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

Advertisements

By Peter Ungphakorn
POSTED OCTOBER 7, 2017 | UPDATED OCTOBER 12, 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).) 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.

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

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, 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. Most of this can be copied from the EU’s, meaning the UK would simply continue with the tariff ceilings and commitments on opening services markets that it currently has through the EU.

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

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

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

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

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

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

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

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

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

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

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

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

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

The real 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 apparently being kept out of the picture.

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

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

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

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

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

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

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

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

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

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

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

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

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

Months of talk 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.

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

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

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

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

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

Part 1 on WTO membership is here

Follow-up: Jochem Sprenger’s 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.


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


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

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

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

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

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

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

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

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

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

The UK is a 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


Alternative thinking: Out of the box for Brexit — and radically

CLEMENS BOONEKAMP proposes a surprising alternative on Brexit’s trade front. Don’t negotiate. Announce.

Guest column by Clemens Boonekamp
Partner at IDEAS Centre, former director of Agriculture and Trade Policy Reviews, WTO Secretariat
POSTED FEBRUARY 12, 2017 | UPDATED FEBRUARY 12, 2017


The UK Prime Minister has opted for a hard Brexit. She is correct. A soft Brexit would have been unlikely. The UK has been a balancing force in Europe for centuries. This role is in question with Brexit, causing disquiet and some anger on the continent. A number of continental EU members also have their own “leave” constituencies with mainstream leaders ready to show that parting is not without cost.

Pexels.com CC0
The UK is in a box. Its future trade relations, and hence its economic actors, are uncertain

These factors alone would have made it naive to think that the “single market” would be available for anything less than the “four freedoms”, substantial payments and no seat at the table — a situation considerably inferior to the EU-membership that the voters rejected!

Making it an issue in the Brexit negotiations could have led to an embarrassing rebuff, with the economy then in an increased state of uncertainty, with its attendant costs. A customs union might be possible but then the UK would forego its independence to negotiate bilateral trade deals.

Radical alternative

There is a radical alternative on the trade front. Don’t negotiate. Announce, after invoking Article 50, that:

  • The UK will “cut and paste” the EU schedules of commitments in the WTO — which are the UK’s schedules as a member of the WTO in its own right
  • But in agriculture the UK will not have an AMS (the right to use trade-distorting domestic support beyond the “de minimis” 5% of the value of production; AMS is a measure of this, the aggregate measurement of support)
  • The UK will scrap all tariff quotas, applying the in-quota rates to unlimited quantities of imports on those lines (or products) where the EU has tariff quotas
  • The UK will trade on an “MFN basis” with the EU — trade between the UK and EU will have the same tariffs as trade between the UK and the rest of the world
  • The UK could also use this opportunity to simplify some extremely complicated tariffs it inherits from the EU, such as on processed agricultural products, where the rates depend on how much milk, sugar and other ingredients they contain. It could apply the lowest rates on all products where the EU has multiple rates

This has advantages: it is quick and clean, gets the job done, reduces uncertainty, avoids potential rebuffs and frees the UK to pursue trade relations with third parties.

It can take control by following a strategy that is bold and independent, simply not negotiating on trade and being generous on all other matters, to the benefit of all

In addition, it may reduce calls for compensation from those who will argue, correctly, that an x% percent tariff into the UK market is not worth as much as the same tariff into the previous EU–28 or, for that matter, the “new” EU–27 market — “nullification and impairment” of expected WTO rights is a likely issue.

Also, there will be a sense of schadenfreude in that there will be WTO members who will want to see the post-Brexit EU AMS reduced and the in-quota amounts of its TRQs (tariff-rate quotas) maintained, while some EU members will argue for the opposite — i.e. the EU will have a problem.

The UK can then move forward on its own choices for its trade relations, buttressed by its WTO membership. Proceed, perhaps, as follows:

  • maintain the generalised system of preferences for developing countries (GSP) provisions of the EU, as well its “everything but arms” duty free/ quota free access for least developed countries (LDCs)
  • propose a free trade agreement (FTA) to the US, offering essentially free access for goods and services, albeit with carefully circumscribed labour mobility

On the latter, knowing that the gains from liberalisation accrue mainly to those that undertake it and that FTAs need not be symmetric, accept any reasonable offer from the US — the point being to get it done quickly, reducing uncertainty and laying the basis for an independent trade framework.

Propose the same to the Commonwealth and China.  When done, and acting with alacrity and generosity it might well happen in reasonably short order, re-approach the EU, suggesting similar terms but with some emphasis on mutual recognition and the financial “passport”. If successful, the UK would establish itself as a free-trade haven in Europe, with the economy to reap the benefits.

