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.
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.
What WTO rules say
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.
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.
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.)
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.
A very useful intervention. One caveat: 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
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.
• July 19, 2018 — comments from Mark Herlihy added, with minor tweaks to other parts of the final section
People’s views of geographical indications range from cherishing them as precious cultural heritage and commercial property, to annoyance and scorn. They are complicated. Every argument has a counter-argument
By Peter Ungphakorn POSTED MAY 5, 2018 | FIRST PUBLISHED ON UK TRADE FORUM APRIL 3, 2018 | UPDATED MAY 7, 2018
Among the thousands of policy questions facing Britain after it leaves the EU is what its approach should be for geographical indications. These are names — like Melton Mowbray pork pies, Rutland bitter and Bordeaux wine — that are used to identify certain products. The UK’s policy will affect both its own and other countries’ names.
People’s views of geographical indications range from cherishing them as precious cultural heritage and commercial property, to annoyance and scorn.
What are they? And what are the decisions facing the UK? This is an attempt to explain them simply. It’s in two main parts with a small third part tacked on.
Part 1 is the basics. Part 2 looks beyond that at policy. Meanwhile the waitress above mentions 10 types of food and drink. How many are geographical indications? The answer is in Part 3 at the end.
They are names used to define boththe originand the quality, characteristics or reputation of products.
Origin is not enough. A cheese made around Roquefort-sur-Soulzon in southern France cannot be called Roquefort unless it is blue, made from sheep’s milk and meets a number of other criteria.
What do they apply to?
The vast majority of geographical indications are on food and drink, particularly wines and spirits. This is because soil and climate conditions can contribute to the products’ specific qualities.
Some countries protect other types of products as well. For example “Native Shetland Wool” (agricultural but not food) in the UK, “Swiss” watches (non-agricultural) in Switzerland, and some types of carpets and other handicrafts around the world.
Thailand would even like a service to be protected — traditional Thai massage — but internationally geographical indications are only used with goods.
Are they always place names?
Usually the terms used are place names, but sometimes they are other words associated with specific regions.
For example basmati is a long-grain fragrant rice variety and not a geographical name. However, it is associated with the Punjab regions of India and Pakistan, although its status as a geographical indication is debated (the EU doesn’t recognise it) because it is grown elsewhere too.
How do they relate to rules of origin?
This has absolutely nothing to do with rules of origin, which are about customs procedures — determining whether a product can be called “made in” a certain country and therefore should qualify for duty-free trade or other special treatment under trade agreements.
Geographical indications are a type of intellectual property, a form of “branding”, along with copyright, trademarks and others, because the products’ characteristics are the result of production techniques as well as location.
Why protect them?
Protection is intended to benefit both consumers and producers. The EU speaks of ensuring a product is “authentic” (for consumers), and providing a marketing tool to give producers “legal protection against imitation or misuse of the product name”.
Under WTO rules, the objective is to avoid misleading the public and unfair competition.
How much protection?
The bottom line for the WTO’s 164 members (including the EU and UK) is what is required in its intellectual property agreement (known as TRIPS or Trade-Related Aspects of Intellectual Property Rights). The agreement only sets minimum standards. It does not deal with individual names. How countries meet the standards and which names they protect is left up to them through their different legal systems.
In general (Article 22), countries have to protect geographical indications to avoid misleading the public and avoid unfair competition. By this criterion, “Californian champagne” should be fine since consumers would be clear that this did not come from the Champagne region of France. But …
For wines and spirits (Article 23), protection is taken to a higher level — even if there is no danger of misleading the public or creating unfair competition. So “Californian champagne” is no longer valid. Except that …
There are a number of exceptions (in Article 24). These include if a term has become generic — cheddar cheese is clearly one case since it’s been made around the world for decades, if not longer. Also an exception is when the name was registered as a trademark before the WTO’s agreement was negotiated (“grandfathering”) — Parma ham has long been a trademark in Canada, an irritant for Italians who were unable to sell Prosciutto di Parma there until recently. The EU has waged a long-running and still unresolved battle with the US over the use of “Champagne”.
When the EU negotiates for its geographical indications to be protected in other countries, part of the effort is about reclaiming names that have become generic — or more vividly to “clawback” names that have been “usurped”. Feta cheese is one case. This 73-page document is what the EU and US have agreed for wines.
PART 2 POLICY
How are geographical indications protected?
The names are usually the property of groups of producers or regional or national authorities, not individual companies.
How they are protected depends on where, and this matters for the UK’s future relationships, such as how it seeks to have its own names protected abroad.
The European Union probably has the most detailed and sophisticated system. Stricter criteria apply to “protected designation of origin (PDO)” and only some products are eligible. A wider category is “protected geographical indications (PGI)”. A third, “traditional speciality guaranteed (TSG)”, emphasises the production method.
The EU’s database of wines contains over 1,700 EU geographical indications (some still being considered), and just over 1,000 from non-EU countries. Only five are British.
For spirits there are 270 geographical indications including some whose protection is being considered. Only four are non-EU. Two are British: Scotch whisky and Somerset cider brandy. Part-British is Irish whiskey made anywhere on the island of Ireland.
For other products, there are almost 1,600 “registered”, “published” or “applied for” geographical indications from both EU and non-EU countries; 79 are British.
At the other extreme used to be Norway. A few years ago, WTO members were asked to fill in a questionnaire with some examples of geographical indications they protected. Norway said it couldn’t be sure because it used consumer protection law rather than a register of names, meaning a term would have to be in a court case to know for certain.
Some countries use specific geographical indications laws and registers. Some use consumer protection. In the US and many others protection is by trademarks and certification marks. There are even variations of approach within the EU. The UK told the WTO that it uses common law (“tort of passing off”) for some terms and trademark law for others, although fundamentally the UK is applying EU law. (See the annex in this now out-of-date WTO document.)
What does the UK face with the EU?
In theory, when the UK leaves the EU it will be free to decide how it protects geographical indications and which names to protect, so long as it complies with the WTO principles.
Will the UK move away from the EU’s near-obsession with geographical indications? It might not have too many wines, but it does have Scotch whisky and a lot of food products.
This is likely to mean the UK setting up its own lists of protected geographical indications with associated legislation.
What does the UK face with other countries?
Beyond the EU, the world of geographical indications has sometimes been described as a divide between old world countries, with traditional methods and products they want to protect, and the new world whose immigrant populations brought those techniques with them. It’s a bit more complicated than that. For example Taiwan is in the so-called new world group and some US producers now want protection for their own products, from wines to Idaho potatoes. But there is some truth in it.
In negotiations with some countries such as other Europeans, India and so on, the UK will be under pressure to protect their names. With others such as Australia, Canada, New Zealand, the US and some Latin American countries, the UK may be the one making the most demands to protect its names.
The EU has deals on geographical indications with other countries, either as part of free trade agreements or separately. With Brexit, the UK wants to roll the EU’s free trade agreements over into its own, and may want to do the same with the deals on geographical indications. To do that will require either negotiation with the other countries or confirmation by them.
The EU and its allies want the register to have some legal effect: if a name is on the register, then that should have some legal implications in all WTO members. The US and its allies see the register as little more than a database of information, which countries would be free take into account (or to ignore) when they decide whether to protect a particular name.
Although this has been discussed at length in the WTO, members still have not even agreed whether it is officially a negotiation. A large number of countries support the move, but in some cases for complex bargaining reasons. The US, Australia and so on oppose it on the grounds that it would be too burdensome and restrictive, and that the standard level (Article 22) is good enough.
