When journalists don’t understand WTO work they jump to wrong conclusions. The questions Canada faced in the Agriculture Committee were not a geopolitical attack. They were more important than that
By Robert Wolfeand Peter Ungphakorn POSTED JUNE 23, 2017 | UPDATED JUNE 24, 2017
Agriculture attachés from around the world may be surprised to learn that Vladimir Putin has taken an interest in their work in Geneva and is targeting Canada’s supply-managed dairy industry.
Or maybe they won’t as they realise a huge amount of journalistic licence has been injected into this account of a routine but important meeting at the World Trade Organization (WTO) on June 7 (The Globe and Mail, “Countries pile on in attack of Canada’s dairy regime”, June 18, 2017).
Canada has faced 156 sets of questions about its dairy policies, in almost every meeting except for a four-year lull
Does the Russian president really think the price of ultra-filtered milk is of such geopolitical significance that he ordered his agriculture officials at the WTO to intervene?
“Whoa. What? Russia — architect of central economic planning in the Soviet era — is lecturing Canada about the evils of supply management?
“That can’t be good.
“That Russian President Vladimir Putin has found common cause with some of Canada’s closest trading partners is a measure of the powerful forces lining up against this country’s embattled dairy industry.”
What really happened in that June 7 WTO meeting is much less dramatic and far more important than that. Canada should welcome Russia’s intervention, but for completely different reasons.
There were actually two separate issues in the meeting. One was an annual look at how countries are keeping their 2015 promise to scrap export subsidies. Canada still subsidises butter exports, which aroused comment from a number of countries.
But Russia “lecturing Canada about the evils of supply management” was no more withering than: “We’re interested too”, more or less.
(In fact, Russia did do a bit more than that. It joined Canada and other members of the “Cairns Group” of successful agricultural exporters in circulating a paper on export subsidies (pdf). There is no reference to anything related to supply management.)
Canada’s supply management (actually, milk classes) featured separately in 80 questions from New Zealand, Australia and the US. On this, Russia said nothing. Perhaps it should have.
Let’s take a step back. The WTO operates a system of agreements that its member countries have negotiated and signed. One of them is about reforming agricultural trade. WTO committees are where all its members can monitor how well the agreements are being implemented.
The Agriculture Committee does this three or four times a year. Questions and answers are key.
There are lots of them. Since the WTO was created in 1995, Canada alone has submitted 1,131 sets of questions on all agricultural trade issues in all but a couple of the 84 meetings. Canada did not lecture any other WTO member but occasionally asked whether a country’s policy was wise or legal.
In the same period, Canada has faced 156 sets of probing questions about its dairy policies, again in almost every meeting, except for a lull between 2000 and 2004.
And yes, the reason for those questions in both the WTO Agriculture Committee and in other meetings is surprise that a country supposedly in favour of liberalizing farm trade maintains strong protection for dairy. Such questions are not an “attack”, but Canada did have to defend the high import duties and subsidies that protect supply managed products in the stymied Doha Round negotiations.
In the June 7 meeting, the 80 questions Canada faced were grouped into 13 sets, one from New Zealand spread over five pages. Almost all were about Class 7 or other milk classes.
Canada wasn’t idle either. It asked 19 sets of questions, seeking answers from the US, EU, Ukraine, Panama, India and Turkey on a range of issues.
The meaning of questions
A lot of these questions are just seeking information: what a new programme does, how a programme works and so on. Some focus on particular policies, such as Canada’s milk classes, because the countries asking the questions — mainly New Zealand, Australia, the US and EU — are worried that these policies are a sneaky way of hiding subsidies.
In the WTO the questions can only really be turned into an “attack” if New Zealand and co believe Canada is subsidising beyond the limits it has agreed. Canada has only ever faced two legal challenges on dairy products, both in 1997 and both involving milk classes (this and this).
This kind of work is crucial if trade negotiations are going to have any meaning. You don’t just wake up, negotiate, sign an agreement and go back to sleep.
The agreement has to be implemented and the countries that negotiated the deal have to be able to see that everyone is honouring it.
This is hard work. For agriculture, all countries have to share information with each other (technically, they “notify the WTO”) on how much they have subsidised each year, what policies they have that might affect prices, production and exports, and what has been happening with imports, particularly if quotas are involved.
Just compiling and sharing the information can be a huge task. Once it’s available it becomes an absolutely essential way for countries to ask each other about the data so they can understand better, to monitor how level the playing field is in agriculture, and for the world at large to do the same.
Treating questions as attacks is therefore about as useful as a teacher complaining about questions from the class. This is about understanding and feedback.
So Russia’s involvement should also be welcomed. Russia is a new WTO member. It only joined in 2012. It’s still learning how the WTO works. The greater the interest it pays to WTO proceedings, the more it will be able to be a responsible WTO member. If it can ask 1,131 questions in the next two decades it will be as good a world trade citizen as Canada.
Who knows? President Putin might even learn something too.
Updates: June 24, 2017 — added text and links on joint Cairns Group and Russia paper on export subsidies; added clarification that probing questions about Canada’s dairy policies do reflect concern
Photocredits: Public domain CC0 except Holstein cow in Nova Scotia 2015 by Dennis Jarvis, Halifax, Canada CC BY-SA 2.0
A look at the UK, EU and WTO with an eye on Brexit. Includes a brief explanation of the WTO system, a taste of how negotiations work in the WTO, and the implications for the UK (and EU) as they prepare for Brexit and beyond
By Peter Ungphakorn POSTED MAY 25, 2017 | UPDATED MAY 25, 2017
This page contains a link to download a handout on the UK, EU and WTO as Brexit approaches. It is slightly modified from a presentation given on May 20, 2017.
The presentation can be downloaded as a handout here (pdf).
It is intended as a taster. It does contain a lot of detail, which can be explored further. But the main purpose is to provide a feel for how the detail and the bigger picture relate.
Negotiations as the starting point. Rights and obligations (reciprocal and non-reciprocal). Space for sound policy-making. Rules and commitments.
2. WTO negotiations: A taster
Consensus. Member-driven. The Doha Round. Negotiating coalitions (in agriculture). Concentric circles — when it’s impossible to negotiate properly in a large crowd. More than just an affair between governments: there are also negotiations at home.
3. Brexit and the WTO: Before, during and after
UK and EU “schedules” of commitments. What schedules are. How to establish the UK’s and EU’s schedules post-Brexit. The EU’s complex tariff profile. Tariffs (shoes and oranges). Tariff quotas (lamb, mutton). Domestic support for agriculture (trade-distorting). Agricultural export subsidies. Services. The cliff-edge and worse: what if there are no acceptable schedules by Brexit day?
