What’s really happening on tariff quotas and Britain’s WTO commitments?

Just as tariff quotas are complex and misunderstood, the same applies to the news that pops up from time to time of what’s happening to the UK’s quotas in its post-Brexit WTO commitments

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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?

Room W, WTO
A founder and still a member: the UK has always had a seat at the WTO, even if the EU speaks for it

RECAPBack to top

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.

Right now, these are part of a single set of commitments for the 28 present EU members. When the UK leaves the EU, it will need its own commitments, which will be separate from those of the EU–27.

Government procurementBack to top

JUMP TO
RECAP

Government procurement
Services
• Goods

DIFFERENT APPROACHES?
The UK
The EU

IN THE WTO
Joint UK-EU approach
Data anomalies
Bigger problem

SEE ALSO
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.

ServicesBack to top

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.

And again, the EU will only have to delete references to the UK and the commitments the UK made.

GoodsBack to top

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.

Has anyone told Liam Fox? The UK is taking “replication” to extremes, even copying tariffs in euros
Has anyone told Liam Fox? The UK is even copying tariffs in euros, which might be needed for a UK-EU customs union such as in a transition (click the image to see it full size)

DIFFERENT APPROACHES?Back to top

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.

That’s not as contradictory as it sounds. The main reason for the difference is that Britain and the EU are doing different things, but for the time being they are doing them together.

The UKBack to top

KEY DATES

2017

  • September — news leaks of a joint UK-EU approach on tariff quotas
  • September 26 — seven WTO ambassadors pre-empt joint UK-EU letter
  • October 11UK-EU letter on joint position
  • October 16–20 — first round of talks. UK-EU explain joint position, show data

2018

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.”

The nuances might be different, but in practice that’s what the EU intends too.

The EUBack to top

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.

Eggs CC0
Out of a hat? With no imports in 2013–15, the EU–27’s quota of 114,669 eggs comes from borrowing data from other tariff quotas (Click the image to see it full size)

IN THE WTO

Joint UK-EU approachBack to top

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.

WTO PROCEDURE

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.

But New Zealand might insist the UK’s commitment should be no smaller than 27,516 tonnes. If the UK accepts that, the two quotas would add up to more than the original for the EU–28.

Data anomaliesBack to top

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.

Again, there are other products in a similar situation with 100% of the present quota either becoming UK’s or EU–27’s.

Bigger problemBack to top

All of this suggests a lot of talking will be needed before the schedules are certified. And there’s an even bigger problem.

THE WTO PROPOSALS

The four papers that the UK and EU circulated in the WTO in July 2018:

(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)

Legality, politics and uncertaintyBack to top

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:


Updates:
• 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

Photocredits:
• 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)


Comments on the EU’s (and UK’s) proposed modified tariff quotas

Countries’ and organisations’ reactions show some of the issues Britain and the EU may have to confront when they negotiate their tariff quotas in the WTO

By Peter Ungphakorn
POSTED SEPTEMBER 12, 2018 | UPDATED SEPTEMBER 12, 2018

In May 2018, the European Union’s Commission circulated proposed modified tariff quotas for the post-Brexit EU–27 to be negotiated in the World Trade Organization (WTO). It also invited comments from interested parties. Twenty-one countries and organizations had responded when the comment period was closed in July, offering a foretaste of negotiations to come.

SEE ALSO
A real beginners’ guide to tariff-rate quotas (TRQs) and the WTO (2018)
What’s really happening on tariff quotas and Britain’s WTO commitments? (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)

Britain will also face those issues in the WTO because the UK’s post-Brexit tariff quotas are linked to the EU–27’s. Both want their separate post-Brexit quotas to add up to the present quotas for the EU–28. (This is explained here***.)

These snapshots of the 21 comments, including short extracts, are hastily put-together and were originally in a Twitter thread.

Follow the links to read the full texts, or find them all on this page.

Very briefly: EU farmers unions broadly support the approach. Exporters (countries and companies) and EU importers oppose it. And some say a similar exercise is needed for tariff quotas in the EU’s bilateral free trade agreements.

