A look at the UK, EU and WTO with an eye on Brexit. Includes a brief explanation of the WTO system, a taste of how negotiations work in the WTO, and the implications for the UK (and EU) as they prepare for Brexit and beyond
By Peter Ungphakorn POSTED MAY 25, 2017 | UPDATED MAY 25, 2017
This page contains a link to download a handout on the UK, EU and WTO as Brexit approaches. It is slightly modified from a presentation given on May 20, 2017.
Negotiations as the starting point. Rights and obligations (reciprocal and non-reciprocal). Space for sound policy-making. Rules and commitments.
2. WTO negotiations: A taster
Consensus. Member-driven. The Doha Round. Negotiating coalitions (in agriculture). Concentric circles — when it’s impossible to negotiate properly in a large crowd. More than just an affair between governments: there are also negotiations at home.
3. Brexit and the WTO: Before, during and after
UK and EU “schedules” of commitments. What schedules are. How to establish the UK’s and EU’s schedules post-Brexit. The EU’s complex tariff profile. Tariffs (shoes and oranges). Tariff quotas (lamb, mutton). Domestic support for agriculture (trade-distorting). Agricultural export subsidies. Services. The cliff-edge and worse: what if there are no acceptable schedules by Brexit day?
Free trade agreements: UK-EU; UK-other WTO members. WTO rules on free trade agreements. Shallow to deep arrangements.
UK as champions of free trade. Policy choice from liberal to protectionist. Impact on bilateral free trade negotiations. UK positioning in WTO — current policy on agriculture puts it closer to the more protectionist group; handling the WTO agendas on regular work and negotiations.
Reaching agreement was one test of multilateralism. Making it work will be another
By Peter Ungphakorn POSTED FEBRUARY 25, 2017 | UPDATED FEBRUARY 28, 2017
It’s always tempting, when a tough negotiation has concluded, to breathe a sigh of relief and proclaim “job done”. But with trade agreements, the job is rarely done. For the World Trade Organization’s shiny new Trade Facilitation Agreement, seriously hard work lies ahead if it is to achieve its potential.
On February 22, 2017, the WTO proclaimed that its new deal on slashing red tape at the border had “entered into force”, the “first multilateral deal” concluded in its 21 year history. This was a truly major achievement. But as the celebrations die down, it’s time to look at what it really means and the challenges that lie ahead.
“The real work is just beginning. This is the biggest reform of global trade in a generation. It can make a big difference for growth and development around the world. Now, working together, we have the responsibility to implement the agreement to make those benefits a reality.”
Trade facilitation is about cutting red tape and streamlining customs and other procedures as goods cross borders. That includes goods in transit to and from land-locked countries.
More specifically, the procedures covered in the agreement include governments providing information and allowing consultation on laws and regulations, how rulings and appeal are handled, impartiality and non-discrimination, fees, release and clearance of goods, cooperation between border agencies and between customs authorities, various formalities, and freedom of transit.
The ink was barely dry. The agreements of the 1986–94 Uruguay Round had been signed in April 1994. They took effect the following January, bringing into existence the World Trade Organization. The round was the largest and most complex trade negotiation ever to be concluded, and was supposed to be the one to end all trade rounds.
Then at the first WTO Ministerial Conference in Singapore in December 1996, the EU and others proposed trade facilitation as a new negotiation topic. It was packaged with three much more controversial issues — investment, competition policy and transparency in government procurement.
Opposition, particularly from developing countries meant these four “Singapore issues” were kicked into the long grass in the shape of discussion groups.
The resistance continued. When in 2001 the Doha Round was launched, the Singapore issues were only included as subject headings that would not turn into negotiations without “explicit consensus”.
It was not until 2004 — when the EU finally agreed to unbundle the four issues and a compromise could be struck — that the more palatable trade facilitation formally became a Doha Round negotiating topic. The three other issues fell by the wayside.
Work on trade facilitation continued — even after the Doha Round ground to a halt in 2008, principally over agriculture. A text was eventually agreed in the run up to the Bali ministerial conference in 2013.