Free trade agreements: UK-EU; UK-other WTO members. WTO rules on free trade agreements. Shallow to deep arrangements.
UK as champions of free trade. Policy choice from liberal to protectionist. Impact on bilateral free trade negotiations. UK positioning in WTO — current policy on agriculture puts it closer to the more protectionist group; handling the WTO agendas on regular work and negotiations.
Be warned. I’m not about to give a proper answer. This is an attempt to point to where the information can be found. There’s so much detail — 160 sub-sectors of it — I’ll wait for others to take up the baton
By Peter Ungphakorn POSTED APRIL 12, 2017 | UPDATED MAY 4, 2017
A lot has been said about the impact on trade in goods if the UK and EU fail to strike a free trade deal after Brexit. They would rely on their WTO commitments, such as on tariffs and quotas. Much less has been said about the commitments on services, despite their importance to the UK economy.
Air transport: WTO commitments on all services are unbelievably complicated, but landing rights are totally excluded
This is not surprising. Firstly, countries’ commitments in the WTO on opening their services markets (known as services “schedules”) are unbelievably complicated. The WTO has a 2,000-word guide to understanding them (approximately 5 pages) — and even that is written for readers who are already familiar with a range of technicalities.
Secondly, although the EU member states’ commitments on services are combined in a single EU schedule, there are countless entries that apply only to individual member states. In other words, what applies in France may not apply in the UK, and so on.
For the EU, added to this complexity is the fact that authority (or “competence”) over services markets is divided between the EU Commission and the member states. This is unlike tariffs, which come under the customs union and are the central responsibility of the EU.
One of the results is that the EU’s present certified services schedule is for the 12-member EU that signed the original WTO agreement on services back in 1994 at the end of the 7-year Uruguay Round negotiations. A draft for the expansion to 15 members in 1995 still has not been certified because two decades later some of those 15 EU members still have not ratified it.
In other words, WTO certification for services is being held up within the EU. By contrast, its goods schedules have been delayed by objections or reservations from WTO members outside the EU.
The WTO’s page for the EU says the EU’s “services schedules include its member states but those who joined in 1995 (Austria, Finland, Sweden) and in May, 2004 […] also have schedules under their own names”. Presumably the same applies to the 2007 and 2013 expansions.
That said, further multilateral negotiations in 1995–1999 — after the Uruguay Round concluded in 1994 and after the WTO came into being the following year — added supplements on financial and telecommunications services. For the EU, these cover Austria, Finland and Sweden and therefore apply to the EU–15.
Finally, analysing the impact of trade barriers on goods is relatively straightforward since tariffs are numbers. Even where the numbers are complex, economists and statisticians can work with them with little difficulty.
But when Germany says accountancy services (other than auditing services) cannot be provided through a particular type of company — “‘GmbH & CoKG’ and ‘EWTV’” — quantifying that trade barrier or its impact is much more complicated.
As with goods, the EU’s services schedules have implications for Brexit in two ways:
They are needed to identify the UK’s own commitments to open its services markets to the rest of the WTO, except where the UK has a free trade agreement in services — and the EU will also have to modify its schedule to take account of the UK’s departure
If the UK and EU do not strike a free trade deal on services, their WTO schedules will define services trade between them. In other words, getting the schedules right is also important for the two because the schedules are a fall-back position in case they cannot strike a bilateral deal. The real impact would be considerably more complicated than just identifying the UK’s own schedules. For the UK, this is compounded by the fact that the schedules for 16 newer EU member states have not yet been incorporated into the EU’s (except for Austria, Finland and Sweden in financial services and telecoms). UK service providers seeking access to the EU single market might have to study up to 17 schedules to decide where best to set up business
Remember that a WTO schedule sets limits on how much protection a member provides to its producers. This is also true of services. Countries are free to open up more than their binding WTO commitments on services, provided they comply with general rules such as non-discrimination (where there are no exceptions in their schedules). But if they want to close markets beyond the limits in the schedules, they have to renegotiate.
Because of the complexity, this article is nothing more than an attempt to encourage a discussion by focusing on where to find the information rather than providing a comprehensive picture. I know less about trade in services than in goods. Hopefully the discussion can develop. But the overall picture for services may still be too complex to for a big-picture examination, unlike tariffs and tariff quotas.
Financial services: Some of the UK’s services commitments are reserved for companies in the European Economic Area
Extracting UK’s services commitments from the EU’s
To recap what has been said elsewhere: although the UK is a WTO member and will continue to be after it leaves the EU, its WTO commitments — including on services — are bundled with the EU’s. So, in order to re-establish itself as a WTO member independent of the EU it will need to extract its commitments from those of the EU.
The EU’s goods and services schedules of commitments have still not yet been certified in the WTO for the enlargements up to the present 28 member states.
British International Trade Minister Greg Hands has now confirmed that work on the UK’s schedules “will be based on the most recent certified EU schedules, which is EU–25 for goods, and EC–12 for services. Since the schedules were certified the EU has entered into further WTO obligations, which we will also seek to replicate in our schedules.”
(He was replying to a written question from Kirsty Blackman, the Scottish National Party’s Westminster MP for Aberdeen North.)
THE FOUR MODES OF DELIVERY Mode 1. Cross-border supply. The supplier and customer are in different countries. The service is supplied across the border Mode 2. Consumption abroad. The customer travels abroad and receives a service from a service provider in the other country Mode 3. Commercial presence. The supplier sets up business in the same country as its customers 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 services, experts say the task is fairly straightforward but time-consuming because of the volume of work required — around 160 types of services are covered, each having commitments on four “modes of delivery”. (There’s an example below.)
Officials will have to go through every provision in the EU’s services schedule that applies either to the EU–12 (or in some cases EU–15) or only to the UK. They will then have to transfer the provision into the UK’s schedule. This is not necessarily straight copy and paste.
Fortunately, judging by a quick electronic search for “UK”, only four limitations on market access are identified as applying specifically to the UK:
Medical services (mode 3 — commercial presence): “Establishment for doctors under the National Health Service is subject to medical manpower planning”
Veterinary services (mode 3 — commercial presence): “Access through partnership or natural persons only”. As I understand it, this means the UK reserves the right to prevent foreign veterinary companies from establishing in the UK. Foreign vets would have to form partnerships, be self-employed, or work for UK firms.
Banking and other financial services (mode 2 — consumption abroad): “Sterling issues, including privately led issues, can be lead managed only by a firm established in the European Economic Area”
Banking and other financial services (mode 2 — consumption abroad): “Inter-dealer brokers, which are a category of financial institutions dealing in Government debt, are required to be established in the European Economic Area and separately capitalised”
Those last two also show that some of the UK’s commitments are linked to the European Economic Area (EEA = the EU except Croatia, which is a provisional EEA member, Iceland, Liechtenstein and Norway). Nothing has been said publicly about what happens to these provisions if, as seems likely, the UK leaves the EEA.
