How to be a trade champion

A guide for busy politicians

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By Peter Ungphakorn
NOVEMBER 21, 2017 | UPDATED NOVEMBER 21, 2017

By Abraham Storck - Public Domain, https://commons.wikimedia.org/w/index.php?curid=1147660
Size counts: the more you trade, the bigger your clout in the WTO

International Trade Minister Greg Hands has again proclaimed the UK is a global trade champion only needing to “reclaim our position at heart of global trading system”.

I have written a longer piece on this. Here are some key points for busy readers. I’m using the WTO as the context since that’s where “the heart of the global trading system” is.

How to be a trade champion
  1. Have a policy
  2. Sort out the UK’s WTO membership terms
  3. Be large(-ish)
  4. Have a position that resonates with others
  5. Either
    a. be constructive so everyone likes you
    or
    b. be stubborn so everyone has to put up with you
  6. Have a good supply of skilled diplomats and trade officials
  7. Accept that you still might not be at the top table

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 policyBack to top

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 termsBack to top

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)Back to top

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 othersBack to top

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 youBack to top

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 youBack to top

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 officialsBack to top

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 tableBack to top

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


What WTO leadership means and where the UK would fit in

People who should know better keep talking about the UK becoming a leader in the World Trade Organization. What exactly does this mean and what are the chances?

By Peter Ungphakorn
NOVEMBER 8, 2017 | UPDATED NOVEMBER 8, 2017

Brexit will allow Britain to lead the World Trade Organization (WTO), the Legatum Institute claims in a new paper published on November 4, 2017.

The paper, “The Brexit Inflection Point: The Pathway to Prosperity”, is new but the claim is not — not entirely.

“Britain stands ready to take a leading role within the WTO,” International Trade Secretary Liam Fox said in a speech at the WTO almost a year earlier on December 1, 2016.

Major General Wellesley (mounted, the future Duke of Wellington) commanding his troops at the Battle of Assaye (J.C. Stadler after W.Heath) Public domain, National Army Museum
No invisible hands here: the British East India Company won monopolies and trading power partly through war such as at the Battle of Assaye in 1803

And further back in September 2016, Fox talked about “corralling coalitions of the willing” in a speech at Manchester Town Hall:

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.

JUMP TO
In Legatum’s extraordinary words
WTO leadership: from Quad to G5
Next level leadership
Liberalising agenda
Why?

SEE ALSO
How to be a trade champion:
a guide for busy politicians

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.”

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 wordsBack to top

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.

The idea of UK leadership is repeated through the paper, for example this on a customs union and the European Free Trade Association (EFTA):

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 G5Back to top

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 leadershipBack to top

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.

(One of them, Crawford Falconer, is now a senior official in Fox’s department. He is also on Legatum’s Special Trade Commission, a move that did raise eyebrows.)

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.

Coalitions in the WTO agriculture negotiations
Where would the UK fit in? The graphic is slightly out of date but it still shows how complex WTO power is, in just one subject (Click the image to see it full size)

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.

Nairobi delegates scrutinise final declaration 19.12.2015
Is Doha dead? Is it alive? Delegates at the WTO’s Nairobi Ministerial Conference scrutinise the final declaration, December 19, 2015
Liberalising agendaBack to top

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.

Why?Back to top

There are a number of other questionable assertions about the UK and the WTO in Legatum’s paper.

They include a claim that other WTO members will want a say in a future UK-EU trade agreement (there’s no precedent for this because WTO disciplines on free trade agreements are weak, except for blatant violations).

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.


Updates: None so far

Photocredits:
• Major General Wellesley (mounted, the future Duke of Wellington) commanding his troops at the Battle of Assaye (J.C. Stadler after W.Heath). Public domain, National Army Museum

• Delegates at the 2015 Ministerial Conference, in Nairobi, © WTO. Courtesy of Admedia Communication


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

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

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.