Difficulties

There are, of course, difficulties. It is probably impossible to know the “cost” of Brexit for the UK economy, but whatever it is there is likely to be a perceived need to safeguard some sensitive sectors. Agriculture, politically important, is an example.

Following Brexit the UK will “lose” EU support to its agricultural sector, amounting to upwards of €4 billion a year, equivalent to some 14% of its agricultural output.

In addition, around 60% of the UK’s agricultural exports go to the EU and would face an average tariff of almost 11%; assuming a unitary price-responsiveness, this could result in an annual income loss for the sector of up to €1.5 billion (and though the “responsiveness” may seem high it serves also as a proxy for areas such as lamb, where the EU has tariff quotas and where the UK loss of market share is almost certain to be substantial).

Making good, WTO-legally

There would then be pressure for the government to make good these revenue shortfalls — which, incidentally, probably could be done comfortably in a WTO-legal manner by use of the “de-minimis” (permitted trade-distorting support of up to 5% of the value of production) and Green Box (non-trade distorting support) provisions of the WTO’s Agriculture Agreement.

Other sensitive sectors could also face significant revenue “losses”, including motor vehicles, which would face an average tariff of around 10% into the EU for a possible loss also of some €1.5 billion a year. The government could consider compensating such sensitive sectors with performance contingent, time-bound, industrial policy measures.

It is not inconceivable that Brexit-related support to sensitive sectors could add well over 1% to government expenditures. This is doable, particularly given the presently low borrowing costs. But it is not a long-term solution; that requires market access, among a range of factors, and growth. The above may be a quick step in that direction.

Other issues will need to be settled with the EU for Brexit, including compensation and pensions. On the former, scrupulously pay the “rent, water and light” until you “close the door behind you”.  On the latter, it may be an EU obligation but it does involve UK citizens; accommodation and generosity could well be good domestic and foreign policy.

The UK is in a box. Its future trade relations, and hence its economic actors, are uncertain. It can take control by following a strategy that is bold and independent, simply not negotiating on trade and being generous on all other matters, to the benefit of all.


Like this blog as a whole, guest contributions are intended to contribute to the debate. I don’t necessarily agree with them.

Updates: None so far
Photo credit: pexels.com Creative Commons CC0


Questions on Brexit, agriculture, WTO schedules, standards, free trade agreements

Written replies to questions for the inquiry of the UK House of Lords EU Energy and Environment Sub-Committee’s inquiry on ‘Brexit: agriculture’, February 8, 2017

By Peter Ungphakorn
POSTED FEBRUARY 9, 2017 | UPDATED FEBRUARY 9, 2017

On February 8, 2017 the UK House of Lords EU Energy and Environment Sub-Committee’s inquiry on Brexit: agriculture published two sets written replies to questions.

My answers are below. They can also be found on the Parliament website: here (ABR0001) and pdf.

Also published were replies and statements from Christian Häberli of the World Trade Institute, Bern, Switzerland: browse, or pdf

Full coverage including transcripts and videos of the hearings is here.

alanmatthews-josephmcmahon-sub-ctte-7feb2017-from-web-page
Alan Matthews (left) and Joseph McMahon speaking to the House of Lords EU Energy and Enviornment Sub-Committee, February 7, 2017. Click the image to watch the session

THE QUESTIONS

1.    Can the UK unilaterally construct its own WTO Schedule of Commitments in agricultural products after Brexit? If the UK does construct its own Schedule, will this be legally binding on other WTO members, including the EU?
2.    To what extent is it possible to determine the EU-28’s current commitments in agricultural products in the WTO for (a) Tariffs (b) Tariff rate quotas (c) domestic support and (d) export subsidies for agricultural products? What impact might this have on (a) the UK’s negotiations with the EU and (b) the UK’s negotiations with other WTO members?
3.    What, if any, are the legal and political challenges of splitting the EU-28’s WTO Schedule of Commitments on agriculture between the UK and the EU? To what extent can this issue be settled (a) by applying WTO law in dispute settlement proceedings before the WTO panels and/or Appellate Body and (b) by political negotiations between the UK and the EU and between the UK/EU and the other WTO members? Could the ‘Czechoslovakia’ example act as a precedent?
4.    To what extent can the UK restrict the import of agricultural products because they do not meet the same quality and safety standards as those produced in the UK? If the UK adopted a precautionary approach to the import of agricultural products into the UK, to what extent would such an approach be compatible with WTO rules?
5.    Why do free trade agreements rarely include agricultural products? What are the main challenges the UK would face when negotiating new free trade agreements covering agriculture with (a) the EU, (b) the USA, (c) Australia, (d) New Zealand and (e) other WTO members? What are the key lessons learnt by the EU or other WTO members negotiating such FTAs?
6.    Which of the EU’s FTAs with other countries include agriculture? Will the UK be able to negotiate continued access to these agreements after Brexit?