However, some provisions apply to all EU member states through Commission regulations, and these may also have to be sorted out to establish the UK’s services schedule.
The same is true of the EU’s “MFN exemptions”, another part of the services schedule, where members reserve the right to discriminate between other WTO members (more below).
On the plus side, the absence of certified services schedules for the enlarged EU might not be a problem. The general provisions for the EU and those specifically for the UK might not be different in the enlarged schedules, experts say — although nothing can be guaranteed.
Tourism is mode 2: the customer travels to consume the service abroad
The full list is in this document from 1991 (pdf), when it was first agreed during the Uruguay Round negotiations (in the document number, “MTN” stands for “multilateral trade negotiations”).
Each of these services can be delivered in four modes:
Mode 1. Cross-border supply. The supplier and customer are in different countries. The service is supplied across the border. For example a UK news agency supplying a news service to a newspaper in France
Mode 2. Consumption abroad. The customer travels to another country and receives a service from a supplier in that 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 UK news agency setting up an office in France to supply French newspapers
Mode 4. Presence or movement of natural persons. Workers or staff move to the customer’s country. For example, the UK news agency sends a British manager to France to run the office there. Note that this is not the same as “free movement of people”. Mode 4 may require visas and work permits, which could be fast-tracked or easier to obtain.
(Some economists are now talking about a fifth “mode”: the value of services incorporated in goods, but this is not yet formally in the WTO.)
None of this means “unfettered free trade” in services. Services regulation is a separate topic in the WTO — liberalisation and deregulation are not the same. And all those pages of commitments are essentially lists of exceptions or limits on liberalisation.
GATS itself recognises the need to regulate and it allows countries to exclude “services supplied in the exercise of governmental authority”. These include utilities, social security and any other public service such as health or education that is not supplied commercially, does not have market conditions, or is not in competition with other suppliers. An annex on air transport completely excludes airline landing rights.
The EU’s schedule goes further in setting limits on commercial access to its government services and only opens up education services that are privately-funded.
Mode 4 (presence of natural persons): giving easier access to visas and work permits is one of the toughest issues in services
The EU’s services schedules
The EU’s latest WTO-certified services schedule is in five documents, although searches produce eight, three of them superceded. Seven of the eight are “commitments”; one is a list of “exemptions” from non-discrimination between other countries (“most-favoured nation” exemptions). There are a number of ways to find them:
In the WTO’s iTip database. This is the simplest way to find individual commitments. Here, although it is possible to search for the UK’s commitments, the results are for all the EU–12 (sometimes EU–15)
Use the links below to download pdf versions (correct at the time of writing)
First, the original 1994 commitments:
The main schedule (GATS/SC/31 of 15 April 1994 — 97 pages). This is in two parts: “horizontal” commitments applying to all services sectors (to page 11), and commitments for the specific sectors (the remaining pages). This schedule is for the EU–12 and still applies except where updated for financial and telecoms services, and “mode 4” by the supplements below.
Exemptions from non-discrimination (“MFN exemptions”) allowing the EU to discriminate in certain cases (GATS/EL/31 of 15 April 1994 — 13 pages). This currently applies to the EU–12
Then, supplements updating commitments in specific sectors (or in one case a services “mode”) resulting from further WTO negotiations. Some include commitments for Austria, Finland and Sweden, which joined the EU in 1995:
“Mode 4” (“movement of natural persons”), supplement 2 (GATS/SC/31/Suppl.2 of 28 July 1995 — 20 pages): replacing the “mode 4” provisions in the original EU–12 commitment. These are the EU–12’s current “mode 4” commitments
Telecommunications services, supplement 3 (GATS/SC/31/Suppl.3 of 11 April 1997 — 10 pages): replacing the original telecoms commitments of the EU–12, Austria, Finland and Sweden. These are the EU–15’s current telecoms commitments
News services: France, Italy and Portugal reserve the right to impose some restrictions on foreign access to their markets
What the schedules contain
WTO members’ commitments in services work in three ways:
Market access — how much of the market is open to foreign service providers or customers, and where that is limited
Non-discrimination (1) — equal treatment between foreign service providers and the country’s own suppliers or nationals, known as “national treatment”, and where that is limited
Non-discrimination (2) — exemptions on treating other WTO member countries equally, known as “most-favoured nation (MFN) treatment”
The first two are in the main services schedule of commitments. These identify where the member’s market is open, or where it reserves the right to restrict access, or to keep the market totally closed. This is expressed negatively as “limitations on market access” (column 2 in the example below).
Where there are no limitations, the market is open. Where there are no commitments (“unbound”), the country is free to close the market.
The commitments also list “limitations on national treatment” (column 3 below). Again, where there are no limitations the country will treat foreign companies as its own. Where there are limitations or no commitments at all (“unbound”), the country reserves the right to favour its own service providers.
Each of these is also specified for the four “modes” of supply, listed across the top of the page, with the limits on commitments running down the two central columns.
The EU’s main schedule document starts with “horizontal commitments” mainly dealing with limitations on investment, real estate ownership and “mode 4” (movement of professionals and other services workers or employees) across all services sectors.
Next come commitments in the 160 services sub-sectors — or more accurately, limitations on the commitments.
This is the section of the EU’s schedule on news and press agency services (chosen because it is one of the shorter items!):
Click the image to see it full size. EU–12 commitments on news services
For the second form of non-discrimination — most-favoured nation (MFN) — the exemptions are listed separately. They arise for a number of reasons, including preferential arrangements between countries that existed before the services were negotiated in the Uruguay Round.
This may explain why, for example, the EU reserves the right to discriminate in favour of Switzerland in a number of areas. The EU may be “grandfathering” sectoral deals with Switzerland that existed before 1994.
One question may be whether the UK and EU will want to “grandfather” preferences they currently or previously gave to each other when they separate their services schedules. This would add complications to the process.
In general, extracting the UK’s MFN exemptions from the EU’s schedule may also be more complicated because a large number of exemptions are under EU-wide regulations and some refer to regions in the EU that are outside the UK. How much of them will apply to the UK after leaving the EU remains to be seen. This may also be linked to the Great Repeal Act, in which the UK will convert EU laws and regulations into its own before deciding whether any need changing. It all adds to the work load.
Finally, what would the UK face?
So, apparently, extracting the UK’s services schedule from the EU’s may be fairly straightforward. But it will take some time. There may be complexities that need careful tailoring so they can apply to the UK. The UK wants to complete this within the 2-years prescribed for leaving the EU under Article 50 of the EU Treaty. Whether this can be done remains to be seen.
