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UK, EU, WTO, Brexit primer — 2. Tariff quotas

Continuing a look at what lies behind the sudden surge in interest in the UK’s and EU’s relationship with the World Trade Organization. Part 2: the ABCs of tariff quotas

Tariff quotas

Basically, “tariff quotas” are where limited quantities of imports are allowed into a country duty-free or at low duty. Quantities beyond those limits would normally be charged high duties. Because they are all about tariff rates for specific quantities, they are also called “tariff-rate quotas” or TRQs.

They are used on products that are sensitive: typically food and other agricultural goods. They are a compromise between: protecting domestic farmers and other producers with high import duties; and demands from exporters to be allowed full access to the market. The compromise is to have low or zero tariffs, but only for limited quantities. This also allows consumers to buy some cheaper or more varied food than if there were no quotas.

When a WTO member has tariff quotas, they are included in its “schedules” or lists of commitments (explained in part 1).

The EU has around 100 — the exact figure depending on how they are counted — on cheese, butter, beef, poultry, sheep and goat meat, other meat, live animals, sugar, citrus and other fruit, fruit juice, some vegetables, eggs, cereals and more.

So does the UK because as an EU member, the UK’s commitments are part of the EU’s. When it leaves, the UK will need to have its own independent set. Most of this can be copied from the EU’s, meaning the UK would simply continue with the tariff ceilings and commitments on opening services markets that it currently has through the EU.

But for a handful of items, copying is not possible. Perhaps easier to handle among these are farm subsidy limits. The most complex and contentious are tariff quotas. This is where the common UK-EU approach comes in.

Take lamb (strictly speaking, “sheep and goat meat”). The EU currently allows around 300,000 tonnes to be imported duty-free. Some of that goes to the UK, some to other EU members. Once imported into one EU country it can be shipped on freely to another.

After Brexit, the UK and EU would normally have separate tariff quotas. What size should the UK’s be? And what about the EU’s?

A basic intuitive approach would be this. If 40% of the EU’s imports go to the UK and 60% go to the other countries, then the quota might also be split 40:60 — the UK’s tariff quota would be 120,000 tonnes and the EU’s would be 180,000. (The actual ratio seems to be closer to 50:50.)

This particular quota is actually subdivided between different suppliers, New Zealand having just over 200,000 tonnes. Although New Zealand could export all of that to any single EU member, in practice around 48% goes to the UK and 52% to the rest of the EU. So the UK’s tariff quota for New Zealand lamb could be 48% of 200,000 tonnes (96,000 tonnes) leaving the EU with a quota of 104,000 tonnes.

It ought to have been easy for the technicians on both sides to agree to those principles for their common approach.

The real challenge would have been grappling with the numbers, a much more difficult and time-consuming task, but a technical one.

Should the trade data be based on a certain number of years (perhaps an average of three or five) and if so which years (up to the start of the separation talks or to the date of the actual separation)? What kind of average should be used for the data (a straight three-year average, or a five-year “Olympic average” which excludes the highest and lowest numbers)? How should imports that enter the EU through other countries but end up consumed in the UK be identified, for example imports via Rotterdam? What should be done when data is unavailable? And so on.

These are the kinds of questions that can occupy economic statisticians for months. But unless they actually have a significant impact on UK and EU commercial interests, they are unlikely to attract the attention of the political masters.

We still don’t know exactly how the discussions went. There is no public information so far to confirm what actually happened.

The agreement was described as preliminary (which Sprenger’s tweets seemed to confirm). It reportedly needed the approval of the EU member states, but the EU also planned to submit it to WTO members later in October on the sidelines of the WTO Agriculture Committee’s meetings, suggesting it believes approval within the EU will be straightforward.

Agreeing common solutions to statistical problems is not what most people would consider a breakthrough in Brexit talks. Nor is it a “deal”, in the sense that a deal usually involves paying something in order to get something else in return.

It also tells us next to nothing about the actual Brexit separation terms or the future relationship between the UK and EU.

The real deal

It’s what happens next that will involve payment. This could take months at least. And the bargaining will not be between the UK and the EU since their own bilateral trade is apparently being kept out of the picture.

It will be between the UK (and separately the EU–27) and the rest of the WTO. To what extent those two sets of negotiations merge remains to be seen.

Already seven countries have rejected (pdf) the UK-EU approach.

