The case of the two UK-EU ‘interim’ deals — is the one in the WTO really ‘Plan B’?

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.

Clock on Big Ben tower
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 familyBack to top

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 goodsBack to top

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.

This is required by WTO rules: principally, Article 24 of the General Agreement on Tariffs and Trade (GATT).

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.

(See P.S. added below)

Interim (2): in the WTO — free trade in servicesBack to top

A similar requirement exists for services. The Politico story did not mention this. The relevant provision is Article 5 of the WTO’s General Agreement on Trade in Services (GATS).

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.Back to top
  1. 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.
  2. 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


Hard work lies ahead now that the WTO Trade Facilitation Agreement has been activated in 112 countries

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.

Port_of_Cape_Town bySkyPixels ShareAlike CC SA 4.0
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.

Azevêdo press conference 22.2.2017
“The real work is just beginning”

“This is not the end of the road,” said WTO Director-General Roberto Azevêdo.

“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.

Here are some points to ponder:

  1. Achievement: it’s taken 20 rough years
  2. Achievement: it will have a real impact
  3. But it has not entered into force everywhere
  4. The numbers should not be taken literally
  5. A lot of work lies ahead by both rich and poor nations
  6. Oh, and by the way, is it really the first?

1. Achievement: it’s taken 20 rough yearsBack to top

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).

The four instruments of acceptance that took the total to 112, and the TFA protocol. From left: Amb François Xavier Ngarambe (Rwanda), Ambr Malloum Bamanga Abbas (Chad), Roberto Azevêdo (WTO), Amb Saja Majali (Jordan), Abdulla Nasser Musallam Al Rahbi (Oman)
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 impactBack to top

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 2015 World Trade Report says (page 7):

“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.

061209-N-8148A-067 - Camp Patriot, Kuwait (Dec. 9, 2006) - A customs border clearance agent assigned to Navy Customs Battalion Romeo keeps record of each inspection. Navy Customs Battalion Romeo, comprised of more than 450 Reservists, was mobilized, trained, equipped and deployed by the Navy Expeditionary Logistics Support Group and is an operational force under the Navy Expeditionary Combat Command. U.S. Navy Photo by Mass Communication Specialist 2nd Class Kitt Amaritnant. UNCLASS (APPROVED FOR PUBLIC RELEASE) Cleared for public release by USARCENT PAO, MAJ Renee Russo. For additional information, contact MCC Anthony C. Casullo at anthony.casullo@me.navy.mil or DSN 318-439-6250 or COM 011-973-1785-6250
3. But it has not entered into force everywhereBack to top

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 literallyBack to top

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.

Cape Town Port by skypixels CC SA 4.0 with data from TFAD
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).

As Cimino-Isaacs wrote:

“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 alikeBack to top

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?Back to top

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.


THE ESTIMATES: The 2015 World Trade Report says this (page 134):

“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


Updates: February 28, 2017 — removed reference to 2017 deadline for accepting the agreement (applies to another WTO amendment, on intellectual property, not this one)

Photo credits:
• Cape Town Port by SkyPixels CC SA 4.0
• Azevêdo + Four acceptances and a protocol: WTO
• Customs clearance: public domain CC0


Alternative thinking: Out of the box for Brexit — and radically

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.

Pexels.com CC0
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


Questions on Brexit, agriculture, WTO schedules, standards, free trade agreements

Written replies to questions for the inquiry of the UK House of Lords EU Energy and Environment Sub-Committee’s inquiry on ‘Brexit: agriculture’, February 8, 2017

By Peter Ungphakorn
POSTED FEBRUARY 9, 2017 | UPDATED FEBRUARY 9, 2017

On February 8, 2017 the UK House of Lords EU Energy and Environment Sub-Committee’s inquiry on Brexit: agriculture published two sets written replies to questions.

My answers are below. They can also be found on the Parliament website: here (ABR0001) and pdf.

Also published were replies and statements from Christian Häberli of the World Trade Institute, Bern, Switzerland: browse, or pdf

Full coverage including transcripts and videos of the hearings is here.

alanmatthews-josephmcmahon-sub-ctte-7feb2017-from-web-page
Alan Matthews (left) and Joseph McMahon speaking to the House of Lords EU Energy and Enviornment Sub-Committee, February 7, 2017. Click the image to watch the session