The UK might be able to avoid negotiations on its services schedule, so long as other WTO members don’t demand a say. But that might not be possible because other countries might argue that Brexit is upsetting a negotiated balance, as a former senior Swiss trade official suggests could also happen with agriculture, throwing into doubt the possibility that the UK would simply “replicate” all the relevant parts of the EU’s schedule.
Much more complex are the barriers that the UK and EU would face in each other’s markets if they cannot agree on free trade in services.
For the UK, the complexity lies in the details for the 160 services sub-sectors multiplied by the four modes of delivery, and the limitations on access and equal treatment that apply generally across the EU and in each of the remaining 27 member states. It also lies in finding out what EU member states are actually applying rather than their binding limits in the WTO.
EU ENLARGEMENTS OVER THE YEARS — January 1, 1958 (under GATT) — 6 founder members
1. Belgium
2. Germany
3. France
4. Italy
5. Luxembourg
6. Netherlands — January 1, 1973 — 3 new members
7. Denmark
8. Ireland
9. United Kingdom — January 1, 1981 — 1 new member
10. Greece — January 1, 1986 — 2 new members
11. Spain
12. Portugal — January 1, 1995 (WTO created) — 3 new members
13. Austria
14. Finland
15. Sweden — May 1, 2004 — 10 new members
16. Czech Republic
17. Estonia
18. Cyprus
19. Latvia
20. Lithuania
21. Hungary
22. Malta
23. Poland
24. Slovenia
25. Slovakia — January 1, 2007 — 2 new members
26. Bulgaria
27. Romania — July 1, 2013 — 1 new member
28. Croatia —
(More details here)
Updates: May 4, 2017 — added link to Bloomberg story Photocredits
• Aircraft: by Francois Van, Unsplash, Creative Commons public domain CC0
• São Paulo Stock Exchange (Bovespa): by Rafael Matsunaga, via Flickr, Creative Commons CC-by-2.0
• Taj Mahal: by Chee Huey Wong via Pixabay, Creative Commons public domain CC0
• Electrician: via Pixabay, Creative Commons public domain CC0
• India’s Commerce Minister Kamal Nath mobbed by reporters at the WTO, July 2008: WTO
The notion that the EU was uncompromising was as absurd as the claim that Brussels had buckled. Brexit has entered a negotiating phase. We need to understand negotiations and to spot the flexibility in the noise
By Peter Ungphakorn POSTED APRIL 1, 2017 | UPDATED APRIL 1, 2017
Perhaps we should not be surprised, but should we be concerned? After Donald Tusk presented the EU–27’s draft negotiating guidelines for Brexit on March 31, 2017, the headlines showed widely different interpretations.
Tusk is acually saying parallel talks are required by Article 50
They ranged from fact and conciliation to confrontation and capitulation, all based on the same document:
The wire services (AP, Bloomberg, and maybe Reuters) focused on the EU Council’s guidelines offering an opening for negotiations — the EU is “engaging”, as Bloomberg put it (the headline on the AP story in the Toronto Star was far more confrontational than the story itself)
Most of the rest reflected a predisposition to see everything as a confrontation, from “says no” and “rules out” — perhaps defendable but seriously misleading — to “collision course”
One is downright bizarre (Express’s “Brussels Buckles”)
As real negotiations are now set to begin, we need better than that. In several cases the actual stories did reflect the nuances, but those headlines set the tone. By and large, Tusk’s text was seen to rebuff May’s March 29 letter kicking off Article 50.
Not so.
The notion that the EU was uncompromising was as absurd as the claim that Brussels had buckled
“The United Kingdom wants to agree with the European Union a deep and special partnership that takes in both economic and security cooperation. To achieve this, we believe it is necessary to agree the terms of our future partnership alongside those of our withdrawal from the EU” (my emphasis)
May was calling for simultaneous, parallel talks: on the divorce terms and on the future relationship, including trade and security.
A few hours later, still on March 29, 2017, Germany’s Chancellor Angela Merkel told journalists:
“The negotiations must first clarify how we will disentangle our interlinked relationship … and only when this question is dealt with, can we — hopefully soon after — begin talking about our future relationship.”
The headlines were unequivocal. Merkel had scuppered May’s plans:
Angela Merkel derails Theresa May’s Brexit plan by rejecting parallel trade talks. Britain is to be put into the slow lane — the Independent — Angela Merkel rejects one of Theresa May’s key Brexit demands. Divorce settlement must come before talks about future relationship, says chancellor, as EU leaders respond to article 50 letter — the Guardian
“4. While an agreement on a future relationship between the Union and the United Kingdom as such can only be concluded once the United Kingdom has become a third country [non-EU member], Article 50 TEU [Treaty of the European Union] requires to take account of the framework for its future relationship with the Union in the arrangements for withdrawal. To this end, an overall understanding on the framework for the future relationship could be identified during a second phase of the negotiations under Article 50. The Union and its Member States stand ready to engage in preliminary and preparatory discussions to this end in the context of negotiations under Article 50 TEU, as soon as sufficient progress has been made in the first phase towards reaching a satisfactory agreement on the arrangements for an orderly withdrawal” (my emphasis)
Tusk is actually saying parallel talks are required by Article 50, because it demands a framework for future relations.
The only question is when the second track of the parallel talks should start. Tusk had an answer to that too — in the autumn.
“Once and only once we have achieved sufficient progress on the withdrawal, can we discuss the framework for our future relationship … probably in the autumn, at least I hope so,” AP and others quoted him saying. That’s still early in the 2-year Article 50 process.
Certainly by comparison with the headlines over Merkel’s statement, Tusk sounds much more flexible. The UK and EU would clarify the terms of separation (even if they are not settled yet) such as an acceptable range of separation costs, and proceed to parallel talks.
Then, take another look at what Merkel said. It’s more or less the same as Tusk and the guidelines.
“The EU’s draft Brexit guidelines look anything but punitive,” wrote Vincenzo Scarpetta, senior policy analyst with the think-tank Open Europe.
“… The door is wide open for parallel negotiations, albeit not from the very beginning. … The draft guidelines make it clear that parallel negotiations will be fully possible during the two-year timeframe stipulated by Article 50 — provided that ‘sufficient progress’ on the terms of the withdrawal is achieved.”
The notion that the EU was uncompromising was as absurd as the claim that Brussels had buckled.
The talks could have been deadlocked over extremes: “parallel” vs “one before the other”. Now there is room to discuss when the second track should begin
Calling the shots
Some have claimed that this is still confrontational because it’s the EU Council that will decide when “sufficient progress” has been made. Therefore the EU is calling the shots and the UK will have no say, they argue.