Bakery products
Tariff quotas are typically on food and other sensitive products

JUMP TO
Tariff quotas
The real deal
Months of talks
Jochem Sprenger’s tweets
The October 16–20 talks

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.

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.

300,000-tonne tariff quota
Quantities within the quota are duty-free. Outside, the tariff is 100%

Tariff quotasBack to top

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 dealBack to top

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.”

The concerns were echoed by Australian trade minister Steven Ciobo on BBC Radio Four’s Today programme on November 25.

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 aheadBack to top

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.

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

Part 1 on WTO membership is here


Follow-up 1: Jochem Sprenger’s tweetsBack to top

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

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

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

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

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

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

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 talksBack to top

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.)


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


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

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

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

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

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

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

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

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

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

The UK is a memberBack to top

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

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

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

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

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

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

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

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

The UK will still be a memberBack to top

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

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

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

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

Marrakesh Ministerial Conference 1994 end of Uruguay Round
Rules and commtiments: WTO agreements at the signing ceremony, Marrakesh, 1994. The rule book is on the far left. The rest are more than 20,000 pages of the original 123 members’ individual commitments

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


UK, EU & WTO — a presentation

A look at the UK, EU and WTO with an eye on Brexit. Includes a brief explanation of the WTO system, a taste of how negotiations work in the WTO, and the implications for the UK (and EU) as they prepare for Brexit and beyond

By Peter Ungphakorn
POSTED MAY 25, 2017 | UPDATED MAY 25, 2017

This page contains a link to download a handout on the UK, EU and WTO as Brexit approaches. It is slightly modified from a presentation given on May 20, 2017.

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

Champions of free trade

Presentation cover The presentation can be downloaded as a handout here (pdf).

It is intended as a taster. It does contain a lot of detail, which can be explored further. But the main purpose is to provide a feel for how the detail and the bigger picture relate.

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

The WTO - basics

1. The WTO: BasicsBack to top

Negotiations as the starting point. Rights and obligations (reciprocal and non-reciprocal). Space for sound policy-making. Rules and commitments.

WTO negotiations - a taster

2. WTO negotiations: A tasterBack to top

Consensus. Member-driven. The Doha Round. Negotiating coalitions (in agriculture). Concentric circles — when it’s impossible to negotiate properly in a large crowd. More than just an affair between governments: there are also negotiations at home.

Brexit and the WTO - before during and after

3. Brexit and the WTO: Before, during and afterBack to top

UK and EU “schedules” of commitments. What schedules are. How to establish the UK’s and EU’s schedules post-Brexit. The EU’s complex tariff profile. Tariffs (shoes and oranges). Tariff quotas (lamb, mutton). Domestic support for agriculture (trade-distorting). Agricultural export subsidies. Services. The cliff-edge and worse: what if there are no acceptable schedules by Brexit day?

Free trade agreements: UK-EU; UK-other WTO members. WTO rules on free trade agreements. Shallow to deep arrangements.

UK as champions of free trade. Policy choice from liberal to protectionist. Impact on bilateral free trade negotiations. UK positioning in WTO — current policy on agriculture puts it closer to the more protectionist group; handling the WTO agendas on regular work and negotiations.


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

Download the presentation as a handout here (pdf).


Updates: None
Photocredits
: See presentation


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

Be warned. I’m not about to give a proper answer. This is an attempt to point to where the information can be found. There’s so much detail — 160 sub-sectors of it — I’ll wait for others to take up the baton

By Peter Ungphakorn
POSTED APRIL 12, 2017 | UPDATED MAY 4, 2017

A lot has been said about the impact on trade in goods if the UK and EU fail to strike a free trade deal after Brexit. They would rely on their WTO commitments, such as on tariffs and quotas. Much less has been said about the commitments on services, despite their importance to the UK economy.