1.      European Sugar Refineries Association

— don’t split the quotas

Thus,WTO TRQs should not be split between UK and the EU. The status quo should be maintained, as the commitments in question adhere to the bloc, not to its individual member states. Our position is based on considerations of practicality, fairness, and certainty, and offers the best solution for both the EU-27 and the UK sugar markets

Link to comment

2.      Canada

— opposes method, still too much uncertainty

The proposal to apportion the EU-28 tariff rate quotas will result in the deterioration of market access in the European Union and in the United Kingdom. The methodology employed to split or “apportion” the tariff rate quotas is well-described in the proposal but the modalities employed are arbitrary. The use of the relatively short reference period to demonstrate trade flows may not fully capture the extent of trade, development of commercial interests or the trans-shipment of products within the European Union territory. Canada would argue that under this proposal “current market access levels” are not maintained but diminished.

Link to comment

3.      Uruguay

— opposes method, questions data and base period

In other words, for the other members not to be affected by the Brexit, it is imperative to maintain the current flexibility of being able to channel the total volume of the tariff quota to any member of the EU, otherwise it would result in a loss of commercial relevance of a quota after its distribution between two independent markets.

Finally, we should highlight certain elements that negatively affect the interpretation and would question the bases of the statistics used in the assessment of bilateral trade statistics, like the treatment of the Rotterdam effect, as well as the limited provision of data and the period considered. This is also accentuated by the problems arising from not considering the historical trade data of the TRQs resulting from the Uruguay Round in order to have commercial patterns that more accurately reflect trade flows that are not evident in the proposed three-year period.

To conclude, the unilateral methodology proposed by the EU to split quotas should not prevail over the provisions of the WTO Agreements, when it is also noted the lack of statistical data of public access that ensure to be able to determine exactly the distribution of the TRQs within the EU Member States, so that the results are consistent with the objectives of a rules based multilateral system.

Link to comment

4.      Meat & Livestock Australia

— opposes method, questions data, seeks clarity about Brexit arrangements

While the total volume covered by these TRQs would not be reduced under the proposed shared UK-EU approach, the value and commercial workability of the concessions would clearly be diminished.

The proposal would commercially disadvantage our existing access by removing the current single market flexibility – whereby commercial entities determine the port of entry that is convenient and commercially viable for the collective EU market.

Further impacting the above, is the difficulty of accurately reflecting, in any TRQ apportionment, where in the UK or EU our products are actually consumed. Neither port of entry import data nor import licensing data accurately reflects the final point of consumption.

This inaccuracy, leading to an arbitrary quota split based on port of entry, increases the likelihood of unforeseen negative effects on our trade.

Link to comment

5.      Paraguay

— challenges legal approach, seeks information on the process, expects outcome will not “nullify nor impair” its access to the EU and UK

Regarding the proposed methodology of apportionment, Paraguay considers that splitting the current TRQs bound by the EU among EU 27 countries and the UK ignores the TRQ commitments reflected in the EU schedule, which bind the Union as an entity, regardless of the number of its Member States. Every concession made in the framework of the WTO list of concessions represents a delicate balance between the EU and the rest of the WTO Members.

On the other hand, with regard to the decision to open formal negotiations on the basis of the Article XXVIII of the GATT 1994, WTO members are not yet informed when the EU plans to officially notify its intention to modify its schedule of concessions and if such notification will be joined by any action from the UK. As a matter of fact, Paraguay was not informed whether the UK will also negotiate their modifications under Article XXVIII as well.

Conclusions

Paraguay believes that the fulfilment of current WTO commitments shall be the basis for the outcome of this process, avoiding the situation of leaving the EU’s trading partners worse off.

In that regard, Paraguay is willing to engage in a constructive dialogue with the EU and UK in order to find the most reasonable and legalistic way to deal with the process of UK withdrawal from the EU. Thus, Paraguay expects that the outcomes of that process would not nullify nor impair its current market access to EU and the UK.

Link to comment

6.      Brazil

— EU–28 commitments are for the as an “indivisible” single entity, single market, so splitting quotas is unjustified. Many other objections or questions.

– The proposal for a Regulation of the European Parliament and of the Council on the apportionment of tariff rate quotas (TRQs) included in the WTO schedule of the EU following the withdrawal of the United Kingdom is based on the assumption that “EU’s existing quantitative commitments will require certain adjustments”. Can the Commission provide an explanation on why these adjustments are required, since those commitments were made by the EU vis-à-vis other WTO Members?