But this is a negotiation. And that means “sufficient progress” is also negotiable. On some issues the EU will hold stronger cards, probably including this, but that doesn’t mean the EU’s position is fixed. Negotiations can only work if both sides want a result and they show flexibility. There will have to be give and take by both.
Which brings us back to the original problem. Many of the headlines show a failure to understand negotiations. The gut reaction is always to pinpoint where the two sides disagree. Often that is valid. But it also means missing the crucial openings when they are made.
The Article 50 talks could have been deadlocked over extreme positions: “parallel talks” versus “one before the other”.
Now there is room to discuss when the second track should begin. If the UK and EU–27 cannot sort that out, there’s no hope for the far more complicated stuff.
View from Spain: is Gibraltar the new cliff edge?
Unwelcome surprises
That said, there is a potential collision course. Not the parallel talks question, but the requirement that Spain should agree on any arrangement involving Gibraltar.
Understanding negotiations also means being prepared for unwelcome surprises. The Gibraltar issue came out of the blue and complicates the UK-EU talks. It may lead to procedural delays even — as some suggest — if the talks’ final outcome is unaffected because of EU voting rules.
It could even get worse. There could be a tussle over fisheries policy.
Or, completely hypothetically, we could imagine a situation where the best sweetener the UK can offer Spain is a free trade agreement with the EU and a commitment to copy and paste the EU’s tariffs on oranges, which currently protect Spain and other Mediterranean producers.
The price for the UK and its consumers would be the missed opportunity to import cheaper, lower-duty oranges from South Africa, Brazil and the US, and additional complications in negotiating free trade agreements with them.
Much will also depend on what influence the 26 other EU members have over Spain and how pragmatic Spain wants to be. If the UK, EU and Spain are not careful, a few words in the Tusk text could escalate into serious complications across a wide range of talks.
Updates: None so far Photo credits: Brexit flags, publicdomainpictures.net, CC0; 3 views, MaxPixel CC0; Peace conference in Karlowitz, Hungarian National Museum, wikimedia, public domain; Gibraltar viewed from Spain, wikimedia, CC0
The move reported by Politico on March 19, 2017 is important, but it might not be what it seems
By Peter Ungphakorn POSTED MARCH 20, 2017 | UPDATED MARCH 23, 2017
According to Politico on March 19, 2017, the UK and EU are preparing a 10-year interim duty-free trade arrangement based on WTO rules, and this is a “Plan B” in case the two sides cannot agree on a free trade agreement before the UK leaves the EU, presumably by March 28, 2019.
Specifying 10 years is a cushion, not a timetable
Before I continue, I want to make clear that I have not talked to any officials of the kind Politico cites, and therefore have not heard any explanation from them. But I have read the WTO articles cited and I believe there is a confusion about what this means.
The confusion is about two different “interim” situations.
Interim (1): all in the family
The first, and up to now the only “interim” to have been discussed, is whether the UK and EU will need more time, beyond the end of the 2-year Article 50 negotiation (the “divorce talks”) — beyond March 28, 2019, if Article 50 is triggered on March 29 this year.
If they do — and all but the most optimistic Brexiteers think two years will be far too short — they will set up interim arrangements between themselves, while they continue to discuss a final deal on trade and other issues. The interim arrangements could include temporarily continuing with part or all of the single market, what to do where jurisdiction is currently with the EU Court of Justice, and so on — until a final deal is agreed and kicks in.
Those interim arrangements are entirely between the EU (and its 27 remaining member states) and UK, and no one else (subject to WTO constraints). It’s voluntary although the situation is likely to force the UK and EU into an interim deal.
Interim (2): in the WTO — free trade in goods
What Politico reported about is related but different. In effect, this may be a WTO requirement — an obligation as well as a right.
The best way to explain this is to start by taking a step back and looking at the final deal between the UK and EU (assuming there will be one).
If the final outcome is a UK-EU free trade agreement in goods — or even a customs union, although that seems to be ruled out now — then the UK and EU will have to notify the agreement to the WTO.
Article 24’s disciplines are needed because it allows countries to deviate from the WTO’s principle of non-discrimination. Instead of charging their normal import tariffs, countries in a free trade agreement trade preferentially, duty free, among themselves.
Article 24 is the one that also requires the free trade agreement to cover “substantially all the trade”, which means a free trade agreement on cars alone would violate WTO rules.
Sometimes a free trade agreement cannot be implemented immediately, or part of it may have to be delayed (the agriculture section of the EU-Turkey customs union has been in preparation for decades).
In that case the two sides notify an interim arrangement to the WTO under GATT Article 24.5(c), which requires this to lead to a final agreement “within a reasonable length of time”:
(c) any interim agreement referred to in subparagraphs (a) and (b) shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time
This interim period should normally be up to 10 years although an extension is possible as an exception, according to a modification signed in Marrakesh in 1994 as part of the package of agreements that set up the WTO:
3. The “reasonable length of time” referred to in paragraph 5(c) of Article XXIV should exceed 10 years only in exceptional cases. In cases where Members parties to an interim agreement believe that 10 years would be insufficient they shall provide a full explanation to the Council for Trade in Goods of the need for a longer period.
In other words, if the UK and EU intend to have an interim agreement (on all issues), then they must notify the WTO for the part dealing with free trade in goods.
Doing so would allow the UK and EU to implement their own interim arrangements and to be free to negotiate their final deal for a period of at least 10 years. Whether they conclude that deal in less than 10 years is up to them. Specifying 10 years is a cushion, not a timetable.
In that sense it is not Plan B, unless you believe concluding a free trade agreement between the UK and EU in two years is a feasible Plan A.
This requires “economic integration” in services to have “substantial sectoral coverage”, and also allows a delay in implementing the integration deal.
It says the provisions should take effect “either at the entry into force of that agreement or on the basis of a reasonable time-frame” (with some exceptions).
In other words, if the UK and EU intend to end up with some kind of free trade deal (or “economic integration”) in services, then this too would have to be notified to the WTO, although no time limit for the interim period appears to be set.
Again, notifying this interim period to the WTO would allow negotiations to continue during that period although some indication of the final destination might be needed at the outset.
And since these provisions only apply to free trade (or something similar) in goods and services, they say nothing about many other subjects that could end up in a UK-EU deal: mutual recognition of standards and regulations for goods and services, issues such as rules of origin, participation in institutions such as Euratom or the Erasmus programme, and a host of other subjects such as security cooperation.
Both for goods and services, this is an unusual situation, just as the whole of Brexit is. Normally countries negotiate a free trade agreement and notify it to the WTO when the deal is done. They can then say what they are going to implement immediately and which parts of the final destination are being delayed.
With Brexit the reverse is happening. The UK and EU have a single market arrangement and are withdrawing some or all of its features. Here the notification will be needed almost at the start of the negotiations, not at the end. Knowing the final destination so early in the process might not be so easy.