Argentina, Brazil, Canada, New Zealand, Thailand, the US, and Uruguay wrote to the UK and EU ambassadors in Geneva:

“We are aware of media reports suggesting the possibility of a bilateral agreement between the United Kingdom and the European Union 27 countries about splitting Tariff Rate Quotas (TRQs) based on historical averages. We would like to record that such an outcome would not be consistent with the principle of leaving other World Trade Organization Members no worse off, nor fully honour the existing access commitment. We cannot accept such an agreement.”

The letter includes a number of legal justifications including this assertion: “The modification of these TRQ access arrangements cannot credibly be achieved through a technical rectification. None of these arrangements should be modified without our agreement.” And “the whole membership of the organization may take an interest.”

What these countries are arguing is that dealing with post Brexit tariff quotas is not just a technical correction (“rectification”) of the implied commitments of the EU–27 and the UK. Under WTO procedures, rectification is quick and requires little or no negotiation. On the other hand, a “modification” does require talking particularly with countries that were part of the original negotiations or have a substantial interest.

The key difference between the two sides is on the meaning of leaving other WTO members “no worse off” and honouring “the existing access commitment”.

Take that example of splitting the 300,000-tonne EU–28 quota into 120,000 tonnes for the UK and 180,000 tonnes for the EU. The combined total is still 300,000 tonnes.

But the seven are arguing that the commercial value to them would be reduced because they have less flexibility to choose where to export their product to. While the UK is still in the EU, they can switch from selling less to the UK and more to Germany or France if the price is better, for example. Under the joint UK-EU approach that freedom would be constrained by the separate quotas.

At the very least, this suggests the seven would want: either, quotas that are larger than 120,000 tonnes (UK) and 180,000 (EU–27), meaning more than 300,000 tonnes in total; or, continued freedom to choose where to sell their products in the 28 countries that are now the EU.

That freedom would continue to exist, for example, if the UK ends up back in the single market and customs union with unchanged tariff quotas. In that case, the seven would drop their demand to negotiate.

The rejection does not mean the talks in the WTO are deadlocked, doomed or an “unmitigated disaster”. They haven’t even really started yet.

The UK, EU and some of the rest of the WTO have now declared their starting positions. Months of negotiations will follow. Any agreement reached after that will be the real deal. It will clear the way for trade to continue.

Months of talk ahead

One journalist I spoke to was surprised that we might have to wait until this time next year at the earliest to find out what the deal is. We should not be surprised. Nothing happens quickly in the WTO.

These are pretty complicated issues. There are around 100 tariff quotas. At each stage, the negotiators in Geneva will have to consult officials, governments, farmers’ groups and exporters back home. The EU will have to consult the 27 member states too. The UK is understood to be aiming to submit its draft schedules of commitments sometime next year.

What if there is no agreement by Brexit day? Some lawyers argue that so long as the UK and EU have constructed their proposed tariff quotas according to legal principles and the case history of WTO disputes, London and Brussels can simply go ahead without needing other countries’ approval. Objecting countries would struggle to win a legal challenge against the two in the WTO, according to this argument.

Other trade experts and experienced negotiators disagree. They believe a legal challenge might be possible, with the risk that trade could be disrupted. Some argue that WTO dispute settlement rulings are not always predictable. In this case the adjudicators would be asked how WTO law would handle tough questions such as “no worse off” and honouring “the existing access commitment”. The worst outcome would be a soured atmosphere leading to tit-for-tat restrictions on imports.

For the time being the point is moot. Those actually involved in the talks say they want to avoid both disruption to trade, and litigation in the WTO. That would require some sort of deal by Brexit day.

The UK’s and EU–27’s schedules of WTO commitments would not necessarily need to be certified in the WTO by that date. The EU has been trading smoothly despite its schedules for various phases of enlargement remaining uncertified for years. To work in practice, the UK and EU would have to have learnt from the negotiations what tariff quotas would be reasonably acceptable to the other WTO members concerned.

One other point that has received little attention: if other WTO members have tariff quotas that specify the EU as a supplier, then those quotas will have to be split between the UK and EU–27 too. But that’s another story.

Part 1 on WTO membership is here

Follow-up: Jochem Sprenger’s tweets

After this article was published, Dutch Foreign Ministry official Jochem Sprenger tweeted:

Actually, there was quite a lot of debate between EU and UK. So “deal” is not very unaccurate. UK insisted on “rectification”

— Jochem Sprenger (@jochemsprenger) October 8, 2017

Note “rectification”, which the US and others rejected.

The discussion included the UK asking the EU for help in transferring its free trade agreements with other countries (such as Canada and South Korea) to the UK, Sprenger went on.

Furthermore, UK asked for EU support te renegotiate UK access to EU’s FTAs.