Azevêdo, who had recently become director-general, introduced a new way of negotiating. Instead of working on the text in a small group of core countries and then taking it to the rest of the WTO, ambassadors from the entire membership (each with one assistant) sat through lengthy sessions as they worked line by line through the draft displayed on a screen.
Hailed at the time as a breakthrough technique to make negotiations totally inclusive (and avoid resentment at being left out), the method only worked once. Since then, the core groups have returned.
The draft agreed in Bali still had to be revised to make it legally correct. Even this was delayed until November 2014 as India held up approval while it sought changes to a decision on agriculture that it had originally agreed in Bali.
Importantly, that also means 51 countries had not (yet) ratified. More on this below. (How the ratifications are counted is discussed here).
2. Achievement: it will have a real impact
Although a latecomer to the Doha Round, trade facilitation became a priority for business associations. Import duties are now often low (apart from agriculture and some other sensitive products), meaning border processes have emerged as a significant part of trading costs.
Calculations suggest the benefits will be large. By how much depends on the assumptions and the type of economic model.
The WTO’s in-depth analysis is in its 2015 World Trade Report, with estimates for reductions in trading cost of up to 14.3%, global export expansion from $750bn to $3.6 trillion — the most frequently cited is the neat $1 trillion — and up to half a per cent per year added to world gross domestic product.
A brief survey by Cathleen Cimino-Isaacs of the Peterson Institute for International Economics think-tank cites other studies that also show “sizable potential gains”.
Understandably, the biggest gains will go to the countries that currently have the most cumbersome border procedures. If goods entering and leaving a country spend weeks at the port waiting for clearance, then the costs to that country’s trade, production and consumption are going to be high.
“The range of trade cost reduction will be between 9.6% and 23.1%. African countries and [least developed counties] are expected to see the biggest average reduction in trade costs (in excess of 16%) from full implementation of the TFA [Trade Facilitation Agreement]. Full implementation will reduce trade costs of manufactured goods by 18% and of agricultural goods by 10.4%. —
“Full implementation of the TFA also has the ability to reduce time to import by over a day and a half (a 47% reduction over the current average) and time to export by almost two days (a 91% reduction over the current average).”
The Trade Facilitation Agreement allows developing countries to set a condition on implementing some of the reforms — receiving assistance to help them cover the costs and introduce new technology — a first in WTO agreements. The onus is therefore as much on the donors as on the reformers.
3. But it has not entered into force everywhere
Drowned out by the fanfare is the actual meaning of “entered into force”.
Strictly speaking, the agreement has only been activated in the ratifying countries although they will apply their streamlined processes to trade with all other WTO members equally, including those that have not ratified.
WTO rules say once the two-thirds of the membership has been reached, an amendment does enter into force, but only in ratifying countries. Therefore, the Trade Facilitation Agreement has not yet entered into force in the 51 countries that — at the time of writing — have not ratified it. They are:
Angola, Antigua and Barbuda, Argentina, Armenia, Barbados, Benin, Bolivia, Burkina Faso, Burundi, Cabo Verde, Cameroon, Central African Republic, Colombia, Congo, Costa Rica, Cuba, Congo (Democratic Republic), Djibouti, Dominican Republic, Ecuador, Egypt, Fiji, the Gambia, Guatemala, Guinea, Guinea-Bissau, Haiti, Indonesia, Israel, Kuwait, Liberia, Malawi, Maldives, Mauritania, Morocco, Namibia, Papua New Guinea, Qatar, Sierra Leone, Solomon Islands, South Africa, Suriname, Tajikistan, Tanzania, Tonga, Tunisia, Uganda, Vanuatu, Venezuela, Yemen, and Zimbabwe.
Among them are some significant traders such as Argentina, Indonesia and South Africa. Among the rest are many that would benefit most from streamlining their border procedures, particularly if they receive aid to do so.