The UK will have to decide how to approach these questions, and also the WIPO treaties on geographical indications.
Some GI titbits
Geographical indications are complicated. Every argument has a counter-argument so they are a perfect playground for intellectual property lawyers, as the endless and bottomless debates in the WTO show. Here are some illustrations.
“-style”? Or “-method”? If “Bulgarian yoghurt” can only be made in Bulgaria, what about “Bulgarian-style” yoghurt? One view is that this is a useful indication of what the product is, helping rather than confusing consumers.
Against that is the argument that “Bulgarian-style” has no owner and no definition. The term could be abused. The reputation of yoghurt associated with “Bulgaria” would be damaged, hurting both consumers and genuine Bulgarian producers. The poor reputation of parmesan cheese made outside Italy is a real-life example.
After all, one of the features of geographical indications is that they have owners responsible for maintaining the quality and reputation. The loose term “Bulgarian-style” would not have that.
Orange: homonyms and more
Several places could have the same name, or names that sound the same (homonyms). The WTO agreement broadly covers that, but homonyms can still get pretty complicated. In late 2000 Australia entertained WTO delegates with an analysis of “Orange”. It’s a place name on five continents, some with vineyards producing what could be called “Orange wine”. And then there’s wine made from oranges. Orange is also a colour and a phone company’s trademark. It’s linked to words in other languages, including Persian where the fruit is named after Portugal, and so on. (See page 6 of this.)
Champagne: Swiss and Indian
A small village in northern Switzerland is called Champagne. It used to produce a still white wine with the name, but not since 2005. Pressure from France put an end to that. Meanwhile, in the WTO debate on “extension”, a US delegate once remarked wryly that Darjeeling tea, a claimed geographical indication, is advertised as “the champagne of teas”.
Gruyère Gruyère is a region in Switzerland surrounding the medieval village of the same name. The cheese was first made there in 1115. It’s now been produced elsewhere for generations and the name has become generic, sometimes using “Gruyère” or an equivalent in another language.
Gruyère is not in France. Nevertheless, France has managed to register “French Gruyère” produced in a dozen departments as a protected geographical indication in the EU. Despite the stereotype of Swiss cheese, authentic Gruyère has no holes. But the French version does: it “must have holes ranging in size from that of a pea to a cherry”, according to the EU regulation.
But is it protected in the EU? The 2011 bilateral agreement between Switzerland and the EU says it is, along with a number of other Swiss products. As an illustration of how complicated these names can be, in the agreement, Switzerland and Greece also promise not to translate “graviera” (γραβιέρα) as “gruyère” and vice versa.
However there seems to be no internal EU law or regulation confirming this — not yet anyway — and nothing Swiss appears in the “DOOR” database of products other than wines or spirits. We can only assume the bilateral agreement holds.
This is one of the most-debated names in the WTO. The minutes of this meeting contain 14 pages of debate in which “feta” appears 50 times. Similarly for these meetings. Is it eligible for protection? Is it generic? Where exactly is its origin? Greece, Bulgaria, Denmark even? Is the legal situation in the EU contradictory? Should migrants to Australia be allowed to continue to use the name for the cheese that their ancestors made? Is feta actually produced in Australia by immigrants or by large companies?
At the top of this article, the waitress refers to 10 types of food and drink (not counting the general “lamb” and “cheese”). Some are geographical indications, some are not:
Geographical indications protected in the EU and therefore the UK — Cornish pasty; Tiroler Bergkäse; Caerphilly; French Gruyère; Amarone della Valpolicella; Armagnac. The EU has agreed to protect Le Gruyère from Switzerland but this does not (yet) appear in the EU’s database.
Names that are generic in the EU/UK — Cheddar (except “West Country Farmhouse Cheddar cheese,” which does include the original Cheddar area in Somerset, and “Orkney Scottish Island Cheddar”, from over 1,000 km away)
Not geographical indications in the EU/UK — New Zealand lamb (although “Scotch lamb” is); Evian (Evian is a place, a lakeside French town at the foot of the Alps, but the name is a trademark for bottled water)
Updates: May 7, 2018 — references to Switzerland’s “Le Gruyère” have been corrected to reflect protection in the EU under the 2011 bilateral agreement and to remove the assertion that the name is not protected because it’s not in the DOOR database. (Thanks to Christian Häberli for pointing me to the bilateral agreement and the US certification mark)
• Waitress — Steven Cleghorn on Unsplash, CC0 (public domain)
• Wine, cheese and parma ham — Lana Abie on Unsplash CC0
• Champagne — Pexels CC0
• Gruyère; wine from Champagne in Switzerland — Peter Ungphakorn CC BY 4.0
• Watercress and chives on bread — silviarita on pixaby CC0
• Darjeeling tea montage — black tea leaves, photo by Oleg Guijinsky on Unsplash CC0; Darjeeling tea, first flush 2007 Risheehat Estate, photo by David J Fred CC BY-SA 2.5
• Feta — JJ Harrison CC BY-SA 2.5
After Brexit, ‘Global Britain’ will want free trade agreements with the rest of the world. But it already has some 37 agreements with over 60 countries through the EU. Rolling them over into the UK’s own agreements will not be automatic. A look at the actual text of the EU-South Korea deal shows why
By Peter Ungphakorn FEBRUARY 13, 2018 | UPDATED FEBRUARY 15, 2018
Leaving the EU means the British government will either have to convert the EU’s free trade agreements with other countries into UK deals, or risk losing them, when Brexit is supposed to be about to allowing Britain more freedom to enjoy trade agreements with the world outside the EU.
At the very least, the UK should continue with the deals it already has through the EU, with Norway, Iceland, Switzerland, Canada, South Korea, Japan (in the pipeline) and many others. Academics at Sussex University say there are over 60 other countries. The UK government says there are over 100. It depends on what kind of agreement is counted.
Even then, the “rolled over” free trade agreements could be less valuable to the UK outside the EU than inside, unless talks can be set up with all three parties leading to something called “diagonal cumulation of rules of origin”.
As with much about Brexit what some fancied was a simple task is actually pretty complicated.
Many had thought that the UK could more or less copy and paste the agreements.
Few thought that the other countries involved might want to negotiate this with the UK — until news broke that some might seek just that, even during a transition period.
Much of the complexity is shown in a paper (pdf) by Michael Gasiorek and Peter Holmes of Sussex University and published by the UK Trade Policy Observatory (UKTPO). They say something that few had considered: that what appears to be a set of bilateral talks will turn into a threesome — the EU will be involved too. This is one of their summary points:
“Grandfathering existing EU free trade agreements is unlikely to happen without some engagement or negotiation with the EU. Hence what you might think is a bilateral issue between the UK and a given Free Trade Agreement (FTA) partner, becomes a trilateral issue which also involves the EU.”
“Grandfathering” means continuing with an older arrangement (here the existing EU free trade agreements), which might lapse or be superseded when a new arrangement is introduced (the UK leaving the EU). The Sussex paper is a comprehensive account of the various issues that could be raised in the talks.
The British government too is learning that this is going to take longer than it had first thought.
“I hear people saying ‘oh we won’t have any [free trade agreements] before we leave’. Well believe me we’ll have up to 40 ready for one second after midnight in March 2019,” International Trade Secretary Liam Fox told a fringe meeting at the Conservative Party Conference only last October.
