This replaces a 2017 article on tariff quotas, originally the second part of a pair of primers on the UK, its WTO membership, and its WTO schedules of commitments. The first part on the UK’s WTO membership is here. The original second part is archived here.
By Peter Ungphakorn
POSTED SEPTEMBER 12, 2018 | UPDATED SEPTEMBER 14, 2018
Since autumn 2017, news has appeared every few months about the UK’s proposed World Trade Organization (WTO) commitments and the objections of other countries. Some have claimed this is a failure of London’s Brexit policy, but they are wrong. What exactly has been happening? And what does it mean?
A reminder: the UK is and will continue to be a WTO member But it will have to work with other countries on its WTO commitments (known as “schedules”) on tariff ceilings, minimum sizes and maximum tariffs for tariff quotas, limits on agricultural subsidies, and opening its markets for services and government procurement.
• UK, EU, WTO, Brexit primer — WTO membership (2017)
• A real beginners’ guide to tariff-rate quotas (TRQs) and the WTO (2018)
• Comments on the EU’s (and UK’s) proposed modified tariff quotas (2018)
• Archived: UK, EU, WTO, Brexit primer — 2. Tariff quotas (2017)
• The limits of ‘possibility’: Splitting the lamb-mutton quota for the UK (2017)
• The Hilton beef quota: a taste of what post-Brexit UK faces in the WTO (2016)
This is the only agreement where the UK has to re-apply (to “acceded”).
The Government Procurement Agreement is only signed by some WTO members (it’s known as a “plurilateral” agreement), and importantly, the EU signed on behalf of all its member states — the EU member states did not sign individually, unlike with all other WTO agreements.
The UK’s accession is underway.
It has submitted the necessary documents and is answering a series of written questions from those WTO members that have signed the agreement. This could take some time just because of the number of questions and the amount of information and clarification that members want.
But it is not a full-blown negotiation since the UK wants to leave its commitments unchanged in practice. Other members are said to be happy with that so long as, for example, references to EU are converted appropriately to the UK.
The EU meanwhile, won’t have to make any changes except to delete the lists of British government agencies whose purchases are open to international competition, and any other references to British terms.
Extracting the UK’s services commitments from those of the EU’s is also said to be relatively straightforward in principle. But adapting and checking the detail will be more time-consuming than with government procurement because of the wide range of services involved and the complexity of the commitments.
It’s noticeable that by this summer (2018), the UK had not circulated its draft services schedules as an official WTO document, unlike for goods, although it did send a draft to members in February, according to Reuters.
The goods schedule covers tariffs, tariff quotas and other commitments related to tariffs (particularly agricultural “safeguard” tariffs), and agricultural subsidies. Much of this is straightforward, again with some time needed to deal with the detail. It’s the tariff quotas that will have to be negotiated.
The rest of this piece deals with the goods schedule.
Much has been made of the different approaches of the UK and EU, but the reason for the difference is not always understood.
The UK wants to minimise any negotiations it might face in the WTO, and to play down the obstacles. So it stresses that it is “replicating” the commitments it has through the EU. The EU is going directly to negotiations to “modify” its commitments.
- September — news leaks of a joint UK-EU approach on tariff quotas
- September 26 — seven WTO ambassadors pre-empt joint UK-EU letter
- October 11 — UK-EU letter on joint position
- October 16–20 — first round of talks. UK-EU explain joint position, show data
- first months — informal discussions with WTO members
- February — UK distributes draft services schedule to members
- May 22 — EU Commission seeks mandate to negotiate proposed tariff quotas in the WTO
- May 22 — EU Commission invites stakeholders to comment on proposed quotas
- June 26 — EU Council approves mandate (pending from European Parliament)
- July 17 — EU stakeholder comment period closed. 21 comments received
- July 24 — UK and EU circulate proposed goods schedules in the WTO
- August — summer break in Europe and at the WTO
- September — will hard talking finally begin?
The UK is submitting an entire goods schedule, and to repeat, that covers tariffs, tariff quotas, agricultural subsidies and some other issues such as safeguards.