Many countries that have not ratified may do so soon. Some have already submitted “Category A notifications” (listing measures they will implement immediately), even though they have not ratified (including Egypt and Indonesia). Many are actively preparing the details of what they will phase in, with and without assistance (C and B notifications).
(The rules on amending WTO agreements actually include a clause allowing the membership to expel countries that do not ratify in time. Of course, the word “expel” is not used. Instead: the country “shall be free to withdraw from the WTO or to remain a Member with the consent of the Ministerial Conference”. Incidentally, this provision seems to be the only way to kick a country out of the WTO. However, it is unlikely to be invoked here.)
4. The numbers should not be taken literally
It’s tempting to use simple figures to describe how important the Trade Facilitation Agreement is: “it will cut trading costs by 14.3%”, “it will increase trade by a trillion dollars”, and so on. At least Azevêdo uses “could” and “up to”.
Just as with any economic analysis this depends on the assumptions, the model and the data.
The assumptions: almost all calculations assume that the agreement is “fully” implemented, and they say so. The 2015 World Trade Report discusses this in some detail, including an assumed length of time for full implementation. But the report is 158 pages long and pretty technical. Few will even open it.
The truth is, we are a long way away from full implementation. For a start, those 51 countries that have not yet ratified will need to do so. Then, some countries will phase in some provisions over time, and some will require aid in order to do so — promised in principle but not legally committed.
According to the Trade Facilitation Agreement database, less than half of the agreement’s coverage has been notified for implementation by developing countries, whether for immediate implementation (Category A), delayed (B) or delayed and requiring technical assistance (C). A large number of Category A notifications (93) have been submitted but they do not cover all the provisions of the agreement.
Because developing countries are still compiling their needs, more notifications in Categories B (currently 9 countries notifying) and C (currently 8) can be expected, even from countries that have notified what they will implement immediately (A).
“Of course, fully implementing the TFA will be key to realizing the gains. The agreement specifies different tiers of obligations for developed and developing countries. For developing countries, the obligations are broken down between those implemented upon entry into force, those subject to a transition period, and those to follow with additional technical assistance. This built-in flexibility is important, but also serves as a reminder that the gains will take time to materialize. Making reforms will entail costs, and measures like investment in information technology and transport infrastructure, while not prerequisites, are important complements to trade facilitation reforms. Once the agreement is ratified, the challenge for the WTO will be monitoring progress towards implementation and ensuring political commitment to deliver the reforms.”
The model and the data: even more technical is the discussion in the 2015 World Trade Report about the methods used. (For the technically minded, computable general equilibrium (CGE) and gravity models produce considerably different estimates: see below.)
As for the data, some countries had implemented provisions that would be in the agreement. The analysis included creating index numbers from how much they had implemented and extrapolating these statistically to different categories of countries in the rest of the world.
Clearly calculations with this amount of construction are not meant to be predictions. They are estimates. However, the various estimates are consistent enough for us to conclude that the gains will be “pretty big” — if and when it’s all implemented.
Some expected benefits are much more difficult to model. One that is frequently cited is the transparency and predictability of bringing policies into the WTO system even if they would be implemented unilaterally anyway. This is what the 2015 World Trade Report says (pages 6–7):
“Given the widespread benefits from trade facilitation, every country should have an incentive to undertake reform on its own. The signing of the TFA, however, suggests that incorporating trade facilitation in a multilateral agreement creates additional benefits compared to what can be achieved unilaterally. —
“It provides greater legal certainty to the changes in trade procedures. It helps in the adoption of common approaches to customs and related matters, which should increase the gains from trade facilitation by harmonizing customs procedures worldwide. By foreseeing that richer members will provide assistance and support for capacity building to developing and [least developed country] members to help them implement the TFA, the agreement helps to match the supply of capacity building with the demand for it. The TFA could also help governments address a credibility problem by integrating their trade facilitation commitments into an institution with an effective enforcement mechanism.”
