By Peter Ungphakorn
POSTED JANUARY 9, 2017 | UPDATED JANUARY 12, 2017
I started writing almost a year ago (in AgraEurope) about what the UK needs to do in the World Trade Organization (WTO) as it leaves the European Union. The analysis was always somewhat tentative, even though it was based on experience of how the WTO has functioned over the decades, both legally and politically.
To a large extent it still is. The three major unknowns are still unknowns: what the UK will seek, how the EU will respond, and how the rest of the world will react.
One expert (and I mean a real expert, unlike me) prefaced a discussion about Brexit and WTO “scheduling” by more or less throwing his arms wide and exclaiming: “Nothing like this has ever been done before. No one knows what will happen.”
But some parts of the picture are sharper. Statements, analysis, leaked information, argument and counter argument — particularly since the referendum — have clarified some of the options.
This is what I’ve learnt:
- Most of the uncertainties are still uncertain
- I can see (a bit more) clearly now
- Time has helped the debate become more realistic …
- … but the notorious “bus” is still alive and well with added features
- New Sussex and Switzerland models refine the options
- Lawyers versus practitioners? It pays to look at the data
Have I changed my view of how difficult the challenge facing the UK in the WTO will be? Very slightly. Here goes.
The three uncertainties — what the UK will seek, how the EU will respond, and how the rest of the world will react — will probably remain uncertain at least until Article 50 is invoked and talks on the UK leaving the EU really start.
We do have more clues now than before, from statements by British ministers, EU officials and others, even members of Donald Trump’s team (on a UK-US trade deal). But on the whole they are still more like brain-storming, with lots of contradictions, than actual policy in the making.
Much has been said about how some Brexit claims still assume other countries will just accept whatever the UK demands.
Bob Hancké has even examined it theoretically using two-level game theory. The UK, he says, approaches Brexit armed with the knowledge that it pays a recalcitrant member state — when operating within the EU — to remain stubborn, “and with, perhaps, a misplaced arrogance about going it alone in the turbulent world we live in”. So,
“the UK draws up its plan for Brexit and seems to assume that the EU will take that as the parting shot. The EU may do that. Stranger things have happened in the past twelve months. But the EU is more likely to look at this as a psychodrama in which it doesn’t really want to participate (that seems to be the prevailing mood elsewhere in Europe since David Cameron’s fated call for a referendum).”
At the same time, there is a better recognition now that other countries’ responses will indeed be important.
True, we still occasionally hear the disingenuous “they need us more than we need them”. But the fact that the organisation Leave Means Leave, which campaigns for a hard Brexit, felt it had to lobby chambers of commerce in EU member states, is a sign that at least some Brexiteers are taking nothing for granted.
And so to the WTO. The uncertainty allows the full spectrum of opinion to persist on how easy or difficult it will be to re-establish the UK’s status as a WTO member independent from the EU. One end asserts the UK should just claim its legal rights with a minimum of negotiations; the other that the UK will face a near-impossible task of bringing on board all the 163 other WTO members. I am not convinced by either.
As I have said before, it all depends on the assumptions, including how well the UK crafts its case (politically and diplomatically as well as legally) and how other countries react.
“That’s a lot of assuming,” wrote Mark Leonard in a piece on why the false confidence of Brexit optimism (at least the most simplistic forms) might prove disastrous. There’s an awful lot of assuming everywhere.
Much also depends on how stretched the UK’s bureaucracy is forced to be by all the negotiations and adjustments to laws and regulations that Brexit will require. That includes negotiations within the UK itself on what policies to adopt and which options to pick.
For example, the Department for Environment, Food and Rural Affairs (Defra) will be the bridge between farmers, government policy and a raft of negotiations on agricultural issues as Britain leaves the EU. Alan Swinbank has described the options and implications in an excellent new paper (pdf).
Defra should have a key role in negotiating agriculture — probably the most challenging Brexit subject facing the UK, in the WTO at least — but its own staff and budget have been depleted (see also this), most recently because of the new departments set up to deal with Brexit.
WTO rules are essentially about disciplining trade policies. For Brexit, there are five linked aspects:
FIRST, the small but potentially disruptive question of establishing what the UK’s commitments in the WTO are
The commitments are listed in negotiated and legally binding documents known as “schedules”. These will define the limits on how protectionist the UK can be — its tariffs, tariff quotas (duty-free or low-duty trade on limited quantities), agricultural subsidies, and barriers to entry for services and service-providers.
They can largely be copied and pasted from the EU–28’s current (but uncertified) schedules although negotiations with a wide range of countries, including the EU, will be necessary in some cases.
