A real beginners’ guide to tariff-rate quotas (TRQs) and the WTO

The first beginners’ guide was on tariffs. It was supposed to be for a “six-year-old” to understand. Sadly tariff quotas are more complicated, so perhaps you have to be seven-and-a-half for this one, and that’s just at the start

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JUMP TO
BASICS
What are quotas?
What are tariff quotas?
Why have tariff quotas?
And in the WTO?

IN PRACTICE
When does the higher tariff kick in?
Are tariff quotas available to all suppliers?
What about the politics?
And Brexit?
Where can I find tariff quotas?

By Peter Ungphakorn
POSTED SEPTEMBER 9, 2018 | UPDATED SEPTEMBER 10, 2018

In trade policy, life can quickly become pretty complicated. The first beginners guide was on tariffs, and it was relatively simple. Move on to “tariff quotas” and we enter a complex, controversial and sometimes murky world.

But it’s useful to understand them because they feature in current debates about Brexit and Donald Trump’s trade policies. So let’s keep this as simple as possible.

First things first.

BASICS

What are quotas?Back to top

SEE ALSO
UK, EU, WTO, Brexit primer — WTO membership (2017)
What’s really happening on tariff quotas and Britain’s WTO commitments?
(2018)
Comments on the EU’s (and UK’s) proposed modified tariff quotas (2018)
Archived: UK, EU, WTO, Brexit primer — 2. Tariff quotas
(2017)
The limits of ‘possibility’: Splitting the lamb-mutton quota for the UK
(2017)
The Hilton beef quota: a taste of what post-Brexit UK faces in the WTO (2016)

We are familiar with quotas. They are simply limits on numbers or amounts. Until recently, Britain had a quota on how many foreign doctors and nurses would be granted visas to work in the UK: 20,700 per year. (This limit was removed in June 2018 in order to tackle health staff shortages.)

Sticking with trade in goods (and ignoring services), quotas are limits on the quantities imported or exported (the technical term is “quantitative restrictions” or QRs, which includes outright prohibitions).

By and large, the world’s trading nations have agreed in the World Trade Organization (WTO)  to scrap import quotas. Export quotas are discouraged (although some countries use them legitimately to control exports that face tariff quotas in the importing country — we’ll see why in a moment).

Below is an imaginary quota on importing some types of live sheep. It could have been a number of animals, say 5,000. But instead, this quota is 196 tonnes (ie, the number of sheep is converted to an equivalent amount in tonnes by some formula.)

This hypothetical country allows 196 tonnes (equivalent) to be imported. Beyond that, imports are banned completely. (The imports will be charged whatever the normal import duty — or tariff — is.)

A quota: quantities outside the quota are not allowed
A quota: quantities outside the quota are not allowed

US President Donald Trump’s war against steel and aluminium imports has led to a quota on steel imports from Brazil and other countries. (Listen also to this podcast on Trump’s quotas.)

People often speak about “quotas” for short when they mean “tariff quotas”. They are not exactly the same. So …

What are tariff quotas?Back to top

The full name is “tariff-rate quotas” (TRQs), and they apply to imports of goods. Within the quota, the tariff rate is zero (duty-free) or low. Outside the quota the tariff rate is much higher. Importing outside a tariff quota is not impossible, but the tariff rate could be so high that it’s unprofitable.

In other words the quota is a limit on the quantity eligible for lower duty.

Below is an actual tariff quota. The EU allows some types of live sheep to be imported at a 10% duty rate, up to a limit of the equivalent of 196 tonnes (yes, the previous example was based on a real figure*). Outside the quota, the duty is €805 per tonne. That would add €805 per tonne to the import price. The exporter could lower the price in order to try to sell the sheep, but often that would still be unprofitable either for the importer or the exporter.