THE QUESTIONS

1.    Can the UK unilaterally construct its own WTO Schedule of Commitments in agricultural products after Brexit? If the UK does construct its own Schedule, will this be legally binding on other WTO members, including the EU?
2.    To what extent is it possible to determine the EU-28’s current commitments in agricultural products in the WTO for (a) Tariffs (b) Tariff rate quotas (c) domestic support and (d) export subsidies for agricultural products? What impact might this have on (a) the UK’s negotiations with the EU and (b) the UK’s negotiations with other WTO members?
3.    What, if any, are the legal and political challenges of splitting the EU-28’s WTO Schedule of Commitments on agriculture between the UK and the EU? To what extent can this issue be settled (a) by applying WTO law in dispute settlement proceedings before the WTO panels and/or Appellate Body and (b) by political negotiations between the UK and the EU and between the UK/EU and the other WTO members? Could the ‘Czechoslovakia’ example act as a precedent?
4.    To what extent can the UK restrict the import of agricultural products because they do not meet the same quality and safety standards as those produced in the UK? If the UK adopted a precautionary approach to the import of agricultural products into the UK, to what extent would such an approach be compatible with WTO rules?
5.    Why do free trade agreements rarely include agricultural products? What are the main challenges the UK would face when negotiating new free trade agreements covering agriculture with (a) the EU, (b) the USA, (c) Australia, (d) New Zealand and (e) other WTO members? What are the key lessons learnt by the EU or other WTO members negotiating such FTAs?
6.    Which of the EU’s FTAs with other countries include agriculture? Will the UK be able to negotiate continued access to these agreements after Brexit?

  1. Can the UK unilaterally construct its own WTO Schedule of Commitments in agricultural products after Brexit? If the UK does construct its own Schedule, will this be legally binding on other WTO members, including the EU? Back to top

No, to both questions. First, the UK can and should draft its own schedules of commitments in agricultural products (and all other sectors). But they will not be legally secure until they have been certified by all WTO members — meaning until there are no WTO members with any objection. Once certified, they will be legally binding.

Second, a country’s schedules are not binding on other WTO members. They are commitments that the country has made to the rest of the membership. Other countries have their own schedules.

It is possible to trade without certified schedules. The EU continues to trade even though its goods schedule for the May 1, 2004 enlargement from 15 to 25 members was only certified 12 years later on 1 December 2016. The schedule for further enlargement to 27 and 28 members has not been certified.

The EU appears to operating with de facto schedules, for example revised tariff quotas appear in EU regulations. And it can trade without disruption, apparently because it has talked to key trading partners and adjusted its tariff quotas accordingly. The latest regulation for the lamb and mutton tariff quota states that the quota has been expanded for New Zealand, to accommodate Bulgaria and Romania becoming new EU members (but not yet for Croatia).

In other words, unilaterally creating the UK’s draft schedules without taking on board what other countries say could cause problems. Some negotiation will be needed so that the drafts are made reasonably acceptable to the UK’s trading partners, including the EU. But until the schedules are certified, the UK will be on legally uncertain ground, at best requiring complex legal arguments to defend the schedules’ contents. We don’t know how other countries would react.

  1. To what extent is it possible to determine the EU-28’s current commitments in agricultural products in the WTO for (a) Tariffs (b) Tariff rate quotas (c) domestic support and (d) export subsidies for agricultural products? What impact might this have on (a) the UK’s negotiations with the EU and (b) the UK’s negotiations with other WTO members? Back to top

Strictly speaking, the EU’s legally binding WTO commitments are only its certified schedules, the latest for goods being for the EU-25 (WTO document WT/LET/1220 and attachments available by going to https://docs.wto.org and searching for WT/LET/1220).

This was only certified two months ago (effective from December 1, 2016 but circulated on December 14, 2016). Because it covers 10 new member states, it should be much closer to the schedule for the EU–28 than the one in force until the end of November (for the EU–15).

What about the EU–27 and EU–28? The current situation with the EU’s goods schedule is on the WTO website here: https://www.wto.org/english/tratop_e/schedules_e/goods_schedules_table_e.htm#eec, although at the time of writing this has not been updated to include the certified EU–25 schedule.

The 7th column lists a number of documents used in negotiations for the EU’s enlargement to 27 members, the latest being G/SECRET/32, “currently underway” — presumably referring to the status of negotiations on that draft. Documents in the series G/SECRET/… are so restricted that even WTO Secretariat staff cannot access them, except for a few key people.

There is no mention of any negotiation over the enlargement to 28 members when Croatia joined, which could be a problem when discussing the post-Brexit schedules of the UK and EU with other WTO members.

Before that, the WTO Secretariat’s report for the Trade Policy Review of the EU (the latest review, in document WT/TPR/S/317/Rev.1 of 21 October 2015) said:

The current certified tariff schedule is the EU-15, effective 27 October 2012.[1] The EU’s tariff concessions and agricultural commitments regarding agricultural market access, domestic support, and export subsidies to reflect the enlargement from 15 to 28 member States have not yet been formally agreed in the WTO. The EU submitted its EU-25 schedule for certification on 25 April 2014[2] and has initiated the procedures for the EU-28 schedule (section 3.1.4.1). With regard to the certified EU-25 services schedule, 18 EU member States have ratified the schedule.[3] ”

As an EU member, the UK government ought to have access to the uncertified de facto schedules for the EU-28 both from Brussels (if not London) and any drafts at the WTO (although none appear to be with the WTO at the time of writing). This can be confirmed with government officials who ought to be able to provide better answers than I can on these points.