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

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

This is not surprising. Firstly, countries’ commitments in the WTO on opening their services markets (known as services “schedules”) are unbelievably complicated. The WTO has a 2,000-word guide to understanding them (approximately 5 pages) — and even that is written for readers who are already familiar with a range of technicalities.

Secondly, although the EU member states’ commitments on services are combined in a single EU schedule, there are countless entries that apply only to individual member states. In other words, what applies in France may not apply in the UK, and so on.

For the EU, added to this complexity is the fact that authority (or “competence”) over services markets is divided between the EU Commission and the member states. This is unlike tariffs, which come under the customs union and are the central responsibility of the EU.

One of the results is that the EU’s present certified services schedule is for the 12-member EU that signed the original WTO agreement on services back in 1994 at the end of the 7-year Uruguay Round negotiations. A draft for the expansion to 15 members in 1995 still has not been certified because two decades later some of those 15 EU members still have not ratified it.

In other words, WTO certification for services is being held up within the EU. By contrast, its goods schedules have been delayed by objections or reservations from WTO members outside the EU.

The WTO’s page for the EU says the EU’s “services schedules include its member states but those who joined in 1995 (Austria, Finland, Sweden) and in May, 2004 […] also have schedules under their own names”. Presumably the same applies to the 2007 and 2013 expansions.

That said, further multilateral negotiations in 1995–1999 — after the Uruguay Round concluded in 1994 and after the WTO came into being the following year — added supplements on financial and telecommunications services.  For the EU, these cover Austria, Finland and Sweden and therefore apply to the EU–15.

Finally, analysing the impact of trade barriers on goods is relatively straightforward since tariffs are numbers. Even where the numbers are complex, economists and statisticians can work with them with little difficulty.

But when Germany says accountancy services (other than auditing services) cannot be provided through a particular type of company — “‘GmbH & CoKG’ and ‘EWTV’” — quantifying that trade barrier or its impact is much more complicated.

As with goods, the EU’s services schedules have implications for Brexit in two ways:

  • They are needed to identify the UK’s own commitments to open its services markets to the rest of the WTO, except where the UK has a free trade agreement in services — and the EU will also have to modify its schedule to take account of the UK’s departure
  • If the UK and EU do not strike a free trade deal on services, their WTO schedules will define services trade between them. In other words, getting the schedules right is also important for the two because the schedules are a fall-back position in case they cannot strike a bilateral deal. The real impact would be considerably more complicated than just identifying the UK’s own schedules. For the UK, this is compounded by the fact that the schedules for 16 newer EU member states have not yet been incorporated into the EU’s (except for Austria, Finland and Sweden in financial services and telecoms). UK service providers seeking access to the EU single market might have to study up to 17 schedules to decide where best to set up business

Remember that a WTO schedule sets limits on how much protection a member provides to its producers. This is also true of services. Countries are free to open up more than their binding WTO commitments on services, provided they comply with general rules such as non-discrimination (where there are no exceptions in their schedules). But if they want to close markets beyond the limits in the schedules, they have to renegotiate.

Because of the complexity, this article is nothing more than an attempt to encourage a discussion by focusing on where to find the information rather than providing a comprehensive picture. I know less about trade in services than in goods. Hopefully the discussion can develop. But the overall picture for services may still be too complex for a big-picture examination, unlike tariffs and tariff quotas.

Sao Paulo Stock Exchange by Rafael Matsunaga Wikimedia Flickr CC-by-2
Financial services: Some of the UK’s services commitments are reserved for companies in the European Economic Area
Extracting UK’s services commitments from the EU’sBack to top

To recap what has been said elsewhere: although the UK is a WTO member and will continue to be after it leaves the EU, its WTO commitments — including on services — are bundled with the EU’s. So, in order to re-establish itself as a WTO member independent of the EU it will need to extract its commitments from those of the EU.

The EU’s goods and services schedules of commitments have still not yet been certified in the WTO for the enlargements up to the present 28 member states.