  1. Can the UK unilaterally construct its own WTO Schedule of Commitments in agricultural products after Brexit? If the UK does construct its own Schedule, will this be legally binding on other WTO members, including the EU? Back to top

No, to both questions. First, the UK can and should draft its own schedules of commitments in agricultural products (and all other sectors). But they will not be legally secure until they have been certified by all WTO members — meaning until there are no WTO members with any objection. Once certified, they will be legally binding.

Second, a country’s schedules are not binding on other WTO members. They are commitments that the country has made to the rest of the membership. Other countries have their own schedules.

It is possible to trade without certified schedules. The EU continues to trade even though its goods schedule for the May 1, 2004 enlargement from 15 to 25 members was only certified 12 years later on 1 December 2016. The schedule for further enlargement to 27 and 28 members has not been certified.

The EU appears to operating with de facto schedules, for example revised tariff quotas appear in EU regulations. And it can trade without disruption, apparently because it has talked to key trading partners and adjusted its tariff quotas accordingly. The latest regulation for the lamb and mutton tariff quota states that the quota has been expanded for New Zealand, to accommodate Bulgaria and Romania becoming new EU members (but not yet for Croatia).

In other words, unilaterally creating the UK’s draft schedules without taking on board what other countries say could cause problems. Some negotiation will be needed so that the drafts are made reasonably acceptable to the UK’s trading partners, including the EU. But until the schedules are certified, the UK will be on legally uncertain ground, at best requiring complex legal arguments to defend the schedules’ contents. We don’t know how other countries would react.

  1. To what extent is it possible to determine the EU-28’s current commitments in agricultural products in the WTO for (a) Tariffs (b) Tariff rate quotas (c) domestic support and (d) export subsidies for agricultural products? What impact might this have on (a) the UK’s negotiations with the EU and (b) the UK’s negotiations with other WTO members? Back to top

Strictly speaking, the EU’s legally binding WTO commitments are only its certified schedules, the latest for goods being for the EU-25 (WTO document WT/LET/1220 and attachments available by going to https://docs.wto.org and searching for WT/LET/1220).

This was only certified two months ago (effective from December 1, 2016 but circulated on December 14, 2016). Because it covers 10 new member states, it should be much closer to the schedule for the EU–28 than the one in force until the end of November (for the EU–15).

What about the EU–27 and EU–28? The current situation with the EU’s goods schedule is on the WTO website here: https://www.wto.org/english/tratop_e/schedules_e/goods_schedules_table_e.htm#eec, although at the time of writing this has not been updated to include the certified EU–25 schedule.

The 7th column lists a number of documents used in negotiations for the EU’s enlargement to 27 members, the latest being G/SECRET/32, “currently underway” — presumably referring to the status of negotiations on that draft. Documents in the series G/SECRET/… are so restricted that even WTO Secretariat staff cannot access them, except for a few key people.

There is no mention of any negotiation over the enlargement to 28 members when Croatia joined, which could be a problem when discussing the post-Brexit schedules of the UK and EU with other WTO members.

Before that, the WTO Secretariat’s report for the Trade Policy Review of the EU (the latest review, in document WT/TPR/S/317/Rev.1 of 21 October 2015) said:

The current certified tariff schedule is the EU-15, effective 27 October 2012.[1] The EU’s tariff concessions and agricultural commitments regarding agricultural market access, domestic support, and export subsidies to reflect the enlargement from 15 to 28 member States have not yet been formally agreed in the WTO. The EU submitted its EU-25 schedule for certification on 25 April 2014[2] and has initiated the procedures for the EU-28 schedule (section 3.1.4.1). With regard to the certified EU-25 services schedule, 18 EU member States have ratified the schedule.[3] ”

As an EU member, the UK government ought to have access to the uncertified de facto schedules for the EU-28 both from Brussels (if not London) and any drafts at the WTO (although none appear to be with the WTO at the time of writing). This can be confirmed with government officials who ought to be able to provide better answers than I can on these points.

The public can detect the contents of the de facto schedules, but not always easily. There are two possible sources, both requiring work to compile the contents into one document: the EU’s own regulations, and its notifications to the WTO (under “The Agriculture Committee and official documents”, in the agriculture section of the WTO website, http://www.wto.org/agriculture#work).