Sheep tariff quota
A tariff quota: quantities outside the quota are allowed, but the duty adds €805 per tonne (equivalent) to the import price

Tariff quotas are used on a wide range of products. Most are agricultural: cereals, meat, fruit and vegetables, and dairy products are the most common. Sugar is not far behind. Not all are food: the US has tariff quotas on cotton. And not all are agricultural. The EU has around 100 tariff quotas: most are agricultural but they also include on fish (not “agricultural” in the WTO), glass beads and imitation precious stones, ferrosilicon, newsprint, and other products.

So far so simple (hopefully). Now it starts to get complicated.

Cotton
Cotton: US growers are a powerful lobby

Why have tariff quotas?Back to top

Essentially they are a compromise. On one side, they protect domestic producers from having to face competition from large quantities of imports. On the other, they allow exporters some access to the market. They also allow consumers and other producers in the importing country to get hold of some imports.

The US cotton tariff quota protects US cotton growers while allowing textiles manufactures to import some cheaper cotton.

The compromise would have come from international trade negotiations, leading to a balance between the interests of importing and exporting countries.

Inside a country it would also have come from the government balancing the interests of different groups of producers (those who compete with the imports, and those who use the imports as raw materials or components) and consumers. How that balance is struck depends on the country’s political processes, including lobbying and interests represented in parliaments.

In the US, cotton growers are a powerful lobby. From Canada eastward to Japan and in many countries in between, it’s dairy producers. In the EU, farmers groups lobby on a wide range of products. In Japan, it’s rice farmers. Sugar is protected in most producing countries, often with tariff quotas. And so on.

Different types of rice
Rice: Japan has a 500–600% tariff and tariff quota; the EU’s tariff quota is about 200,000 tonnes

And in the WTO?Back to top

The agricultural tariff quotas in the WTO have a particular history. They are the result of the 1986–94 Uruguay Round negotiations, which reformed international trade rules and created the WTO.

In the talks, countries agreed to scrap import bans and straight quotas, and to replace them with tariffs having a similar effect. (This conversion to tariffs was called “tariffication” — the full complexity is in Annex 3 of this non-binding document from the talks.)

How did tariffication work? If banning imports meant the domestic price was six times the world price, the equivalent tariff would be 500% — the 500% tariff would, in principle result in a price that’s six times the world price. That was approximately the situation for rice imports into Japan.

Importing with a 500% duty rate is clearly impossible (or almost impossible). So the negotiators compromised by opening up tariff quotas that would allow some imports. The unofficial target was 5% of domestic consumption, but that was never officially agreed.

The result was tariff quotas that were often considerably manipulated. (This could have been called “cheating” but because the target was not agreed it was just called “dirty tariffication” — the 5% target is in paragraph 5 of the same non-binding document.)

Raw sugar
Raw cane sugar: The US tariff quota is allocated among 40 countries

And now, I’m afraid, it gets really complicated.

IN PRACTICE

When does the higher tariff kick in?Back to top

Or, does the tariff quota have to be used up completely before imports are charged the higher duty? The short answer is “no”. Some imports can face the higher duty even if the lower-duty quota is not filled.

QUOTA ALLOCATION METHODS

WTO members identified all these methods in their notifications to the organisation (compiled in Secretariat document TN/AG/S/26/Rev.1)

  • Applied tariffs: unlimited imports at the in-quota tariff rate or below
  • Auctioning: importers bid for shares or licences
  • First-come, first-served: physical imports charged in-quota tariffs until the quota is filled
  • Historical importers: based past imports of the product
  • Licences on demand: allocated in relation to quantities demanded, often before the period specified for the quota — first-come, first-served or allocations trimmed proportionately if demand exceeds the quota
  • Mixed allocation methods: combinations of the above, none dominant
  • Non-Specified: no method notified
  • Other: methods not clearly within any of these categories
  • Producer groups or associations: if they import or control the country’s imports
  • Imports by state trading entities: if they import or control the country’s imports

It depends on how the importing country manages the tariff quota. Normally this means issuing import licences, and the way they are issued has an impact.

If the licences are issued automatically as shipments head for the importing port, and if they are issued first-come-first-served, then the quota would be filled before the higher tariff kicks in.