Is grandfathering difficult or impossible? No, for the most part, it shouldn’t be. But there’s a lot to copy, adjust and check. And the number of negotiations the UK will be involved in for Brexit is huge.
Then there are the more complex areas such as “tariff quotas” and agricultural “safeguards” and “rules of origin”. It becomes even more complicated if the other countries want to negotiate additional adjustments.
Then, on February 8, the government admitted for the first time that this will not be possible. It released a position paper (pdf) calling for the EU’s free trade agreements to continue to apply to the UK — as if it were still an EU member — during the proposed two-year transition period after March 2019.
To keep life simple, this would probably mean EU institutions continuing to handle various aspects of the free trade agreements on Britain’s behalf, such as managing the allocation of tariff quotas among importers (including British companies), confirming that imports into the EU (including Britain) meet EU standards and “rules of origin”, and participating in committees set up under the agreements and in disputes.
What happens after the transition period remains to be seen. The quickest approach would be to convert the EU’s agreements into the UK’s. The alternative would be for the UK to negotiate new agreements from scratch. But since it may want to do that with other countries such as the US, China, Australia, New Zealand and so on, the load on UK trade negotiators would be immense.
Michael Gasiorek’s and Peter Holmes’ paper actually speaks of “great-grandfathering”! But more importantly, it refers to complex supply chains, which are important for a number of reasons:
“Clearly the UK will want to and needs to establish the nature of its relationship with the existing FTA [free trade agreement] partner countries on a long-term basis. However, this will be more difficult to achieve without the partner countries knowing what form of trade agreement the UK has with the EU.
“For many products this is because we are in a world of more complex supply chains and for many FTA countries, their exports to the EU may be indirect via the UK. For some agricultural products where tariff-rate quotas apply, changing access to the UK may impact on their access to EU markets.
“It is therefore likely that both the UK and the partner countries may seek to roll the agreements over on a temporary basis for the duration of the transition. In turn, that means that during the transition period the UK will need to renegotiate these agreements, or at a minimum, renegotiate the grandfathering, hence greatgrandfathering the agreements” (page 5)
Overall, Gasiorek and Holmes suggest renegotiation might be needed because of rules of origin, most-favoured-nation (MFN) or non-discrimination clauses, mutual recognition of standards and regulations, and tariff quotas. I will look at a couple of those issues, but I’m not going to repeat their excellent work. Their paper speaks for itself.
Possible to do; impossible to do quickly
What I am going to do here is to dip into the EU-South Korea free trade agreement — and I really mean “dip in” because it’s over 1,400 pages long — to highlight a few issues that attracted my attention. They are intended as examples to illustrate some important points. This is also developed from an older Twitter thread.
The bottom line. Is grandfathering difficult or impossible? No, for the most part, it shouldn’t be. But even where it’s relatively straightforward, the task is time-consuming. There’s a lot to copy, adjust and check. If there were only one agreement to deal with, it could be completed quite quickly. But the number of negotiations the UK will be involved in for Brexit is huge.
Then there are the more complex areas such as “tariff quotas” and agricultural “safeguards” (there aren’t many in the EU-S.Korea agreement but there are a lot more in the agreement with Canada) and “rules of origin”. It becomes even more complicated if the other countries want to negotiate additional adjustments.
Grandfathering: more than CTRL+C, CTRL+V
You don’t have to go very far into the text to see that there are references to the EU which will have to be replaced by the UK’s equivalents.
Numerous references to EU procedures and regulations will also have to be changed.
The endless lists of regulations will have to be replaced with UK versions. This is just a small part of a long table of regulations for vehicles.
All of this is also bound up in how the UK sorts out its own post-Brexit arrangements.
And provisions such as this would have to go:
And then there are services. The EU-S.Korea agreement has long lists describing where their services markets are opened up to each other (pages 1165-1250 for the EU’s commitments). Much can be copied for the UK. There are also lots of provisions which don’t apply to the UK and will have to be removed, and a lot that refer to the EU as a whole, which will have to be changed.
This is what the agreement says for mining and quarrying services. It’s complicated, technical stuff, but even if we don’t understand it fully, at the very least “5% of the European Union’s oil or natural gas imports” will have to be changed to “the United Kingdom’s”. You have to be an expert in the field to know if that “5%” will stay unchallenged.
“EU: Unbound for juridical persons controlled […] by natural or juridical persons of a non-European Union country which accounts for more than 5 % of the European Union’s oil or natural gas imports. Unbound for direct branching (incorporation is required). Unbound for extraction of crude petroleum and natural gas”
Finally there are institutional arrangements, everything from committees and working groups to arbitration procedures, which will have to be set up for the new bilateral relationship
Article 15 creates a “Trade Committee”, which meets annually, plus at least six “specialised” committees and at least seven working groups:
The agreement includes procedures for settling disputes, including the creation of arbitration panels and references to international law including the Vienna Convention on the Law of Treaties and World Trade Organization dispute rulings. The procedure is similar to the WTO’s and adapting it for the UK would be relatively simple.
So, the task has moved beyond copy-paste to search, adjust, adapt, replace or delete. The volume is pretty large, and this is just one of the 37-or-so agreements. Still, what we have looked at so far won’t necessarily need any negotiation, just a lot of work.
Photocopier? Or negotiating table?
Where negotiations will be needed is on market access, particularly for goods, but only on some parts. (There may be no need to renegotiate services, but the technical detail is beyond me.)
For goods, the EU-S.Korea agreement lists tariffs on around 900 pages. They could be run through the photocopier — except that S.Korea is reported to be one of the countries that might seek unspecified concessions from the UK, according to Politico:
“South Korea has already indicated that it wants to address its trade deficit with the U.K., which was particularly high between 2012 and 2015, before granting Britain continued market access during transition, EU diplomats and business people said.
“‘Exports are South Korea’s credo No. 1, and trade balance is their credo No. 2,” said Christoph Heider, president of the European Chamber of Commerce in Korea, who is in close contact with the government in Seoul. “I expect that Great Britain will have to make concessions if it wants to stay in the trade deal during the transition.’”
In many cases, tariffs are not scrapped from the start: they are phased out over different periods depending on the product, from immediate (most products) to 21 years and in some cases tariffs are never eliminated (“staging category E”). So the UK would be stepping into an appropriate phase of the reductions (unless “rolling over” took more than two decades!)
What most people forget is the EU’s free trade agreements include tariff quotas as well. That’s where limited quantities of imports are allowed in duty-free or at lower than normal rates, also known as tariff-rate quotas or TRQs. And it’s where negotiations will probably be needed.
The EU-S.Korea agreement has a few, mainly on the Korean side. Here’s one for flatfish where the duty-free allowance increases from 800 tonnes in year 1 to duty-free for all imports from year 13.
Here’s another on various types of milk and cream. This time the duty-free allowance remains indefinitely at 1,512 tonnes after year 16 (“staging category E”), meaning quantities outside the quota will be charged import duty, which is 89% or 176% depending on the product. (The tariff rates are on page L127/102 of the EU’s version of the text (pdf).)
This is not exactly “free trade”. It’s an example of how trade agreements are not necessarily as free as they are made out to be, and a warning to those who argue that the value of the UK’s present access to the EU market can be replaced by trade deals with other countries.
What will the UK’s share of that 1,000–1,512 tonnes be? The answer is likely to come from talks among all three sides: the UK, EU and S.Korea.
Incidentally, The EU’s agreement with Canada (the Comprehensive and Economic Trade Agreement, or CETA) has many more tariff quotas for imports into both sides. The EU has them on some kinds of seafood, wheat, sweetcorn, bison meat, beef and veal, and pork. Canada has them on cheese.