Finally, since I am not a lawyer, I may have missed something in reading GATT Article 24 and its modification, and GATS Article 5. So comments welcome via the feedback form or by tweeting @CoppetainPU
P.S.
Lorand Bartels wrote a revealing article in 2009 (pdf) about the difference between a full (or final) free trade agreement and an interim agreement as notified to the WTO. Among the points he raised: the fact that no interim agreement had been notified since 1995; that an interim agreement would normally be expected to state what the “fully-fledged” final agreement would contain; and the increased chance that objecting members could resort to litigation under the WTO’s dispute settlement system.
Since I posted this article, a number of people, including Sir Tim Barrow, the UK’s new ambassador to the EU, have stated that the UK and EU can conclude a free trade agreement within the 2-year Article 50 period. That would certainly make an interim agreement Plan B. However, few outside the UK government share that view — see for example the repeated statements by Pascal Lamy, former EU trade commissioner and ex-WTO director-general. For many, having an interim agreement would be Plan A (and as discussed above that would oblige the UK and EU to notify the WTO). Plan B would be dealing with the “cliff edge” of no UK-EU deal, which could well also mean no agreement on their WTO schedules and therefore no “WTO terms” to fall back on either.
Updates: March 23, 2017 — “P.S.” added, plus some editing to try to make the text clearer Photocredits: Pixabay via Pexels, CC0
Reaching agreement was one test of multilateralism. Making it work will be another
By Peter Ungphakorn POSTED FEBRUARY 25, 2017 | UPDATED FEBRUARY 28, 2017
It’s always tempting, when a tough negotiation has concluded, to breathe a sigh of relief and proclaim “job done”. But with trade agreements, the job is rarely done. For the World Trade Organization’s shiny new Trade Facilitation Agreement, seriously hard work lies ahead if it is to achieve its potential.
Cape Town: South Africa is one of 51 countries that have not yet ratified the agreement
On February 22, 2017, the WTO proclaimed that its new deal on slashing red tape at the border had “entered into force”, the “first multilateral deal” concluded in its 21 year history. This was a truly major achievement. But as the celebrations die down, it’s time to look at what it really means and the challenges that lie ahead.
“The real work is just beginning. This is the biggest reform of global trade in a generation. It can make a big difference for growth and development around the world. Now, working together, we have the responsibility to implement the agreement to make those benefits a reality.”
Trade facilitation is about cutting red tape and streamlining customs and other procedures as goods cross borders. That includes goods in transit to and from land-locked countries.
More specifically, the procedures covered in the agreement include 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.
The ink was barely dry. The agreements of the 1986–94 Uruguay Round had been signed in April 1994. They took effect the following January, bringing into existence the World Trade Organization. The round was the largest and most complex trade negotiation ever to be concluded, and was supposed to be the one to end all trade rounds.
Then at the first WTO Ministerial Conference in Singapore in December 1996, the EU and others proposed trade facilitation as a new negotiation topic. It was packaged with three much more controversial issues — investment, competition policy and transparency in government procurement.
Opposition, particularly from developing countries meant these four “Singapore issues” were kicked into the long grass in the shape of discussion groups.
The resistance continued. When in 2001 the Doha Round was launched, the Singapore issues were only included as subject headings that would not turn into negotiations without “explicit consensus”.
It was not until 2004 — when the EU finally agreed to unbundle the four issues and a compromise could be struck — that the more palatable trade facilitation formally became a Doha Round negotiating topic. The three other issues fell by the wayside.
Work on trade facilitation continued — even after the Doha Round ground to a halt in 2008, principally over agriculture. A text was eventually agreed in the run up to the Bali ministerial conference in 2013.
Azevêdo, who had recently become director-general, introduced a new way of negotiating. Instead of working on the text in a small group of core countries and then taking it to the rest of the WTO, ambassadors from the entire membership (each with one assistant) sat through lengthy sessions as they worked line by line through the draft displayed on a screen.
Hailed at the time as a breakthrough technique to make negotiations totally inclusive (and avoid resentment at being left out), the method only worked once. Since then, the core groups have returned.
The draft agreed in Bali still had to be revised to make it legally correct. Even this was delayed until November 2014 as India held up approval while it sought changes to a decision on agriculture that it had originally agreed in Bali.
Two and a half years later, 112 countries had ratified (or “accepted”) the deal, which counts as an amendment to the WTO’s agreements. They crossed the threshold of 110, two thirds of the membership, which was needed for the agreement to take effect.
Importantly, that also means 51 countries had not (yet) ratified. More on this below. (How the ratifications are counted is discussed here).
NOW WE ARE 112: four new acceptances and a protocol. From left: Amb François Xavier Ngarambe (Rwanda), Amb Malloum Bamanga Abbas (Chad), WTO DG Roberto Azevêdo (holding protocol), Amb Saja Majali (Jordan), Amb Abdulla Nasser Musallam Al Rahbi (Oman)
2. Achievement: it will have a real impact
Although a latecomer to the Doha Round, trade facilitation became a priority for business associations. Import duties are now often low (apart from agriculture and some other sensitive products), meaning border processes have emerged as a significant part of trading costs.
Calculations suggest the benefits will be large. By how much depends on the assumptions and the type of economic model.
The WTO’s in-depth analysis is in its 2015 World Trade Report, with estimates for reductions in trading cost of up to 14.3%, global export expansion from $750bn to $3.6 trillion — the most frequently cited is the neat $1 trillion — and up to half a per cent per year added to world gross domestic product.
A brief survey by Cathleen Cimino-Isaacs of the Peterson Institute for International Economics think-tank cites other studies that also show “sizable potential gains”.
Understandably, the biggest gains will go to the countries that currently have the most cumbersome border procedures. If goods entering and leaving a country spend weeks at the port waiting for clearance, then the costs to that country’s trade, production and consumption are going to be high.
“The range of trade cost reduction will be between 9.6% and 23.1%. African countries and [least developed counties] are expected to see the biggest average reduction in trade costs (in excess of 16%) from full implementation of the TFA [Trade Facilitation Agreement]. Full implementation will reduce trade costs of manufactured goods by 18% and of agricultural goods by 10.4%. —
“Full implementation of the TFA also has the ability to reduce time to import by over a day and a half (a 47% reduction over the current average) and time to export by almost two days (a 91% reduction over the current average).”
The Trade Facilitation Agreement allows developing countries to set a condition on implementing some of the reforms — receiving assistance to help them cover the costs and introduce new technology — a first in WTO agreements. The onus is therefore as much on the donors as on the reformers.
3. But it has not entered into force everywhere
Drowned out by the fanfare is the actual meaning of “entered into force”.