5. A lot of work lies ahead for rich and poor nations alike
WTO members will now create a Trade Facilitation Committee of the full membership, including countries that have not yet ratified. Its job will be to receive notifications describing what various members will implement and when, monitor how the agreement is being implemented and discuss related issues.
Two immediate tasks are to encourage the remaining members to ratify the agreement, and for all developing countries to complete their notifications of what they are implementing, whether immediately (A) or delayed (B) or delayed-requiring-assistance (C).
A third is to ensure the requests for technical assistance can be met. This requires well-designed assessments of needs from the developing countries concerned, and a real commitment to provide the assistance by developed countries and donor institutions.
In short, reaching agreement was one test of multilateralism. Making it work will be another.
6. Oh, and by the way, is it really the first?
Don’t shout this out too loud, but there are those who say trade facilitation is not the first multilateral trade deal since the WTO was created. They point to WTO deals in services on finance (twice), movement of natural persons and basic telecommunications.
But those agreements date back to 1995–97, soon after the WTO was born (and when trade facilitation was still a twinkle in the EU’s eye). That was an awfully long time ago.
The various databases and other resources available are rather confusing. You can access one, follow some links, and find yourself in another. However, the amount of available information is useful.
“Full implementation of the TFA has the potential to reduce trade costs by an average of 14.3 per cent. The computable general equilibrium (CGE) estimates see the TFA increasing global exports by between US$750 billion and US$1 trillion, depending on the speed and extent of implementation. The faster and more extensive the implementation, the greater the gains. TFA implementation has ramifications for the future trajectory of the global economy as well. This report estimates that over the 2015-30 horizon, implementation of the TFA could add up to 2.7 per cent a year to world export growth, and more than half a per cent a year to world GDP growth.
“The simulations using the gravity model provide higher estimates of the potential global export expansion arising from TFA implementation. They range from US$ 1.1 trillion to US$ 3.6 trillion depending on the extent to which the provisions of the TFA are implemented. Like the CGE simulation results, they show that the more fully the TFA is implemented, the greater are the gains for members.”
DISCLAIMER: This was written with the help of sources who asked not to be identified. It could not have been written without them. Consider it “Fake News” if you are so inclined
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 subsidies, and the minimum market opening they have promised for various services.
Under those agreements, WTO members have rights (for example not to face discrimination, and to have access to other countries’ markets) and obligations (for example not to discriminate, or to keep markets open at least as much as they have committed).
The agreements come from negotiations. The WTO dispute settlement system is about whether those agreements are being implemented as promised or how they should be interpreted. All decisions are taken by the membership, almost always by consensus (meaning no one objects).
The clichés are: the WTO operates a rules-based trading system; and it is member-driven.
Updates: Februay 15, 2017 — adding link to WTO legal texts Photo credits: WTO via Flickr; Marrakesh signing by Peter Ungphakorn
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%)
This should bury a number of myths. The memoirs of 17 key authors of a WTO agreement plus an editor’s remarks make a unique account of a complex international negotiation almost miraculously producing a deal
International trade agreements are sometimes demonised as the Grand Plan imposed by major powers in cahoots with multinational corporations. Intellectual property rights is a particular target, as is the case currently with the Trans-Pacific Partnership (TPP), and previously with the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
Watal, Jayashree and Taubman, Antony (eds),The Making of the TRIPS Agreement: Personal insights from the Uruguay Round negotiators, Geneva, World Trade Organization, 2015, pp 361 + appendixes.