British International Trade Minister Greg Hands has now confirmed that work on the UK’s schedules “will be based on the most recent certified EU schedules, which is EU–25 for goods, and EC–12 for services. Since the schedules were certified the EU has entered into further WTO obligations, which we will also seek to replicate in our schedules.”

(He was replying to a written question from Kirsty Blackman, the Scottish National Party’s Westminster MP for Aberdeen North.)

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

THE FOUR MODES OF DELIVERY
Mode 1. Cross-border supply. The supplier and customer are in different countries. The service is supplied across the border
Mode 2. Consumption abroad. The customer travels abroad and receives a service from a service provider in the other country
Mode 3. Commercial presence. The supplier sets up business in the same country as its customers
Mode 4. Presence or movement of natural persons. Professionals and other service workers move to the customer’s country. Not to be confused with free movement of people

For services, experts say the task is fairly straightforward but time-consuming because of the volume of work required — around 160 types of services are covered, each having commitments on four “modes of delivery”. (There’s an example below.)

Officials will have to go through every provision in the EU’s services schedule that applies either to the EU–12 (or in some cases EU–15) or only to the UK. They will then have to transfer the provision into the UK’s schedule. This is not necessarily straight copy and paste.

Fortunately, judging by a quick electronic search for “UK”, only four limitations on market access are identified as applying specifically to the UK:

  • Medical services (mode 3 — commercial presence): “Establishment for doctors under the National Health Service is subject to medical manpower planning”
  • Veterinary services (mode 3 — commercial presence): “Access through partnership or natural persons only”. As I understand it, this means the UK reserves the right to prevent foreign veterinary companies from establishing in the UK. Foreign vets would have to form partnerships, be self-employed, or work for UK firms.
  • Banking and other financial services (mode 2 — consumption abroad): “Sterling issues, including privately led issues, can be lead managed only by a firm established in the European Economic Area”
  • Banking and other financial services (mode 2 — consumption abroad): “Inter-dealer brokers, which are a category of financial institutions dealing in Government debt, are required to be established in the European Economic Area and separately capitalised”

Those last two also show that some of the UK’s commitments are linked to the European Economic Area (EEA = the EU except Croatia, which is a provisional EEA member, Iceland, Liechtenstein and Norway). Nothing has been said publicly about what happens to these provisions if, as seems likely, the UK leaves the EEA.

However, some provisions apply to all EU member states through Commission regulations, and these may also have to be sorted out to establish the UK’s services schedule.

The same is true of the EU’s “MFN exemptions”, another part of the services schedule, where members reserve the right to discriminate between other WTO members (more below).

On the plus side, the absence of certified services schedules for the enlarged EU might not be a problem. The general provisions for the EU and those specifically for the UK might not be different in the enlarged schedules, experts say — although nothing can be guaranteed.

Tourists Taj Mahal Chee Huey Wong CC0
Tourism is mode 2: the customer travels to consume the service abroad
Types and modes of servicesBack to top

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

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

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

The full list is in this document from 1991 (pdf), when it was first agreed during the Uruguay Round negotiations (in the document number, “MTN” stands for “multilateral trade negotiations”).

Each of these services can be delivered in four modes:

  • Mode 1. Cross-border supply. The supplier and customer are in different countries. The service is supplied across the border. For example a UK news agency supplying a news service to a newspaper in France
  • Mode 2. Consumption abroad. The customer travels to another country and receives a service from a supplier in that country. For example a tourist staying at a hotel abroad
  • Mode 3. Commercial presence. The supplier sets up business in the same country as its customers. For example a UK news agency setting up an office in France to supply French newspapers
  • Mode 4. Presence or movement of natural persons. Workers or staff move to the customer’s country. For example, the UK news agency sends a British manager to France to run the office there. Note that this is not the same as “free movement of people”. Mode 4 may require visas and work permits, which could be fast-tracked or easier to obtain.

