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.
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.
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.
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
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?
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.
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?
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).
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. 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 and has initiated the procedures for the EU-28 schedule (section 188.8.131.52). With regard to the certified EU-25 services schedule, 18 EU member States have ratified the schedule. ”
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.
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?
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.
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?
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”.
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?
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.)
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?
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.
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.
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.
Falling back on WTO “terms”
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.
UK-EU relations and WTO “rules”, now and in the future
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.
Finally, WTO rights and obligations
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 products, 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
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).
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?
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.
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.
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.
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.
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.
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)
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:
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)
EU ENLARGEMENTS OVER THE YEARS — January 1, 1958 (under GATT) — 6 founder members
6. Netherlands — January 1, 1973 — 3 new members
9. United Kingdom — January 1, 1981 — 1 new member
10. Greece — January 1, 1986 — 2 new members
12. Portugal — January 1, 1995 (WTO created) — 3 new members
15. Sweden — May 1, 2004 — 10 new members
16. Czech Republic
25. Slovakia — January 1, 2007 — 2 new members
27. Romania — July 1, 2013 — 1 new member
28. Croatia —
(More details here)
February 4, 2017 — removed incorrect information on EU committing zero export subsidies
February 5, 2017 — added screenshots from the EU–25’s goods schedule
♦ Public domain/Creative Commons CC0 via pexels.com/pixabay.com
Customs unions, free trade areas, rules of origin and the single market
Both the terms Customs Union and Free Trade Area (FTA) have specific meanings in the WTO, as regulated by GATT Article XXIV (Similar provisions apply with the General Agreement on Trade in Services: GATS). A customs union involves the abolition of tariff barriers and ‘other restrictive regulations’ on ‘substantially all the trade’ between its constituent members. Quite what is meant by the word ‘substantially’ has never been entirely resolved. The Turkey-EU Customs Union excludes agriculture for example; but it is difficult to believe that WTO Members would now agree that a new agreement was WTO-compatible if it excluded a major sector of the economy such as agriculture. Similarly all of the members of the customs union apply ‘substantially the same duties’ on trade with Third Countries. The EU is itself a customs union, with complete product coverage, and a common external tariff, meaning that goods once imported into the EU are in free circulation and can be transferred to other EU states without further payment of customs duties.
A Free Trade Area (FTA) is rather different. This involves the elimination of tariffs and other restrictive regulations of commerce on ‘substantially all the trade’ in products originating within the FTA. Many FTAs have only partial coverage of agricultural, food and drink products. Thus the European Commission (2014: 3-4) has reported that the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada will eliminate tariffs and quotas on 91.7% of agri-food tariff lines on EU products entering Canada, and on 93.8% of EU tariff lines faced by Canada. TRQs will apply on imports of beef and pigmeat into the EU, and on some dairy products into Canada, whilst some poultry products will be excluded from the FTA altogether.
The parties to a FTA still determine their own trade barriers against Third Countries. Consequently rules of origin (which can often be extremely complex) have to be negotiated to determine what constitutes an originating product (what minimum level of processing is required?). Moreover border controls are still needed at the FTA’s internal borders to differentiate between originating products (entitled to duty-free access) and non-originating products (on which duty is payable). If this did not happen, trade deflection would be an issue, as traders tried to import their goods into the FTA via the country with the lowest external tariff. The problem becomes more acute when commodities (such as bulk sugar) are involved, where product substitution could readily occur. Thus if the EU maintained its very high tariffs on sugar and negotiated an FTA with the UK that did include sugar, but left the UK to freely import sugar from the world market, the outcome might be that the UK would source all its supplies for domestic consumption from world markets, while exporting all its domestic production (produced from sugar-beet grown on British farms) to the EU.
It is not just tariffs that can restrict trade. Divergent regulatory provisions (e.g. covering food safety, animal and plant health) can do so too. Although the WTO has attempted to provide a framework within which such provisions can apply (the Agreement on the Application of Sanitary and Phytosanitary Measures for example) many FTAs now include agreements that go beyond the WTO rules. The European Commission has talked about Deep and Comprehensive Free Trade Area (DCFTA) agreements. However its ambition has on occasion proved deeper and more comprehensive than can be readily delivered. Thus the proposed Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU has had difficulty with a number of regulatory issues, including US reluctance to accept the EU’s policy on Geographical Indications (GIs) of origin on many food and drink products, and EU concerns about the chlorine washing of poultry carcasses to reduce pathogens (Josling & Tangermann, 2015: 241-6).
The EU’s Single Market goes beyond regulatory convergence on selected topics. A key element in achieving the free movement of goods —one of the ‘four freedoms’ for goods, services, capital and workers— is that the same regulatory regime applies in all the Member States (or the principle of mutual recognition results in products legally produced in one Member State being accepted throughout the Single Market). With a customs union covering all goods, and regulatory harmonisation or equivalence achieved, there is no need to apply border controls within the EU.