The public can detect the contents of the de facto schedules, but not always easily. There are two possible sources, both requiring work to compile the contents into one document: the EU’s own regulations, and its notifications to the WTO (under “The Agriculture Committee and official documents”, in the agriculture section of the WTO website, http://www.wto.org/agriculture#work).

  • Tariffs: these should be available from customs authorities, EU Trade or the UK Department of International Trade (bearing in mind applied tariffs can be lower than the legally bound rates). Most of them are unlikely to be very different from the tariffs in the schedule for the EU-15.
  • Tariff rate quotas: each of these should be available in separate EU regulations. They are also available in EU notifications on agricultural tariff quotas, but without the details from the schedules of how the quotas are divided among individual supplying countries.
  • Domestic support: the commitment is only one figure, for total aggregate measurement of support (AMS). The EU reports this in its domestic support notification along with an explanation of how much it has added for each expansion up to 28 members.
  • Export subsidies, also in the EU’s notifications. The latest for marketing year 2014/15 says the commitment is for the EU-25 while the actual reported subsidies are for the EU-28. Since the actual subsidies are considerably less than the limit, this difference is unimportant.

I would assume the UK’s negotiations over its schedules, both with the EU and other countries, ought to be based on the de facto schedules currently in use, because both the EU and the UK should have access to them.

We don’t know yet whether other countries would be willing to negotiate from the de facto pre-Brexit EU-27 schedules (with apparently nothing existing yet for the EU-28), but at this stage there seems to be no indication that they would object. Any that are holding back on certifying the schedules might have some reservations, but we don’t know what their objections are.

  1. What, if any, are the legal and political challenges of splitting the EU-28’s WTO Schedule of Commitments on agriculture between the UK and the EU? To what extent can this issue be settled (a) by applying WTO law in dispute settlement proceedings before the WTO panels and/or Appellate Body and (b) by political negotiations between the UK and the EU and between the UK/EU and the other WTO members? Could the “Czechoslovakia” example act as a precedent?Back to top

The only areas where the UK and EU would split their commitments are tariff quotas (or tariff-rate quotas, TRQs) and agricultural subsidies. Most of the rest of schedules can remain unchanged. For example the UK can simply continue with the thousands of tariff commitments it currently has as an EU member. So my reply focuses on the quotas and subsidies.

I’m not a lawyer and cannot respond definitively to the legal points of (a). I do know that opinion is split. Some lawyers believe the UK can construct its schedules using legal principles and that if other countries object, the UK would probably prevail in any legal dispute. Some other lawyers disagree. The argument seems to be based on the idea that the entire UK schedule is obtained by using criteria based on WTO case law, leading to “rectification” (a more or less technical correction of the UK’s schedule implied in the EU’s schedule).

Many who have first-hand experience of how the WTO works, beyond the jurisprudence of dispute settlement cases, doubt whether other WTO members would accept the UK’s legal arguments, and whether the legalistic approach would be enough. I share that view.

For example, to account for current UK-EU trade in sheep and goat meat, almost 100,000 tonnes would be added to the combined UK and EU-27 tariff quota, around 33% more than its present size. That seems to stretch the idea of “rectification” (a technical correction) too far.  It’s an adjustment arising from terminating a free trade deal (along with withdrawal from the rest of the single market), and introduced in order to take into account the volume of that duty-free trade between the UK and the EU.

Judging by recent experience in WTO negotiations, there may even be bargaining over which representative period to use as a basis for calculations. Possible options include averages over the last three or five years, including or excluding the highest and lowest numbers (an “Olympic average” excludes extreme points), and so on. I look at all of these points in detail here: https://tradebetablog.wordpress.com/2017/01/06/limits-of-possibility/

Generally, therefore, the UK and EU quotas should be settled by negotiation, where both political and commercial interests would play a part. Legal precedent would be a useful starting point, but probably not the conclusion. This would minimise any resentment and any trade disruption that might result from it.

Experts with inside experience of these processes have told me the Czech-Slovak split is not a suitable model. The split was under the General Agreement on Tariffs and Trade (GATT, the WTO’s predecessor), and before the agriculture and services agreements were added to the multilateral trading system. The two countries swiftly set up a customs union, meaning little changed in goods trade between the two and between them and the rest of the world. As a result, the rest of the GATT membership had few problems with this, at a time when they also wanted to ease former Soviet bloc countries into the multilateral trading system. The two then became EU members. The sizes of the UK and EU and the scale of the tasks they face are quite different.

  1. To what extent can the UK restrict the import of agricultural products because they do not meet the same quality and safety standards as those produced in the UK? If the UK adopted a precautionary approach to the import of agricultural products into the UK, to what extent would such an approach be compatible with WTO rules? Back to top

No WTO member can restrict imports purely on quality grounds. The WTO has criteria for requiring imports to meet certain safety, health and other standards. They are set out in the WTO agreements on Sanitary and Phytosanitary measures (SPS, dealing with food safety and animal and plant health), and Technical Barriers to Trade (TBT, other standards, regulations, labelling, etc).