Cambridge University lawyer Lorand Bartels (@Lorand_Bartels) says that in the scheme of things this is a minor Brexit task. He is right. His comment has been a useful reminder to keep WTO schedules in perspective. But they might still have a wider impact.
Sorting out Brexit as a whole will involve complex negotiations (and other work) on a wide range of subjects, from trade relationships to security.
The WTO schedules are a small but fundamental part of the trade side. And within the schedule for goods, most of tens of thousands of tariffs ought to be settled quickly. Most people think converting the EU’s schedule for services into the UK’s is pretty straightforward too.
- The schedules are where the UK and EU land if the 2-year Art.50 period ends with no transitional or final trade deal. They would also apply if any UK-EU trade deal broke down in the future, an incentive to get it right. Importantly, this applies to the revised schedules of both the UK and the EU–27
- Once the UK is outside the EU, they are the default for the UK’s trade relationships with Australia, Canada, US, South Korea and all other WTO members (as well as the EU) so long as no free trade or other form of economic integration deal is struck with them. It’s an open question whether any other country would be willing to explore the terms of a free trade agreement with the UK before it knows what the schedules are — it may first need some idea of how much better preferential trade will be, compared with normal trade
- There is no guarantee that the UK’s and EU–27’s schedules will be completed within Art.50’s 2-year period. If the UK leaves the EU without re-established WTO commitments, the potential for disruption is massive. But that can be avoided if the UK (and EU) can use the time efficiently to sound out trading partners so that draft schedules can be prepared to accommodate others’ needs and to sort out their own positions. These things can take a long time. Revising the EU’s goods schedule for its enlargement from 12 to 15 members in 1996 took 14 years. But with enough resources and expertise they don’t have to take that long
Someone asked me recently when the UK should start sounding out other countries about its schedules. My answer: “Now. Or even better, it should have started already.”
But when in early December I asked a couple of UK trade officials at a discussion on trade and Brexit how long they had been in the job, the answers were something like “since the beginning of the month” and “since Monday”.
SECOND, establishing what the EU–27’s WTO commitments are after the UK leaves
The EU and UK trade with each other and therefore have interests in each other’s commitments. In other words, the UK will also need to watch what happens to the EU–27’s commitments in the WTO as well as preparing its own.
Take lamb and mutton for example. Simply using the EU–28’s present tariff quota leaves no guarantee that the UK and EU–27 would continue to have duty-free access to each other’s markets, whereas New Zealand and several other suppliers would keep their duty-free access to both.
In some subjects, negotiations over the UK’s and EU–27’s quotas may become inseparable, and other countries would also demand a say because any UK-EU arrangement could affect their own competitiveness (or their expected “rights and obligations”) in the two markets. (More below and here.)
THIRD, WTO rules will govern the UK’s future special trade relationships with everyone
That includes both with the EU–27 and with the rest of the world, whether through customs unions, free trade agreements or any other form of economic integration. Talks to set these up could also have a bearing on the negotiations over the schedules, and vice versa.
FOURTH, “leading” world trade liberalisation means hard work in the WTO
Theresa May’s government has ambitions to be a “leader” in global liberalisation. Unless that’s just another meaningless slogan, it would require an active, constructive and leadership role in the WTO. And that, in turn, means having the knowledge, skills, staff and other resources in London and Geneva for the task.
It means active participation in the 25-or-so WTO committees that oversee implementing the present agreements, and in the tortuous negotiations that continue to take place, albeit on a smaller scale than the full, beleaguered Doha Round.
And it means having a stance. Take agriculture. Would the UK join the Australia-led Cairns Group, which includes Canada, New Zealand, Brazil, Argentina, Uruguay, Thailand, Malaysia and others, pressing for agricultural trade liberalisation through WTO negotiations?
Or would it prefer the more protectionist agricultural trade alliance, the G–10, which includes Switzerland, Norway, Japan, South Korea and Taiwan? Or would it be a loner like the US and the EU?
How would UK leadership work in a forum that already has a number of experienced and active leaders? (British public debate seems to be ignorant of that last fact.)
In any case the UK also needs to be prepared to deal with its own WTO legal disputes, both when facing challenges and when challenging others.
FIFTH, will the UK want to be more liberal than its WTO commitments?
The schedules set legally binding limits on protection. Countries are free to open their markets more than in those commitments, but have to renegotiate if they want to be more protectionist.
Some debate continues on whether the UK should be more liberal. For example critics who accuse the EU of being “protectionist”, advocate slashing tariffs on agricultural products in order to make food cheaper.