— Jochem Sprenger (@jochemsprenger) October 8, 2017

And he confirmed that there was no attempt to include UK-EU trade in the tariff-quotas.

Lastly, no agreement on EU’s access to UK’s TRQs or vice versa

— Jochem Sprenger (@jochemsprenger) October 8, 2017

Then he said there is still no consensus on how to split the quotas. Only a “common letter”.

Oh, and btw: there is no concensus yet between the UK and the EU on the actual devision of the TRQs. Only a common letter.

— Jochem Sprenger (@jochemsprenger) October 8, 2017

And finally he said the EU Commission should have published the UK-EU letter

There is no deal – only a common letter about the approach. But even of that one, the Commission ought to have made the EU proposal public

— Jochem Sprenger (@jochemsprenger) October 8, 2017

The letter was published three days later on October 11 (pdf). It seems to confirm Sprenger’s tweets. “Rectification” does not appear in it, and nor does any specific reference to “modification” or negotiating rights. If the two sides (UK and EU versus other WTO members) haggle over the legal status of the talks, then we can expect delays to the discussion of the actual tariff quotas.

Updates:
• October 9, 2017 — adding new information from Jochem Sprenger’s tweets
• October 12, 2017 — adding UK-EU letter and references to it in the story
Photocredits: Pixabay, Pexels CC0

UK, EU, WTO, Brexit primer — 1. WTO membership

Let’s keep this simple. What lies behind the sudden surge in interest in the UK’s and EU’s relationship with the World Trade Organization? First: the UK’s WTO membership

By Peter Ungphakorn
POSTED OCTOBER 7, 2017 | UPDATED OCTOBER 10, 2017

Adam Sharpe is my editor at IEG Policy. On October 5, he emailed me. “I almost spat my coffee out,” Adam wrote, “when I turned on twitter and saw that ‘EU-UK WTO’ was trending this morning. Looks like TRQs are now ‘mainstream’.”

“EU-UK WTO” was trending because suddenly the media were reporting on some highly technical discussions related to the UK leaving the EU (Brexit) and the implications in the World Trade Organization (WTO).

Room W, WTO — In the WTO, the EU generally speaks on behalf of its member states, including the UK

JUMP TO
• The UK is a member
• The UK will still be a member

The surge in interest was sparked by reports of a “breakthrough deal” in the separation talks between the UK and EU. The two were about to agree on a common position in the WTO. More reports followed almost immediately saying the US, New Zealand and some other WTO members rejected that position. This sparked a flood of comments, in many cases reflecting misunderstandings.

So here are a couple of primers on what this was all about. We’ll get to the “breakthrough deal” and those “TRQs” in part 2. First, the UK’s WTO membership.

The UK is a member

The UK is and will continue to be a WTO member. All experts agree that it is a member. All but a tiny minority also agree that there will be no break in its membership when it leaves the EU. There will be negotiations with other WTO members, but that will only be about some of the terms of membership — the commitments the UK makes in the WTO — not membership itself.

UK signed WTO agreement — **The UK signed the 1994 agreement setting up the WTO**. From the UN Treaty Collection

What matters in practice is that for now at least, all other WTO member governments accept the UK will continue to be a member. They are the ones who count because the WTO is run by them, and it’s the members that the UK will be dealing with.

For what it’s worth, the WTO Secretariat, also shares the view. Director-General Roberto Azevêdo has said it on several occasions including in an interview with the BBC’s Stephen Sakur (partial transcript here). But it’s not the Secretariat’s decision.

The WTO was originally the General Agreement on Tariffs and Trade (GATT). The UK helped create GATT in 1948 and was therefore a founder-member. Then in 1973, the UK joined what is now the EU.

Then, in 1995 the WTO was created out of the GATT system. The EU became a member of the new organisation. So did the member states. Right now, the WTO has 164 members. The EU is 29 — the EU itself plus each of its 28 member states.

Because the EU has a common commercial policy, in the WTO it generally speaks on behalf of its member states (including the UK, France, Germany, etc). The member states do speak independently on issues such as administration and the budget, but not on the bulk of WTO affairs.

This is one reason why people are confused about the UK’s WTO membership. Because the EU is a member it’s easy to think that by leaving the union, Britain will also lose WTO membership. That is not the case. The UK is a member in its own right.

The UK will still be a member

The other source of confusion is the fact that the UK will have to negotiate something in the WTO. In fact, so will the EU, whose membership has not been questioned.

The UK will not be negotiating membership. It will be negotiating some of its promises to other WTO members.