But there are many other criteria that countries use for issuing import licences. One is for this year’s licence to be based on the company’s previous years’ imports (“historical importers”). Another requires importers to pay for the licence by bidding — a controversial method that some argue that in practice raises the in-quota tariff, violating the country’s WTO commitment (explained here).

Among the questions countries ask each other most often in the WTO’s Agriculture Committee is why imports under their tariff quotas do not reach the limit (the quotas are “unfilled”).

The answer is usually because of supply and demand — domestic demand for the imports is too weak or the prices on imports are too high. A number of countries claim that the real reason is often the way import licences are allocated. They have tried to negotiate tighter disciplines, but as part of a wider agriculture negotiation which is largely stalled.

Are tariff quotas available to all suppliers?Back to top

Some are, some aren’t. Tariff quotas often specify which countries can supply the product. Sometimes the quota is defined by which country can supply, meaning there can be several quotas, one for each supplier. Sometimes a single quota is subdivided to show how much goes to each country, how much goes to other unspecified countries and how much is available for all countries (the dreaded “erga omnes”, abbreviated as “EO” — personally I prefer to think of “EO” as “everyone”).

The US recently announced how its 1.1 million-tonne WTO sugar tariff quota will be shared out among 40 countries in financial year 2019.

Dairy products: protected in the EU, US, Canada and elsewhere
Dairy products: protected in the EU and around the world

What about the politics?Back to top

On the face of it, this is about protectionism versus access to markets (or to imports). But there’s more to it.

THAI TAPIOCA

In the 1980s and 90s, Thailand exported millions of tonnes of tapioca pellets to the EU through a tariff quota. (Tapioca is called manioc in the EU; elsewhere it’s also called cassava.) The tapioca fed pigs in Europe because it was cheaper than barley and other feed ingredients, whose imports faced high tariffs.

Thailand was also allowed to control its exports to match the EU’s import quota, under a voluntary export restraint (VER) agreement, and this transferred control of the quota rent to Thailand. (VERs were largely outlawed when the WTO came into being in 1995, but they have reappeared in response to Trump’s threats against imports.)

Various controversial and allegedly corrupt schemes were devised by the Thai government to allocate shares of the exports among various companies.

In one method, companies could export in proportion of the stocks they held. This led to a race to stock tapioca, drove up warehouse rental and produced official figures for total stocks that exceeded total warehouse capacity. The quota rent went to warehouse owners, and perhaps officials who checked the stocks.

Thailand also exported its poorest quality tapioca to the EU at a high price, inflated by the quota and the captive market created by import barriers on alternative feed ingredients. It exported its best quality tapioca cheaply to South Korea. South Korean importers got a share of the quota rent both through the lower price and the better quality.

That battle is over. Tapioca is now traded mainly as starch for use in food processing. But it is a vivid example of how quotas create a battle ground for economic, political, and sometimes corrupt interests.

Quotas (including tariff quotas) create a free gift for someone. They are themselves valuable.

Part of the controversy is about the fight for that additional value, which economists call “quota rent”.

Quotas restrict the supply of a product. Buyers compete for shares of the restricted supply and bid up its price. That higher price produces quota rent for the amount supplied, as a free gift.

The fact that governments are able to open bidding for import licences shows companies are willing to pay extra in order to get their hands on products that have become more scarce as a result of a quota or tariff quota.

Who gets this free gift? It depends.

If the government allocates import licences by bidding, then some or all of the quota rent goes to the government.

Some economists argue that this is the most useful way of dealing with quota rent. It should not be seen as an extra tariff, they and some governments argue. Otherwise the free gift just goes to the private sector.

Sometimes companies receive import licences and sell them on to other companies for a profit. That profit comes from the quota rent.

Sometimes it’s the exporting county that controls the quota rent by controlling the quota (see box).

The bottom line: whoever controls the quota also controls who gets the quota rent.