Inevitably, British farmers will resist that. But if the government decides to defy them, it will be free to set tariffs below the legally binding ceilings it has committed in the WTO, to widen its tariff quotas to any size, and to reduce or eliminate farm subsidies. (The same applies to opening wider its services markets.)
This could be done freely within the limits of UK schedules “replicated” from the EU’s so long as it was applied equally to all WTO members. Trying to lock it into the schedules would unnecessarily increase the Brexit workload.
But there is another WTO angle that some have pointed out: countries tend to use their trade barriers as a bargaining chip to secure better access to their trading partners’ markets.
In other words, “I’ll cut my tariff on X if you also cut your tariff on X”; or “I’ll cut my tariff on X if you cut your tariff on Y”.
If I don’t have a tariff on X, it’s more difficult to pressurise you to cut your tariff. But in this case I could say, “I might not have a tariff on X but my WTO schedule allows me to restore it up to the binding ceiling, so I’ll offer to lower that ceiling if you reduce yours.” (Believe me, the success or failure of some apparently complex WTO negotiations have essentially boiled down to that.)
How the WTO affects the UK is summarised in this table (pdf) covering the UK’s basic position in the WTO, its special relationships, and its future role in the WTO.
“This is likely to be the most complicated negotiation of modern times. It may be the most complicated negotiation of all times. By comparison, Schleswig-Holstein is an O-level question.”
So said Brexit Secretary David Davis to the House of Lords EU Select Committee on September 12, 2016, almost three months after the referendum. (The full transcript is here, pdf, from page 56; the video is here.)
To many who had been studying Brexit’s implications, this was not news. But it was a breakthrough, probably the first time a key government minister and leading advocate of leaving the EU acknowledged so clearly that the process would not be simple.
This has allowed Davis, at least, to move on from the cop-out of “we won’t give a running commentary”, to the more reasonable position that the government is still studying its options, and consulting interested groups, and that Parliament will be informed at least to some extent when the government itself has a clearer picture.
Two months later, International Trade Secretary Liam Fox followed up with a written statement to Parliament on December 5 saying: “In order to minimise disruption to global trade as we leave the EU, over the coming period the Government will prepare the necessary draft [WTO] schedules which replicate as far as possible our current obligations.”
The decision to “replicate as far as possible” current obligations means the UK aims to ensure that re-establishing its schedules is as simple as possible, and to minimise the areas that need to be negotiated (see above). This is welcome realism.
There is still room to debate what “replicate” and “as far as possible” mean in practice. For those who care, it’s about “rectifying” (pdf) versus “modifying” the UK’s commitments, which are currently merged with the EU’s.
However, one expert familiar with these processes says the distinction is unimportant since in practice, either way, some tough negotiation may be unavoidable.
The telling point is that it took Fox almost five months from his appointment — including two visits to the WTO in Geneva — to reach a decision that was blindingly obvious to most people familiar with WTO schedules. That is a measure of how much learning is needed, including among the officials advising ministers.
We also now have serious discussions of interim or transition periods, better recognition by some ministers that at least some immigration will probably be needed (some of it unskilled) for the economy and for health and other services, and better awareness of some other issues such as the constraints on arrangements such as customs unions and free trade areas.
Nevertheless, many of those who want to leave the EU still think the break can be quick and clean.
Those who point out that the process will be lengthy and complex are often accused of undermining the “will of the people”.
One low point of the referendum debate was the infamous £350m-a-week Brexit bus, symbolic of the misinformation and shoddy analysis feeding a discussion that was particularly bad considering the referendum was about to propel the UK super-tanker into a juddering momentum-breaking U-turn away from Europe. (Another was the racism and xenophobia the debate stoked.)
Both sides share the blame, but those on the “Leave” side were worse.
Any hope that the debate would improve after the referendum was dashed when Change Britain, which campaigns “to make a success of Britain’s departure from the EU”, released “new research” the day after Christmas, claiming the UK would gain £450m a week (over £23bn annually) by leaving the EU Single Market and Customs Union, and providing numerous “calculations”.
I don’t need to examine the claim in detail. Others have already done a better job than I could. If you do want detail, the calculations have been torn to shreds by Sam Bowman of the Adam Smith Institute, Essex University’s Steve Peers, and others.
I’ll just note that Change Britain does not see any fall in UK trade, GDP and government revenue from ditching what one group of economists calls “the most integrated bilateral/regional trade relations on the planet”.
“The results mean nothing. It isn’t research, it’s junk,” said former Cabinet Office chief economist Jonathan Portes (now at King’s College London).