  • Tariffs: these should be available from customs authorities, EU Trade or the UK Department of International Trade (bearing in mind applied tariffs can be lower than the legally bound rates). Most of them are unlikely to be very different from the tariffs in the schedule for the EU-15.
  • Tariff rate quotas: each of these should be available in separate EU regulations. They are also available in EU notifications on agricultural tariff quotas, but without the details from the schedules of how the quotas are divided among individual supplying countries.
  • Domestic support: the commitment is only one figure, for total aggregate measurement of support (AMS). The EU reports this in its domestic support notification along with an explanation of how much it has added for each expansion up to 28 members.
  • Export subsidies, also in the EU’s notifications. The latest for marketing year 2014/15 says the commitment is for the EU-25 while the actual reported subsidies are for the EU-28. Since the actual subsidies are considerably less than the limit, this difference is unimportant.

I would assume the UK’s negotiations over its schedules, both with the EU and other countries, ought to be based on the de facto schedules currently in use, because both the EU and the UK should have access to them.

We don’t know yet whether other countries would be willing to negotiate from the de facto pre-Brexit EU-27 schedules (with apparently nothing existing yet for the EU-28), but at this stage there seems to be no indication that they would object. Any that are holding back on certifying the schedules might have some reservations, but we don’t know what their objections are.

  1. What, if any, are the legal and political challenges of splitting the EU-28’s WTO Schedule of Commitments on agriculture between the UK and the EU? To what extent can this issue be settled (a) by applying WTO law in dispute settlement proceedings before the WTO panels and/or Appellate Body and (b) by political negotiations between the UK and the EU and between the UK/EU and the other WTO members? Could the “Czechoslovakia” example act as a precedent?Back to top

The only areas where the UK and EU would split their commitments are tariff quotas (or tariff-rate quotas, TRQs) and agricultural subsidies. Most of the rest of schedules can remain unchanged. For example the UK can simply continue with the thousands of tariff commitments it currently has as an EU member. So my reply focuses on the quotas and subsidies.

I’m not a lawyer and cannot respond definitively to the legal points of (a). I do know that opinion is split. Some lawyers believe the UK can construct its schedules using legal principles and that if other countries object, the UK would probably prevail in any legal dispute. Some other lawyers disagree. The argument seems to be based on the idea that the entire UK schedule is obtained by using criteria based on WTO case law, leading to “rectification” (a more or less technical correction of the UK’s schedule implied in the EU’s schedule).

Many who have first-hand experience of how the WTO works, beyond the jurisprudence of dispute settlement cases, doubt whether other WTO members would accept the UK’s legal arguments, and whether the legalistic approach would be enough. I share that view.

For example, to account for current UK-EU trade in sheep and goat meat, almost 100,000 tonnes would be added to the combined UK and EU-27 tariff quota, around 33% more than its present size. That seems to stretch the idea of “rectification” (a technical correction) too far.  It’s an adjustment arising from terminating a free trade deal (along with withdrawal from the rest of the single market), and introduced in order to take into account the volume of that duty-free trade between the UK and the EU.

Judging by recent experience in WTO negotiations, there may even be bargaining over which representative period to use as a basis for calculations. Possible options include averages over the last three or five years, including or excluding the highest and lowest numbers (an “Olympic average” excludes extreme points), and so on. I look at all of these points in detail here: https://tradebetablog.wordpress.com/2017/01/06/limits-of-possibility/

Generally, therefore, the UK and EU quotas should be settled by negotiation, where both political and commercial interests would play a part. Legal precedent would be a useful starting point, but probably not the conclusion. This would minimise any resentment and any trade disruption that might result from it.

Experts with inside experience of these processes have told me the Czech-Slovak split is not a suitable model. The split was under the General Agreement on Tariffs and Trade (GATT, the WTO’s predecessor), and before the agriculture and services agreements were added to the multilateral trading system. The two countries swiftly set up a customs union, meaning little changed in goods trade between the two and between them and the rest of the world. As a result, the rest of the GATT membership had few problems with this, at a time when they also wanted to ease former Soviet bloc countries into the multilateral trading system. The two then became EU members. The sizes of the UK and EU and the scale of the tasks they face are quite different.

  1. To what extent can the UK restrict the import of agricultural products because they do not meet the same quality and safety standards as those produced in the UK? If the UK adopted a precautionary approach to the import of agricultural products into the UK, to what extent would such an approach be compatible with WTO rules? Back to top

No WTO member can restrict imports purely on quality grounds. The WTO has criteria for requiring imports to meet certain safety, health and other standards. They are set out in the WTO agreements on Sanitary and Phytosanitary measures (SPS, dealing with food safety and animal and plant health), and Technical Barriers to Trade (TBT, other standards, regulations, labelling, etc).

Broadly, the criteria include having to provide scientific evidence or a risk assessment that the standard or measure is necessary for health or safety, or adopting an internationally-recognised standard. (WTO members have also agreed non-binding codes of good regulatory practice.) So long as the standards meet the legally binding criteria the UK can (and does, through the EU) require imports to meet the same standards as its own products. It cannot set stricter standards on imports than on domestically-produced products. This is known as applying “national treatment”.