This is part of the EU’s CETA tariff-quota on one category of beef and veal (there are more details than this):
And this is Canada’s tariff quota for one category of cheese, again ignoring a lot of additional detail:
Although Canada is apparently keen to use copy-paste as much as possible, there will almost certainly be renegotiations over the tariff quotas.
One type of tariff barrier that has received little attention is “safeguards”. These are temporary increases in import duty to protect producers from import surges or falling prices, the kind of raised duty the US recently imposed on washing machines and solar panels.
For agricultural products and in bilateral trade agreements the rules are not quite the same as for industrial goods. Here, S.Korea has secured the right to impose an additional duty on beef imports of up to 40% for the first six years, the ceiling declining to zero after 17 years, if the “trigger level” specified is reached.
S.Korea has the right to use safeguard duties on pork, apples, malt and malting barley, potato starch, ginseng, sugar, alcohol, and dextrins.
For beef the right to impose a safeguard duty expires after 16 years. For pork it’s 11 years, for apples 24 years, and for other products somewhere in between.
The trigger volumes were for the whole of the EU-28. Copying the same trigger level for imports from the UK alone would not make sense for S.Korea. To do so would double the size of the import surge before Seoul could react. That means these volumes would be split between the UK and EU, requiring negotiations between all three sides.
In its agreement with the EU, Canada has dozens of products eligible for additional safeguard duty, but the EU has none.
The dreaded rules of origin
To qualify for lower duty or duty free access to the EU market, or for recognition of standards under the agreement, a product has to be shown to have been made in S.Korea. The same goes for EU products entering S.Korea, and for UK products under a future UK-S.Korea deal.
Anyone who has looked at these “rules of origin” knows they can be pretty complicated, to the extent that lower tariffs are not always worth the additional red tape. (You can find explainers by the Institute for Government here, and by Sam Lowe here.)
The criteria start with general rules on what qualifies and what proof is needed, covering 8 pages (1346–1354) in the EU-S.Korea agreement. For example, Article 6 lists 17 operations that cannot be cited — “sharpening, simple grinding or cutting” is not enough (item (i)). Nor is it enough if two ingredients from elsewhere are simply mixed together in the EU — they cannot be said to be “made in the EU” (item (m)):
But that’s just the start. A further 57 pages has tables of excruciating detail — like this on what is required for two types of “woven fabrics of man-made-filament yarn” to qualify with the right origin:
(Note that in that last paragraph, the product can qualify even if the value of the unprinted fabric exceeds 47.5%, so long as the fabric itself is also of local origin.)
Could these rules of origin just be run through the photocopier? Maybe. But remember right now exports from the UK to S.Korea only have to qualify as “made in the EU”, meaning components could be sourced anywhere in the 28 countries. A post-Brexit UK-S.Korea free trade agreement would only deal with products “made in the UK”.
In other words, from the point of view of qualifying products, a future UK-S.Korea agreement will be much less valuable for the UK than the present EU-S.Korea agreement.
Complicated? That’s just the start. Here’s what Gasiorek and Holmes say about duty-free imports involving the UK, EU and S.Korea:
“It is important to note that this could easily mean that, for example, a given intermediate input could be exported directly from Korea to the EU duty free, but if that input is used in the production of a UK good which is then exported to the EU, that input cannot count for UK originating status.
“The same could apply to UK exports of intermediates to the EU which are then used in EU exports to Korea; and EU exports of intermediates to the UK which are then used in UK exports to Korea. Hence bilateral flows between each of the three countries in this example (the UK, Korea and the EU) are likely to be affected.”
They then talk about “diagonal cumulation”, essentially a three-way deal that says if assembly, processing or other form of production in any two (combined) of the three meets the requirement, then the item can be imported duty-free into the third.
And a three-way deal needs a three-way negotiation.
Finally, how well does EU-S.Korea represent other EU free trade agreements? It depends. No two agreements are the same, but they can be similar. The Korean agreement is partly similar to the Canadian one but also has significant differences.
Norway and Switzerland are important trading partners of the UK. One of the most complicated agreements for the UK to grandfather is the one with Norway, Iceland and Liechtenstein — the European Free Trade Association (EFTA) countries, which form the European Economic Area (EEA) with the EU.
Developed from a Twitter thread from October 25, 2017. On February 15, 2018, I wrote this thread about the response to this article.
Updates: February 14, 2018 — added a link to Lorand Bartel’s article on various legal implications in Borderlex. Photos and drawing: Either CC BY 2.0 or CC0
People’s understanding of the WTO is a bit like the ancient parable of the blind men and the elephant. Even those who have spent their lives working on it stress different aspects
By Peter Ungphakorn DECEMBER 17, 2017 | ORIGINAL PUBLISHED ON UK TRADE FORUM DECEMBER 16, 2017 | UPDATED DECEMBER 17, 2017
There’s been an elephant in the room ever since the discussion of Brexit and trade began. Gradually, bits of the animal have become visible, but what we’ve seen has not always been accurate. It’s time to complete the picture, and to understand why the beast isn’t in the best of health.
WTO agreements already apply to the United Kingdom’s relationship with the European Union as an EU member.
As the Brexit talks enter their second phase, they will determine what can and cannot be done with the future UK-EU relationship on trade — sometimes explicitly, sometimes quietly behind the scenes. WTO rules will also affect any trade relationship Britain seeks to define with the rest of the world, whether globally, regionally or with individual countries.
How well WTO rules and the terms of Britain’s WTO membership work depends on the nature of the elephant and its health, which cannot be taken for granted.
People’s understanding of the WTO is a bit like the ancient parable of the blind men and the elephant.
IT was six men of Indostan To learning much inclined, Who went to see the Elephant (Though all of them were blind), That each by observation Might satisfy his mind.
Each feels a different part and, according to this version, they observe separately a wall (the body), spear (tusk), snake (trunk), tree (leg), fan (ear), and rope (tail).
And so these men of Indostan Disputed loud and long, Each in his own opinion Exceeding stiff and strong, Though each was partly in the right,
And all were in the wrong!
The same applies to the WTO. Even people who have spent their lives working on it stress different aspects.
Some lawyers’ eyes magnify WTO dispute settlement and its jurisprudence, the “jewel in the crown”. For some practitioners, what matters are the achievements of WTO committees whose work is partly designed to avoid legal disputes. Many journalists judge the WTO by the success or failure of negotiations. And so on.
So what is this elephant?
The WTO’s own explanation is here. We’ll do it differently, focusing on the elephant’s four legs — bearing in mind that the whole elephant is the WTO’s multilateral trading system. The elephant stands or moves on those legs. All four are important. Right now they are not too steady.
Leg 1: Trade negotiations — where WTO rules come from
Negotiations are the starting point of everything that happens in the WTO. All “WTO rules” are actually negotiated agreements. Everything the WTO does is based on them.
They have been negotiated and re-negotiated since the end of the Second World War, starting with the 1947 General Agreement on Tariffs and Trade (GATT, which deals with trade in goods), through the addition of services and intellectual property in 1995 (when the WTO was created) and to streamlining border procedures (“trade facilitation”) in 2013.
Negotiations can be by individual subject, or as a package or “round” covering many subjects. Rounds allow trade-offs across subjects, which can help to break deadlock — for example, a country reluctant to reform agriculture might find it easier to do so if other countries open up their financial services markets in return. But because rounds cover many subjects they are also more complex. Single-subject negotiations are simpler but with less scope for trade-offs.