(Some economists are now talking about a fifth “mode”: the value of services incorporated in goods, but this is not yet formally in the WTO.)

None of this means “unfettered free trade” in services. Services regulation is a separate topic in the WTO — liberalisation and deregulation are not the same. And all those pages of commitments are essentially lists of exceptions or limits on liberalisation.

GATS itself recognises the need to regulate and it allows countries to exclude “services supplied in the exercise of governmental authority”. These include utilities, social security and any other public service such as health or education that is not supplied commercially, does not have market conditions, or is not in competition with other suppliers. An annex on air transport completely excludes airline landing rights.

The EU’s schedule goes further in setting limits on commercial access to its government services and only opens up education services that are privately-funded.

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

electrician by Skeeze pixabay CC0
Mode 4 (presence of natural persons): giving easier access to visas and work permits is one of the toughest issues in services
The EU’s services schedulesBack to top

The EU’s latest WTO-certified services schedule is in five documents, although searches produce eight, three of them superceded. Seven of the eight are “commitments”; one is a list of “exemptions” from non-discrimination between other countries (“most-favoured nation” exemptions). There are a number of ways to find them:

  • In the WTO’s iTip database. This is the simplest way to find individual commitments. Here, although it is possible to search for the UK’s commitments, the results are for all the EU–12 (sometimes EU–15)
  • Download the documents using these pre-configured searches, and selecting “European Union”
  • Use the links below to download pdf versions (correct at the time of writing)

First, the original 1994 commitments:

  1. The main schedule (GATS/SC/31 of 15 April 1994 — 97 pages). This is in two parts: “horizontal” commitments applying to all services sectors (to page 11), and commitments for the specific sectors (the remaining pages). This schedule is for the EU–12 and still applies except where updated for financial and telecoms services, and “mode 4” by the supplements below.
  2. Exemptions from non-discrimination (“MFN exemptions”) allowing the EU to discriminate in certain cases (GATS/EL/31 of 15 April 1994 — 13 pages). This currently applies to the EU–12

Then, supplements updating commitments in specific sectors (or in one case a services “mode”) resulting from further WTO negotiations. Some include commitments for Austria, Finland and Sweden, which joined the EU in 1995:

  1. Financial services, supplement 1 (GATS/SC/31/Suppl.1 of 28 July 1995 — 27 pages): replacing the original financial services commitments of the EU–12, Austria, Finland and Sweden
  2. Financial services, supplement 1, revision 1 (GATS/SC/31/Suppl.1/Rev.1 of 4 October 1995 — 27 pages): again replacing the original financial services commitments of the EU–12, Austria, Finland and Sweden
  3. “Mode 4” (“movement of natural persons”), supplement 2 (GATS/SC/31/Suppl.2 of 28 July 1995 — 20 pages): replacing the “mode 4” provisions in the original EU–12 commitment. These are the EU–12’s current “mode 4” commitments
  4. Telecommunications services, supplement 3 (GATS/SC/31/Suppl.3 of 11 April 1997 — 10 pages): replacing the original telecoms commitments of the EU–12, Austria, Finland and Sweden. These are the EU–15’s current telecoms commitments
  5. Financial services, supplement 4 (GATS/SC/31/Suppl.4 of 26 February 1998 — 24 pages): replacing supplement 1 revision 1
  6. Financial services, supplement 4, revision 1 (GATS/SC/31/Suppl.4/Rev.1 of 18 November 1999 — 19 pages): replacing supplement 4. These are the EU–15’s current financial services commitments

Kamal Nath ambush | WTO July 2008
News services: France, Italy and Portugal reserve the right to impose some restrictions on foreign access to their markets
What the schedules containBack to top

WTO members’ commitments in services work in three ways:

  • Market access — how much of the market is open to foreign service providers or customers, and where that is limited
  • Non-discrimination (1) — equal treatment between foreign service providers and the country’s own suppliers or nationals, known as “national treatment”, and where that is limited
  • Non-discrimination (2) — exemptions on treating other WTO member countries equally, known as “most-favoured nation (MFN) treatment

The first two are in the main services schedule of commitments. These identify where the member’s market is open, or where it reserves the right to restrict access, or to keep the market totally closed. This is expressed negatively as “limitations on market access” (column 2 in the example below).