And Brexit?Back to top

Tariff quotas have emerged as part of the UK’s need to re-establish itself as a WTO member independent of the EU. In particular, the UK has to separate its own tariff quotas from those of the EU’s. London and Brussels have agreed on a method which would be a straight post-Brexit split of the present pre-Brexit tariff quotas of the EU–28.

Some other WTO members are unhappy with the method and have promised tough negotiations to produce something different.

This is discussed here.

Where can I find tariff quotas?Back to top

Every year, WTO members have to notify what’s been happening with their agricultural tariff quotas. A useful tool for searching for these notifications is here  — look for “Search documents online” and “Notifications on tariff and other quotas under Article 18.2 (MA:1, MA:2)”

Some importing countries have information on their websites. The EU’s is here, but searching the EU’s databases is complicated because of the need to look up tariff code numbers first rather than key words. So good luck! (If anyone knows a simpler source, please let me know.)


* The EU’s actual commitment in the WTO is 5,676 tonnes, but that is for the 25 EU members before Bulgaria, Romania and Croatia joined. The EU’s commitment for the EU–28 has not yet been cleared by WTO members but it is applying the 196 tonnes specified for “other countries” in its commitment.

Updates: September 10, 2018 — added box on quota allocation methods (thanks to Derrick Wilkinson for remining me about the WTO Secretariat paper); tweaked the list of products with tariff quotas, based  on another Secretariat paper, TN/AG/S/5

Photocredits:
• Public domain or CC0: customs barrier (YvonneH | Pixabay), hake (Freshwater and Marine Image Bank), wheat (Pixabay), newsprint (Samuel J Hood | Australian National Maritime Museum), glass beads (cocoparisienne | Pixabay), rice (strecosa | Pixabay)
Ferro-silicon (FocalPoint | Wikimedia commons CC BY-SA 4.0)
• Raw sugar (Giridhar Appaji Nag Y | Wikimedia commons CC BY 2.0)
Cotton (S Aziz123 | Wikimedia commons CC BY-SA 4.0)
• Sheep in front of a cattle grid — looking over the Duddon estuary, Cumbria (SKITTZITILBY | Wikimedia commons CC BY 2.0)
• Cheeses (Chris Buecheler | Wikimedia commons CC BY 2.0)


Standards, regulations and trade in goods — a primer

As import duties fall, other trade barriers appear. Some have compared this to rocks emerging at low tide. Among the most important of these ‘non-tariff barriers’ are standards and regulations. How do they work?

JUMP TO
What are product standards?
Are standards compulsory?
What about regulations and legislation?
Who sets the standards?
Who sets international product standards?
Do those two agreements only deal with standards?
Are CE marks EU standards?
Are international standards compulsory or voluntary?
Surely we should try to make life simpler?
Does reclaiming sovereignty have a cost?
And standards in services?

By Peter Ungphakorn
POSTED SEPTEMBER 5, 2018 | ORIGINALLY PUBLISHED ON UK TRADE FORUM, MAY 8, 2018 | UPDATED SEPTEMBER 5, 2018

“Standards” and “regulations” are critically important for trade and have entered the public discussion about Britain’s future trade relationship with the EU and the rest of the world. But what are they? Are they the same? Are they compulsory or voluntary?

This is an attempt to explain as simply as possible how they work in international trade. And to keep it simple, it only deals with standards for goods — key, for example, to what happens on the Irish border after the UK leaves the EU — even though standards also exist in services.

Standards and regulations were part of the Brexit debate from the start. Many standards applied in the UK are the EU’s, although quite a lot are the UK’s own. One purpose of Brexit is supposed to be to allow the UK to have its own standards or even to scrap some standards completely. That might be easier said than done.

A smooth-running Brexit will require the UK and its trading partners, including the EU, to try to recognise each other’s standards and regulations or to pool them in some way. And if standards diverge on either side of the Irish border, the border will no longer be frictionless.

plugs_1080
Round holes and square pegs: over 30 standards cover safety but create compatibility problems

What are product standards?Back to top

They are descriptions of criteria or specifications that products may have to meet for various purposes such as health and safety, or compatibility.