Authors, and (for most) their affiliation at the time: Antony Taubman (current WTO Secretariat), Jayashree Watal (India), Adrian Otten (GATT Secretariat), Thomas Cottier(Switzerland), John Gero (Canada), Mogens Peter Carl (EU), Matthijs Geuze (GATT Secretariat), Catherine Field (US), Thu-Lang Tran Wasescha (Switzerland), Jörg Reinbothe (EU), AV Ganesan (India), Piragibe dos Santos Tarragô (Brazil), Antonio Gustavo Trombetta (Argentina), Umi KBA Majid (Malaysia), David Fitzpatrick (Hong Kong), Hannu Wager (Nordics), Jagdish Sagar (India), Adrian Macey (New Zealand), Lars Anell (Sweden, TRIPS negotiations chair)
The Making of the TRIPS Agreement, the insightful, unofficial collected memoirs of 17 of the agreement’s key authors, plus one editor, challenges that view in two ways. This unique account of how a complex international negotiation can almost miraculously produce a deal should also bury a number of other myths. (Most notable is the idea that this was entirely about rich countries versus the poor — there were serious North-North differences and to a lesser extent South-South ones as well — or that negotiators were completely at the behest of industry lobbies.)
First, the conventional view is that WTO agreements are about balancing legal “rights” and “obligations”: they affirm a country’s rights, but oblige it to respect others’ rights as well. That balance comes from compromise, which is necessary for striking a deal. For the 1986–94 Uruguay Round talks, it meant reaching consensus among more than 120 countries. The round transformed the General Agreement on Tariffs and Trade (GATT) into the WTO, producing an expanded and updated set of agreements, one of which was TRIPS.
The TRIPS Agreement has now been in play for over 20 years, and the emphasis has changed. This is not so much about complying with a rights-and-obligations template, but about providing a good policy platform that includes options for dealing with a wide range of social and technological objectives:
“There is considerable opportunity for TRIPS implementation to include attaining public policy goals through sound policy-making, not simply passing legislation to achieve passive, formal compliance with the letter of the law,” writes co-editor Antony Taubman, the present director in charge of intellectual property at the WTO. That’s some distance from the starting point, which was a focus on tackling imported counterfeit goods.
Taubman has described himself as an interloper among the authors since he was negotiating disarmament at the time, perhaps not as different as it sounds. His overview chapter provides a good executive summary of the book.
Second, the book reveals how much the negotiators on all sides had to learn and then to compromise before this ground-breaking pact could be agreed. It highlights the critical role of flexibility both in the negotiations and also built into the resulting rules. So much for the Grand Plan.
A repeated theme is not only that many trade officials had to learn about copyrights, trademarks, patents, geographical indications and all the other flavours of intellectual property. Even more significantly they had to learn from each other. One of the results, 20 years later, is the clear respect they still have for each other.
It was in Negotiating Group 11 — the one on intellectual property — that Swiss negotiator Thomas Cottier learnt about other countries’ preoccupations, he recalls: “for example those with a strong generics industry, or the fear of abuse of rights, or the need to combine enhanced protection with enhanced transfer of technology and job creation. It was here that I learned about the importance of bringing about a proper balance while defending Switzerland’s core interests.”
Many trade officials had to learn all the flavours of intellectual property. Even more significantly they had to learn from each other
Indian negotiator Jayashree Watal (co-editor of the book) relates how she approached counterparts Mogens Peter Carl (EU) and John Gero (Canada) — both contributors to this volume — on compulsory licensing. The result was a compromise draft text that was largely accepted, India contributing to a solution instead of persisting with its hard line.
Without that understanding and respect, a TRIPS Agreement would not have been possible. The present deadlock in the WTO’s Doha Round negotiations can be blamed on the fact that in some key subjects, many delegations are still not really listening to each other — witness the interminable dialogues of the deaf in current WTO negotiating meetings, such as on geographical indications and biopiracy (among intellectual property topics), and some stalemated issues in agriculture.
“With the passage of time and in the light of the difficulties that the WTO has since had in making headway in its negotiating agenda, the scale of the TRIPS Agreement seems the more remarkable,” writes Adrian Otten, Taubman’s predecessor as director, and the key (GATT) Secretariat official in the TRIPS negotiations.
Gobbledygook, fudge and theology
Otten’s chapter will resonate with anyone following current talks. It outlines the story of the negotiations, the key phases, the variety of meetings needed, the criss-crossing of alliances of shared interests in the different subjects, the role of the Secretariat and chair (Lars Anell from Sweden) — both of whose main concerns were to help a deal to be struck, not to push any other agenda — and ultimately what it took to reach agreement.