In 2001 WTO members agreed to launch the Doha Round. They hoped to reach agreement in four years, and they failed. Despite immense progress in 2006–2008, the talks fell short of agreement. Since then, they have stagnated. In the meantime a handful of single-subject deals have been struck. Some came from the Doha Round, including the one in 2013 on trade facilitation.
Agreement in the WTO is by “consensus”, which means no one objects. In 2015 some countries such as the US wanted to declare the Doha Round to be over. Others, mainly developing countries, disagreed. Without consensus, the Doha Round could not be declared dead. But it could not continue in that form either. I’ve called it a zombie.
The WTO’s political leaders, ever since Mike Moore was its director-general in 1999, have measured their own success or failure by the fate of negotiations. By that measure, Moore was successful in launching the Doha Round but all his successors have failed to conclude the talks, until recently when single-issue deals have been agreed.
But there’s more to this elephant than that.
Leg 2: Implementing and monitoring — vital, routine WTO work
Someone described the WTO’s negotiations and other headline-hitting work as the “poetry” in its “plumbing”. The plumbing is unglamorous and rarely seen but cannot be ignored.
Signing negotiated agreements is not an end: it’s a beginning.
Most of the WTO’s routine work is about monitoring how well countries keep the promises they made in those agreements and implementing what was agreed.
It involves a huge amount of information-sharing and scrutiny by WTO members — in over 20 “regular” committees, each comprising the full membership. This leg is wobbling because members struggle to keep up-to-date with the information they have to supply once or twice a year, or when they introduce new regulations or policies. That makes monitoring difficult.
Even when countries keep their promises, the way they do it can hamper trade. When these problems are raised in the committees, solutions can be found just by talking, avoiding expensive legal disputes. Some of the most productive work is on product standards and regulations, such as how to ensure food or industrial products are safe.
If there is no news from these committees, then the system is working well. Generally, peer pressure encourages countries to keep the promises they made in the agreements. That in itself should be news but it’s rarely reported.
All of this means most of the $20 trillion global trade in goods and services flows smoothly and almost unnoticed. Some experts even argue that the WTO’s success or failure should be measured primarily by the “plumbing”, not the poetry.
Leg 3: Dispute settlement — adjudicating WTO law
Back to the poetry, though. Formal WTO disputes attract much more attention. They help enforce agreements. They also deal with huge amounts of money (such as aircraft subsidies) or other concerns (such as when tuna fishing endangers dolphins).
WTO disputes are always between governments, so “Boeing” versus “Airbus” is actually the US versus the EU.
And they are always about broken promises (violations of WTO agreements, commitments or expected rights). If a government simply dislikes another’s trade policy in general, the solution is to try to negotiate new rules.
Normally, that is also the recourse when a country is dissatisfied with a dispute ruling.
This year, something different has happened. The US is unhappy with rulings against a particular method it used to calculate something called a “dumping margin”. It’s all very technical but powerful commercial interests are involved and the upshot is that the US is blocking the appointment of WTO appeals judges to replace those whose terms expire. By December 11, they had dwindled from seven to just four.
Unless something changes, WTO disputes could eventually come to a halt. The elephant would be toothless.
Leg 4: Development — the WTO’s particular role
The WTO Is not a development agency, but members want it to have a role. It does this in several ways.
Trade itself is supposed to help developing countries. The rules in the trade agreements also include a considerable amount of leeway for them.
The WTO hosts “aid-for-trade” meetings between development agencies and other donors, and developing countries, so that aid matches real needs as much as possible.
And the WTO Secretariat also trains officials from developing countries so they can operate better in the system.
Acknowledging this used to be routine. Not anymore.
The US blocked a draft declaration for the December 10–13, 2017 WTO Ministerial Conference in Buenos Aires. It objected to the commitments to the WTO’s multilateral trading system and development, both standard in previous declarations.
Putting it all together — and what it means for the UK
Some have claimed that the threat to the dispute settlement system means the elephant could be on its deathbed. Others have said the same about the failure to conclude a major negotiation. And then there are those who remind us that the routine work is in reasonably good health, even if the information that members notify to the WTO needs to be better and to arrive faster.
As far as Brexit is concerned, a weakened WTO would allow Britain more leeway in how it chooses its trade policies. But it if the UK feels that others’ trade policies are unwelcome, a weakened WTO would also give it less leverage to deal with the problem.
Illustrations: drawings and paintings of the blind men and the elephant, all public domain:
from Charles Maurice Stebbins & Mary H Coolidge, Golden Treasury Reader (US);
by Itcho Hanabusa (Japan);
from Phra That Phanom chedi temple (Thailand):
from Holton-Curry Readers (US);
from Augusta Stevenson, Children’s Classics in Dramatic Form (US)
The WTO operates a consensus system, which means a decision is reached when no one objects.
In theory all 164 members should have the same decision-making power. In practice, there is an unofficial power structure, even though consensus is ultimately needed: the power structure influences the consensus outcome.
At the top: these days it’s the G5 — the US, EU, Brazil, China, India.
Next level down: the “Green Room” or equivalent — 20 to 30 members because of their influence or because they represent constituencies. They include the G5 plus Canada, Japan, Switzerland, Australia, Argentina, and others representing various groups of developing and least developed countries.
This is roughly how they got there and what the UK would need to join them
1. Have a policy
Obviously. But when politicians talk about the UK being a champion of trade, they are also advocating the UK being much more of a free trader than it is now, particularly in agriculture. This has not been debated properly and is certainly not the official policy of any of the main British political parties. In particular, this government has promised to continue to support farmers at present levels, at least for a time. Moving away from that would involve some substantial changes that have barely been discussed.
If the UK ends up in a customs union with the EU, then its trade policy for goods (not services) will be more or less the same as the EU’s. If it doesn’t, it may have a freer hand, but a lot also depends on how it aligns its regulations. Even though a customs union is not government policy, some still advocate it. Other policies are also still up in the air.
2. Sort out the UK’s WTO membership terms
The UK (and EU) have only just started talking about establishing their separate commitments in the WTO on tariffs, “tariff quotas” (explained here), farm subsidies, and on opening services and public procurement markets. It’s taken months just to prepare data for the tariff quotas and the real negotiations haven’t yet begun.
These commitments will be needed by Brexit day, March 29, 2019, so that the UK’s WTO membership terms are clear, and it’s going to be hard work. There’s no harm in having a long term vision, but for now the focus should be on the more urgent nitty-gritty.
3. Be large(-ish)
A key reason for being either in the G5 or the Green Room is economic size, particularly the share of world trade. As a rough guide we can look at WTO figures for goods exports.
Among the G5, the EU would be top if counted as a single entity, followed by China and the US. But the WTO ranks EU member states individually (Germany 3rd, the Netherlands 5th, etc) and this puts India 20th and Brazil 25th.
Among countries in the Green Room, with their ranking, are: Japan (4, after Germany), Canada (12 after a number of EU states, Hong Kong and South Korea), Switzerland (15), Australia (23), and so on.
And the UK? Tenth, putting it well inside the Japan, Canada and Switzerland group.
The factors that affect trading size include the size of the economy (population size and per capita income), the value of products (which goes some way to explaining Switzerland’s high ranking), and also having a large port (as with Hong Kong and Singapore, and to some extent the Netherlands).