For example, food safety — 0.2ppm pesticide residue. On April 25, 2018 the US notified the World Trade Organization (WTO) that it intended to apply a new food safety standard that would set new limits in residues of a pesticide called clethodim in products ranging from almonds to brassicas and other vegetables. For almond husks it would be 0.2 parts per million (ppm); for green onions 2.0 ppm; and so on. The notification also says there is no equivalent international standard, so this is a US standard.

This was the 2,779th time the US notified the WTO about its draft, new, revised or updated pesticide residue standards and regulations since the WTO was set up in 1996.

For example, compatibility — plugs. When we travel we soon come across a problem — our plugs often don’t fit into the power sockets in other countries. Wikipedia lists over 30 different types of plugs used as standard in countries around the world. Although there will be safety aspects for all of them, that does not determine the number of pins (there are even two-pin plugs with separate earth contacts), or the pins’ sizes and shapes, or the dimensions of the plugs themselves. Note that the UK has its own unique plug standards as do several other EU members.

Are standards compulsory?Back to top

Some are, some aren’t. When a country adopts standards for food or electrical safety they are usually compulsory: all suppliers have to meet the standards by law. But standards can also be voluntary.

Standardising the electrical plugs and sockets in various countries is for convenience (within the country) as well as safety, but we often see other types of plugs used as well. It all depends on the country’s rules.

Even with food, some standards are not compulsory. Take “fair trade” and “organic” food. Or the UK’s voluntary standards for “Red Tractor”, “Lion Eggs” and other labelling. They are voluntary because producers can sell the products without complying, but compulsory if the producers want to use the label.

What about regulations and legislation?Back to top

Many regulations have nothing to do with standards. But when a country adopts a standard, either compulsory or voluntary, it usually does so through a regulation, which says what the adopted standard is. That regulation often comes under a law, for example saying the country’s food and drug authority or food safety agency has the power to issue regulations to ensure food is safe to eat.

So the hierarchy is usually:

  1. law assigning power or authority — but sometimes with more specific details;
  2. rules and regulations under the law;
  3. standards cited in the rules and regulations.

In other words a “standard” is a description; a regulation makes the standard a requirement.

Pesticide application
Spraying lettuces in Arizona: the US has close to 2,800 WTO notifications on pesticide residues

Who sets the standards?Back to top

In the WTO, countries are free to choose what standards to adopt, but with some conditions. They are encouraged to use internationally-recognised standards. Or they can set their own provided they can justify the standards with scientific evidence and risk assessment. The purpose is to ensure the standards are genuine, not arbitrary or an excuse to be protectionist.

Who sets international product standards?Back to top

A common misunderstanding is that the WTO sets product standards. It doesn’t. The international standards-setting bodies are outside the WTO. To see how this works, it’s best to separate two sets of standards.

  1. Food safety, and animal and plant health (sanitary and phytosanitary measures — SPS). The WTO’s SPS Agreement identifies “three sisters” as recognised standards-setting bodies in its preamble:

The agreement leaves open the possibility of adding others. Countries are free to adopt standards from the “three sisters” or set their own — as the US has done with the pesticide residue. If they do use these international standards they are more or less safe from a legal challenge in the WTO.

Jaques_Paysans_fribourgeois
Health labelling: tobacco has it — should alcohol?
  1. Other standards. These come under the WTO agreement on Technical Barriers to Trade (TBT) whose coverage also extends beyond standards to labelling, regulations, and how regulations are created.

Both SPS and TBT deal with human health. If it’s food safety, it’s SPS. If it’s nutritional requirements or labelling, or the safety of non-food products, it’s TBT.

The situation with TBT is much more complicated than with SPS. There are hundreds of standards-setting bodies around the world, many specialising in specific industries, many involving the private sector.