WTO agreements don’t mention a “precautionary principle” specifically. However, some experts see article 5.7 of the SPS Agreement as a means of adopting the principle at least temporarily until the government obtains “additional information necessary for a more objective assessment of risk” and reviews the measure “within a reasonable period of time”.

  1. Why do free trade agreements rarely include agricultural products? What are the main challenges the UK would face when negotiating new free trade agreements covering agriculture with (a) the EU, (b) the USA, (c) Australia, (d) New Zealand and (e) other WTO members? What are the key lessons learnt by the EU or other WTO members negotiating such FTAs?Back to top

Many if not all free trade agreements actually include agricultural products on way or another, but they may have exemptions or delays on scrapping import duty on these products.

Agriculture is a particularly sensitive sector for various reasons: politics, culture, concerns about rural society, food security, and so on. It is often one of the last areas to be liberalised whether multilaterally or through free trade agreements. The most sensitive products have ended up with tariff quotas using prohibitively high out-of-quota tariffs. Some free trade agreements also have tariff quotas.

In general, the challenge the UK will face with all of those countries is to strike a balance between:

  • the demand for support and protection from the UK’s own farmers
  • the demand from UK consumers and processors for cheaper food and raw materials
  • the demand from exporters in the other countries for access to the UK market
  • the trade-off with UK producers in other sectors (such as services) wanting access to the other countries’ markets, which might entail opening up UK agriculture

For example, the UK might be willing to give Australia a larger quota for meat or dairy products in return for Australia allowing better access for British financial services or protecting British geographical indications such as Melton Mowbray pies or Scotch whisky. Some geographical indications are covered by bilateral agreements between the EU and the US, Australia and others. They mainly deal with wines and spirits since “new world” producers resist tightening protection for food and other products. It’s unclear whether those agreements will automatically apply to the UK. The full list is here: https://ec.europa.eu/agriculture/gi-international_en. Some of the EU’s free trade agreements also include chapters on geographical indications, for example the one with South Korea.

The range of sensitive agricultural products is extensive: dairy, meat, fruit and vegetables, various cereals, sugar, and so on. Canada (not listed in the question) also has interests and sensitivities in the dairy sector.

Large books have been written about the lessons learnt. Some of the issues most frequently mentioned in current conversations include:

  • Agreement can be held up by complex ratification processes in federal systems (the Walloon parliament on the Canada-EU agreement, for example) or where parliaments are strong (the Trans Pacific Partnership was under threat in the US Congress even before President Trump pulled the plug)
  • Many agreements include investor-state dispute settlement (ISDS) provisions, which are deeply unpopular because, rightly or wrongly, they are seen to give large companies power over governments. Some experts think the mega-regionals (TPP and TTIP) would be easier to conclude without ISDS. The EU is proposing an alternative multilateral arbitration system, but it’s unclear whether this will be more acceptable
  • When negotiations are secret, they are an easy target. To gain public support, they should be more transparent, while allowing new ideas to be floated in confidence until they become more established.
    (To declare an interest: I worked on information at the WTO Secretariat, where I think we were reasonably successful in striking a balance in the Doha Round negotiations. For example all the chairs’ drafts and other texts have been published as they have evolved, and the WTO website contains broad-brush accounts of the negotiating sessions, along with many of the members’ proposals. After the protests in Seattle in 1999, the WTO was rarely accused of secrecy, unlike with the negotiations under its predecessor, GATT.)

  1. Which of the EU’s FTAs with other countries include agriculture? Will the UK be able to negotiate continued access to these agreements after Brexit?Back to top

The answer is more complex than the question suggests. Most if not all EU FTAs include agriculture in one way or another, including exemptions for specific products or lengthy phase-in periods, and various provisions on rules as well as tariffs. Experts who have studied the many agreements in detail may be able to answer better than I can.

On its website, http://ec.europa.eu/trade/policy/countries-and-regions/agreements/, the EU lists 44 agreements currently in place (including the one with Canada, which has been signed but still needs final parliamentary approval). Some agreements cover goods alone, others both goods and services. Here are two examples:

  • The EU-South Korea FTA lists all agricultural products, with tariffs generally at zero immediately or gradually over periods of up to 21 years, depending on the product and whether it is imported into the EU or South Korea. In addition, some products escape tariff reductions completely, such as rice in both markets.
  • The customs union with Turkey includes a section on agriculture with the “common objective to move towards the free movement of agricultural products” and even to have a common agricultural policy, under a 22-year timetable in an “additional protocol” originally signed in 1970 but still not yet achieved.