4. Have a position that resonates with others
Size is not the only reason Brazil, China and India are in the G5. They each speak on behalf of different groups of developing countries. Brazil tries to bridge the differences between agricultural free traders (Thailand, Uruguay) and those wanting to protect their poor farmers (India, Indonesia, Kenya). In different ways China and India sometimes speak on behalf of weaker developing countries.
At the next level are coordinators of various coalitions of shared interests. Australia represents agricultural free traders. Switzerland coordinates a group of more advanced but more defensive agricultural producers. Others represent the African Group, the least-developed countries, and so on.
If the UK sticks to its present trade policy, it could find that the EU still best represents its position even after Brexit.
Or will its trade policy change? For now, that’s unclear. To be a leader of any kind, it would have to develop a new separate policy of its own, and one that would resonate with other members. But the field is already crowded. In agriculture, the UK might have to accept the leadership of Australia or Switzerland, depending on which direction it chooses, or be a lone voice with no followers.
5a. Either be constructive so everyone likes you
One way of winning friends and influencing people in the WTO is to help break a deadlock by proposing a compromise that everyone likes enough to want to work on it. This requires knowledge, skill and subtlety. It means understanding what might and might not be acceptable to others and the creativity and imagination to produce something new.
Countries rarely do this on their own. In the past few weeks, China has produced a new proposal on disciplining fisheries subsidies on its own, but the paper essentially reflects a Chinese concern and will need to be negotiated. By contrast, the EU and Brazil approached the negotiations on curbing farm subsidies from different directions and proposed a draft compromise. Whether that succeeds remains to be seen.
5b. Or be stubborn so everyone has to put up with you
India has a decades-old reputation in the WTO for being a blocker although it would argue that it is defending the weak and vulnerable. Most recently, it held up a new agreement on streamlining border procedures (“trade facilitation”) in order to push a separate proposal that would free public stockholding of food from WTO subsidy disciplines.
Anyone can be stubborn. From time to time the US and EU have been too, so size counts as well. There’s no doubt that a large and vocal India was difficult to ignore.
An anecdote. In 1986 the US and EU wanted to launch a major new round of negotiations. Some hardline developing countries led by India, Brazil and Argentina opposed the move. Finally two smallish countries, Colombia and Switzerland decided to take matters into their own hands. They produced a joint compromise proposal (appropriately nicknamed “café au lait”). More and more countries signed on, and that eventually became the basis for launching the “Uruguay Round” talks, which created the WTO.
In that example, constructive compromise trumped stubbornness.
6. Have a good supply of skilled diplomats and trade officials
If you’ve read this far, the need is obvious. Trade is technical and political. If a country is to operate effectively and credibly it needs skilled officials who can understand both the technicalities and other countries’ concerns.
Right now, the UK is in the early stages of rebuilding its capacity to negotiate trade. Its initial focus will be on sorting out its trading relationship with the EU, then on negotiating or renegotiating bilateral free trade agreements with other countries.
Those deals will be important for the UK, but they are not enough to make it a trade champion on the world stage. For some time to come, they will also draw British resources away from work in the WTO.
7. Accept that you still might not be at the top table
In fact there is really little chance that the UK will be in the G5 or whatever evolves next. A proper analysis of how countries fit into the power structure is bound to show that.
There is no shame in this. Constructive middle-level roles in the WTO — such as by Canada, Australia, Argentina, Japan, Switzerland, etc — are vital for the trading system. They are all realistic about what they can achieve and they get on with it.
The UK should do the same. Misguided self-importance will only backfire.
Updates: None so far Photocredits:
• Harbour scene by Abraham Storck, public domain
If other nations are hanging back, then the UK will happily lead the charge for global free trade. We will corral coalitions of the willing who share a belief that a more open and free trading world is the one which will provide the brightest economic future for our citizens.
The UK is a full and founding member of the WTO, though we have chosen to be represented by the EU in recent years. As we establish our independent position post-Brexit, we will carry the standard of free and open trade as a badge of honour.
This should be a minor distraction. It isn’t. Although Legatum’s paper deals with a wide range of issues, it makes leadership in the WTO an over-riding objective, determining for example whether the UK should be in a customs union with the EU and what kind of regulatory system it should adopt.
Legatum is forever optimistic — nothing wrong in that so long as the optimism is justified. Its paper covers a wide range of topics including regulations, standards, customs cooperation, options for an interim or transition period for Brexit, and so on.
Much of it has been questioned. That includes a number of Twitter threads, for example by barrister George Peretz, law professor Steve Peers, and commentator Frances Coppola. And then there’s pro-Brexit Richard North, who wrote on his blog that Legatum was confused about regulations, standards, mutual recognition and conformity assessment. And Martin Sandhu in an FT article, who called the paper “a confidence trick”.
Many of the criticism are about the details. More broadly Legatum is also accused of painting a picture of a future that is too rosy and a past that was not as glorious as it claims — certainly not a model for modern trade:
A century ago, Britain was the “free trade nation”, a cause that brought crowds of tens of thousands to the streets in its defence, being vital both to the livelihoods of Britons and to the economic miracle Britain gave the world in the century to 1914. But in the century since, our trade — and the world’s — has been subsumed into a restrictive system that creates poverty. The global economy is essentially stuck (page 5).
Many have commented that much of the UK’s trade dominance was actually acquired by force and empire-building. As for the future, “free trade is not an unalloyed good, and we do have to consider the costs as well as the benefits” said Frances Coppola in an exchange on her Twitter thread.
She echoed a more general assessment by Friends of the Earth’s Sam Lowe, who tweeted in May 2017 that Legatum’s papers are “all upside, little acknowledgement of the down. The remotely possible portrayed as plausible.”
This is my assessment of their papers also – all upside, little acknowledgement of the down. The remotely possible portrayed as plausible. pic.twitter.com/rJ902K3xxQ
I’m not saying the paper is all wrong. Far from it. But I’ll leave it to others to debate the rights and wrongs of other details. Many of these are either beyond my expertise or are based on debatable assumptions about the future, about how the EU and others will react to particular positions.
What follows here is about that over-riding objective in the paper, leadership in the WTO, developed from my own Twitter thread.
In Legatum’s extraordinary words
There is a subtle difference between taking “the lead” in the WTO (Legatum) and “a leading role” (Fox). What did Legatum mean, and what other leading roles might be available to the UK?
These are some extracts from Legatum’s paper. It calls for much more than simply “a leading role”. In fact, what it proposes is pretty extraordinary.
It says that one of the UK government’s immediate actions should be:
Taking the lead in World Trade Organisation (WTO) membership and explaining why the UK and WTO members now share a trade liberalising agenda. (Page 4, and similar on page 10, my emphasis here and in other quotes).
Suddenly, it seems, according to Legatum, the UK can be at the peak of the WTO’s power structure. (Who is currently there? We’ll look at power politics in the WTO in a moment.)
But more than that, the UK will “explain” why all of a sudden Britain and all other WTO members “now share a trade liberalising agenda”.
Legatum does not clarify how, simply because the UK is leaving the EU, this remarkable change can take place. It could not possibly do so. After all, “WTO members” includes the EU and its member states (for now including the UK) as well as the 135 non-EU, non-UK WTO members. Brexit doesn’t change that.
There’s no earthly reason why the diverse agendas of all the 164 members (including the EU’s) should suddenly align once the UK has left the EU and “explained” the need for a different direction.