– In addition to leaving trade partners in a worse-off situation, the proposed apportionment of the EU´s existing quantitative commitments would also put in question a number of attributes of the EU, such as:

(a) its reliability as a trade partner, insofar as political decisions can downsize commitments previously made by the Union as a single entity;

(b) the reputation of the single market as something greater than the sum of the markets of the Member States it comprises.

Link to comment

7.      New Zealand

— EU–27 shouldn’t amend EU–28 quotas, UK’s position is questionable, no hurry since the UK is staying in the customs union through the transition

6             This approach seems to be grounded in a number of false premises, including:

– that splitting (or “apportioning”) the tariff rate quotas can “ensure that other WTO Members’ current market access levels would be maintained” (paragraph 3 of the preamble to the proposed draft Regulation). This is not the case. Both European importers, as well as the exporters from many of the EU’s closest trade partners, would find themselves seriously disadvantaged if the EU were to pursue this approach; and

– that the UK, as a third country, can compensate Members for the EU’s proposed unilateral reduction of its own commitments, while at the same time asserting that the UK is an independent entity no longer bound by the EU’s collective responsibilities.

Link to comment

8.      Dairy Companies Association of New Zealand

— full range of objections

1.3         DCANZ submits that this is a matter that is subject to World Trade Organisation (WTO) rules and commitments, and any changes to arrangements following the withdrawal of the United Kingdom must not erode New Zealand’s current trade opportunities.

1.4          DCANZ is concerned that the EU TRQ apportionment proposal:

1. Is unilateral in approach, that does not accord with recently signalled EU intensions to initiate good faith negotiations with other WTO members;

2. Is not in accord with WTO rules and commitments; these quota’s form part of the EU’s binding schedule of commitments which represents a balance of benefits and concessions between WTO member countries;

3. Is being advanced while the future shape of the relationship between the EU and UK remains uncertain;

4. Erodes the current flexibility of New Zealand exporters to make use of the full volumes available under the TRQ’s to meet demand in any geographic part of what is the current Union;

5. Uses a methodology that represents a tortuous extrapolation from a limited dataset, which is neither representative of trade which has occurred during the full lifetime of the quota, realistic in terms of modern supply chains and port networks, nor representative of how future trade may evolve;

6. Would not result in an equivalent market access opportunity compared to the current situation and would leave New Zealand dairy exporters demonstrably worse off;

Link to comment

9.      Beef + Lamb New Zealand and the Meat Industry Association of New Zealand

— unacceptable approach, and too hasty

3. The EU proposal to apportion the TRQs established in the EU’s legally binding Schedule of Commitments is unacceptable to the sheep and beef sector in New Zealand. This proposal does not meet the EU and the United Kingdom’s (UK) joint and several legal obligations and commitments to their fellow WTO Members.

4. The Sector has developed a set of key principles to guide its approach to the Brexit related TRQ discussion:

5. The quality and quantity of the WTO access commitments are legally binding;

6. An important aspect that goes to the quality of the EU’s WTO’s commitments is the flexibility New Zealand exporters have to responsibly respond to consumer demand and changing market conditions across EU markets;

7. The Sector expects the EU to undertake genuine and constructive engagement with negotiating partners and stakeholders in order to ensure a mutually workable solution that creates the least amount of disruption to the market.

8. The EU proposal to apportion the TRQ’s established in the EU’s legally binding Schedule of Commitments is completely unacceptable to the New Zealand sheep and beef sector as it erodes New Zealand’s market access rights.

9. The Sector sets out three principal concerns with the EU’s proposal on apportionment:

10. Apportioning the TRQs is not acceptable to the New Zealand meat industry;

11. A three-year reference period from 2013-2015 is a flawed snapshot of the trade relationships;

12. The timing and nature of the EU’s proposal for a regulation to apportion TRQs is both presumptive and unilateral in nature.

13. The timing of the EU’s proposal is pre-emptive, unhelpful and unnecessary. There is considerable detail left to be negotiated between the UK and the EU with respect to the terms of the UK’s departure from the EU. Asking affected parties to assess their interests without a clear understanding of the terms of trade between the EU and the UK is both untenable and unreasonable. The detail of the future EU and UK relationship will significantly determine the impact on trading partners and indeed New Zealand’s trading interests.

