no deal and how does it differ from a “sophisticated” one? To borrow someone else’s expression, no deal means no deal. Full stop.
And of course, “Australia-type” is like the emperor’s new clothes, failing to cover up the embarrassment of “no deal” because Australia does have agreements with the EU.
The chair of the committee that deals with agriculture should know that Australia has country-specific tariff quotas for farm products in the EU whereas a “no deal” UK would not. Australia also has mutual recognition agreements with the EU — the UK wouldn’t have any either.
First Commandment
Then this, from Parish:
“Are you confident that we can get food through the border in January, whatever happens with the EU, and will you waive tariffs if that can’t be got through?”
We really shouldn’t be talking about this any more. So, wearily, all together now. The first commandment in WTO rules for trade in goods is:
Thou shalt not discriminate between thy trading partners (unless thou hast a free trade agreement).
Unlike biblical commandments, those in trade always have qualifiers.
I digress. As many know by now, this is the famous “most-favoured-nation (MFN) treatment”, General Agreement on Tariffs and Trade (GATT) Article 1.
Outside the EU and up the creek without a UK-EU free trade agreement, goods trade between the two must be charged the same tariffs as each of them charge on imports from any other WTO member, except where there’s a free trade agreement.
Since this is “no deal”, there is no free trade agreement. Therefore
- UK imports from the EU have to be charged the same standard tariffs as the UK charges on imports from the US, Australia, China, etc
- EU imports from the UK also have to be charged the same standard tariffs as the EU charges on imports from the US, Australia, China, etc
Look again at what Parish said: “… and will you waive tariffs if that can’t be got through?”
This is ambiguous. If he means waiving tariffs only on EU goods, without doing the same for the US, Australia, China, etc, then it is breaking that First Commandment on MFN. The UK can only “waive” tariffs exclusively for imports from the EU if the two have a free trade agreement.
Otherwise, under the First Commandment both sides would be obliged to charge tariffs on each other’s goods.
Perhaps he meant “waiving” tariffs on food imports from everywhere (MFN). (His spokesperson has confirmed this is the case. See below.)
At the very least some tariff reductions can be expected in order to keep food affordable.
But this committee chair ought to know that if tariffs on food are waived across the board, he might bump into some unhappy British farmers on the streets of Westminster. I could elaborate but there’s already enough BS in this piece.
Johnson’s answer dodges the question. He simply talks about preparations for border procedures, and neither side wanting to impose tariffs on each other’s goods — he clearly interprets the question as being about tariffs on UK-EU trade.
“I am confident that we will be able to keep things flowing smoothly at the border — or as smoothly as we possibly can. […] As for the possibility of tariff barriers on either side, I don’t think that our friends and partners would want to see them go up — us putting tariff barriers up against their produce—any more than we want to put tariff barriers up against theirs, for the very good reason that they have a considerable net surplus in food products coming into this country.”
Hardball, softball, all balls
Next, Parish seems to contradict his own call for tariffs to be “waived”:
“If we are not going to levy tariffs on their goods coming in, are we just going to give our trade away to the EU? Surely, if they are playing hardball at the moment, we should put tariffs on absolutely everything that comes in because that will bring them to a negotiating position where we can actually get a tariff-free deal. At the moment we seem to be very blocked. We will just trade away our farming and our food processing industry, and so much of it relies on having a true level playing field with the EU.”
Point by point, then.
“If we are not going to levy tariffs on their goods coming in …”
That would violate the First Commandment. It would violate MFN. The UK would be in breach of its WTO obligations.
“… we should put tariffs on absolutely everything that comes in …”.
Either he means the UK should apply its standard tariffs to EU imports, which it is obliged to do under MFN, the First Commandment.
Or he really means tariffs on everything even when the standard tariffs are zero — the UK’s external MFN tariff regime includes zero duty on some products.
That would violate the First Commandment because the EU would be charged tariffs on products that are duty-free when imported from the US, Australia, China, etc.
And in some cases those zeros are legally binding ceilings in the WTO, so charging tariffs on those products would also violate the UK’s WTO commitments. Tariff bindings and how they differ from applied tariffs are explained below.
“… because that will bring them to a negotiating position where we can actually get a tariff-free deal …”.
Maybe. More likely it will bring the EU to Geneva, to WTO dispute settlement, with a complaint that the UK was violating the First Commandment.
Johnson replies with a good answer:
“Our external tariff regime, were it to come in, would be quite formidable for some of their products, and I think it is all the more reason why everybody should want to agree a zero-tariff, zero-quota arrangement.”
Reciprocal? How?
Then comes this:
Parish: “So will you commit to putting reciprocal tariffs on EU imports if we do not make a free trade agreement with the EU? It is essential if we are going to maintain production in this country and also get a deal with the Europeans.”
Johnson: “Neil, you are quite right.”
Problem 1. They are not reciprocal tariffs. They are WTO obligations under the First Commandment, MFN
Problem 2. Since the UK decided to diverge from the standard tariffs of the EU customs union (still applied under Brexit transition), the British and EU tariff schedules are not the same. For some products both will charge the same rates. For others, the UK tariffs will be lower than the EU’s. So the tariff rates would not all be reciprocated.
Neil Parish: “So you will commit to a reciprocal—”
Johnson: “We certainly will. Of course. The tariff schedule has been published, and you will be familiar with it.”
In the end, a good answer, Mr Johnson. Stick to the tariff schedule. And yes, Mr Parish should be familiar with it.
Parish: And it will be reciprocal.
Johnson: Of course.