Norway, through the European Economic Area (EEA), applies EU regulatory provisions enabling it to participate in the Single Market; but paradoxically it is not in the Customs Union as the EEA is built on a series of FTAs (and nor do its FTA provisions apply to agriculture). Consequently, border controls are still necessary to apply rules of origin. Turkey, despite its partial customs union with the EU, is not in the Single Market, and so border controls are needed to ascertain that traded products do fall within the remit of the customs union, and that the EU’s regulatory provisions are met.
 Of the various Directives regulating agricultural production (the Nitrates Directive, the Water Framework Directive, etc.) the National Farmers Union (2016: 32) identified only two — the Habitats and the Birds Directives — that Norway is not obliged to apply for it to participate in the Single Market.
Photo credit: Containers in Antwerp, public domain CC0 via pexels.com
This is long, self-indulgent, and largely a memo to self. Brexit is unprecedented. The past few months have been a huge learning opportunity for all of us, in my case even within the narrow (but important) field of WTO rights and obligations. What have I learnt?
By Peter Ungphakorn POSTED JANUARY 9, 2017 | UPDATED JANUARY 12, 2017
I started writing almost a year ago (in AgraEurope) about what the UK needs to do in the World Trade Organization (WTO) as it leaves the European Union. The analysis was always somewhat tentative, even though it was based on experience of how the WTO has functioned over the decades, both legally and politically.
To a large extent it still is. The three major unknowns are still unknowns: what the UK will seek, how the EU will respond, and how the rest of the world will react.
One expert (and I mean a real expert, unlike me) prefaced a discussion about Brexit and WTO “scheduling” by more or less throwing his arms wide and exclaiming: “Nothing like this has ever been done before. No one knows what will happen.”
But some parts of the picture are sharper. Statements, analysis, leaked information, argument and counter argument — particularly since the referendum — have clarified some of the options.
The three uncertainties — what the UK will seek, how the EU will respond, and how the rest of the world will react — will probably remain uncertain at least until Article 50 is invoked and talks on the UK leaving the EU really start.
We do have more clues now than before, from statements by British ministers, EU officials and others, even members of Donald Trump’s team (on a UK-US trade deal). But on the whole they are still more like brain-storming, with lots of contradictions, than actual policy in the making.
Much has been said about how some Brexit claims still assume other countries will just accept whatever the UK demands.
Bob Hancké has even examined it theoretically using two-level game theory. The UK, he says, approaches Brexit armed with the knowledge that it pays a recalcitrant member state — when operating within the EU — to remain stubborn, “and with, perhaps, a misplaced arrogance about going it alone in the turbulent world we live in”. So,
“the UK draws up its plan for Brexit and seems to assume that the EU will take that as the parting shot. The EU may do that. Stranger things have happened in the past twelve months. But the EU is more likely to look at this as a psychodrama in which it doesn’t really want to participate (that seems to be the prevailing mood elsewhere in Europe since David Cameron’s fated call for a referendum).”
At the same time, there is a better recognition now that other countries’ responses will indeed be important.
True, we still occasionally hear the disingenuous “they need us more than we need them”. But the fact that the organisation Leave Means Leave, which campaigns for a hard Brexit, felt it had to lobby chambers of commerce in EU member states, is a sign that at least some Brexiteers are taking nothing for granted.
And so to the WTO. The uncertainty allows the full spectrum of opinion to persist on how easy or difficult it will be to re-establish the UK’s status as a WTO member independent from the EU. One end asserts the UK should just claim its legal rights with a minimum of negotiations; the other that the UK will face a near-impossible task of bringing on board all the 163 other WTO members. I am not convinced by either.
As I have said before, it all depends on the assumptions, including how well the UK crafts its case (politically and diplomatically as well as legally) and how other countries react.
“That’s a lot of assuming,” wrote Mark Leonard in a piece on why the false confidence of Brexit optimism (at least the most simplistic forms) might prove disastrous. There’s an awful lot of assuming everywhere.
Much also depends on how stretched the UK’s bureaucracy is forced to be by all the negotiations and adjustments to laws and regulations that Brexit will require. That includes negotiations within the UK itself on what policies to adopt and which options to pick.
For example, the Department for Environment, Food and Rural Affairs (Defra) will be the bridge between farmers, government policy and a raft of negotiations on agricultural issues as Britain leaves the EU. Alan Swinbank has described the options and implications in an excellent new paper (pdf).
WTO rules are essentially about disciplining trade policies. For Brexit, there are five linked aspects:
FIRST, the small but potentially disruptive question of establishing what the UK’s commitments in the WTO are
The commitments are listed in negotiated and legally binding documents known as “schedules”. These will define the limits on how protectionist the UK can be — its tariffs, tariff quotas (duty-free or low-duty trade on limited quantities), agricultural subsidies, and barriers to entry for services and service-providers.
They can largely be copied and pasted from the EU–28’s current (but uncertified) schedules although negotiations with a wide range of countries, including the EU, will be necessary in some cases.