It says it will stick to the EU’s tariff commitments, which are currently its own too, as an EU member.
So if the EU has an 8% maximum tariff for some kinds of shoes, Britain will keep that 8%.
Its draft schedule literally copies and pastes all the tariffs from the EU’s goods schedule.
Even where an EU tariff is expressed in euros (per tonne or whatever quantity), Britain has made no attempt to convert these into pounds.
Brexiters — including International Trade Secretary Liam Fox — have not noticed or commented on the fact that the UK’s tariff commitments in the WTO after Brexit are still going to be in an EU currency.
Keeping tariff in euros means the schedule can be agreed more quickly, without haggling over an appropriate exchange rate.
It’s also practical if the UK and EU are in a customs union, one of the possibilities for the transition from Brexit to a future relationship.
For agricultural subsidies there are only two key numbers. One is zero — both the UK and EU committed to scrapping export subsidies. Other members will accept this because it’s a WTO deal from 2015 they all agreed to.
The other is the domestic support entitlement. Here the committed ceiling across the EU is much higher than the actual support given to farmers — we are talking about “trade-distorting” support which has a direct impact on prices and production, not broader support that is not linked to them.
There are no signs that Britain will suddenly become the world champion trade-distorting agricultural subsidiser, which would be totally out of character. Therefore, the discussion with other WTO members, about how much of that ceiling should be given to the UK, will largely be to ensure that the calculation is technically and legally acceptable. It’s unlikely to be about political or commercial interest.
The UK has proposed a trade-distorting support limit of €5,914.1 million (basing the calculation on the original entitlement for the EU–12 that negotiated the limit in the 1980s and 90s). The EU’s limit is €72.4 billion. Its actual support is currently about €6 billion.
That leaves 100 or so tariff quotas (the EU counts 124 on agricultural products and 18 on others). And here, the UK has admitted it’s likely to have to negotiate with other WTO members.
On June 12, 2018, Greg Hands, at that time a minister in the International Trade Department, wrote to the chair of the House of Commons European Scrutiny Committee:
“Should it be necessary, the UK may then move on to a second stage, and open our own […] negotiations, on a UK-specific goods schedule and tightly constrained to residual specific tariff rate quota lines where rectification with our partners has not been finalised.”
For its part, Brussels is only submitting revised tariff quotas. It does not have to touch its WTO commitments on tariffs — the UK’s departure has no effect on them. It does not have to reduce its entitlement to support farm prices and incomes, although other WTO members might not agree — they could demand a lower entitlement since the EU would be smaller.
That’s why the British and EU approaches look different. But on the key question of tariff quotas they are not, and they are actually closely linked.
IN THE WTO
From the start, Britain and the EU announced a joint approach on tariff quotas. They would split the present quotas for the EU–28 according to the proportions of imports going to the UK and to the EU within those quotas. This was announced in a letter from their ambassadors to their WTO counterparts, published on October 11, 2017.
Politically, the British government says it is “replicating” the EU–28’s present commitments, suggesting copying and pasting, or “rolling over” (another favourite phrase) those commitments.
Officially, it is submitting its schedules for “rectification”, a quick and not necessarily dirty procedure in the WTO, using a procedure from 1980. Rectification is for technical corrections, for example when the code numbers identifying products change, as they do every few years. Revised schedules are submitted with the new code numbers, WTO members take a quick look, usually they raise no objections, and the revised schedules are certified after three months.
Usually. Not always.
“Modification” is a different matter. This is when WTO members actually change the content of their commitments. The EU has modified its goods schedule each time it expanded to include new members. Its latest certified goods schedule is for when it expanded to 25 members. The one that includes Bulgaria, Romania and Croatia still hasn’t been certified. Presumably at least one WTO member has objections.
WTO rules say modification must allow negotiation. They grant some countries the right to negotiate, including key suppliers and those in the talks that led to the original commitment.
It’s clear that in practice tariff quotas come under the “modification” rule for both the UK and EU, whatever London says.