Broadly, the criteria include having to provide scientific evidence or a risk assessment that the standard or measure is necessary for health or safety, or adopting an internationally-recognised standard. (WTO members have also agreed non-binding codes of good regulatory practice.) So long as the standards meet the legally binding criteria the UK can (and does, through the EU) require imports to meet the same standards as its own products. It cannot set stricter standards on imports than on domestically-produced products. This is known as applying “national treatment”.

WTO agreements don’t mention a “precautionary principle” specifically. However, some experts see article 5.7 of the SPS Agreement as a means of adopting the principle at least temporarily until the government obtains “additional information necessary for a more objective assessment of risk” and reviews the measure “within a reasonable period of time”.

  1. Why do free trade agreements rarely include agricultural products? What are the main challenges the UK would face when negotiating new free trade agreements covering agriculture with (a) the EU, (b) the USA, (c) Australia, (d) New Zealand and (e) other WTO members? What are the key lessons learnt by the EU or other WTO members negotiating such FTAs?Back to top

Many if not all free trade agreements actually include agricultural products on way or another, but they may have exemptions or delays on scrapping import duty on these products.

Agriculture is a particularly sensitive sector for various reasons: politics, culture, concerns about rural society, food security, and so on. It is often one of the last areas to be liberalised whether multilaterally or through free trade agreements. The most sensitive products have ended up with tariff quotas using prohibitively high out-of-quota tariffs. Some free trade agreements also have tariff quotas.

In general, the challenge the UK will face with all of those countries is to strike a balance between:

  • the demand for support and protection from the UK’s own farmers
  • the demand from UK consumers and processors for cheaper food and raw materials
  • the demand from exporters in the other countries for access to the UK market
  • the trade-off with UK producers in other sectors (such as services) wanting access to the other countries’ markets, which might entail opening up UK agriculture

For example, the UK might be willing to give Australia a larger quota for meat or dairy products in return for Australia allowing better access for British financial services or protecting British geographical indications such as Melton Mowbray pies or Scotch whisky. Some geographical indications are covered by bilateral agreements between the EU and the US, Australia and others. They mainly deal with wines and spirits since “new world” producers resist tightening protection for food and other products. It’s unclear whether those agreements will automatically apply to the UK. The full list is here: https://ec.europa.eu/agriculture/gi-international_en. Some of the EU’s free trade agreements also include chapters on geographical indications, for example the one with South Korea.

The range of sensitive agricultural products is extensive: dairy, meat, fruit and vegetables, various cereals, sugar, and so on. Canada (not listed in the question) also has interests and sensitivities in the dairy sector.

Large books have been written about the lessons learnt. Some of the issues most frequently mentioned in current conversations include:

  • Agreement can be held up by complex ratification processes in federal systems (the Walloon parliament on the Canada-EU agreement, for example) or where parliaments are strong (the Trans Pacific Partnership was under threat in the US Congress even before President Trump pulled the plug)
  • Many agreements include investor-state dispute settlement (ISDS) provisions, which are deeply unpopular because, rightly or wrongly, they are seen to give large companies power over governments. Some experts think the mega-regionals (TPP and TTIP) would be easier to conclude without ISDS. The EU is proposing an alternative multilateral arbitration system, but it’s unclear whether this will be more acceptable
  • When negotiations are secret, they are an easy target. To gain public support, they should be more transparent, while allowing new ideas to be floated in confidence until they become more established.
    (To declare an interest: I worked on information at the WTO Secretariat, where I think we were reasonably successful in striking a balance in the Doha Round negotiations. For example all the chairs’ drafts and other texts have been published as they have evolved, and the WTO website contains broad-brush accounts of the negotiating sessions, along with many of the members’ proposals. After the protests in Seattle in 1999, the WTO was rarely accused of secrecy, unlike with the negotiations under its predecessor, GATT.)

  1. Which of the EU’s FTAs with other countries include agriculture? Will the UK be able to negotiate continued access to these agreements after Brexit?Back to top

The answer is more complex than the question suggests. Most if not all EU FTAs include agriculture in one way or another, including exemptions for specific products or lengthy phase-in periods, and various provisions on rules as well as tariffs. Experts who have studied the many agreements in detail may be able to answer better than I can.

On its website, http://ec.europa.eu/trade/policy/countries-and-regions/agreements/, the EU lists 44 agreements currently in place (including the one with Canada, which has been signed but still needs final parliamentary approval). Some agreements cover goods alone, others both goods and services. Here are two examples:

  • The EU-South Korea FTA lists all agricultural products, with tariffs generally at zero immediately or gradually over periods of up to 21 years, depending on the product and whether it is imported into the EU or South Korea. In addition, some products escape tariff reductions completely, such as rice in both markets.
  • The customs union with Turkey includes a section on agriculture with the “common objective to move towards the free movement of agricultural products” and even to have a common agricultural policy, under a 22-year timetable in an “additional protocol” originally signed in 1970 but still not yet achieved.