Link to comment

10. Starch Europe A.I.S.B.L

— calls for Thailand’s manioc starch quota to be included

Generally speaking, there are two Tariff Rate Quotas of relevance to the European starch industry in the Brexit preparedness exercise:

1. The tariff rate quota of Manioc Starch (10 000 tonnes) opened to all third countries (Erga Omnes) for exporting Manioc Starch at a reduced duty (66€/tonne) to the EU.

2. The tariff rate quota of Manioc Starch (10 500 tonnes) devoted to Thailand for exporting Manioc Starch at a reduced duty (66€/tonne) to the EU.

While the draft COM 2018 (312) proposal reports on the first quota of manioc starch (Erga Omnes) in the Annex to the Commission’s proposal, it does not include the second quota devoted to Thailand.

Starch Europe therefore calls on the Commission to include, in the Brexit preparedness exercise, the existence of this tariff rate quota of Manioc Starch (10 500 tonnes) devoted to Thailand for exporting Manioc Starch at a reduced duty (66€/tonne) to the EU, order number 090125.

We would be grateful if you could take our suggestion on board, and remain available for any question you may have.

Link to comment

11. International Meat Trade Association (UK)

— disagrees with approach for splitting quotas without adjusting overall quantities, questions data

-In principle we don’t agree that the methodology whereby the shares must add up to 100% is a fair approach.

-The flexibility to sell product either to the UK or other member states is an integral part of the market access granted to third countries under the WTO commitments. Whilst using a 3 year period is a convenient mirror of the procedure used for any enlargement of the EU, a member state leaving the EU is not a mirror image given the presence of the single market. Current flexibility to send to the EU27 or to the UK allows importers to respond to market changes & to supply product where it is most required. The EU & the UK are not self-sufficient in meat & need stable sources of imported product from trading partners in order to meet consumer demand, helping balance the market.

-Once imported into a member state the product is free to travel within the single market thus post clearance movement of product is common, responding to changes in price differentials between member states for particular cuts of meat.

We attach a more detailed response.

Link to comment

12. Australia

— concern about value of concessions, data. Calls for EU to use transition period and consider current strain on WTO

Australia believes that the current proposal for apportioning TRW between the United Kingdom and the European Union would diminish the commercial value of Australia’s existing agricultural market access to the EU. While the total ‘volume’ covered by the TRW to be shared between the UK and EU would not be reduced under the approach proposed, the ‘value’ of the concessions would clearly be reduced. The approach would leave Australia at a commercial disadvantage, by removing flexibility in where product is sent year-to-year, and by rendering some country-specific quota allocations too small to be commercially viable.

Australia further notes the difficulty of reflecting accurately, in any TRQ apportionment, whether goods are consumed in the UK or elsewhere in the EU, due to the ‘Rotterdam effect’. Neither import data nor licensing data accurately reflects the final point of consumption for goods within the EU. Such uncertainty in the data increases the likelihood of unforeseen negative effects on trade from the proposed approach.

Australia also notes that key trading partners of the EU and the UK have consistently rejected the proposed TRQ-splitting approach, since it was first proposed in October 2017.

Link to comment

13. European Association of Fruit and Vegetable Processors (PROFEL)

— supports some quotas, questions figure for agaricus mushrooms and seeks smaller quotas for canned fruit

1. Dried onions: the EU sector of dried onions can support the current proposal

2. Mushrooms of the species Agaricus, prepared, preserved or provisionally preserved: after coordination with the European Group of Mushroom Growers (GEPC) we would like to point out that the 2 volumes mentioned are not consistent with the volumes of the regulation No 1979/2006, which are to date: 30 400 T for EU imports from China (28 950 T + 800 T with the accession of Bulgaria, Romania – Reg. No. 637/2014 and + 650 T with the accession of Croatia – Reg. 2016/2244) and 5030 T for EU imports from other third countries. On the principle, the EU sector can accept to keep the current quota as the UK has imported very few canned mushrooms from China these last years.

3. Preserved pineapples, citrus fruit, pears, apricots, cherries, peaches and strawberries: the European sector of canned fruit can support the current proposal to adapt the WTO quota and stresses the importance of reducing the EU’s import quota for canned fruit in the context of Brexit. For the European sector, it is of utmost importance to adapt also the bilateral quota in the free trade agreements between the EU and third countries, such as the quota for canned fruit in the agreement with the South African Development Community (SADC) of 57.156 tons. Given that around 26% of the EU imports of canned peaches from South Africa are destined for the UK market, these volumes need be reduced from the EU quota when the UK leaves the European Union.