The TBT Agreement doesn’t mention any particular bodies. Instead, it creates a “Code of Good Practice for the Preparation, Adoption and Application of Standards” and says any standard-setting body complying with the code is considered to be complying with the agreement. Note that the Code of Good Practice is itself a set of standards, and is required for more or less automatic safety against legal challenge in the WTO.

So who set the standards for those plugs? One set of standards is “CEE 7”. They come from the International Electrotechnical Commission (IEC), a not-for-profit, “quasi-governmental” organization whose delegates include representatives of government and industry.

Plugs are only a small part of IEC’s work. It has 203 technical committees and subcommittees working on standards and technical specifications of everything from miniature fuses and overhead cables to nuclear instrumentation. And that’s only in electrical technology. The International Organization for Standardization (ISO) lists over 22,000 standards in around 300 categories.

fruit-flies-1080
Pests: some say eradicating fruit fly is the key to development

Do those two agreements only deal with standards?Back to top

No. Both cover broader regulations as well. For example in SPS, the OIE’s animal health measures include how to deal with an outbreak of disease such as foot-and-mouth: establishing zones to deal with different degrees of infection and risk, quarantine, treatment, how other countries might react and more.

The TBT Agreement includes broader provisions on regulations and labelling — such as nutritional information. Health warnings on labels have been debated intensively. They are now accepted widely on tobacco products, but there are moves to use them on junk food and alcoholic drinks..

Are CE marks EU standards?Back to top

Not exactly. They are certificates. Many — but not all — products sold in the European Economic Area (EU plus Iceland, Liechtenstein and Norway) have to have the CE mark. They are declarations by the manufacturer that the products meet the EU standards that apply to those products. They are not a guarantee that the products can be sold.

Because the EU and its EEA partners are such a large market, manufacturers outside the area use the CE mark even if some of their production is sold in countries that don’t require it.

Incidentally, this is different from the UK’s Kite Mark, which is owned by the British Standards Institution otherwise known as the BSI Group, and is intended to assure consumers that a product is safe but not necessarily that it meets any official requirements.

Crash test | Pexels | CC0
Car safety: UNECE is working on global standards

Are international standards compulsory or voluntary?Back to top

As far as the WTO is concerned, they are voluntary. Countries can choose whether to adopt them or not, but have to justify using alternative standards. The IEC says its standards are “entirely voluntary.”

But once adopted, a country’s standards — or the EU’s in the case of its member states — are compulsory for suppliers. So producers exporting almonds, green onions or brassicas to the US will have to meet the 0.2ppm to 3.0ppm maximum levels for clethodim residues, which apply only to the US.

Surely we should try to make life simpler?Back to top

Yes. Or as one person said on Twitter the aim should be to allow producers to “test once and export everywhere”.

The WTO’s TBT and SPS agreements encourage countries to move towards “harmonising” their standards. This can mean, for example, adopting identical standards, “regulatory alignment” or simply recognising that another country’s standards or methods of testing are equivalent to one’s own for a given purpose — such as protecting health — even if they are not identical.

One international body is working towards closing international gaps in regulations for cars. This is the UN Economic Commission for Europe (UNECE), which hosts the World Forum for the harmonisation of vehicle regulations. UNECE regulations for cars are increasingly cited in trade agreements such as the EU-South Korea pact, which lists EU regulations alongside the UNECE equivalents.

But countries often prefer tighter criteria, particularly if they are large enough and have enough bargaining power so that exporters have to meet their requirements. It’s easier to get the world to accept EU, US or Japanese standards than those of a smaller country such as Switzerland.

Does reclaiming sovereignty have a cost?Back to top

This is important for Brexit. Part of Brexit is about reclaiming the power to set the UK’s own product standards, in addition to the areas — like plugs — where the UK already has its own.

Achieving that comes at a price: in fact at two prices.

One price is creating costs and infrastructure for goods crossing the Irish border. It’s why the talk is now about recognition and harmonisation of UK-EU standards (or “regulatory alignment”). This might even mean the UK continuing to use EU standards, but from outside, unless another solution is found. As an EU member the UK always had a say in EU regulations.