As far as I can see, there is nothing to stop the UK negotiating continued access to these agreements provided the FTA partners also agree. Whether those negotiations lead to identical terms, or something different, depends on the negotiations. For some, the criteria will clearly be different. It’s hard to see the present EU agreements with Iceland and Norway being replicated with the UK, not least since they include the four freedoms of movement and contributions to the EU budget.

I have not seen any legal argument suggesting transferring the agreements to the UK will be automatic or a legal right.

Perhaps the most important question is what happens to the UK’s trade under the EU’s FTAs while the UK’s new FTA negotiations have not been concluded.

For all of these points, take for example an FTA between the UK and South Korea. This could be based on the EU-South Korea FTA, a 1,432-page document which includes the following:

  • around 70 pages of detailed terms, conditions and regulations for trade in goods and services, and intellectual property rights
  • well over 1,000 pages of commitments by the two sides on goods, including a number of tariff quotas
  • annexes on regulatory convergence and conformity on electronics, motor vehicles and parts, and pharmaceutical products and medical devices
  • an annex on agricultural safeguards. These are temporary tariff increases to deal with import surges — the present trigger levels are for imports from the EU, which would have to be adapted if separate figures are to be established for the UK and EU27
  • around 250 pages of commitments on services
  • a couple of pages on public procurement and build-operate-transfer contracts
  • about 25 pages on geographical indications for food (none of it British) as well as wines and spirits
  • institutional arrangements, including arbitration
  • other annexes containing, for example, definitions or criteria

Creating a UK version of this agreement has many similarities with creating the UK’s WTO schedules out of the EU’s plus any changes the UK and South Korea might want to make to the regulations.

That is just one of 44 agreements, but perhaps one of the most detailed. To ensure continuity, the UK should reach agreement with all of the EU’s 44 FTA partners by the time it leaves the EU. That sounds like extremely hard work, since during the same 2-year period the UK will already be negotiating with the EU, potential new FTA partners such as the US, Australia, New Zealand, India and others, and with all WTO members over its schedules.


EU-South Korea FTA:  http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2011:127:FULL&from=EN

EU-Turkey Customs Union:  http://www.avrupa.info.tr/fileadmin/Content/Downloads/PDF/Custom_Union_des_ENG.pdf

EU-Turkey Additional Protocol: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A21970A1123(01)

2 February 2017


[1] WTO document WT/Let/868, 30 October 2012.
[2] WTO document G/MA/TAR/RS/357, 25 April 2014.
[3] WTO document S/C/M/111, 21 November 2012.


Updates: none so far
Photocredit
: Screenshot from UK Parliament TV


Why UK is already under WTO rules, and why that matters for Brexit

If we want to understand the UK’s trade relations with the EU after Brexit we cannot say that without a UK-EU deal they will “fall back on WTO rules”

By Peter Ungphakorn
POSTED FEBRUARY 8, 2017 | UPDATED FEBRUARY 15, 2017

Now that the UK is about to start negotiating its departure from the European Union, it’s important to understand the meaning of World Trade Organization (WTO) “rules”.

Why? Because people are talking about WTO rules as if they only kick in if the UK and EU fail to reach agreement on their future trade relationship — that only then would the UK and EU “fall back on WTO rules”. They are wrong.

The truth is: WTO rules already apply to the UK’s present trade relationship with the EU.

They will also apply to any future trade relationship between the two, whether there is a deal of some kind, or no deal at all — so long as the UK and the EU and its member states are members of the WTO.

WTO offices lakeside
WTO offices, Geneva: WTO rules affecting the UK and EU are wide-ranging
Falling back on WTO “terms”Back to top

So what will the UK and EU fall back on if they cannot agree and the UK still leaves the EU?

They will fall back on commitments they have agreed in the WTO for trade with all other WTO members — except for those with whom they have a special (or “preferential”) trade arrangement, such as a free trade agreement.

This is sometimes called “WTO terms”, a better shorthand description than “WTO rules”. Some speak of “WTO tariffs”, which is more precise but doesn’t include services and agricultural subsidies.

Without a special deal between the UK and EU, trade between them will face import duties according to their WTO commitments for normal trade (without any free trade agreement).

The import duties (or “tariffs”) they charge on each other’s products will have to be the same as they charge on products from all WTO members except partners in free trade agreements. WTO non-discrimination rules would apply.

Limited amounts of some products — mainly agricultural — will be traded at low tariffs, with volumes outside those quantities facing much higher tariffs, so high that it might be impossible to import them. These are called tariff quotas.