Cambridge University lawyer Lorand Bartels (@Lorand_Bartels) says that in the scheme of things this is a minor Brexit task. He is right. His comment has been a useful reminder to keep WTO schedules in perspective. But they might still have a wider impact.
Sorting out Brexit as a whole will involve complex negotiations (and other work) on a wide range of subjects, from trade relationships to security.
The WTO schedules are a small but fundamental part of the trade side. And within the schedule for goods, most of tens of thousands of tariffs ought to be settled quickly. Most people think converting the EU’s schedule for services into the UK’s is pretty straightforward too.
That leaves only 100-or-so contentious tariffs and tariff-quotas. But resolving those will at the very least be time-consuming; they could also have knock-on effects on other trade negotiations:
The schedules are where the UK and EU land if the 2-year Art.50 period ends with no transitional or final trade deal. They would also apply if any UK-EU trade deal broke down in the future, an incentive to get it right. Importantly, this applies to the revised schedules of both the UK and the EU–27
Once the UK is outside the EU, they are the default for the UK’s trade relationships with Australia, Canada, US, South Korea and all other WTO members (as well as the EU) so long as no free trade or other form of economic integration deal is struck with them. It’s an open question whether any other country would be willing to explore the terms of a free trade agreement with the UK before it knows what the schedules are — it may first need some idea of how much better preferential trade will be, compared with normal trade
There is no guarantee that the UK’s and EU–27’s schedules will be completed within Art.50’s 2-year period. If the UK leaves the EU without re-established WTO commitments, the potential for disruption is massive. But that can be avoided if the UK (and EU) can use the time efficiently to sound out trading partners so that draft schedules can be prepared to accommodate others’ needs and to sort out their own positions. These things can take a long time. Revising the EU’s goods schedule for its enlargement from 12 to 15 members in 1996 took 14 years. But with enough resources and expertise they don’t have to take that long
Someone asked me recently when the UK should start sounding out other countries about its schedules. My answer: “Now. Or even better, it should have started already.”
But when in early December I asked a couple of UK trade officials at a discussion on trade and Brexit how long they had been in the job, the answers were something like “since the beginning of the month” and “since Monday”.
SECOND, establishing what the EU–27’s WTO commitments are after the UK leaves
The EU and UK trade with each other and therefore have interests in each other’s commitments. In other words, the UK will also need to watch what happens to the EU–27’s commitments in the WTO as well as preparing its own.
Take lamb and mutton for example. Simply using the EU–28’s present tariff quota leaves no guarantee that the UK and EU–27 would continue to have duty-free access to each other’s markets, whereas New Zealand and several other suppliers would keep their duty-free access to both.
In some subjects, negotiations over the UK’s and EU–27’s quotas may become inseparable, and other countries would also demand a say because any UK-EU arrangement could affect their own competitiveness (or their expected “rights and obligations”) in the two markets. (More below and here.)
THIRD, WTO rules will govern the UK’s future special trade relationships with everyone That includes both with the EU–27 and with the rest of the world, whether through customs unions, free trade agreements or any other form of economic integration. Talks to set these up could also have a bearing on the negotiations over the schedules, and vice versa.
FOURTH, “leading” world trade liberalisation means hard work in the WTO
Theresa May’s government has ambitions to be a “leader” in global liberalisation. Unless that’s just another meaningless slogan, it would require an active, constructive and leadership role in the WTO. And that, in turn, means having the knowledge, skills, staff and other resources in London and Geneva for the task.
And it means having a stance. Take agriculture. Would the UK join the Australia-led Cairns Group, which includes Canada, New Zealand, Brazil, Argentina, Uruguay, Thailand, Malaysia and others, pressing for agricultural trade liberalisation through WTO negotiations?
Or would it prefer the more protectionist agricultural trade alliance, the G–10, which includes Switzerland, Norway, Japan, South Korea and Taiwan? Or would it be a loner like the US and the EU?
How would UK leadership work in a forum that already has a number of experienced and active leaders? (British public debate seems to be ignorant of that last fact.)
In any case the UK also needs to be prepared to deal with its own WTO legal disputes, both when facing challenges and when challenging others.
FIFTH, will the UK want to be more liberal than its WTO commitments? The schedules set legally binding limits on protection. Countries are free to open their markets more than in those commitments, but have to renegotiate if they want to be more protectionist.
Some debate continues on whether the UK should be more liberal. For example critics who accuse the EU of being “protectionist”, advocate slashing tariffs on agricultural products in order to make food cheaper.
Inevitably, British farmers will resist that. But if the government decides to defy them, it will be free to set tariffs below the legally binding ceilings it has committed in the WTO, to widen its tariff quotas to any size, and to reduce or eliminate farm subsidies. (The same applies to opening wider its services markets.)
This could be done freely within the limits of UK schedules “replicated” from the EU’s so long as it was applied equally to all WTO members. Trying to lock it into the schedules would unnecessarily increase the Brexit workload.