Strictly speaking, the agreement has only been activated in the ratifying countries although they will apply their streamlined processes to trade with all other WTO members equally, including those that have not ratified.
WTO rules say once the two-thirds of the membership has been reached, an amendment does enter into force, but only in ratifying countries. Therefore, the Trade Facilitation Agreement has not yet entered into force in the 51 countries that — at the time of writing — have not ratified it. They are:
Angola, Antigua and Barbuda, Argentina, Armenia, Barbados, Benin, Bolivia, Burkina Faso, Burundi, Cabo Verde, Cameroon, Central African Republic, Colombia, Congo, Costa Rica, Cuba, Congo (Democratic Republic), Djibouti, Dominican Republic, Ecuador, Egypt, Fiji, the Gambia, Guatemala, Guinea, Guinea-Bissau, Haiti, Indonesia, Israel, Kuwait, Liberia, Malawi, Maldives, Mauritania, Morocco, Namibia, Papua New Guinea, Qatar, Sierra Leone, Solomon Islands, South Africa, Suriname, Tajikistan, Tanzania, Tonga, Tunisia, Uganda, Vanuatu, Venezuela, Yemen, and Zimbabwe.
Among them are some significant traders such as Argentina, Indonesia and South Africa. Among the rest are many that would benefit most from streamlining their border procedures, particularly if they receive aid to do so.
Many countries that have not ratified may do so soon. Some have already submitted “Category A notifications” (listing measures they will implement immediately), even though they have not ratified (including Egypt and Indonesia). Many are actively preparing the details of what they will phase in, with and without assistance (C and B notifications).
(The rules on amending WTO agreements actually include a clause allowing the membership to expel countries that do not ratify in time. Of course, the word “expel” is not used. Instead: the country “shall be free to withdraw from the WTO or to remain a Member with the consent of the Ministerial Conference”. Incidentally, this provision seems to be the only way to kick a country out of the WTO. However, it is unlikely to be invoked here.)
4. The numbers should not be taken literally
It’s tempting to use simple figures to describe how important the Trade Facilitation Agreement is: “it will cut trading costs by 14.3%”, “it will increase trade by a trillion dollars”, and so on. At least Azevêdo uses “could” and “up to”.
Just as with any economic analysis this depends on the assumptions, the model and the data.
The assumptions: almost all calculations assume that the agreement is “fully” implemented, and they say so. The 2015 World Trade Report discusses this in some detail, including an assumed length of time for full implementation. But the report is 158 pages long and pretty technical. Few will even open it.
The truth is, we are a long way away from full implementation. For a start, those 51 countries that have not yet ratified will need to do so. Then, some countries will phase in some provisions over time, and some will require aid in order to do so — promised in principle but not legally committed.
According to the Trade Facilitation Agreement database, less than half of the agreement’s coverage has been notified for implementation by developing countries, whether for immediate implementation (Category A), delayed (B) or delayed and requiring technical assistance (C). A large number of Category A notifications (93) have been submitted but they do not cover all the provisions of the agreement.
Click the image to see it full size
Because developing countries are still compiling their needs, more notifications in Categories B (currently 9 countries notifying) and C (currently 8) can be expected, even from countries that have notified what they will implement immediately (A).
“Of course, fully implementing the TFA will be key to realizing the gains. The agreement specifies different tiers of obligations for developed and developing countries. For developing countries, the obligations are broken down between those implemented upon entry into force, those subject to a transition period, and those to follow with additional technical assistance. This built-in flexibility is important, but also serves as a reminder that the gains will take time to materialize. Making reforms will entail costs, and measures like investment in information technology and transport infrastructure, while not prerequisites, are important complements to trade facilitation reforms. Once the agreement is ratified, the challenge for the WTO will be monitoring progress towards implementation and ensuring political commitment to deliver the reforms.”
The model and the data: even more technical is the discussion in the 2015 World Trade Report about the methods used. (For the technically minded, computable general equilibrium (CGE) and gravity models produce considerably different estimates: see below.)
As for the data, some countries had implemented provisions that would be in the agreement. The analysis included creating index numbers from how much they had implemented and extrapolating these statistically to different categories of countries in the rest of the world.
Clearly calculations with this amount of construction are not meant to be predictions. They are estimates. However, the various estimates are consistent enough for us to conclude that the gains will be “pretty big” — if and when it’s all implemented.
Some expected benefits are much more difficult to model. One that is frequently cited is the transparency and predictability of bringing policies into the WTO system even if they would be implemented unilaterally anyway. This is what the 2015 World Trade Report says (pages 6–7):
“Given the widespread benefits from trade facilitation, every country should have an incentive to undertake reform on its own. The signing of the TFA, however, suggests that incorporating trade facilitation in a multilateral agreement creates additional benefits compared to what can be achieved unilaterally. —
“It provides greater legal certainty to the changes in trade procedures. It helps in the adoption of common approaches to customs and related matters, which should increase the gains from trade facilitation by harmonizing customs procedures worldwide. By foreseeing that richer members will provide assistance and support for capacity building to developing and [least developed country] members to help them implement the TFA, the agreement helps to match the supply of capacity building with the demand for it. The TFA could also help governments address a credibility problem by integrating their trade facilitation commitments into an institution with an effective enforcement mechanism.”
5. A lot of work lies ahead for rich and poor nations alike
WTO members will now create a Trade Facilitation Committee of the full membership, including countries that have not yet ratified. Its job will be to receive notifications describing what various members will implement and when, monitor how the agreement is being implemented and discuss related issues.
Two immediate tasks are to encourage the remaining members to ratify the agreement, and for all developing countries to complete their notifications of what they are implementing, whether immediately (A) or delayed (B) or delayed-requiring-assistance (C).
A third is to ensure the requests for technical assistance can be met. This requires well-designed assessments of needs from the developing countries concerned, and a real commitment to provide the assistance by developed countries and donor institutions.
In short, reaching agreement was one test of multilateralism. Making it work will be another.
6. Oh, and by the way, is it really the first?
Don’t shout this out too loud, but there are those who say trade facilitation is not the first multilateral trade deal since the WTO was created. They point to WTO deals in services on finance (twice), movement of natural persons and basic telecommunications.
But those agreements date back to 1995–97, soon after the WTO was born (and when trade facilitation was still a twinkle in the EU’s eye). That was an awfully long time ago.
Useful resources:
The various databases and other resources available are rather confusing. You can access one, follow some links, and find yourself in another. However, the amount of available information is useful.