British and European service industries are now relatively free to trade across the EU or to set up in other EU countries. Without a special deal, services trade between the UK and EU will revert to the much less liberal commitments they have made in the WTO on opening their markets to foreign services.

The commitments are explained in more detail here.

WTO Public Forum 2010
WTO: to understand it is to understand what will govern UK-EU trade relations
UK-EU relations and WTO “rules”, now and in the futureBack to top

Even now, while the UK is a member of the EU and its single market, it is governed by WTO rules. These mainly deal with how the EU and its member states relate to the rest of the world. They also discipline how the single market and customs union themselves are set up.

The WTO rules affecting the UK and EU cover a large number of issues. They include:

WTO rules are actually negotiated agreements. The full package is here.

The EU’s member states have agreed to go beyond those WTO rules for much of their trade relations. Therefore when disputes arise between the member states, they are handled within the EU, for example if the UK objects to French restrictions over foot and mouth disease.

After Brexit, the UK and EU aim to have some kind of free trade agreement. This will have to come under WTO rules including one that says a free trade agreement in goods or a customs union must cover substantially all trade.

Another says an agreement in services has to have substantial sectoral coverage.

Even though they are both members of the North American Free Trade Agreement, the US and Canada have taken some disputes to both the WTO and NAFTA

In other words, WTO rules will prevent the UK and EU from having a free trade agreement only for the auto industry, aerospace and banking.

That long list of all the areas covered by WTO rules will also govern UK-EU relationships even if they have a comprehensive agreement.

Depending on the type of arbitration set out in their agreement, they could also find themselves facing each other at the WTO dispute settlement court.

The US and Canada have taken each other to WTO dispute settlement even though they have an arbitration mechanism within their North America Free Trade Agreement (NAFTA). Some cases have been taken to both the WTO and NAFTA.

Failure to understand this would mean a failure to understand the future UK-EU trade relationship.

marrakesh-signing-pu_7_tilt-adjusted_cropped
The complete deal: WTO agreements at the signing ceremony, Marrakesh, 1994. The rule book is on the far left. The rest are more than 20,000 pages of the original 123 members’ individual commitments
Finally, WTO rights and obligationsBack to top

To complete the picture, the WTO is a system of negotiated multilateral trade agreements. The whole package must now run close to 30,000 pages. It consists of two parts.

First is a rule book of about 500 pages. Among the key principles running through its wide-ranging coverage is non-discrimination in trade — between a country’s trading partners, and between foreign companies, products and people and its own.

The remaining 20 to 30,000 pages are the lists of commitments made by each of the WTO’s 164 members, the limits they have agreed on tariffs on tens of thousands of products and on agricultural subsidies, and the minimum market opening they have promised for various services.

Under those agreements, WTO members have rights (for example not to face discrimination, and to have access to other countries’ markets) and obligations (for example not to discriminate, or to keep markets open at least as much as they have committed).

The agreements come from negotiations. The WTO dispute settlement system is about whether those agreements are being implemented as promised or how they should be interpreted. All decisions are taken by the membership, almost always by consensus (meaning no one objects).

The clichés are: the WTO operates a rules-based trading system; and it is member-driven.


Updates: Februay 15, 2017 — adding link to WTO legal texts
Photo credits: WTO via Flickr; Marrakesh signing by Peter Ungphakorn


12 years on, EU’s certified WTO goods commitments now up to date to 2004

Just before Christmas and almost unnoticed, the WTO circulated the EU’s “schedules” of commitments on goods (not services) to reflect its 2004 expansion from 15 to 25 members. They are also the UK’s current official WTO commitments. What are they?

By Peter Ungphakorn
POSTED FEBRUARY 4, 2017 | UPDATED FEBRUARY 5, 2017

Some pretty important documents were issued in Geneva by the World Trade Organization (WTO) on December 14, 2016 as Europe started to close down for Christmas and the New Year. They have flown under the radar.

Twelve years after the EU expanded from 15 to 25 members on 1 May 2004, it now has revised commitments on tariffs, tariff quotas and agricultural subsidies to take into account the addition of those 10 new members (you can download them below).

Contract signing CC0

JUMP TO

What is a WTO schedule?
Goods
Services
DOWNLOAD: the EU–25’s goods schedules
The UK’s post-Brexit goods schedule
EU enlargements over the years

Because the UK is an EU member, its commitments are bundled with the EU’s, so these are also the UK’s latest certified commitments.

For the UK, this means that re-establishing its own post-Brexit commitments in the WTO can be based on EU commitments that are closer to what they should be for the full 28-member union.

Next up: accounting for Bulgaria and Romania, which joined in 2007, to become EU–27, then Croatia (2013) for EU–28; and then subtracting the UK to go back to EU–27.

What is a WTO schedule?Back to top

To recap: a WTO “schedule” is essentially a negotiated commitment on how a WTO member agrees to curb protectionist policies. Countries have schedules for goods (including agriculture) and services.