But there is another WTO angle that some have pointed out: countries tend to use their trade barriers as a bargaining chip to secure better access to their trading partners’ markets.
In other words, “I’ll cut my tariff on X if you also cut your tariff on X”; or “I’ll cut my tariff on X if you cut your tariff on Y”.
If I don’t have a tariff on X, it’s more difficult to pressurise you to cut your tariff. But in this case I could say, “I might not have a tariff on X but my WTO schedule allows me to restore it up to the binding ceiling, so I’ll offer to lower that ceiling if you reduce yours.” (Believe me, the success or failure of some apparently complex WTO negotiations have essentially boiled down to that.)
How the WTO affects the UK is summarised in this table (pdf) covering the UK’s basic position in the WTO, its special relationships, and its future role in the WTO.
3. Time has helped the debate become more realistic …
“This is likely to be the most complicated negotiation of modern times. It may be the most complicated negotiation of all times. By comparison, Schleswig-Holstein is an O-level question.”
To many who had been studying Brexit’s implications, this was not news. But it was a breakthrough, probably the first time a key government minister and leading advocate of leaving the EU acknowledged so clearly that the process would not be simple.
This has allowed Davis, at least, to move on from the cop-out of “we won’t give a running commentary”, to the more reasonable position that the government is still studying its options, and consulting interested groups, and that Parliament will be informed at least to some extent when the government itself has a clearer picture.
Two months later, International Trade Secretary Liam Fox followed up with a written statement to Parliament on December 5 saying: “In order to minimise disruption to global trade as we leave the EU, over the coming period the Government will prepare the necessary draft [WTO] schedules which replicate as far as possible our current obligations.”
The decision to “replicate as far as possible” current obligations means the UK aims to ensure that re-establishing its schedules is as simple as possible, and to minimise the areas that need to be negotiated (see above). This is welcome realism.
There is still room to debate what “replicate” and “as far as possible” mean in practice. For those who care, it’s about “rectifying” (pdf) versus “modifying” the UK’s commitments, which are currently merged with the EU’s.
However, one expert familiar with these processes says the distinction is unimportant since in practice, either way, some tough negotiation may be unavoidable.
The telling point is that it took Fox almost five months from his appointment — including two visits to the WTO in Geneva — to reach a decision that was blindingly obvious to most people familiar with WTO schedules. That is a measure of how much learning is needed, including among the officials advising ministers.
We also now have serious discussions of interim or transition periods, better recognition by some ministers that at least some immigration will probably be needed (some of it unskilled) for the economy and for health and other services, and better awareness of some other issues such as the constraints on arrangements such as customs unions and free trade areas.
Nevertheless, many of those who want to leave the EU still think the break can be quick and clean.
Those who point out that the process will be lengthy and complex are often accused of undermining the “will of the people”.
At least they can now reply: “You don’t need to believe us. Just listen to the Secretary of State for Exiting the European Union.”
4. … but the notorious “bus” is alive and well with added features
One low point of the referendum debate was the infamous £350m-a-week Brexit bus, symbolic of the misinformation and shoddy analysis feeding a discussion that was particularly bad considering the referendum was about to propel the UK super-tanker into a juddering momentum-breaking U-turn away from Europe. (Another was the racism and xenophobia the debate stoked.)
Both sides share the blame, but those on the “Leave” side were worse.
Any hope that the debate would improve after the referendum was dashed when Change Britain, which campaigns “to make a success of Britain’s departure from the EU”, released “new research” the day after Christmas, claiming the UK would gain £450m a week (over £23bn annually) by leaving the EU Single Market and Customs Union, and providing numerous “calculations”.
I don’t need to examine the claim in detail. Others have already done a better job than I could. If you do want detail, the calculations have been torn to shreds by Sam Bowman of the Adam Smith Institute, Essex University’s Steve Peers, and others.
I’ll just note that Change Britain does not see any fall in UK trade, GDP and government revenue from ditching what one group of economists calls “the most integrated bilateral/regional trade relations on the planet”.
Bowman concluded: “I say this not to trash Change Britain but to highlight just how weak some of the numbers and claims that are floating around, and being given very kind press coverage, can be. Change Britain has some heavyweight backers — they can do better than this.
“Whether you’re a hard or a soft Brexiteer, a continuity Remainer or a die-hard Leaver, you should expect better than this.”
5. New Sussex and Switzerland models refine the options
staying in the Single Market (the Norway/Iceland or Switzerland models)
staying wholly or partly in the customs union (CU — the Turkey model is partial), with an additional agreement for services since a customs union only deals with goods
a free trade agreement (FTA — the South Korea or Canada model)
reverting to WTO commitments (sometimes called MFN or most-favoured nation treatment, the archaic WTO term for normal, non-preferential trade)
In November, Sussex University’s UK Trade Policy Observatorypublished a paper (pdf) by Michael Gasiorek, Peter Holmes and Jim Rollo looking at the options and asking whether the UK and EU have too many “red lines” (defensive negotiating positions that cannot be crossed).