Interim proposals are now being floated to remain in the Customs Union, part of it, or join EFTA and accede to the EEA Agreement. This is very dangerous: the EU will use such uncertainty to maximise its leverage, while other trading partners will re-focus their energies on the EU. The UK will lose its opportunity for trade leadership at the WTO, and the consequences will be serious. (Page 7)
And this on regulations:
The UK must therefore be able to regulate differently from the EU in areas like standards and regulatory issues. If it is locked into the EU regulatory model, it will not be able to make the adjustments necessary in order to sign comprehensive free trade deals with other countries, nor will it be able to lead in the WTO and other multilateral fora. (Page 21, and similar on page 23)
And this on tariff commitments and again a customs union:
Without control over tariff schedules [ie, lists of commitments in the WTO], time in the Customs Union prevents UK leadership within the WTO. (Page 29)
Also repeated is the notion that the UK’s role in the WTO is to “explain” what the world should do:
Beginning at the WTO, the UK needs to frame its case by explaining that making the global economy more prosperous over the long-term requires the urgent liberalisation of world trade. (Page 9)
Before Fox considers “corralling coalitions of the willing” in the WTO — or taking up Legatum’s fantasy of the UK leading and explaining — he might like to look at the many coalitions that already exist and how power is structured in reality in the organisation.
WTO leadership: from Quad to G5
Once upon a time, there was the “Quad”, occupying the summit of the power pyramid. They were the US, EU (including the UK), Canada and Japan, at that time the four largest traders.
Roughly speaking, nothing would be agreed if it couldn’t pass the Quad. But more importantly, if they could negotiate a breakthrough among themselves then the rest of the membership could be covered, provided some flexibility or opt-outs were included for smaller countries.
One historical breakthrough in November 1992 was bilateral, between the US and EU (the so-called Blair House accord on agriculture). Not even Canada and Japan were involved. Even in that structure, the UK on its own would hardly be the leader. But that structure no longer exists anyway.
The Quad dominated throughout the Uruguay Round — the 1986–94 negotiation that created the WTO in 1995 — and into the WTO’s early years. Then, as the century turned, trade was changing. By 2015, Canada and Japan had been jettisoned. In came Brazil, China and India.
At the peak, the Quad has been replaced by the “G5”, which was responsible for the breakthrough at the WTO Ministerial Conference in Nairobi in December 2015, when members agreed to scrap agricultural export subsidies.
Ironically, the UK was represented in that G5 — by EU commissioners Cecilia Malmström (trade) and Phil Hogan (agriculture). After Brexit, it’ll be on its own.
Next level leadership
At a pinch the UK might have been able to get a seat in the old Quad beside Canada and Japan, but not now. In the WTO, the UK will be in the second or third tier of the power structure.
There’s nothing wrong with that. Many countries at that level play constructive roles and have won the respect of fellow-members.
However, none of them did it by marching in and proclaiming “I’m a leader now, let me explain.” Not even the US can get away with that.
Nor did they have to be major traders. New Zealand has supplied a succession of chairs in the crucial agricultural talks, its trade diplomats having acquired a reputation as professional, skilled, honest brokers.
A more effective way of being heard in the WTO is to join an alliance. WTO alliances already have coordinators, so in another sense, the WTO already has lots of leaders.
Australia coordinates the Cairns Group campaigning to liberalise agriculture. Switzerland (an EFTA member) does it for the G–10, which is more defensive on agricultural trade. Brazil set up the G–20 group of developing countries. Taiwan (officially “Chinese Taipei”) coordinates a group of countries that recently joined the WTO. And so on. The WTO website has a long list of alliances in its trade negotiations.
What should the UK do? Take agriculture. If it really is keen on liberalising agriculture, it could join the Cairns Group, but not as its leader. Australia and the others would not appreciate that.
If on the other hand it wants to keep the more defensive policy it now applies as an EU member, it could join the G–10, but Switzerland, Norway and Japan would also not accept it as a leader.
Or, it could go it alone. Only the US and some countries with a minor interest in agriculture have done that, for example Singapore, Hong Kong and some Middle Eastern states. The UK would have a voice, but not a very loud one.
But before it embarks on any of this, Britain will have to sort out what kind of trade policy it wants. Take agriculture again. What should the policy be?
Low import duties and low subsidies? Broadly speaking, consumers would gain, many farmers would lose (some would gain) and subsidies for protecting the environment might also be lost.
Continuing with present high duties and some subsidies? Food would remain fairly expensive but farmers would stay in business and British production would be sustained (although Brexit itself might affect that too).
Or something else? The discussion has barely begun.
The UK might face another struggle if it wants to be influential in the WTO. Several non-UK officials have remarked that the UK used to be respected as a sound, pragmatic player in trade and other issues. Brexit, they say, means the UK is now seen as confused, floundering and ineffective.
If that reputation can be repaired, then the UK could find itself among over a dozen second-tier “leaders” in the WTO. It would not have a seat at the summit, but it could be invited to unofficial meetings of 20–30 members (sometimes called “Green Room” meetings) alongside the “G5”, Canada, Japan, Australia, Switzerland, Norway, Argentina, South Africa and whoever chairs various groups of developing countries.
To be clear, for a country of the UK’s size and clout, there would be no disgrace in joining that group. It would also be more realistic than talking of leadership.
Tied in with idea of leadership is the notion that Britain outside the EU can launch its independent WTO membership by “explaining that making the global economy more prosperous over the long-term requires the urgent liberalisation of world trade.”
The truth is that in the WTO a call to liberalise trade is a meaningless cliché. The UK can “explain” as much as it likes but the real difficulty is that there is little agreement on how and what to liberalise, what the downsides are for a widely divergent membership, and how urgent the need is.
In 2001, sixteen years ago, the start of a new set of negotiations was agreed. They are unofficially known as the Doha Round or the Doha Development Agenda (DDA). Launching the talks, WTO trade ministers declared:
We are determined, particularly in the light of the global economic slowdown, to maintain the process of reform and liberalization of trade policies, thus ensuring that the system plays its full part in promoting recovery, growth and development.
Sixteen years later, WTO members have failed to agree on how to achieve that, except in a limited number of issues such as cutting red tape at the border (“trade facilitation”) and scrapping agricultural export subsidies (whose use is now dwindling).
Worse, WTO members cannot even agree on whether the Doha Round is over or not. This is what their ministers declared at their last biennial conference in Nairobi in December 2015:
30. We recognize that many Members reaffirm the Doha Development Agenda, and the Declarations and Decisions adopted at Doha and at the Ministerial Conferences held since then, and reaffirm their full commitment to conclude the DDA on that basis. Other Members do not reaffirm the Doha mandates, as they believe new approaches are necessary to achieve meaningful outcomes in multilateral negotiations. Members have different views on how to address the negotiations. We acknowledge the strong legal structure of this Organization.
Given how diverse opinions and interests are among WTO members, the notion that they will take heed when the UK “explains” is bizarre.
There are a number of other questionable assertions about the UK and the WTO in Legatum’s paper.
And Legatum says the UK should talk to other WTO members alone, without the EU, when setting up Britain’s WTO commitments on tariff quotas (difficult to achieve since processes for the UK and EU are intertwined, and British officials are far less experienced than the EU’s in negotiating tariff quotas). In any case the two are already working together.
One of the problems with Legatum’s obsession with WTO leadership is that it diverts attention away from the real issues it should be considering.
For example, the question of whether the UK should be in a customs union with the EU is really about a trade-off. The benefit is smoother trade (in goods) between the two. The downside is that the UK would not be free to set its own tariff rates and negotiating free trade agreements with other countries would be almost impossible.