They are called “schedules” because when a negotiation is concluded, the promised changes are phased in according to timetables, which are also set out in the schedules.

In other words, schedules are tools for reducing tariff protection, agricultural subsidies and barriers to trade in services.

GoodsBack to top

This is what a goods schedule contains:

For general import duties (or “tariffs”) on goods, the schedule sets legally binding ceilings (the “bound rates” of tariffs). The country is free to charge a duty (an “applied rate”) below the ceiling for that product, but not to go above it without renegotiating and offering compensation. These tariffs are known as “most-favoured nation” tariffs (MFN, essentially non-preferential equal treatment for products from all sources). They are also the legally bound rates for quantities outside tariff quotas.

eu-25-mutton-lamb-tariff-in-schedule
EU–25’s agreed “MFN” tariffs for mutton and lamb. Applies outside the tariff quota. Click the image to see it full size

For tariff quotas (or tariff-rate quotas, TRQs), the schedule sets out the quantity that can be imported at a lower duty or duty-free. The country can set a lower in-quota duty or expand the eligible quantity beyond the legally bound amount. But if it wants to raise the in-quota duty above the legally bound rate, or reduce the eligible quantity to less than the legally bound amount, again it has to renegotiate and offer compensation.

EU-25 TRQ
EU–25’s agreed tariff quota for mutton and lamb. Duty-free inside the quota. Click the image to see it full size

For agricultural domestic support — subsidies given to the sector within the country — the schedule has an agreed ceiling on the total amount of “trade-distorting” support  provided to farmers, a figure known as the “aggregate measurement of support” (AMS, sometimes called “Amber Box”).

Support is considered to distort trade if it has an impact on prices or production quantities. More details are here. Most countries have nothing on AMS in their schedules because they were not major subsidisers when the support limits were negotiated in the 1980s and 1990s. Some (such as the EU, US and others) are allowed AMS support, but had to reduce it as part of the negotiated liberalisation.

All countries can still use a conceptually small amount of trade-distorting support, known as “de minimis”. For developed countries, this is 5% of the value of production for developed countries (either for specific products or for agriculture generally), 10% for developing countries, and 8.5% for China. Although “de minimis” support is of the same type as AMS, it is not counted against the AMS limits for those countries that have them.

EU–25 AMS
EU–25’s agreed limit on trade-distorting domestic support. Click the image to see it full size

For agricultural export subsidies, the schedules also set legally bound limits on both the amount of money given in subsidy and the export quantities that are subsidised.

More information: on tariffs and disciplines in agriculture

EU–25 ceilings on export subsidies
EU–25’s agreeed limits on export subsidies. Click the image to see it full size

ServicesBack to top

WTO members also have separate schedules on services. These are complicated documents listing when a county will allow foreign services to enter its markets, each of the many types of services (banking, insurance, telecommunications, tourism, professional, and so on) including commitments on each of four “modes”:

  • Mode 1 “cross-border supply” — services supplied from one country to another (e.g. international telephone calls)
  • Mode 2 “consumption abroad” — consumers or firms making use of a service in another country (e.g. tourism
  • Mode 3 “commercial presence” a foreign company setting up subsidiaries or branches to provide services in another country (e.g. foreign banks setting up operations in a country
  • Mode 4 “presence of natural persons” — individuals travelling from their own country to supply services in another (e.g. fashion models or consultants)

More information: on services

Certified schedule

The EU–25’s goods schedules — downloadBack to top

The WTO document code number for the EU–25’s goods schedule is WT/LET/1220. This actually consists of covering letters and four attachments. They can be downloaded from the list below (the files are correct at the time of writing), or by going to WTO DocsOnline, https://docs.wto.org, and searching for WT/LET/1220:

  • Cover letters (pdf)
  • Agricultural tariffs, tariff quotas, processed agricultural products (PAPs) and the banana agreement (pdf or Excel)
  • Non-agricultural tariffs and tariff quotas (pdf). Also “mdb” database format, downloadable from WTO DocsOnline (above). I have created an Excel file from the mdb file. (NAMA = non-agricultural market access)
  • Duty-free trade in pharmaceutical products (pdf or Excel)
  • Agricultural subsidies, including an agreement on oilseeds (pdf or Excel)

The UK’s post-Brexit goods scheduleBack to top

Finally, the implications for extracting the UK’s goods schedule from the EU’s are discussed elsewhere in this blog: agricultural tariffs, agricultural tariff quotas, processed agricultural products, extracting the UK’s schedule. See also this free-to-view AgraEurope article.