Oh no! How many times? It’s not reciprocal. It’s an obligation. And the two sides’ tariffs will not be the same.
Now to be fair, some have interpreted Johnson’s reply as standard Johnson, ie, to say anything that his supporters want to hear. Others are not so sure he understood what he was saying.
Peston, ‘WTO tariffs’ and tariffs traders actually face
What about Peston’s tweet?
“That was quite something. @BorisJohnson seemed to say that if EU levies WTO tariffs on UK goods, UK would retaliate by doing the same. Which from memory is contrary to official government policy. We seem to be entering Trumpian trade war territory with the EU.”
Not just official government policy, Mr Peston, but Rule Number One of the WTO’s agreement on trade in goods, the First Commandment. If the tariffs are obligations under GATT Article 1 (MFN), they can hardly be called retaliation.
But there’s another problem, which few picked up apart from some trade geeks. Peston, like many others, uses the phrase “WTO tariffs”. It’s an unhelpful, misleading expression that should be avoided. Why?
We are talking about tariffs that traders actually face in the real world when countries trade on WTO terms. Can they be called “WTO tariffs”? At a pinch, maybe but they are not what the phrase seems to mean.
First, the WTO does not set tariffs. A lot of people hearing that phrase assume wrongly that it does.
Instead, WTO members negotiate tariff reductions within the WTO, leading to agreement on new, lower tariff ceilings.
Each country has its own set of agreed tariff ceilings and submits these to the WTO in lists called “schedules” of concessions or commitments. These ceilings are legally binding and are known as “bound rates”.
They are not the tariffs we are talking about here.
Second, because the bound rates are ceilings, countries can and often do charge import duties that are below the rates in the legally binding schedules. These are “applied rates”.
Third, applied rates are the ones that count in real-life trade, because they are the rates importers and exporters face.
But they do not have any legal status in the WTO even though countries are required to notify them for transparency and for statistical analysis.
The only link with WTO legality is through that First Commandment, MFN (and the obligation to keep applied rates at or below the bound rates). So each country has to charge the same applied rates on imports from all WTO members except under a free trade agreement. What those rates are is up to them.
Fourth, people often say “WTO tariffs” as shorthand to mean “the tariffs that apply when trading on WTO terms”.
That means “applied rates”, the rates that have the least legal status in the WTO.
Many people are not aware of the difference between bound and applied rates. So the phrase “WTO tariffs” conveys a meaning that may have little to do with what the speaker intends and only a weak relationship with tariffs in the WTO.
It’s best to stop using it. What should we say instead?
Technically this is easy: “MFN applied rates” or perhaps “MFN rates”. Non-technically, perhaps something like “standard rates” or “standard rates outside a free trade agreement”.
We are going to hear a lot more about tariffs in the near future. We’d better get it right.
Parish clarifies
A spokesperson for Parish has responded. I’ll leave you to judge how much of the above the clarification addresses. These are from an exchange by email:
Parish’s spokesperson: The key point is that tariffs would be applied to EU imports under the Global Tariff, as published. There was a time when the Government was considering unilaterally cutting tariffs to zero. Concerns remain that if there are issues with food supply, tariffs could still be cut and our negotiating leverage for an FTA undermined.
Me: First, are you confirming the second option in the discussion of what Neil Parish meant when he talked about waiving tariffs, ie “Perhaps he meant ‘waiving” tariffs on food imports from everywhere (MFN)” — a reference to earlier consideration of cutting tariffs unilaterally (MFN) to zero?
Parish’s spokesperson: Yes. When the UK Temporary Tariff Regime was published there was a big uproar in the farming community here about sweeping tariff reductions on food. The adjusted and published Global Tariff is much better for the UK farming industry, applying greater tariffs on food imports.
Me: But it still leaves the question: even if the government had decided on zero tariffs MFN, how could it justify breaking MFN by charging tariffs on EU goods in order to bring them to the negotiating table?
Parish’s spokesperson: It couldn’t. The reverse was actually considered when the TTR [Temporary Tariff Regime] was published, zero-rating tariffs from the EU on a standstill but levying them on other trade partners. This wouldn’t have worked.
On reciprocity, the UK is entitled to change its global tariff regime, but without an FTA, it would apply to everyone under MFN. You’re right, of course.
The key point, I suppose, was “will the UK government implement the UK’s current published global tariff in the event of ‘no deal’ with our largest trading partner, or will there yet be changes?”
How firm will the Government be? If there are food supply issues, will that change their approach? If they waived tariffs, would our negotiating position for a FTA be lost? The answer, simply, was yes, and the UK Global Tariff will be quite punishing on the EU who have a trade surplus with the UK.
I really hope this clears things up.
(Note: the two names for the UK’s MFN tariffs charged outside a free trade agreement:
(1) The “UK Temporary Tariff Regime (TTR)” with low or zero tariffs on food.
Replaced by (2) the “Global Tariff” which is based on present UK tariffs within the EU customs union but with some reductions, rates originally in euros converted to pounds, and some simpler tariffs. Eliminated tariffs are mainly those that are already low and considered a “nuisance”.
Both are applied MFN tariffs; one has more low tariffs than the other.)
Updates:
• September 22,2020 — adding response from Parish’s spokesperson; minor edits
Image credits:
• Johnson and Parish | screengrabs from Parliament TV
• Emperor’s new clothes drawing | Koninklijke Bibliotheek, CC BY-SA 2.0
• God and stone tablets | unknown, rights free
• Baseballs | Heung Soon via Pixabay CC0
• Customs barrier | CC0
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