The UK has four red lines, they observe:
No free movement of people/labour
Independent trade policy
No compulsory budgetary contribution
Legal oversight by UK courts only and not by the European Court of Justice
The EU has one: no cherry picking — choosing which parts of the Single Market to keep and which to drop.
“It is easy to be lost in pessimism given the four British red lines and EU equivalent on cherry picking on the EU–27 side,” the paper says.
Its antidote is a hybrid: a broad free trade agreement with some sectors in a customs union (the UK and EU would charge the same tariffs on imports within those sectors from the rest of the world) and regulatory arrangements based on the Single Market for those sectors.
A prime candidate would be the car industry whose complex value chains would avoid costly rules of origin requirements and other red tape, as parts and assembled cars criss-cross the borders between the UK and EU–27. Another would be aerospace.
“We have demonstrated that the most attractive outcome, from the UK government’s point of view and given its red lines, would be an FTA with a variety of special sectoral arrangements. If that reduced or abolished non-tariff barriers on a wide range of goods and services, much trade would be saved,” the paper continues.
“Whether this is acceptable to the EU side is unclear, but the alternative of going from the most integrated bilateral/regional trade relations on the planet to MFN [no preferences in UK-EU trade] ought to be deeply unpalatable to all concerned, and an incentive to find an FTA-based least-cost alternative.
“The debate, however, is heated on both sides, and mistakes and accidents are all too possible. MFN may be the only answer unless both sides shift from megaphone diplomacy and start explaining to their own constituencies that the cost of the most extreme versions of the red lines is unnecessarily high.
“Moreover, such extreme versions of Brexit do not exclude trade and investment subsidy wars as governments try to compensate footloose multinationals for the consequences of policy failure.”
The hybrid proposal sparked a debate among experts as to whether it would violate WTO rules.
They were already debating to what extent WTO agreements would limit the UK’s and EU’s ability to be selective in including or excluding certain sectors in a free trade agreement or customs union.
These are Art.24 (actually XXIV) of the General Agreement on Tariffs and Trade (GATT, the WTO treaty on goods), and Art.5 (actually V) of the WTO’s General Agreement on Trade in Services (GATS). GATT Art.24 says this would have to cover “substantially all the trade” in goods; GATS Art.5 requires “substantial sectoral coverage” in services.
Lawyers have told us that there is WTO case history to show a free trade deal in cars alone would be illegal (disputes DS139 and DS142).
Some have also reminded us that there is a large grey area of inclusions and exclusions in customs unions and free trade agreements that could allow the UK and EU to escape litigation. The debate is about how large the grey area is, and whether there would be significant reactions from other WTO members.
The Sussex paper expanded the debate to how those two articles would apply to the case where a partial customs union is superimposed on a broader free trade agreement. Opinion among lawyers and other experts is equally divided.
So far, the move has attracted little interest in the UK even though it provides a possible model for Britain to remain in the Single Market. To be sure, the various red lines would become a smudgy grey, but that’s how the Swiss, with decades (if not centuries) of experience in direct democracy and political compromise, are dealing with their conundrum.
6. Lawyers versus practitioners? It pays to look at the data
To some extent this explains the difference of opinion over what the UK may face when it re-establishes its WTO commitments (the schedules) as a member in its own right, independent of the EU.
One side argues that the UK can carefully craft its case legally, table its commitments, probably escape litigation and almost certainly escape trade disruption.
The other believes that WTO processes are more complicated than that and that more can be achieved by talking.
Other countries will want to scrutinise at least some parts of the schedules and may even challenge the UK’s legal case. This could lead to the kind of arguments that are heard over and over in the WTO — on both the content (in this case the commitments) and the legal approach, and even about which are the most suitable base years for making crucial calculations.
So, according to this view, if the UK wants to avoid disruption, it should listen to its trading partners and draft schedules that accommodate their legal and commercial concerns as much as possible.
That, after all, is how the EU has seen trade continue untroubled even though its commitments have not been certified (accepted by consensus) by WTO members, since it expanded first from 15 members to 25, then to 27 and most recently to 28.
Which view is right? Time will tell.
A closer look at the details might shed some light. For example the EU’s present tariff quota for lamb and mutton gives some clues as to where purely claiming a legal right might break down as the UK and EU become entangled in each other’s revised (or “rectified”?) commitments, and as other countries weigh in.
The tariff quota is examined in detail in this five-step analysis. Even if we accept that the first two steps are straightforward (they divide the EU–28 quota into UK and EU–27 portions), the simplicity may still unravel in steps three and four, when current UK-EU trade is brought into the calculation.
The conclusions are:
The volume of UK-EU trade is likely to be added in some way to the tariff quotas of the UK and EU. The negotiations could expand the combined UK and EU quotas considerably — by as much as one third or more in the case of lamb and mutton, if farmers are allowed to keep their current trade volumes.