Back to top

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:
February 4, 2017 — removed incorrect information on EU committing zero export subsidies
February 5, 2017 — added screenshots from the EU–25’s goods schedule

Photo credits:
♦ Public domain/Creative Commons CC0 via pexels.com/pixabay.com


Types of a possible future UK-EU trade deal

All you need to know about customs unions, free trade areas, rules of origin, the single market and agriculture

By Professor Alan Swinbank, University of Reading
POSTED JANUARY 10, 2017 | UPDATED JANUARY 10, 2017

This excellent summary is an annex in a new paper by Professor Alan Swinbank, “World Trade Rules and the Policy Options for British Agriculture Post-Brexit| Briefing Paper 7 | UK Trade Policy Observatory (Sussex University and Chatham House) | January 2017.

Reproduced with permission.

Containers at Antwerp

Customs unions, free trade areas, rules of origin and the single market

Both the terms Customs Union and Free Trade Area (FTA) have specific meanings in the WTO, as regulated by GATT Article XXIV (Similar provisions apply with the General Agreement on Trade in Services: GATS). A customs union involves the abolition of tariff barriers and ‘other restrictive regulations’ on ‘substantially all the trade’ between its constituent members. Quite what is meant by the word ‘substantially’ has never been entirely resolved. The Turkey-EU Customs Union excludes agriculture for example; but it is difficult to believe that WTO Members would now agree that a new agreement was WTO-compatible if it excluded a major sector of the economy such as agriculture. Similarly all of the members of the customs union apply ‘substantially the same duties’ on trade with Third Countries. The EU is itself a customs union, with complete product coverage, and a common external tariff, meaning that goods once imported into the EU are in free circulation and can be transferred to other EU states without further payment of customs duties.

A Free Trade Area (FTA) is rather different. This involves the elimination of tariffs and other restrictive regulations of commerce on ‘substantially all the trade’ in products originating within the FTA. Many FTAs have only partial coverage of agricultural, food and drink products. Thus the European Commission (2014: 3-4) has reported that the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada will eliminate tariffs and quotas on 91.7% of agri-food tariff lines on EU products entering Canada, and on 93.8% of EU tariff lines faced by Canada. TRQs will apply on imports of beef and pigmeat into the EU, and on some dairy products into Canada, whilst some poultry products will be excluded from the FTA altogether.

The parties to a FTA still determine their own trade barriers against Third Countries. Consequently rules of origin (which can often be extremely complex) have to be negotiated to determine what constitutes an originating product (what minimum level of processing is required?). Moreover border controls are still needed at the FTA’s internal borders to differentiate between originating products (entitled to duty-free access) and non-originating products (on which duty is payable). If this did not happen, trade deflection would be an issue, as traders tried to import their goods into the FTA via the country with the lowest external tariff. The problem becomes more acute when commodities (such as bulk sugar) are involved, where product substitution could readily occur. Thus if the EU maintained its very high tariffs on sugar and negotiated an FTA with the UK that did include sugar, but left the UK to freely import sugar from the world market, the outcome might be that the UK would source all its supplies for domestic consumption from world markets, while exporting all its domestic production (produced from sugar-beet grown on British farms) to the EU.

It is not just tariffs that can restrict trade. Divergent regulatory provisions (e.g. covering food safety, animal and plant health) can do so too. Although the WTO has attempted to provide a framework within which such provisions can apply (the Agreement on the Application of Sanitary and Phytosanitary Measures for example) many FTAs now include agreements that go beyond the WTO rules. The European Commission has talked about Deep and Comprehensive Free Trade Area (DCFTA) agreements. However its ambition has on occasion proved deeper and more comprehensive than can be readily delivered. Thus the proposed Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU has had difficulty with a number of regulatory issues, including US reluctance to accept the EU’s policy on Geographical Indications (GIs) of origin on many food and drink products, and EU concerns about the chlorine washing of poultry carcasses to reduce pathogens (Josling & Tangermann, 2015: 241-6).

The EU’s Single Market goes beyond regulatory convergence on selected topics. A key element in achieving the free movement of goods —one of the ‘four freedoms’ for goods, services, capital and workers— is that the same regulatory regime applies in all the Member States (or the principle of mutual recognition results in products legally produced in one Member State being accepted throughout the Single Market). With a customs union covering all goods, and regulatory harmonisation or equivalence achieved, there is no need to apply border controls within the EU.

Norway, through the European Economic Area (EEA), applies EU regulatory provisions enabling it to participate in the Single Market;[1] but paradoxically it is not in the Customs Union as the EEA is built on a series of FTAs (and nor do its FTA provisions apply to agriculture). Consequently, border controls are still necessary to apply rules of origin. Turkey, despite its partial customs union with the EU, is not in the Single Market, and so border controls are needed to ascertain that traded products do fall within the remit of the customs union, and that the EU’s regulatory provisions are met.


[1] Of the various Directives regulating agricultural production (the Nitrates Directive, the Water Framework Directive, etc.) the National Farmers Union (2016: 32) identified only two — the Habitats and the Birds Directives — that Norway is not obliged to apply for it to participate in the Single Market.


Photo credit: Containers in Antwerp, public domain CC0 via pexels.com