Where there are no limitations, the market is open. Where there are no commitments (“unbound”), the country is free to close the market.

The commitments also list “limitations on national treatment” (column 3 below). Again, where there are no limitations the country will treat foreign companies as its own. Where there are limitations or no commitments at all (“unbound”), the country reserves the right to favour its own service providers.

Each of these is also specified for the four “modes” of supply, listed across the top of the page, with the limits on commitments running down the two central columns.

The EU’s main schedule document starts with “horizontal commitments” mainly dealing with limitations on investment, real estate ownership and “mode 4” (movement of professionals and other services workers or employees) across all services sectors.

Next come commitments in the 160 services sub-sectors — or more accurately, limitations on the commitments.

This is the section of the EU’s schedule on news and press agency services (chosen because it is one of the shorter items!):

EU services commitments on news services
Click the image to see it full size. EU–12 commitments on news services

For the second form of non-discrimination — most-favoured nation (MFN) — the exemptions are listed separately. They arise for a number of reasons, including preferential arrangements between countries that existed before the services were negotiated in the Uruguay Round.

This may explain why, for example, the EU reserves the right to discriminate in favour of Switzerland in a number of areas. The EU may be “grandfathering” sectoral deals with Switzerland that existed before 1994.

One question may be whether the UK and EU will want to “grandfather” preferences they currently or previously gave to each other when they separate their services schedules. This would add complications to the process.

In general, extracting the UK’s MFN exemptions from the EU’s schedule may also be more complicated because a large number of exemptions are under EU-wide regulations and some refer to regions in the EU that are outside the UK. How much of them will apply to the UK after leaving the EU remains to be seen. This may also be linked to the Great Repeal Act, in which the UK will convert EU laws and regulations into its own before deciding whether any need changing.  It all adds to the work load.

Finally, what would the UK face?Back to top

So, apparently, extracting the UK’s services schedule from the EU’s may be fairly straightforward. But it will take some time. There may be complexities that need careful tailoring so they can apply to the UK. The UK wants to complete this within the 2-years prescribed for leaving the EU under Article 50 of the EU Treaty. Whether this can be done remains to be seen.

The UK might be able to avoid negotiations on its services schedule, so long as other WTO members don’t demand a say. But that might not be possible because other countries might argue that Brexit is upsetting a negotiated balance, as a former senior Swiss trade official suggests could also happen with agriculture, throwing into doubt the possibility that the UK would simply “replicate” all the relevant parts of the EU’s schedule.

Much more complex are the barriers that the UK and EU would face in each other’s markets if they cannot agree on free trade in services.

For the UK, the complexity lies in the details for the 160 services sub-sectors multiplied by the four modes of delivery, and the limitations on access and equal treatment that apply generally across the EU and in each of the remaining 27 member states. It also lies in finding out what EU member states are actually applying rather than their binding limits in the WTO.

Assessing that is beyond me. Over to you.

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


Back to top

EU ENLARGEMENTS OVER THE YEARS

January 1, 1958 (under GATT) — 6 founder members
1. Belgium
2. Germany
3. France
4. Italy
5. Luxembourg
6. Netherlands

January 1, 1973 — 3 new members
7. Denmark
8. Ireland
9. United Kingdom

January 1, 1981 — 1 new member
10. Greece

January 1, 1986 — 2 new members
11. Spain
12. Portugal

January 1, 1995 (WTO created) — 3 new members
13. Austria
14. Finland
15. Sweden

May 1, 2004 — 10 new members
16. Czech Republic
17. Estonia
18. Cyprus
19. Latvia
20. Lithuania
21. Hungary
22. Malta
23. Poland
24. Slovenia
25. Slovakia