As far as I can see, there is nothing to stop the UK negotiating continued access to these agreements provided the FTA partners also agree. Whether those negotiations lead to identical terms, or something different, depends on the negotiations. For some, the criteria will clearly be different. It’s hard to see the present EU agreements with Iceland and Norway being replicated with the UK, not least since they include the four freedoms of movement and contributions to the EU budget.

I have not seen any legal argument suggesting transferring the agreements to the UK will be automatic or a legal right.

Perhaps the most important question is what happens to the UK’s trade under the EU’s FTAs while the UK’s new FTA negotiations have not been concluded.

For all of these points, take for example an FTA between the UK and South Korea. This could be based on the EU-South Korea FTA, a 1,432-page document which includes the following:

  • around 70 pages of detailed terms, conditions and regulations for trade in goods and services, and intellectual property rights
  • well over 1,000 pages of commitments by the two sides on goods, including a number of tariff quotas
  • annexes on regulatory convergence and conformity on electronics, motor vehicles and parts, and pharmaceutical products and medical devices
  • an annex on agricultural safeguards. These are temporary tariff increases to deal with import surges — the present trigger levels are for imports from the EU, which would have to be adapted if separate figures are to be established for the UK and EU27
  • around 250 pages of commitments on services
  • a couple of pages on public procurement and build-operate-transfer contracts
  • about 25 pages on geographical indications for food (none of it British) as well as wines and spirits
  • institutional arrangements, including arbitration
  • other annexes containing, for example, definitions or criteria

Creating a UK version of this agreement has many similarities with creating the UK’s WTO schedules out of the EU’s plus any changes the UK and South Korea might want to make to the regulations.

That is just one of 44 agreements, but perhaps one of the most detailed. To ensure continuity, the UK should reach agreement with all of the EU’s 44 FTA partners by the time it leaves the EU. That sounds like extremely hard work, since during the same 2-year period the UK will already be negotiating with the EU, potential new FTA partners such as the US, Australia, New Zealand, India and others, and with all WTO members over its schedules.


EU-South Korea FTA:  http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2011:127:FULL&from=EN

EU-Turkey Customs Union:  http://www.avrupa.info.tr/fileadmin/Content/Downloads/PDF/Custom_Union_des_ENG.pdf

EU-Turkey Additional Protocol: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A21970A1123(01)

2 February 2017


[1] WTO document WT/Let/868, 30 October 2012.
[2] WTO document G/MA/TAR/RS/357, 25 April 2014.
[3] WTO document S/C/M/111, 21 November 2012.


Updates: none so far
Photocredit
: Screenshot from UK Parliament TV


Why UK is already under WTO rules, and why that matters for Brexit

If we want to understand the UK’s trade relations with the EU after Brexit we cannot say that without a UK-EU deal they will “fall back on WTO rules”

By Peter Ungphakorn
POSTED FEBRUARY 8, 2017 | UPDATED FEBRUARY 15, 2017

Now that the UK is about to start negotiating its departure from the European Union, it’s important to understand the meaning of World Trade Organization (WTO) “rules”.

Why? Because people are talking about WTO rules as if they only kick in if the UK and EU fail to reach agreement on their future trade relationship — that only then would the UK and EU “fall back on WTO rules”. They are wrong.

The truth is: WTO rules already apply to the UK’s present trade relationship with the EU.

They will also apply to any future trade relationship between the two, whether there is a deal of some kind, or no deal at all — so long as the UK and the EU and its member states are members of the WTO.

WTO offices lakeside
WTO offices, Geneva: WTO rules affecting the UK and EU are wide-ranging
Falling back on WTO “terms”Back to top

So what will the UK and EU fall back on if they cannot agree and the UK still leaves the EU?

They will fall back on commitments they have agreed in the WTO for trade with all other WTO members — except for those with whom they have a special (or “preferential”) trade arrangement, such as a free trade agreement.

This is sometimes called “WTO terms”, a better shorthand description than “WTO rules”. Some speak of “WTO tariffs”, which is more precise but doesn’t include services and agricultural subsidies.

Without a special deal between the UK and EU, trade between them will face import duties according to their WTO commitments for normal trade (without any free trade agreement).

The import duties (or “tariffs”) they charge on each other’s products will have to be the same as they charge on products from all WTO members except partners in free trade agreements. WTO non-discrimination rules would apply.

Limited amounts of some products — mainly agricultural — will be traded at low tariffs, with volumes outside those quantities facing much higher tariffs, so high that it might be impossible to import them. These are called tariff quotas.

British and European service industries are now relatively free to trade across the EU or to set up in other EU countries. Without a special deal, services trade between the UK and EU will revert to the much less liberal commitments they have made in the WTO on opening their markets to foreign services.