Bowman concluded: “I say this not to trash Change Britain but to highlight just how weak some of the numbers and claims that are floating around, and being given very kind press coverage, can be. Change Britain has some heavyweight backers — they can do better than this.
The standard options for post-Brexit UK-EU trade and economic relations are:
- staying in the Single Market (the Norway/Iceland or Switzerland models)
- staying wholly or partly in the customs union (CU — the Turkey model is partial), with an additional agreement for services since a customs union only deals with goods
- a free trade agreement (FTA — the South Korea or Canada model)
- reverting to WTO commitments (sometimes called MFN or most-favoured nation treatment, the archaic WTO term for normal, non-preferential trade)
In November, Sussex University’s UK Trade Policy Observatory published a paper (pdf) by Michael Gasiorek, Peter Holmes and Jim Rollo looking at the options and asking whether the UK and EU have too many “red lines” (defensive negotiating positions that cannot be crossed).
The UK has four red lines, they observe:
- No free movement of people/labour
- Independent trade policy
- No compulsory budgetary contribution
- Legal oversight by UK courts only and not by the European Court of Justice
The EU has one: no cherry picking — choosing which parts of the Single Market to keep and which to drop.
“It is easy to be lost in pessimism given the four British red lines and EU equivalent on cherry picking on the EU–27 side,” the paper says.
Its antidote is a hybrid: a broad free trade agreement with some sectors in a customs union (the UK and EU would charge the same tariffs on imports within those sectors from the rest of the world) and regulatory arrangements based on the Single Market for those sectors.
A prime candidate would be the car industry whose complex value chains would avoid costly rules of origin requirements and other red tape, as parts and assembled cars criss-cross the borders between the UK and EU–27. Another would be aerospace.
“We have demonstrated that the most attractive outcome, from the UK government’s point of view and given its red lines, would be an FTA with a variety of special sectoral arrangements. If that reduced or abolished non-tariff barriers on a wide range of goods and services, much trade would be saved,” the paper continues.
“Whether this is acceptable to the EU side is unclear, but the alternative of going from the most integrated bilateral/regional trade relations on the planet to MFN [no preferences in UK-EU trade] ought to be deeply unpalatable to all concerned, and an incentive to find an FTA-based least-cost alternative.
“The debate, however, is heated on both sides, and mistakes and accidents are all too possible. MFN may be the only answer unless both sides shift from megaphone diplomacy and start explaining to their own constituencies that the cost of the most extreme versions of the red lines is unnecessarily high.
“Moreover, such extreme versions of Brexit do not exclude trade and investment subsidy wars as governments try to compensate footloose multinationals for the consequences of policy failure.”
The hybrid proposal sparked a debate among experts as to whether it would violate WTO rules.
They were already debating to what extent WTO agreements would limit the UK’s and EU’s ability to be selective in including or excluding certain sectors in a free trade agreement or customs union.
These are Art.24 (actually XXIV) of the General Agreement on Tariffs and Trade (GATT, the WTO treaty on goods), and Art.5 (actually V) of the WTO’s General Agreement on Trade in Services (GATS). GATT Art.24 says this would have to cover “substantially all the trade” in goods; GATS Art.5 requires “substantial sectoral coverage” in services.
Some have also reminded us that there is a large grey area of inclusions and exclusions in customs unions and free trade agreements that could allow the UK and EU to escape litigation. The debate is about how large the grey area is, and whether there would be significant reactions from other WTO members.
The Sussex paper expanded the debate to how those two articles would apply to the case where a partial customs union is superimposed on a broader free trade agreement. Opinion among lawyers and other experts is equally divided.
Meanwhile, the “Swiss model” is also changing. Bern is optimistic it can preserve its various agreements with the EU and the Single Market — including funding for research and student exchanges — after its Parliament passed a bill on December 16.This watered down a 2014 referendum vote to curb EU immigration by giving priority to Swiss job seekers instead of setting quotas.
So far, the move has attracted little interest in the UK even though it provides a possible model for Britain to remain in the Single Market. To be sure, the various red lines would become a smudgy grey, but that’s how the Swiss, with decades (if not centuries) of experience in direct democracy and political compromise, are dealing with their conundrum.
Ask a lawyer what the UK can do to keep food safe and protect animal and plant health, and the answer will likely be based on the case history of disputes involving the WTO’s Sanitary and Phytosanitary (SPS) Measures Agreement.