For example, the present EU–28 tariff quota for butter from New Zealand is 74,693 tonnes per year. According to EU data, 63.2% of imports through the quota ended up in the EU–27, and 36.8% went to the UK.
Those percentages are used to split the quota. So the quota in the proposed UK schedule is 27,516 tonnes, and the revised number in the EU–27’s schedule is 47,177 tonnes. The sum of those two numbers is the original 74,693 tonnes.
The fact that the UK and EU–27 quotas add up to the original EU–28 quota is significant. The EU has already agreed to negotiate because it is modifying its commitment. So if it negotiates with New Zealand and ends up with a different figure, the UK’s quota would automatically change too, unless the joint approach is dropped. The UK would almost certainly want to be part of that negotiation.
Hypothetically, it’s possible that New Zealand and the EU agree to a 50,000-tonne quota for the EU–27.
Under the joint approach, that would imply cutting the UK share to 24,693 tonnes. The UK would have no problem with that. It can always apply a larger tariff-quota than its commitment in the WTO.
There are a number of problems with this approach. The first is data.
Those calculations are based on data in an EU database that even member states cannot access. Britain cannot. Nor can Germany, France or anyone else. The EU has released the relevant figures for the calculation, and nothing more — only for 2013–15, the three years before the Brexit referendum, which the UK and EU prefer.
WHERE ARE THE NUMBERS FROM?
When there no imports through the quota, we are told this about where the proposed shares come from:
- To apportion the TRQs, the UK and EU have used licence data for those TRQs managed by licences and EU-level customs authority data for first-come first-served TRQs. This data provides the best available picture of TRQ use and trade flows.
- Unused TRQs are apportioned based on an alternative usage ratio identified in comparable trade. If a WTO TRQ exists for the same products, or the unused TRQ is a sub-allocated quota then the usage data of the comparable TRQ is applied to the unused (sub-allocated) TRQ.
- Where the unused quota is a standalone quota, the UK share of overall EU28 imports in the tariff lines of the TRQ is used to apportion the TRQ. For the specific case of the ACP sugar quota the usage share is based on import licenses for the overall TRQ.
- This approach is in line with accepted WTO practices and rules. It will maintain existing levels of concessions and maintain market access at the same level into the UK and EU27.
Other countries want to see figures for years before and after that to check whether the 3-year period is typical. So far, the EU has declined to release the figures. The UK and EU have simply invited the other countries to submit their own data, but that would require them to have a good knowledge of what happens outside their own markets, in the EU.
And then, there are a number of anomalies. For example, the present EU tariff quota for poultry eggs in shells, for consumption, is 136,000 tonnes.
In 2013–15 total imports through the quota were a nice egg-shaped zero.
None imported into the UK; none into the EU–27. And yet, a figure of 84.9% seems to have been pulled out of a hat for the EU–27 along with a post-Brexit quota of 114,669 tonnes, 20,331 tonnes for the UK — actually the proposed shares come from imports of the same or similar products through their tariff quotas, or from imports of all tariff quotas combined (see box).
Eggs are not the only products where there were no imports at all.
And then there’s Australian cheddar. In 2013–2015 none of that went to the UK. So 100% of the 3,711-tonne quota will go the EU–27. Australian cheddar will not have tariff-quota access to Britain, unless the policy changes.
THE WTO PROPOSALS
The four papers that the UK and EU circulated in the WTO in July 2018:
- The UK’s covering document and explanation, July24, 2018
- The UK’s proposed goods schedule, July24, 2018
- Data used to calculate the tariff quota splits, July24, 2018
- EU’s proposed tariff quota modification, July24, 2018 (excludes attached — “offset” — data files)
(These leaked documents were obtained by Bryce Baschuk of BNA Bloomberg)
Even before the joint UK-EU letter was circulated to WTO members, a number of countries got wind of the plan and responded with their own letter opposing the joint 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.”
Briefly their argument is that the straight split would decrease the value of their present access to the EU–28 market. At the moment they can choose to export to Britain, or Sweden, or Greece, or Germany, wherever the price is better and the deal more profitable at any particular moment.