The other price is more complexity and red tape in trade with the EU and other parts of the world more generally.

When British producers sell domestically and export to the US, at the moment they only have to consider two sets of standards, typically EU and US. If the UK has its own standards, they will have to consider three. In some sectors that will be easier to handle than others.

It will also be tougher for UK producers who currently only sell in the EU and want to replace some lost EU sales with exports to the US. They will face two sets of standards instead of one – at least.

And standards in services?Back to top

There are also standards and regulations in services. Financial regulations designed to make bank customers’ deposits secure can include requirements for how much capital a bank should have in proportion to its assets, and to its risk weighted assets. The US and Eurozone both have these requirements.

There is even an international standard-setting body — the Bank for International Settlements in Basel, Switzerland — whose “Basel I” to “Basel III” regulatory frameworks include standards for capital requirements. The EU applies these standards through Regulation (EU) No 575/2013 and other documents. The parallels with standards and regulations in goods are clear. But this deserves separate treatment.


Updates: September 5, 2018 — correction to penultimate paragraph on bank capital requirements

Photocredits: All public domain or CC0, including
• Tomatoes: Jametlene Reskp on Unsplash
• Pesticide application on leaf lettuce in Yuma, Az: Jeff Vanuga
• François Louis Jaques (1877–1937): Paysans fribourgeois au bistrot (Switzerland, 1923)
• Fruit flies: Skeeze onPixaba


Does the WTO require countries to control their borders?

Among the arguments that politicians are making about the Irish border are the claim either that WTO rules require countries to control their borders, or that the UK can drop border controls and wait to see what Ireland does. One is partly false, the other totally.

By Peter Ungphakorn
POSTED JULY 18, 2018 | UPDATED JULY 19, 2018

On Monday (July 16), MP Anna Soubry launched a vigorous attack in the House of Commons against hard-line Brexiters. There was a lot of truth in what she said, except on one point.

She turned to the likelihood that if the UK simply trades with the EU on WTO terms, and without an adequate form of free trade agreement, it will have to impose border controls on trade between the Republic of Ireland and the North.

WTO “rules say every member must secure their borders,” she said.

It’s a commonly-held view.

 

Two days later Independent.ie reported that the Irish government was “gearing up for a major confrontation with the World Trade Organisation (WTO) over the commitment to retain a soft Border in Ireland in the event of a no-deal Brexit”.

It went on: “Government sources say they are prepared for major confrontation with WTO officials, who will insist on a Border with the North as part of strict trade laws.”

The truth is that whatever happens, there will be no confrontation with the WTO or its officials.

Soubry’s comment was partly a reaction to some Brexiters claim that when trading purely under the WTO rules, the UK can simply decide not to check trade crossing the land border into Northern Ireland. It would be up to Ireland, according to this argument, to decide whether to set up its own checks, add friction and infrastructure to the border and put the Good Friday Agreement at risk, or to follow the UK.

Soubry was right in one respect. There is a problem with those Brexiters’ claim. Time to look at the rules.

WTO Agreements
Member-driven: the WTO agreements are administered by the members themselves
What WTO rules sayBack to top

First, a fact:

There is no rule in the WTO requiring its member governments to secure their borders.

After Brexit, the UK could drop all border controls for traded goods and services and it would be perfectly within its WTO rights.

And yet there was some truth in what Anna Soubry said. Independent.ie was much farther off the mark. And the hard Brexiters are completely at sea.

Here’s why:

  • The WTO does not tell countries what to do other than to keep their promises (abide by the WTO agreements and their WTO commitments)
  • Even when countries break their WTO promises, there is no “confrontation” with “the WTO” and least of all with “WTO officials”
  • The WTO is member-driven. If in the future other WTO countries believe the UK is violating an agreement, it is they, not the WTO bureaucracy, who will act. They can do so by complaining in a WTO meeting or filing a legal challenge in WTO dispute settlement
  • Since there is no WTO rule requiring governments to secure their borders, failing to do so would not break any specific agreement
  • Where the UK might run into trouble is under the WTO’s non-discrimination rules, particularly “most-favoured-nation” treatment (MFN), which means treating one’s trading partners equally

Suppose the UK and EU trade on WTO terms after Brexit. Suppose American apples arriving in the UK at an English port have to go through controls, but Irish apples crossing the border into Northern Ireland (also the UK) do not. Then the US could complain that its apples were discriminated against. They weren’t given equal treatment with Irish apples when they entered the UK.