This is linked to confusion about WTO “rules”. A common misunderstanding is that if London and Brussels cannot agree on a bilateral free trade arrangement, then trade between them will fall back on “WTO rules”, in practice tariffs and quotas.

To understand why this is a misunderstanding, we have to distinguish between the system’s “rules” and its members’ “commitments”.

Marrakesh Ministerial Conference 1994 end of Uruguay Round — **Rules and commtiments**: 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

The WTO rule book is about 500 pages long. Its contents are the agreements the membership has negotiated over the years since the 1940s. They cover a wide range of issues, applying to all members:

the broad approaches countries should apply when setting import duty rates (tariffs)
how regulations can deal with food safety and animal and plant health
product standards and labelling
industrial and agricultural subsidies
actions taken against dumping cheap products and against other countries’ subsidies
public procurement
various customs issues
principles of services liberalisation (including exemptions for government services)
minimum standards for protecting intellectual property such as trademarks, copyright, patents and geographical indications
how to settle legal disputes
and much, much more

Each of these includes principles such as non-discrimination, obligations to make information available, and special treatment for developing countries.

Individual members’ commitments are also the result of negotiations, but they are different for each member. Currently, they probably run to around 30,000 pages. They list what each member has agreed to do to open its goods and services markets and to limit certain types of subsidies. It’s all negotiated and some do more than others.

The lists of commitments are called “schedules” because they usually start off with timetables for achieving what was agreed, for example to reduce a tariff in equal steps over 10 years from 25% to 15%. They limit how much a country can protect its domestic producers, so if the listed tariff is 15%, then that’s a maximum. The country is free to apply a tariff below 15% but if it wants to go above (as Ukraine has done recently with some of its tariffs), it has to renegotiate.

WTO membership therefore requires both accepting the rules and making individual commitments. Does the UK do both?

Yes, both. But it’s the commitments that are most immediately related to Brexit. They determine the conditions of the UK’s trade with the rest of the WTO, particularly for import tariffs, quotas, farm subsidies and services. And they are what the UK and EU will “fall back on” bilaterally if they do not have a free trade agreement of some kind.

As an EU member, the UK’s commitments are bundled with the EU’s. (If you really want to look at the gory details you can see these pages on goods and services schedules. You have been warned.)

To most people that means the UK’s commitments can be inferred from the EU’s. The EU’s present tariff ceiling on some types of shoes is 8%. That’s currently also the UK’s tariff ceiling for those types of shoes, and will continue to be after Brexit unless the UK wants to change it.

A tiny handful of people say that when the UK leaves the EU it will have to create its schedules of commitments from scratch. The UK’s schedules cannot be inferred from the EU’s. Therefore, according to this argument, if there is no agreement on the commitments on the day Britain leaves the union then it will not have schedules and therefore its membership will lapse.

But, as I said, for the time being at least, the people who count — WTO member governments — do not share that minority view.

In any case, if by Brexit day, March 29, 2019 — when the UK becomes an independent WTO member — a set of documents called schedules has been agreed in the WTO, then it won’t matter whether they should be seen as inferred or created from scratch.

Still, between now and Brexit day, some hard talking in the WTO lies ahead particularly for the UK, but also the EU.

The bargaining won’t be about the 8% tariff on shoes. It will be about the almost 300,000 tonnes of sheep and goat meat from New Zealand and elsewhere, which can now be imported duty-free into the EU. It will be about similar conditions for a range of other agricultural products.

These are the famous tariff-rate quotas (TRQs). I’ll look at them as simply as I can in part 2.

Updates: October 9, 2017 — minor edit to make text clearer; October 10, 2017 — adding links on UK in the WTO
Photocredits: the author

Who put the boot into Canadian dairy and why?

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 Wolfe and 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).

Dairy cow Canada — 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.”

The Globe & Mail June 18, 2017

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.

Robert Wolfe is Professor of Policy Studies at Queen’s University in Kingston, Ontario and co-editor of a new IRPP book, Redesigning Canadian Trade Policies for New Global Realities. Follow him @BobWolfeSPS

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

UK, EU & WTO — a presentation

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.

It was part of a series of lectures on “Policy in Practice”, under the London School of Economics’ Executive Master in Public Administration programme.

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.

This is what the presentation contains, in three parts on the WTO, WTO negotiations and Brexit:

1. The WTO: Basics

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.

Recommended reading: Oliver Ilott, Ines Stelk, Jill Rutter: Taking back control of trade policy. Institute for Government, May 17, 2017

Download the presentation as a handout here (pdf).

Updates: None
Photocredits: See presentation

If the EU and UK fall back on WTO commitments what does this mean for services?