Once the tariff quotas are split, that flexibility is lost and they may not be able to make the most profitable deal.
A number of possible solutions have been suggested. One is for the UK and EU to continue to use single quotas for the EU–28 even after Brexit. This would be automatic if the UK was in a customs union with the EU (and that may happen in the post-Brexit transition period). Or it could be through a customs agreement between the EU and EU specifically to have joint quotas (not on the cards at the moment).
The most obvious alternative would be for the UK and EU–27 quotas to end up larger than proposed to compensate for the loss of flexibility.
(From May to July 2018, the EU invited public comment on its proposed revised tariff-quotas. The comments came from 21 countries and organisations, some for, many against the proposal. Comments from Australia and Paraguay were similar to those from the letter writers. The US was silent. The comments can be seen here, and a quickly-compiled summary is here)
What if the UK and EU stick to their guns and go ahead with their proposed quotas? What does WTO law say?
The standard answer in an issue like this is: “we don’t know because there has never been a legal dispute on this point in the WTO.” That doesn’t stop speculation.
Some lawyers argue that provided the calculations have been made carefully, the UK and EU would win any legal challenge in the WTO because commitments on quotas are about quantities, not the commercial value of access to a market.
Some others are not so sure, and New Zealand and its allies continue to argue that it’s the value of the access that is key. They will push their claim as far as they can. Some add there’s no hurry because Britain is going to stay in a customs union with the EU during the transition anyway, delaying the need for the tariff and tariff quota parts of the goods schedule. (That assumes there will be a Brexit Withdrawal Agreement by next March.)
Depending on their mood, WTO members can also be practical. The EU has been able to trade for years even though its certified schedules are not up-to-date.
And complaints don’t always end up as legal challenges. From 2010 to 2013 Costa Rica was questioned in every meeting of the WTO Agriculture Committee because it subsidised its rice farmers by up to six times its agreed limit. But this never became a formal dispute because Costa Rica owned up first, and other members were confident it would do what was necessary, including to amend its constitution.
The key was the belief that Costa Rica was acting in good faith.
All of which means the UK and EU could trade smoothly with the rest of the world after Brexit even the schedules are not certified, provided good faith is preserved.
But if other countries are dissatisfied enough, particularly with the tariff quotas, then they might kick up a fuss and even go to WTO dispute settlement. This will take some time to resolve but it will create uncertainty in trade and sour the mood among countries Britain is targeting for free trade deals.
For now Britain (and presumably the EU) is working hard to preserve the goodwill of other WTO members. How successful it will be remains to be seen.
P.S. There is one other aspect of tariff quotas that is missing from the above, but could prove crucial for Brexit. Any idea what it is?
NOTE: Parts of this article draw on material researched and written for IEG Policy, including interviews with a range of WTO delegates. More details are in articles available to subscribers, including:
- UK to circulate draft post-Brexit WTO commitments ‘next year’ — September 25.2017
- Brexit: New Zealand official confirms approach to WTO TRQ talks — October 3, 2017
- EU hands WTO updated goods commitments, includes scrapping farm export subsidies — October 9, 2017
- UK and EU release joint letter to WTO members on approach to commitments — October 11, 2017
- EU joins UK in post-Brexit WTO talks as data emerges as first major hurdle — October 23, 2017
- Analysis: Commission draft raises prospect of no WTO quota deal by Brexit Day — May 23, 2018
- Hard talking on UK and EU WTO tariff quotas finally about to start — June 28, 2018
• September 14, 2018 — clarifying the method used to calculate UK and EU shares of tariff quotas where there have been no imports
• September 13, 2018 — corrected to include justification for the UK’s proposed tariff commitments to be in euros, and adding Reuters report on services schedules being circulated in February; adding figures for UK and EU domestic agricultural support
• Thun, Switzerland, bridge and weir. Just like a tariff quota, different volumes flow over the high and low parts of the barrier. Photo: Peter Ungphakorn CC SA-BY 4.0
• Other images public domain (CC0)