The talks could therefore become messy, merging two sets of negotiations over the UK’s and EU’s schedules, Each side could use a tariff quota in its schedule as a bargaining chip, for example the UK offering a smaller quota to the EU if it believes the Brussels is not offering enough, and vice versa. There is no guarantee that the UK and EU will adopt compatible approaches to their respective tariff quotas.
With such large scale changes, it could also be difficult for the UK to argue that it was simply “rectifying” its schedule (the key legal point seems to be whether a “concession” granted to WTO members was being altered or not). In other words, other countries might take the view that what is needed is more than a simple legal construction. They could claim the right to negotiate. It would be difficult but they might even challenge the proposed quotas for upsetting (as they see it) the balance of “rights and obligations” that was negotiated before Brexit. And the same applies to the EU–27’s schedule.
Back home, the UK and EU member states’ governments could also be dealing with pressure from their farmers, and perhaps in the opposite direction from their consumers or the manufacturers who use agricultural products as their inputs. This could add more time and need more resources in order to complete the negotiations.
Perhaps most important of all, the EU, whose latest schedules have not been certified, has shown that the key to avoiding disputes and disruption is spending time talking, listening and taking on board other countries’ concerns. Simply insisting on a legal right might not achieve that. It might even be counterproductive.
Is the analysis correct? Again, time will tell. But it’s hard to see a solely legal process working. Will trade be disrupted? Not if the UK plays its cards right. It’s an “if” that has to be taken seriously.
Updates: January 10 and 12, 2017 — adding links to new papers by Alan Swinbank and Alan Matthews
♦ Generally: public domain/Creative Commons CC0 via pexels.com, pixabay.com
♦ Dairy farmers protesting in Brussels by Teemu Mäntynen via Instagram. “About 1000 farmers from Belgium, France, Germany, Italy and other EU nations protested outside the EU Council building on 5th of October 2009. Farmers want regulation to shield them from volatile free markets that have collapsed milk prices.” (CC BY-SA 2.0)
An exercise in applying the “latest 3-year average” rule to the tariff quota on lamb and mutton. International Trade Secretary Liam Fox has announced the UK will “replicate as far as possible” the EU’s commitments in the WTO. This is a sound approach. But how far is “as far as possible”?
By Peter Ungphakorn POSTED JANUARY 6, 2017 | UPDATED JANUARY 6, 2017
The goods schedule for the EU’s enlargement in 2004 to 25 members (EU–25) was certified and circulated in December 2016. Details are here
Expert opinion differs over whether re-establishing the UK’s WTO commitments will be little more than reproducing, as a legal right, those of the present 28-member European Union.
For thousands of legally binding ceilings on tariffs and access to services markets, this is true.
The main differences are over “tariff quotas” and possibly some tariffs, and whether these will drag the UK and EU into lengthy and messy negotiations. This even raises the prospect that the “schedules” (essentially lists) of commitments might not be ready at the end of the 2-year Article 50 process of leaving the EU.
To keep this as simple as possible, International Trade Secretary Liam Fox has announced the UK will “replicate as far as possible” the EU’s schedule.
The exact meaning of the statement is debated, but essentially it recognises that straight “replication” is possible in many cases but not in some others.
Where it won’t be possible includes almost 100 tariff quotas (pdf) (where limited quantities can be imported duty-free or at a low tariff). It may even include some tariffs.
The EU’s present tariff quota for lamb and mutton (“meat of sheep or goats, fresh chilled or frozen”) offers some clues as to where purely claiming a legal right might work, and where it might break down, dragging the UK and EU into entangled negotiations on each other’s revised commitments, with other countries weighing in.
Incidentally, lamb and mutton are important for trade across the Irish border, which is a particularly sensitive issue in Brexit.
We can walk through the process step by step, remembering that the WTO schedules are default binding commitments in the event there is no free trade between the UK and EU, or between either of them and the rest of the world.
Lamb and mutton — the EU’s tariff quota
The EU’s current certified WTO commitment on goods (tariffs, tariff quotas and agricultural subsidies) is for the 15-member EU that existed from 1996 to 2004. It was certified by consensus among all WTO members in 2010, 14 years after the enlargement to 15 members. Commitments for when the EU added new members since then (to 25, 27 and 28 members) have not yet been certified. But, crucially, trade continues.
The EU–15’s certified WTO schedule has this commitment for lamb and mutton:
It has promised to allow at least 283,825 tonnes to be imported duty-free.
Quantities outside the quota can be charged a mixed tariff of up to 12.8% of the price, plus up to €902 to €3,118 per tonne (mostly between €1,000 and €2,000) depending on the cut, whether it is chilled or frozen and so on. The highest rate is on boneless meat.
The EU has also reserved the right to apply an additional “special safeguard” tariff on the out-of-quota rate, triggered by a sufficient surge in imports or fall in price.