The commitments are explained in more detail here.

WTO Public Forum 2010
WTO: to understand it is to understand what will govern UK-EU trade relations
UK-EU relations and WTO “rules”, now and in the futureBack to top

Even now, while the UK is a member of the EU and its single market, it is governed by WTO rules. These mainly deal with how the EU and its member states relate to the rest of the world. They also discipline how the single market and customs union themselves are set up.

The WTO rules affecting the UK and EU cover a large number of issues. They include:

WTO rules are actually negotiated agreements. The full package is here.

The EU’s member states have agreed to go beyond those WTO rules for much of their trade relations. Therefore when disputes arise between the member states, they are handled within the EU, for example if the UK objects to French restrictions over foot and mouth disease.

After Brexit, the UK and EU aim to have some kind of free trade agreement. This will have to come under WTO rules including one that says a free trade agreement in goods or a customs union must cover substantially all trade.

Another says an agreement in services has to have substantial sectoral coverage.

Even though they are both members of the North American Free Trade Agreement, the US and Canada have taken some disputes to both the WTO and NAFTA

In other words, WTO rules will prevent the UK and EU from having a free trade agreement only for the auto industry, aerospace and banking.

That long list of all the areas covered by WTO rules will also govern UK-EU relationships even if they have a comprehensive agreement.

Depending on the type of arbitration set out in their agreement, they could also find themselves facing each other at the WTO dispute settlement court.

The US and Canada have taken each other to WTO dispute settlement even though they have an arbitration mechanism within their North America Free Trade Agreement (NAFTA). Some cases have been taken to both the WTO and NAFTA.

Failure to understand this would mean a failure to understand the future UK-EU trade relationship.

marrakesh-signing-pu_7_tilt-adjusted_cropped
The complete deal: 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
Finally, WTO rights and obligationsBack to top

To complete the picture, the WTO is a system of negotiated multilateral trade agreements. The whole package must now run close to 30,000 pages. It consists of two parts.

First is a rule book of about 500 pages. Among the key principles running through its wide-ranging coverage is non-discrimination in trade — between a country’s trading partners, and between foreign companies, products and people and its own.

The remaining 20 to 30,000 pages are the lists of commitments made by each of the WTO’s 164 members, the limits they have agreed on tariffs on tens of thousands of products and on agricultural subsidies, and the minimum market opening they have promised for various services.

Under those agreements, WTO members have rights (for example not to face discrimination, and to have access to other countries’ markets) and obligations (for example not to discriminate, or to keep markets open at least as much as they have committed).

The agreements come from negotiations. The WTO dispute settlement system is about whether those agreements are being implemented as promised or how they should be interpreted. All decisions are taken by the membership, almost always by consensus (meaning no one objects).

The clichés are: the WTO operates a rules-based trading system; and it is member-driven.


Updates: Februay 15, 2017 — adding link to WTO legal texts
Photo credits: WTO via Flickr; Marrakesh signing by Peter Ungphakorn


12 years on, EU’s certified WTO goods commitments now up to date to 2004

Just before Christmas and almost unnoticed, the WTO circulated the EU’s “schedules” of commitments on goods (not services) to reflect its 2004 expansion from 15 to 25 members. They are also the UK’s current official WTO commitments. What are they?

By Peter Ungphakorn
POSTED FEBRUARY 4, 2017 | UPDATED FEBRUARY 5, 2017

Some pretty important documents were issued in Geneva by the World Trade Organization (WTO) on December 14, 2016 as Europe started to close down for Christmas and the New Year. They have flown under the radar.

Twelve years after the EU expanded from 15 to 25 members on 1 May 2004, it now has revised commitments on tariffs, tariff quotas and agricultural subsidies to take into account the addition of those 10 new members (you can download them below).

Contract signing CC0

JUMP TO

What is a WTO schedule?
Goods
Services
DOWNLOAD: the EU–25’s goods schedules
The UK’s post-Brexit goods schedule
EU enlargements over the years

Because the UK is an EU member, its commitments are bundled with the EU’s, so these are also the UK’s latest certified commitments.

For the UK, this means that re-establishing its own post-Brexit commitments in the WTO can be based on EU commitments that are closer to what they should be for the full 28-member union.

Next up: accounting for Bulgaria and Romania, which joined in 2007, to become EU–27, then Croatia (2013) for EU–28; and then subtracting the UK to go back to EU–27.

What is a WTO schedule?Back to top

To recap: a WTO “schedule” is essentially a negotiated commitment on how a WTO member agrees to curb protectionist policies. Countries have schedules for goods (including agriculture) and services.

They are called “schedules” because when a negotiation is concluded, the promised changes are phased in according to timetables, which are also set out in the schedules.