Other writers fill in the details on the different alliances, how and when countries contributed in groups or individually to each area of intellectual property, what was happening within their governments, and how they responded to compromise. For example, having yielded on listing exemptions for patenting, the US turned to proposals for disciplining them, writes US negotiator Catherine Field. (Her “axioms” for a successful negotiation should be pinned to the desktop of every negotiator’s laptop, tablet or smartphone, and be adopted as the mission-statement of the WTO’s Institute for Training and Technical Cooperation. The whole book should be required reading for the ITTC’s courses on negotiation.)
It’s easy to mock what happens in the GATT/WTO — after all, the tedium has to be broken somehow. So here goes
The resulting compromise sometimes produced “precise” but “inelegant” syntax, which “to an innocent bystander […] looks like gobbledygook,” acknowledges the EU’s Carl. Sometimes the compromise was quite simply a fudge, recall Matthijs Geuze of the GATT Secretariat, and negotiators Thu-Lang Tran Wasescha of Switzerland and David Fitzpatrick of Hong Kong. The technical term is “constructive ambiguity”, meaning (although they wouldn’t put it so bluntly): “we got what we wanted, we’ll interpret it our own way, and you can take us to court if you disagree.”
In the process, TRIPS negotiators forced each other to suffer too. “It was not unusual to have lengthy ‘theological’ discussions based on one’s own policies and laws,” writes Gero, “but such discussions could not yield negotiated solutions.” He particularly remembers the arguments on enforcement featuring the merits of civil law versus common law. Of course, neither prevailed.
It’s easy to mock what happens in the GATT/WTO — after all, the tedium has to be broken somehow. So here goes. A couple of survival tips for anyone trapped in one of these statement-ridden sessions: look around the room and (1) count how many delegates are NOT listening — a measure of futility — or (2) add up the salaries and calculate how many of the world’s poor could have been fed in each passing hour — a measure of waste.
But there’s the rub. Otten’s account and more recent experience show that a dialogue of the deaf is actually essential, so long as it’s limited to an early phase of a negotiation. It allows countries to declare their interests.
While negotiators can afford to be deaf for a while, those assisting the talks cannot. Breakthrough to the next step needed that bureaucratic monster, the dreaded “synoptic table” compiling the entire range of positions into a single document. Later came a “composite text”, now linear but still containing everyone’s positions in layers of square brackets. Both were produced by the Secretariat and chair. Otten says these compilations allowed negotiations-proper to kick off in 1989, once work in Geneva had rescued the mid-term review that had failed the previous December.
That year, 1989, turned out to be a turning point in a number of ways, several writers observe. In particular, it saw the fall of the Berlin Wall and the switch to market economies in those that had been planned centrally.
Times have changed. Ganesan now sees TRIPS as a ‘blessing in disguise’ for India
In 1989 the US also finally became a party to the Berne Convention on copyright. And in that year the US started to implement its “Special 301” legislation, allowing Washington to act against imports from countries it deemed to be violating intellectual property rights. Several developing countries decided it was better to negotiate multilateral rules that would take their concerns into account, than to face US unilateralism.
Malaysia was one, writes Umi KBA Majid. And it’s why India dropped its opposition to TRIPS, AV Ganesan recalls “candidly”: “Retaliatory action against Indian garment and other exports to the United States was looming large over India like a Damocles’ sword, especially in the last few years of the Uruguay Round.”
But ultimately India’s interests stretched beyond that: “India had a number of scientific and technical cooperation relationships with the United States at both the academic level (e.g. between universities) and the level of government science departments. The need for adequate protection of [intellectual property rights] in India was raised by the Americans as well, if those relationships were to be sustained,” Ganesan writes. Times have changed. He now sees TRIPS as a “blessing in disguise” for India.