The tariff quota is almost entirely allocated among 15 countries (some now EU members). New Zealand has almost 80%, with 200 tonnes left over for “others”. When it leaves the EU, the UK will count among those “others” unless the EU sets up a specific quota for the UK. The same applies to the EU in the UK’s commitment.
In practice the quota is now 285,910 tonnes (an increase of 2,085 tonnes or 0.7%) allocated among nine countries, according to an EU regulation from 2011. The regulation says the latest adjustment expands the allocations for Chile and New Zealand, the latter specifically because of the EU’s enlargement to include Bulgaria and Romania (when the EU became 27 members).
When compared with the certified WTO (EU–15) schedule, the figures show adjustments had also previously been made for Australia, Norway, Faeroes, Turkey and Iceland. Clearly the EU had been negotiating with its suppliers over the years and adjusting the quota accordingly, even if the revised schedules still have not been certified in the WTO.
That means it was listening to them as well as asserting its legal rights. It’s almost certainly why the quotas applied by the EU in practice have allowed trade to continue trouble-free.
So the first question is: should the UK’s tariff quota be based on the WTO-certified schedule for the old EU–15? Or should it be based on an uncertified regulation for the EU–28 (or pre-Croatia EU–27, the latest reference in an EU Commission regulation)?
The most pragmatic answer could be to start from the 285,910-tonne quota the EU is using in practice, even though the draft in the WTO is top secret, it’s uncertified and therefore legally uncertain, and it’s untransparent. So, here goes.
Step by step
STEP ONE: Out of the 285,910-tonne tariff quota, how much should be in the UK’s schedule? And how much in the EU–27’s? About half-and-half according to current data.
The common WTO practice for making calculations like these is to take an average over a recent 3-year period. Borrowing that method: according to EU figures, in 2015 the EU imported 202,271 tonnes from non-members. The UK imported 102,350 tonnes, or 50.6% of that. The figures for 2014 are 187,605 (EU) and 96,845 (UK = 51.6%) and for 2015 they are 199,936 (EU) and 103,718 (UK = 51.9%).
So, the UK’s average share for the three years is 51.4%.
Using that average, the 285,910 tonnes would be split:
— 146,862 tonnes in the UK’s tariff quota
— 139,048 tonnes in the EU–27’s tariff quota
STEP TWO: How should the individual supplying countries’ quotas be split between the UK and EU–27?
For New Zealand, which has almost 80% of the quota, the ratio has been similar, but not the same. For example in 2015 (pdf), the UK took up 48% of New Zealand’s exports to the EU. This suggests the quota shares should be calculated for each of the individual suppliers, rather than using the 51%-to-49% UK-to-EU split for the quota as a whole.
So far so straightforward (assuming other countries don’t demand a say — but they might).
STEP THREE: What about UK-EU trade in mutton and lamb? This is where the simplicity may well unravel.
First, accounting for EU-to-UK trade in Britain’s tariff quota. The UK imported an average of 10,917 tonnes from the EU in the three years 2013–2015. Over half was from Ireland. Other major EU suppliers were Spain, France and the Netherlands. The present EU–28 tariff quota does not account for this because the UK is one of the 28. After Brexit — without any additional change — in order to export duty-free to Britain, those EU suppliers would have to fight for a share of the 200-tonne allocation to “other” non-EU suppliers.
So we can expect the EU to demand an additional 10,917 tonnes or so in the UK’s tariff quota.
Ireland and the other EU member states might not be satisfied with that figure, even if it comes from the latest 3-year average. EU exports to the UK exceeded that figure every other year in the 11 years since 2005, except 2011 and 2015, reaching 14,208 tonnes in 2005 and surpassing 13,000 tonnes in 2006, 2007, 2008 and 2013. The average for the three most recent years is dragged down by an unusually low 7,611 tonnes in 2015.
On the other side, we can expect British farmers to react if they think the additional quota allows too much to be imported, particularly if their ability to export to the EU–27 is hampered.
Cue haggling — within the UK, between the EU and UK, and among EU member states — over which years and which figures to use in the UK’s schedule. Bargaining over which base years to use in a calculation is common in WTO negotiations. It has sometimes produced an “Olympic average” over five or more years, a method that excludes the highest and lowest numbers.
Second, accounting for UK-to-EU trade in the EU’s tariff quota. On the other side, the UK will be interested in the EU–27’s tariff quota. Again the 200-tonne allocation to “others” could not possibly cater for this.
The latest three-year average for EU–27 imports from the UK is 82,576 tonnes, also depressed by an unusually low figure for 2015 — 74,851 tonnes. That average was exceeded every year in the past decade except 2007, 2012 (borderline) and 2015, peaking at 93,667 tonnes in 2009.
Around two thirds of UK lamb and mutton sales to the EU goes to France, with significant quantities also going to Germany, Ireland, Italy and the Netherlands. They are the member states that will have to juggle the interests of their farmers against those of their consumers.
Cue more haggling — between the UK government and its farmers as well as the UK and EU, and within EU member states.