In other words, schedules are tools for reducing tariff protection, agricultural subsidies and barriers to trade in services.

GoodsBack to top

This is what a goods schedule contains:

For general import duties (or “tariffs”) on goods, the schedule sets legally binding ceilings (the “bound rates” of tariffs). The country is free to charge a duty (an “applied rate”) below the ceiling for that product, but not to go above it without renegotiating and offering compensation. These tariffs are known as “most-favoured nation” tariffs (MFN, essentially non-preferential equal treatment for products from all sources). They are also the legally bound rates for quantities outside tariff quotas.

eu-25-mutton-lamb-tariff-in-schedule
EU–25’s agreed “MFN” tariffs for mutton and lamb. Applies outside the tariff quota. Click the image to see it full size

For tariff quotas (or tariff-rate quotas, TRQs), the schedule sets out the quantity that can be imported at a lower duty or duty-free. The country can set a lower in-quota duty or expand the eligible quantity beyond the legally bound amount. But if it wants to raise the in-quota duty above the legally bound rate, or reduce the eligible quantity to less than the legally bound amount, again it has to renegotiate and offer compensation.

EU-25 TRQ
EU–25’s agreed tariff quota for mutton and lamb. Duty-free inside the quota. Click the image to see it full size

For agricultural domestic support — subsidies given to the sector within the country — the schedule has an agreed ceiling on the total amount of “trade-distorting” support  provided to farmers, a figure known as the “aggregate measurement of support” (AMS, sometimes called “Amber Box”).

Support is considered to distort trade if it has an impact on prices or production quantities. More details are here. Most countries have nothing on AMS in their schedules because they were not major subsidisers when the support limits were negotiated in the 1980s and 1990s. Some (such as the EU, US and others) are allowed AMS support, but had to reduce it as part of the negotiated liberalisation.

All countries can still use a conceptually small amount of trade-distorting support, known as “de minimis”. For developed countries, this is 5% of the value of production for developed countries (either for specific products or for agriculture generally), 10% for developing countries, and 8.5% for China. Although “de minimis” support is of the same type as AMS, it is not counted against the AMS limits for those countries that have them.

EU–25 AMS
EU–25’s agreed limit on trade-distorting domestic support. Click the image to see it full size

For agricultural export subsidies, the schedules also set legally bound limits on both the amount of money given in subsidy and the export quantities that are subsidised.

More information: on tariffs and disciplines in agriculture

EU–25 ceilings on export subsidies
EU–25’s agreeed limits on export subsidies. Click the image to see it full size

ServicesBack to top

WTO members also have separate schedules on services. These are complicated documents listing when a county will allow foreign services to enter its markets, each of the many types of services (banking, insurance, telecommunications, tourism, professional, and so on) including commitments on each of four “modes”:

  • Mode 1 “cross-border supply” — services supplied from one country to another (e.g. international telephone calls)
  • Mode 2 “consumption abroad” — consumers or firms making use of a service in another country (e.g. tourism
  • Mode 3 “commercial presence” a foreign company setting up subsidiaries or branches to provide services in another country (e.g. foreign banks setting up operations in a country
  • Mode 4 “presence of natural persons” — individuals travelling from their own country to supply services in another (e.g. fashion models or consultants)

More information: on services

Certified schedule

The EU–25’s goods schedules — downloadBack to top

The WTO document code number for the EU–25’s goods schedule is WT/LET/1220. This actually consists of covering letters and four attachments. They can be downloaded from the list below (the files are correct at the time of writing), or by going to WTO DocsOnline, https://docs.wto.org, and searching for WT/LET/1220:

  • Cover letters (pdf)
  • Agricultural tariffs, tariff quotas, processed agricultural products (PAPs) and the banana agreement (pdf or Excel)
  • Non-agricultural tariffs and tariff quotas (pdf). Also “mdb” database format, downloadable from WTO DocsOnline (above). I have created an Excel file from the mdb file. (NAMA = non-agricultural market access)
  • Duty-free trade in pharmaceutical products (pdf or Excel)
  • Agricultural subsidies, including an agreement on oilseeds (pdf or Excel)

The UK’s post-Brexit goods scheduleBack to top

Finally, the implications for extracting the UK’s goods schedule from the EU’s are discussed elsewhere in this blog: agricultural tariffs, agricultural tariff quotas, processed agricultural products, extracting the UK’s schedule. See also this free-to-view AgraEurope article.


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:
February 4, 2017 — removed incorrect information on EU committing zero export subsidies
February 5, 2017 — added screenshots from the EU–25’s goods schedule

Photo credits:
♦ Public domain/Creative Commons CC0 via pexels.com/pixabay.com