Chairman Anell recalls that 1989 was also the year Tim Berners-Lee “implemented the first successful communication between a hypertext transfer protocol [aka http] client and a server.” The Internet was too young to have a major impact on the TRIPS negotiations, but several writers consider it to be important for the agreement’s future.
… and beyond
Trade negotiations are always a blend of developments inside and outside the talks, and the book provides accounts of both, from many angles. The EU, for example, was represented by the European Commission, which at that time was shielded from lobbying, unlike other delegations and even the EU’s own member governments.
It actually took only about two years of real negotiations to produce the bulk of what is now the TRIPS Agreement
The stories are also often personal and frank. Carl says he was in a minority of one on software protection, even within his own delegation. He admits that when the EU accused others of “usurping” its geographical indications (names identifying the origin and character of products) it was being “somewhat poetic”. (The EU still uses the term.)
It actually took only about two years of real negotiations to produce the bulk of what is now the TRIPS Agreement. This appeared as the intellectual property section of the draft Uruguay Round package produced in late 1991, known as the “Dunkel text”. Arthur Dunkel was GATT director-general at the time and chair of the overall negotiations, but much of the draft he circulated under his own responsibility was produced in the different subject groups — including the TRIPS text.
Two more years were still needed to arrive at a final package. Surprisingly, this book does not mention at all a couple of developments that were critical for lifting the round out of hiatus and towards a conclusion. Without them, there would be no TRIPS Agreement. These were the November 1992 US-EU deal on agriculture known as the Blair House accord, and the subsequent G–7 meetings in 1993.
So, as several authors observe, intellectual property ended up largely negotiated in its own bubble, except briefly when the Montreal ministerial meeting collapsed in 1988. Countries did see trade-offs with agriculture and textiles, but once the talks were underway, this was not overt. TRIPS never came up, for example, in “Green Room” meetings where key ambassadors would negotiate other trade-offs in the round.
The result is an agreement that has fared well for two decades, needing only one minor change (on compulsory licensing for exports of pharmaceuticals). Proposals are on the table for amendments on geographical indications and patents related to biological diversity, although both are far from being agreed. Previously critical activists now see the agreement as a reasonable benchmark to be defended against pressure to raise the bar further — “TRIPS-plus”.
Pride, lessons and regrets
History is only part of the story. No one can be this involved without having a large amount of pride mixed with some regrets or thoughts about the future. “The TRIPS Agreement is now firmly in place but it must not be overlooked that it addresses concerns of the past,” writes Ganesan. Swift technological change “in almost every field may soon render these concerns obsolete” and may require completely new approaches, he says.
The book ought to have a wider readership. I am not aware of anything else like it, at least on trade
Cottier, for example, calls for maximum standards to be added to existing minimum standards as a defence against “TRIPS-plus” pressure. Carl believes other “trade-related” issues should also be handled in the WTO, including labour standards and environmental issues. Several authors call for good competition policies for when intellectual property leads to monopoly (not always the case). Taubman says it’s time to look beyond trade in goods and services that contain intellectual property, to trade in intellectual property itself.
This fascinating book does have some flaws. The most serious is that it makes no concessions to non-specialist readers. We are expected to be familiar with the Uruguay Round, how GATT and the WTO work, the WIPO conventions, articles of GATT and TRIPS, and concepts such as Gattability, exhaustion and moral rights.
This is a pity because the book ought to have a wider readership. I am not aware of anything else like it, at least on trade. It should provide a valuable case study for anyone interested in how international negotiations can succeed but who may know little either about intellectual property or about the WTO or both. Even adding the odd phrase of explanation would help considerably, although the parts on specific types of intellectual property are bound to be technical. So while some parts are quite readable, others will be tough going for many. Also lacking is an index, which would make research so much easier.
That said, this is an enlightening collection, offering a range of perspectives on the talks, with anecdotes mixed in (apparently there was a 2 am bilateral session under the trees in the GATT car park) to show how personal relationships worked to produce the serious substance.
No doubt some periods of the negotiation were gripping, but a lot of it must have been tedious — much more fun to read about afterwards.