MFN

Most-favoured-nation (MFN) treatment is probably the most important WTO rule.It means not discriminating between one’s trading partners

Article 1 of the General Agreement on Tariffs and Trade (GATT), for trade in goods
Article 2 of the General Agreement on Trade in Services (GATS)
Article 4 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

But in each agreement the principle is handled slightly differently

The US might seek a legal ruling in WTO dispute settlement. Months or years later, the ruling might conclude that the UK had discriminated. So either checks at the English ports would have to be dropped, or checks at the Irish border would have to be set up.

In other words, while no WTO rule actually says the UK will have to set up border checks, the non-discrimination rule may force it to.

That’s quite different from saying “every member must secure their borders”. In a system where nuance matters, the difference is important.

(Note the “might” and “may”. It’s possible that an in-depth legal ruling might disagree with the US’s claim in that example. After all, the difference is at the ports and not with the products themselves, although the US could counter that having to ship through Ireland in order to avoid checks adds to its costs. Until there is a real case we cannot say for certain. But legal opinion seems to take the view that the UK would be violating non-discrimination.)

Mexico-US border wall at Tijuana
National security: could the UK and EU legitimately cite it in the WTO?
National security?Back to top

There may be an alternative way to do this within WTO rules, only let’s not take this too seriously just yet, not least because there are conflicting opinions.

I’m not a lawyer but some trade lawyers have discussed the possibility. This is what I understand.

The idea is that the UK and EU could cite national security as a justification for breaking the non-discrimination rule at the Irish border.

London and Brussels (and Dublin) could seek a “waiver” in the WTO for the purpose, citing security exception clauses such as Article 21 of the General Agreement on Tariffs and Trade (GATT).

For this to be agreed in the WTO, at the very least both Britain and the EU would have to agree. It would probably have to apply only to Northern Ireland, not the whole United Kingdom, meaning there would probably have to be controls between Northern Ireland and the rest of the UK.

The national security argument would be undermined if controls were dropped only on one side of the border. The UK and Ireland would need to confirm that they were both acting in the security interests of the Good Friday Agreement, which they both signed. Otherwise, acting unilaterally would put the UK into conflict with WTO non-discrimination rules.

Some lawyers disagree. Shortly after this article was posted, Mark E Herlihy of Georgetown University challenged the idea that GATT Article 21 could be cited, although he said the UK and EU could obtain a waiver in the WTO.

“A waiver could be sought for what otherwise would be violations of non-discrimination obligations at the Irish/NI border, but that waiver could not be based on ‘national security’ under Art. XXI, which is narrow, and has no application here,” he tweeted.

Whether or not this is legally safe, there are a number of political problems. The most obvious is securing agreement from the EU and Ireland. Simply acting within WTO rules only the start. A number of other political and administrative complexities are involved, which are beyond the scope of this article.

And if the chosen route is “national security” then this is complicated by the fact that both the UK and EU are accusing the US of abusing the national security provision by citing it to justify tariffs on aluminium and steel.

Those political problems alone, particularly getting the EU and Ireland to agree, might prevent the idea from being considered seriously.


Updates:
• July 19, 2018 — comments from Mark Herlihy added, with minor tweaks to other parts of the final section

Photocredits:
• Southampton docks at night, by Geni GFDL CC-BY-SA

• WTO agreements: WTO publications
• Mexico-US border wall at Tijuana, Mexico © Tomas Castelazo, http://www.tomascastelazo.com / Wikimedia Commons / CC BY-SA 4.0