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.

BA jumbo CC0 — **Air transport**: WTO commitments on all services are unbelievably complicated, but landing rights are totally excluded

JUMP TO
• Extracting UK’s services commitments from the EU’s
• Types and modes of services
• The EU’s services schedules
• What the schedules contain
• Finally, what would the UK face?

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.

Sao Paulo Stock Exchange by Rafael Matsunaga Wikimedia Flickr CC-by-2 — **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.)

How this might be done for goods (particularly agricultural products) is discussed in several other articles in this blog.

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.

Tourists Taj Mahal Chee Huey Wong CC0 — **Tourism is mode 2**: the customer travels to consume the service abroad

Types and modes of services

The certified services schedules are annexed to the General Agreement on Trade in Services (GATS), the WTO’s umbrella agreement for the sector.

The GATS covers around 160 different types of services, grouped under 12 broad headings and sub-divided down to three levels:

Business services (professional, computer, R&D, real estate, rental and leasing, etc)
Communication services (postal, courier, telecommunications, audiovisual, etc)
Construction and related engineering services
Distribution services (commission agents, wholesale, retail, etc)
Educational services
Environmental services (sewage, refuse, sanitation, etc)
Financial services (insurance, banking, etc)
Health related and social services
Tourism and travel related services (hotels, restaurants, travel agencies, tour operators, etc)
Recreational, cultural and sporting services (entertainment, news, libraries and museums, sport, etc)
Transport services (sea, inland waterways, air, space, rail, road, pipeline, cargo handling, etc)
Other services

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.

GATS and services issues in the WTO are explained here (introduction), here (FAQs), and here (more technical, pdf).

electrician by Skeeze pixabay CC0 — **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)
Download the documents using these pre-configured searches, and selecting “European Union”
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:

Financial services, supplement 1 (GATS/SC/31/Suppl.1 of 28 July 1995 — 27 pages): replacing the original financial services commitments of the EU–12, Austria, Finland and Sweden
Financial services, supplement 1, revision 1 (GATS/SC/31/Suppl.1/Rev.1 of 4 October 1995 — 27 pages): again replacing the original financial services commitments of the EU–12, Austria, Finland and Sweden
“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
Financial services, supplement 4 (GATS/SC/31/Suppl.4 of 26 February 1998 — 24 pages): replacing supplement 1 revision 1
Financial services, supplement 4, revision 1 (GATS/SC/31/Suppl.4/Rev.1 of 18 November 1999 — 19 pages): replacing supplement 4. These are the EU–15’s current financial services commitments

Kamal Nath ambush | WTO July 2008 — **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!):

EU services commitments on news services — 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.

Assessing that is beyond me. Over to you.

(Here’s one answer: “Brexit Means U.K. Lawyers and Bankers May Not Be at Your Service” — Bloomberg May 4, 2017)

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

If we’re to understand the Brexit talks, the media must do better than this

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.

brexit-referendum-uk-headlines publicdomainpictures.net CC0 — 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:

EU’s Brexit negotiating stance revealed by European Council President Donald Tusk (Independent)
EU draft guidelines soften line on future UK relationship (AP, on ABC news)
The EU Engages: What We Learned About Brexit From Donald Tusk (Bloomberg)
EU offers Brexit trade talks, sets tough transition terms (Reuters)
Brexit: EU says no to free trade talks until ‘progress’ on final terms (The Guardian)
EU rules out early trade talks with UK in Brexit process (BBC)
The EU’s Brexit Guidelines Say No Trade Talks Until After Withdrawal Terms Are Clear (Buzzfeed)
EU pushes to settle Brexit divorce first, then hold talks on future UK relationship (AP in Toronto Star)
Negotiations can’t take place in parallel — EU (The National, Scotland)
Council response puts Brexit talks on collision course (Politico)
BRUSSELS BUCKLES: EU WILL open trade talks before Brexit despite Merkel saying NO (Express)

Broadly:

The Independent’s headline was neutral
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.

3 views — The notion that the EU was uncompromising was as absurd as the claim that Brussels had buckled

3 days, 3 angles

This is what happened over the three days.

On March 29, 2017, UK Prime Minister Theresa May sent a letter to EU Council President Donald Tusk, saying:

“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

Some voices disagreed with that interpretation, but they were largely unheard.

Then on March 31, 2017, Tusk presented his draft guidelines (pdf), which includes this:

“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.

Peace conference in Karlowitz — 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.

Gibraltar seen from Spain 2007 — 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 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 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.

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 services

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.

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