January 1, 2007 — 2 new members
26. Bulgaria
27. Romania

July 1, 2013 — 1 new member
28. Croatia

(More details here)


Updates: May 4, 2017 — added link to Bloomberg story
Photocredits

• Aircraft: by Francois Van, Unsplash, Creative Commons public domain CC0
• São Paulo Stock Exchange (Bovespa): by Rafael Matsunaga, via Flickr, Creative Commons CC-by-2.0
• Taj Mahal: by Chee Huey Wong via Pixabay, Creative Commons public domain CC0
• Electrician: via Pixabay, Creative Commons public domain CC0
• India’s Commerce Minister Kamal Nath mobbed by reporters at the WTO, July 2008: WTO


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

The notion that the EU was uncompromising was as absurd as the claim that Brussels had buckled. Brexit has entered a negotiating phase. We need to understand negotiations and to spot the flexibility in the noise

By Peter Ungphakorn
POSTED APRIL 1, 2017 | UPDATED APRIL 1, 2017

Perhaps we should not be surprised, but should we be concerned? After Donald Tusk presented the EU–27’s draft negotiating guidelines for Brexit on March 31, 2017, the headlines showed widely different interpretations.

brexit-referendum-uk-headlines publicdomainpictures.net CC0
Tusk is acually saying parallel talks are required by Article 50

They ranged from fact and conciliation to confrontation and capitulation, all based on the same document:

Broadly:

  • The Independent’s headline was neutral
  • The wire services (AP, Bloomberg, and maybe Reuters) focused on the EU Council’s guidelines offering an opening for negotiations — the EU is “engaging”, as Bloomberg put it (the headline on the AP story in the Toronto Star was far more confrontational than the story itself)
  • Most of the rest reflected a predisposition to see everything as a confrontation, from “says no” and “rules out” — perhaps defendable but seriously misleading — to “collision course”
  • One is downright bizarre (Express’s “Brussels Buckles”)

As real negotiations are now set to begin, we need better than that. In several cases the actual stories did reflect the nuances, but those headlines set the tone. By and large, Tusk’s text was seen to rebuff May’s March 29 letter kicking off Article 50.

Not so.

3 views
The notion that the EU was uncompromising was as absurd as the claim that Brussels had buckled
3 days, 3 anglesBack to top

This is what happened over the three days.

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

“The United Kingdom wants to agree with the European Union a deep and special partnership that takes in both economic and security cooperation. To achieve this, we believe it is necessary to agree the terms of our future partnership alongside those of our withdrawal from the EU” (my emphasis)

May was calling for simultaneous, parallel talks: on the divorce terms and on the future relationship, including trade and security.

A few hours later, still on March 29, 2017, Germany’s Chancellor Angela Merkel told journalists:

“The negotiations must first clarify how we will disentangle our interlinked relationship … and only when this question is dealt with, can we — hopefully soon after — begin talking about our future relationship.”

The headlines were unequivocal. Merkel had scuppered May’s plans:

Angela Merkel derails Theresa May’s Brexit plan by rejecting parallel trade talks. Britain is to be put into the slow lane — the Independent

Angela Merkel rejects one of Theresa May’s key Brexit demands. Divorce settlement must come before talks about future relationship, says chancellor, as EU leaders respond to article 50 letter — the Guardian

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

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

“4. While an agreement on a future relationship between the Union and the United Kingdom as such can only be concluded once the United Kingdom has become a third country [non-EU member], Article 50 TEU [Treaty of the European Union] requires to take account of the framework for its future relationship with the Union in the arrangements for withdrawal. To this end, an overall understanding on the framework for the future relationship could be identified during a second phase of the negotiations under Article 50. The Union and its Member States stand ready to engage in preliminary and preparatory discussions to this end in the context of negotiations under Article 50 TEU, as soon as sufficient progress has been made in the first phase towards reaching a satisfactory agreement on the arrangements for an orderly withdrawal” (my emphasis)

Tusk is actually saying parallel talks are required by Article 50, because it demands a framework for future relations.