And the argument in favour of having a customs union temporarily during a transition period is to give business more time to adjust to the final UK-EU relationship.
Legatum ignores all of those arguments on the grounds that the UK needs to grab WTO leadership and to do so fast. It does not say what the benefit of leadership will be other than the questionable claim that it is needed so other countries can take the UK seriously. And of course that it will bring pride and the futile hope that the world will be spurred into creating a free trade paradise.
If this were just about a paper from an ill-informed institute, it would not matter much. The problem is that misguided jingoism is common in the debates about Brexit. Legatum’s line feeds straight into Fox’s preoccupations, for example.
There are real trade-offs and real dilemmas that have to be tackled. Talk of UK leadership in trade is unrealistic, unhelpful and a distraction.
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
By Peter Ungphakorn POSTED OCTOBER 7, 2017 | UPDATED NOVEMBER 25, 2017
When the press learned that the UK and EU had agreed on a common approach for their talks with other World Trade Organization (WTO) members, the headlines spoke of a “breakthrough” and a “deal”. A closer look suggests this was an exaggeration. But the issue is important, nonetheless.
What the two had agreed was a joint approach for handling something called “tariff quotas” when dealing with other WTO members.
On October 12, that joint approach was published in a letter to WTO members (pdf). The following week it was the basis of the first proper round of talks with other WTO members.
No sooner had the story broken than opposition emerged in a letter that the US, New Zealand and some other countries had sent to the British and EU ambassadors in Geneva.
Suddenly tariff quotas were really juicy. Critics saw the developments as proof that London’s Brexit plans were in disarray, and that ministers were misguided (or deliberately misleading the public) in claiming it would be easy to secure future free trade deals with the likes of the US and New Zealand. Politico’s headline said “post-Brexit trade woes deepen”.
This was “a complete, unmitigated disaster for the Brexiteers, Liam Fox, and the UK as a whole”, one member of parliament initially tweeted. She subsequently toned her comment down by clarifying “this is technical. UK has to lodge new schedules at WTO. Gov was planning to do this using method that requires little approval,” before continuing to criticise the government for getting it wrong.
This is technical. UK has to lodge new schedules at WTO. Gov was planning to do this using method that requires little approval. https://t.co/jg0bCn3o7s
As Adam, my editor at IEG Agribusiness Intelligence, said: tariff quotas were now mainstream. Even The Guardian had an editorial on the subject.
The excitement partly arose because this issue is so esoteric and technically complex that its significance is difficult to assess. Little wonder people struggled to judge realistically what it meant. It was easy fodder for the emotions Brexit has been stirring for months.
The use of “breakthrough” was defended on the grounds that it was the first time the UK and EU had agreed on anything in their fraught separation talks.
Perhaps a valid point, but this was not really about their future relationship, and “breakthrough” suggests the UK and EU had previously been deadlocked on this issue as well.
There is little public evidence to support that, although a Dutch official indicated on Twitter that some differences did need sorting out, so perhaps there was a breakthrough of a kind. Another tweet suggests the agreed approach was vaguer than the original reports suggested and might fall short of a “deal” (confirmed when the UK-EU letter was published — see details below).
Basically, the issue is so complex that much of it could easily have been left to civil service trade technicians on the two sides to come up with a common approach.
It’s unlikely David Davis and Michel Barnier would get their hands dirty on this one. But it was part of phase 1 (on separation terms) of the “Article 50” Brexit talks. Paragraph 13 of the EU’s negotiating guidelines deals broadly with honouring international commitments. The WTO is only one of these.
13. Following the withdrawal, the United Kingdom will no longer be covered by agreements concluded by the Union or by Member States acting on its behalf or by the Union and its Member States acting jointly. The Union will continue to have its rights and obligations in relation to international agreements. In this respect, the European Council expects the United Kingdom to honour its share of all international commitments contracted in the context of its EU membership. In such instances, a constructive dialogue with the United Kingdom on a possible common approach towards third country partners, international organisations and conventions concerned should be engaged.
Free from political supervision, technical-level officials often collaborate well to produce a shared result. After all, for tariff quotas there is nothing mysterious about the possible approach. I even explored it here.
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 of commitments. 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.
It turned out that these were precisely the kinds of questions that occupied UK’s and EU’s economic statisticians and other officials 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.
The agreement on a commont UK and EU approach was described as preliminary (which Sprenger’s tweets seemed to confirm). Securing the approval of EU member states was apparently straightforward. The UK and EU followed up, as planned, by submitting it to WTO members in the third week of October on the sidelines of the WTO Agriculture Committee’s meetings.
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 for now being kept out of the picture — an important point since it implies the UK and EU assume free trade between them in goods will continue after Brexit.
The bargaining will be between the UK (and separately the EU–27) and the rest of the WTO. Those talks began in the week of October 16–20, when the UK and EU together met other delegations individually to present the data they had been working on, and to explain their joint approach. To what extent the UK’s and EU’s negotiations with other WTO members stay merged remains to be seen.
Already on September 26 — before the UK and EU sent out their joint letter — seven countries had publicly 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.
Since the new WTO commitments, including on tariff quotas, will be needed when the UK leaves the EU on March 29, 2019, and since they would normally need three months to be processed in the WTO, officials say they expect an agreement by the end of 2018.
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.
Even the first stage of preparing the data has taken so long that some sources say it was still incomplete at that first round of talks in the week of October 16–20. Other WTO members then started to look at their own data on their exports to the EU and UK to see if they tallied.
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.
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.
Follow-up 2: the October 16–20 talks
The first round of proper talks took place on the sidelines of the WTO Agriculture Committee meetings in the week of October 16–20. They were between the UK and EU together, and a selection of individual WTO members with the most interest in the tariff quotas.
The main purpose for the UK and EU was to present their data and explain their joint position. They also heard other countries’ reactions. Briefly, these issues emerged:
data: the immediate and tough challenge of how to arrive at figures that accurately reflect imports and subsidies separately in the UK and remaining EU–27, particularly for calculating how to split tariff quotas between them. This has been the focus of the first round of talks where a range of technical difficulties have arisen
tariff quotas and honouring “access” commitments: whether the UK and EU will be able to stick to their position that they can simply divide the present tariff quotas into UK and EU–27 portions while keeping the combined totals unchanged, in the face of opposition from some other WTO members
agricultural subsidies: how to divide the EU’s present entitlement between the UK and remaining EU–27
negotiating rights: whether the UK and EU should recognize other countries’ claim to legal rights to negotiate over the revised commitments — for the time being at least, this only seems to have been mentioned in passing
And on the data, among the objections raised by other WTO members were:
at least some of the data did not accurately reflect how much of EU imports went to the UK and how much to the EU–27
in some cases the proposed period of 2013–2015 was challenged because it could give exporting countries smaller quotas than if other years were used. Several delegations wanted to test the data for different and longer periods, including up to 2016, to see how that affects the outcome. Some rejected the argument that a three-year period is traditionally used in the WTO, countering that this is a process without precedent
some of the presentations were incomplete because they dealt with only a small proportion of tariff quotas allocated specifically to some countries
the way the quotas are administered — how they are allocated to individual companies or countries — could have distort the data
(A comprehensive report is available to subscribers of IEG Policy here.)
• 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
• November 21, 2017 — adding information on the October 16–20 first round of WTO talks
• November 25, 2017 — adding Australia’s concerns aired on the BBC’s Today programme Photocredits: Pixabay, Pexels CC0