“Full implementation of the TFA has the potential to reduce trade costs by an average of 14.3 per cent. The computable general equilibrium (CGE) estimates see the TFA increasing global exports by between US$750 billion and US$1 trillion, depending on the speed and extent of implementation. The faster and more extensive the implementation, the greater the gains. TFA implementation has ramifications for the future trajectory of the global economy as well. This report estimates that over the 2015-30 horizon, implementation of the TFA could add up to 2.7 per cent a year to world export growth, and more than half a per cent a year to world GDP growth.
“The simulations using the gravity model provide higher estimates of the potential global export expansion arising from TFA implementation. They range from US$ 1.1 trillion to US$ 3.6 trillion depending on the extent to which the provisions of the TFA are implemented. Like the CGE simulation results, they show that the more fully the TFA is implemented, the greater are the gains for members.”
DISCLAIMER: This was written with the help of sources who asked not to be identified. It could not have been written without them. Consider it “Fake News” if you are so inclined
CLEMENS BOONEKAMP proposes a surprising alternative on Brexit’s trade front. Don’t negotiate. Announce.
Guest column by Clemens Boonekamp Partner at IDEAS Centre, former director of Agriculture and Trade Policy Reviews, WTO Secretariat POSTED FEBRUARY 12, 2017 | UPDATED FEBRUARY 12, 2017
The UK Prime Minister has opted for a hard Brexit. She is correct. A soft Brexit would have been unlikely. The UK has been a balancing force in Europe for centuries. This role is in question with Brexit, causing disquiet and some anger on the continent. A number of continental EU members also have their own “leave” constituencies with mainstream leaders ready to show that parting is not without cost.
The UK is in a box. Its future trade relations, and hence its economic actors, are uncertain
These factors alone would have made it naive to think that the “single market” would be available for anything less than the “four freedoms”, substantial payments and no seat at the table — a situation considerably inferior to the EU-membership that the voters rejected!
Making it an issue in the Brexit negotiations could have led to an embarrassing rebuff, with the economy then in an increased state of uncertainty, with its attendant costs. A customs union might be possible but then the UK would forego its independence to negotiate bilateral trade deals.
Radical alternative
There is a radical alternative on the trade front. Don’t negotiate. Announce, after invoking Article 50, that:
The UK will “cut and paste” the EU schedules of commitments in the WTO — which are the UK’s schedules as a member of the WTO in its own right
But in agriculture the UK will not have an AMS (the right to use trade-distorting domestic support beyond the “de minimis” 5% of the value of production; AMS is a measure of this, the aggregate measurement of support)
The UK will scrap all tariff quotas, applying the in-quota rates to unlimited quantities of imports on those lines (or products) where the EU has tariff quotas
The UK will trade on an “MFN basis” with the EU — trade between the UK and EU will have the same tariffs as trade between the UK and the rest of the world
The UK could also use this opportunity to simplify some extremely complicated tariffs it inherits from the EU, such as on processed agricultural products, where the rates depend on how much milk, sugar and other ingredients they contain. It could apply the lowest rates on all products where the EU has multiple rates
This has advantages: it is quick and clean, gets the job done, reduces uncertainty, avoids potential rebuffs and frees the UK to pursue trade relations with third parties.
It can take control by following a strategy that is bold and independent, simply not negotiating on trade and being generous on all other matters, to the benefit of all
In addition, it may reduce calls for compensation from those who will argue, correctly, that an x% percent tariff into the UK market is not worth as much as the same tariff into the previous EU–28 or, for that matter, the “new” EU–27 market — “nullification and impairment” of expected WTO rights is a likely issue.
Also, there will be a sense of schadenfreude in that there will be WTO members who will want to see the post-Brexit EU AMS reduced and the in-quota amounts of its TRQs (tariff-rate quotas) maintained, while some EU members will argue for the opposite — i.e. the EU will have a problem.
The UK can then move forward on its own choices for its trade relations, buttressed by its WTO membership. Proceed, perhaps, as follows:
maintain the generalised system of preferences for developing countries (GSP) provisions of the EU, as well its “everything but arms” duty free/ quota free access for least developed countries (LDCs)
propose a free trade agreement (FTA) to the US, offering essentially free access for goods and services, albeit with carefully circumscribed labour mobility
On the latter, knowing that the gains from liberalisation accrue mainly to those that undertake it and that FTAs need not be symmetric, accept any reasonable offer from the US — the point being to get it done quickly, reducing uncertainty and laying the basis for an independent trade framework.
Propose the same to the Commonwealth and China. When done, and acting with alacrity and generosity it might well happen in reasonably short order, re-approach the EU, suggesting similar terms but with some emphasis on mutual recognition and the financial “passport”. If successful, the UK would establish itself as a free-trade haven in Europe, with the economy to reap the benefits.
Difficulties
There are, of course, difficulties. It is probably impossible to know the “cost” of Brexit for the UK economy, but whatever it is there is likely to be a perceived need to safeguard some sensitive sectors. Agriculture, politically important, is an example.
Following Brexit the UK will “lose” EU support to its agricultural sector, amounting to upwards of €4 billion a year, equivalent to some 14% of its agricultural output.
In addition, around 60% of the UK’s agricultural exports go to the EU and would face an average tariff of almost 11%; assuming a unitary price-responsiveness, this could result in an annual income loss for the sector of up to €1.5 billion (and though the “responsiveness” may seem high it serves also as a proxy for areas such as lamb, where the EU has tariff quotas and where the UK loss of market share is almost certain to be substantial).
Making good, WTO-legally
There would then be pressure for the government to make good these revenue shortfalls — which, incidentally, probably could be done comfortably in a WTO-legal manner by use of the “de-minimis” (permitted trade-distorting support of up to 5% of the value of production) and Green Box (non-trade distorting support) provisions of the WTO’s Agriculture Agreement.
Other sensitive sectors could also face significant revenue “losses”, including motor vehicles, which would face an average tariff of around 10% into the EU for a possible loss also of some €1.5 billion a year. The government could consider compensating such sensitive sectors with performance contingent, time-bound, industrial policy measures.
It is not inconceivable that Brexit-related support to sensitive sectors could add well over 1% to government expenditures. This is doable, particularly given the presently low borrowing costs. But it is not a long-term solution; that requires market access, among a range of factors, and growth. The above may be a quick step in that direction.
Other issues will need to be settled with the EU for Brexit, including compensation and pensions. On the former, scrupulously pay the “rent, water and light” until you “close the door behind you”. On the latter, it may be an EU obligation but it does involve UK citizens; accommodation and generosity could well be good domestic and foreign policy.
The UK is in a box. Its future trade relations, and hence its economic actors, are uncertain. It can take control by following a strategy that is bold and independent, simply not negotiating on trade and being generous on all other matters, to the benefit of all.
Like this blog as a whole, guest contributions are intended to contribute to the debate. I don’t necessarily agree with them.
Updates: None so far Photo credit: pexels.com Creative Commons CC0