Ask a practitioner (official, delegate, diplomat) and the first point of reference (after the SPS Agreement itself) may be the WTO’s SPS Committee with its lengthening history of discussions on specific trade concerns, and where a main aim is more pragmatic: to resolve conflict and keep trade flowing by talking and establishing voluntary good practices instead of prosecuting.
To some extent this explains the difference of opinion over what the UK may face when it re-establishes its WTO commitments (the schedules) as a member in its own right, independent of the EU.
One side argues that the UK can carefully craft its case legally, table its commitments, probably escape litigation and almost certainly escape trade disruption.
The other believes that WTO processes are more complicated than that and that more can be achieved by talking.
Other countries will want to scrutinise at least some parts of the schedules and may even challenge the UK’s legal case. This could lead to the kind of arguments that are heard over and over in the WTO — on both the content (in this case the commitments) and the legal approach, and even about which are the most suitable base years for making crucial calculations.
So, according to this view, if the UK wants to avoid disruption, it should listen to its trading partners and draft schedules that accommodate their legal and commercial concerns as much as possible.
That, after all, is how the EU has seen trade continue untroubled even though its commitments have not been certified (accepted by consensus) by WTO members, since it expanded first from 15 members to 25, then to 27 and most recently to 28.
Which view is right? Time will tell.
A closer look at the details might shed some light. For example the EU’s present tariff quota for lamb and mutton gives some clues as to where purely claiming a legal right might break down as the UK and EU become entangled in each other’s revised (or “rectified”?) commitments, and as other countries weigh in.
The tariff quota is examined in detail in this five-step analysis. Even if we accept that the first two steps are straightforward (they divide the EU–28 quota into UK and EU–27 portions), the simplicity may still unravel in steps three and four, when current UK-EU trade is brought into the calculation.
The conclusions are:
- The volume of UK-EU trade is likely to be added in some way to the tariff quotas of the UK and EU. The negotiations could expand the combined UK and EU quotas considerably — by as much as one third or more in the case of lamb and mutton, if farmers are allowed to keep their current trade volumes.
- The talks could therefore become messy, merging two sets of negotiations over the UK’s and EU’s schedules, Each side could use a tariff quota in its schedule as a bargaining chip, for example the UK offering a smaller quota to the EU if it believes the Brussels is not offering enough, and vice versa. There is no guarantee that the UK and EU will adopt compatible approaches to their respective tariff quotas.
- With such large scale changes, it could also be difficult for the UK to argue that it was simply “rectifying” its schedule (the key legal point seems to be whether a “concession” granted to WTO members was being altered or not). In other words, other countries might take the view that what is needed is more than a simple legal construction. They could claim the right to negotiate. It would be difficult but they might even challenge the proposed quotas for upsetting (as they see it) the balance of “rights and obligations” that was negotiated before Brexit. And the same applies to the EU–27’s schedule.
- Back home, the UK and EU member states’ governments could also be dealing with pressure from their farmers, and perhaps in the opposite direction from their consumers or the manufacturers who use agricultural products as their inputs. This could add more time and need more resources in order to complete the negotiations.
- Perhaps most important of all, the EU, whose latest schedules have not been certified, has shown that the key to avoiding disputes and disruption is spending time talking, listening and taking on board other countries’ concerns. Simply insisting on a legal right might not achieve that. It might even be counterproductive.
Note that lamb and mutton is an issue that affects politically sensitive trade across the border of an EU member state: Ireland.
Is the analysis correct? Again, time will tell. But it’s hard to see a solely legal process working. Will trade be disrupted? Not if the UK plays its cards right. It’s an “if” that has to be taken seriously.
- Accompanying this blog post: The limits of ‘possibility’: Splitting the lamb-mutton quota for the UK and EU–27
- A different argument: the legal case, by Lorand Bartels in an SSRN paper and an ICTSD blog
- Conservative MEP Dan Dalton: Agriculture in a post-Brexit World (even though it overlooks the fact that New Zealand has scrapped trade-distorting farm subsidies)
- Alan Swinbank: World Trade Rules and the Policy Options for British Agriculture Post-Brexit (pdf)
- Alan Matthews: Brexit and Irish agri-food trade
Updates: January 10 and 12, 2017 — adding links to new papers by Alan Swinbank and Alan Matthews
♦ Generally: public domain/Creative Commons CC0 via pexels.com, pixabay.com
♦ Dairy farmers protesting in Brussels by Teemu Mäntynen via Instagram. “About 1000 farmers from Belgium, France, Germany, Italy and other EU nations protested outside the EU Council building on 5th of October 2009. Farmers want regulation to shield them from volatile free markets that have collapsed milk prices.” (CC BY-SA 2.0)