The only question is when the second track of the parallel talks should start. Tusk had an answer to that too — in the autumn.

“Once and only once we have achieved sufficient progress on the withdrawal, can we discuss the framework for our future relationship … probably in the autumn, at least I hope so,” AP and others quoted him saying. That’s still early in the 2-year Article 50 process.

Certainly by comparison with the headlines over Merkel’s statement, Tusk sounds much more flexible. The UK and EU would clarify the terms of separation (even if they are not settled yet) such as an acceptable range of separation costs, and proceed to parallel talks.

Then, take another look at what Merkel said. It’s more or less the same as Tusk and the guidelines.

“The EU’s draft Brexit guidelines look anything but punitive,” wrote Vincenzo Scarpetta, senior policy analyst with the think-tank Open Europe.

“… The door is wide open for parallel negotiations, albeit not from the very beginning. … The draft guidelines make it clear that parallel negotiations will be fully possible during the two-year timeframe stipulated by Article 50 — provided that ‘sufficient progress’ on the terms of the withdrawal is achieved.”

The notion that the EU was uncompromising was as absurd as the claim that Brussels had buckled.

Peace conference in Karlowitz
The talks could have been deadlocked over extremes: “parallel” vs “one before the other”. Now there is room to discuss when the second track should begin
Calling the shotsBack to top

Some have claimed that this is still confrontational because it’s the EU Council that will decide when “sufficient progress” has been made. Therefore the EU is calling the shots and the UK will have no say, they argue.

But this is a negotiation. And that means “sufficient progress” is also negotiable. On some issues the EU will hold stronger cards, probably including this, but that doesn’t mean the EU’s position is fixed. Negotiations can only work if both sides want a result and they show flexibility. There will have to be give and take by both.

Which brings us back to the original problem. Many of the headlines show a failure to understand negotiations. The gut reaction is always to pinpoint where the two sides disagree. Often that is valid. But it also means missing the crucial openings when they are made.

The Article 50 talks could have been deadlocked over extreme positions: “parallel talks” versus “one before the other”.

Now there is room to discuss when the second track should begin. If the UK and EU–27 cannot sort that out, there’s no hope for the far more complicated stuff.

Gibraltar seen from Spain 2007
View from Spain: is Gibraltar the new cliff edge?
Unwelcome surprisesBack to top

That said, there is a potential collision course. Not the parallel talks question, but the requirement that Spain should agree on any arrangement involving Gibraltar.

Understanding negotiations also means being prepared for unwelcome surprises. The Gibraltar issue came out of the blue and complicates the UK-EU talks. It may lead to procedural delays even — as some suggest — if the talks’ final outcome is unaffected because of EU voting rules.

It could even get worse. There could be a tussle over fisheries policy.

Or, completely hypothetically, we could imagine a situation where the best sweetener the UK can offer Spain is a free trade agreement with the EU and a commitment to copy and paste the EU’s tariffs on oranges, which currently protect Spain and other Mediterranean producers.

The price for the UK and its consumers would be the missed opportunity to import cheaper, lower-duty oranges from South Africa, Brazil and the US, and additional complications in negotiating free trade agreements with them.

Much will also depend on what influence the 26 other EU members have over Spain and how pragmatic Spain wants to be. If the UK, EU and Spain are not careful, a few words in the Tusk text could escalate into serious complications across a wide range of talks.


Updates: None so far
Photo credits
: Brexit flags, publicdomainpictures.net, CC0; 3 views, MaxPixel CC0; Peace conference in Karlowitz, Hungarian National Museum, wikimedia, public domain; Gibraltar viewed from Spain, wikimedia, CC0