What this also means is that the UK will not only be dealing with its own WTO schedule of commitments. The UK and EU–27 will bargain with each other over the size of their respective quotas. In this case that applies even if the EU simply keeps for its 27 members the tariff quota it currently has for the present 28. Otherwise the UK would be forced to fight for a share of the 200-tonne “others” quota.
At this stage, the process has become pretty complicated. And it might not end there.
POSSIBLE STEP FOUR: So, the UK and EU have expanded their shares of the split quota to account for current trade between them. Taking the figures from Step One and adding the latest 3-year averages for UK-EU trade in Step Three would expand the combined UK and EU–27 tariff quota from 285,910 tonnes to at least 379,403 tonnes, an increase of 33%, around one third.)
Would other countries sit by and accept it? Maybe. Maybe not.
By now, the UK and EU would be hard-pressed to argue they are still only “replicating” or “rectifying” their schedules. The alternative, a “modification” (not least because a regional integration pact has ended), gives other countries negotiating rights. They could well demand a say.
For example, they could argue that expanding the combined quota by one-third changes the nature of competition in the two markets. Or, that there is no justification to add into the schedules the figures for UK-EU duty-free trade under the single market, since that relationship will no longer exist — those figures would exaggerate the expected access for the EU and UK into each other’s markets.
Cue even more complicated haggling. And since we are now in schedule “modification” territory, it is conceivable that new suppliers not currently listed in the tariff quota will want their own shares. India, for example, is a significant exporter even if it does not currently sell to the EU.
Click the image to see it full size
FINALLY: What about quota fill? Will the EU and UK seek larger quota allocations than the trade figures suggest?
There is an argument in favour of this since suppliers are rarely able to export their entire quotas to the EU. New Zealand did so from about 2006 to 2009 but is currently running at about 70–80%. If this “underfill” is caused by the way the quota is managed, then there is an argument for a larger quota than the actual traded amount.
What does this tell us?
So it seems likely that the lamb and mutton quota will lead to simultaneous bargaining over both the UK’s and the EU–27’s schedules, and that many countries will become involved directly and indirectly, including key EU member states as well as non-members.
Is this typical of all the tariff quotas? No. Most have fewer allocated suppliers (if any) and larger shares available to “others” or unspecified suppliers.
But most if not all will also involve steps three and four — expanding the combined quota to allow for UK-EU trade — casting doubt on whether any of these are simply “rectifications”, and allowing other countries to join the negotiations.
As I said when I started writing about this almost a year ago (in AgraEurope), it does not mean the task is impossible. But it does mean negotiations over the UK’s and EU’s schedules will be complicated and may take a long time, particularly since other Brexit activities will already be occupying resources in the four departments involved — Exiting the EU, International Trade, the Foreign Office, and Environment, Food and Rural Affairs.
Finally, will this matter if the UK and EU end up with a free trade deal of some kind anyway? Why not stop after Steps One and Two? If the UK and EU are confident that they will strike a bilateral deal, then including UK-EU trade in the tariff quotas will be less critical. But because the schedules are fall-back positions, it is in the interests of both to ensure the schedules are in a good shape for their own bilateral trade.
This analysis assumes all the imports are via the tariff quota. Getting relevant figures is not easy. The ones used here are from data available on the EU website and from uktradeinfo. They should be seen as a way to approximate what might happen, rather than to give a precise account. Hopefully the officials dealing with this will have quicker means of getting more appropriate data.
The tariff quota in the EU’s latest EU certified goods schedule WTO document WT/LET/666 (for the EU–15) of 22 February 2010, extract
Description of products
Tariff item number(s)
Final quota quantity and in-quota tariff rate
Other terms and conditions
Meat of sheep or goats, fresh chilled or frozen
283 825 t
Allocated to supplying countries as follows:
Argentina 23.000 t Australia 18.650 t Chile 3.000 t New Zealand 226.700 t Uruguay 5.800 t Iceland 600 t Poland 200 t Rumania 75 t Hungary 1.150 t Bulgaria 1.250 t Bosnia Herzegovina 850 t Croatia 450 t Slovenia 50 t Former Yugoslav Republic of Macedonia 1.750 t Greenland 100 t Other 200 t
Qualification for the quota is subject to conditions laid down in the relevant Community provisions.
Meat of sheep or goats, fresh chilled or frozen
285 910 t
Argentina 23 000 t (534 t = 2%) Australia 19 186 t (16 493 t = 86%) New Zealand 228 254 t (174 540 t = 76%) Uruguay 5 800 (1 785 t = 31%) Chile 7 400 t (2 503 t = 34%) Norway 300 t (0 t = 0%) Greenland 100 t (0 t = 0%) Faeroes 20 t (1 t = 5%) Turkey 200 t (0 t = 0%) Others 200 t (0 t = 0%) “Erga Omnes” 200 t (195 t = 97%)
(= all origins, including the countries mentioned in the current table) Iceland* 1 850 t (1 093 t = 59%)