Link to comment

14. Argentina

— opposes method, asks about UK-EU trade in the quotas

In addition, we would like to express our profound substantive concern about the methodology of the proposed apportionment. Simply splitting the current TRQs bound by the EU among EU 27 countries and the UK raises a number of issues. This methodology ignores the fact that the TRQ commitments reflected in the EU schedule, which represents a delicate balance of concessions and entitlements between the EU and the rest of the WTO Members, bind the Union as an entity regardless of the number of its Member States.

The apportionment methodology negatively affects the quality of the TRQ market access rights by creating a market segmentation that was not present at the time the TRQs were negotiated. This simply denies the current right of exporters to decide to which EU Member State to export and to take advantage of variations of internal prices. Besides, on the representative three-year period, the EU plans to use the 2013-2015 period because it allegedly reflects better the situation before the UK’s withdrawal. However, the EU did not submit any evidence supporting the premise that more recent periods suffered from indirect effects of the UK’s withdrawal from the EU.

Regarding future trade flows between the EU and the UK, there is neither information the new UK schedule and its tariff (bound or applied), nor on whether the goods that are currently imported into theEU-28 through TRQs will continue to enjoy DFQF between the EU-27 and the UK

(DFQF = duty-free, quota free)

Link to comment

15. International Beef Alliance

— opposes method, questions haste

Market stability and predictability is paramount. It is important for the beef producers and consumers in Europe, as well the beef producers within our countries. Trade relationships and important commercial relationships have been established over decades of successful trade between all of our countries. It is essential that any outcome at the WTO preserve this stability and continues to promote open trade. An important contributor to this market stability is the ability of exporters to trade into either Continental Europe or the United Kingdom, without further restrictions. Many of our exporters take advantage of distribution networks by using a port as a centre of distribution into a number of European markets. We value this flexibility which is eroded by the EU’s proposal to “apportion” quotas.

Apportionment of quotas also compromises the quality and quantity of quotas, and in the case of smaller quotas, apportionment renders some almost economically unviable. We encourage the EU to approach this task in the spirit of greater trade liberalization, and work with trading partners to come to a mutually beneficial solution that overcomes these challenges.

We also question the timing of this proposal from the EU given the significant uncertainty around the terms of trade between the UK and the EU after March 2019. There remains a significant amount of detail left to be negotiated between the EU and the UK, and it seems presumptuous to propose a regulation before adequate consultation and negotiation has occurred between affected WTO Members.

Link to comment

16. EPEGA (poultry meat importers)

— EU–27 keep unchanged quotas, UK negotiates new ones

As regards the arrangements for the tariff quotas of poultry meat from third countries after withdrawal of the UK from the EU, EPEGA sees no need for action, to behave generously towards the United Kingdom. The United Kingdom leaves the European Union voluntarily and should be aware of the consequences of the withdrawal.

EPEGA favours the option of maintaining poultry meat quotas unchanged in the EU 27 after the withdrawal of the United Kingdom and that the United Kingdom renegotiates its quotas with the third countries.

A percentage allocation of the quotas between the EU and the United Kingdom constitutes a discrimination of importers in the member states remaining in the EU and could provide incentives for potential imitators.

Furthermore, it is of vital importance that trade or import certificates (reference quantities for the quotas that were generated by other EU Member States in the United Kingdom before the Brexit ) will be mutually recognized after the Brexit.

Link to comment

17. COPA & COGECA

— supports the EU and UK approach including possible unilateral apportionment

Copa and Cogeca are supportive of the joint offer made by the EU and the UK to the World Trade Organisation (WTO) members regarding the adjustment of the EU’s WTO bound Tariff Rate Quotas (TRQs). We agree that this proposal is in the interest of maintaining clarity and predictability in the mutual trading system.

Furthermore, we believe that the methodology proposed by the EU and the UK to maintain the existing levels of market access available (through an apportionment of the EU’s existing commitments) to other WTO members is appropriate. The methodology is compatible with the EU’s obligation under the WTO Agreement.

While the EU’s schedule commitments will continue after the withdrawal of the United Kingdom from the European Union, the existing quantitative obligations need to be adjusted. Full absorption by the EU27 of all current EU’s WTO bound TRQs would lead to significant imbalances within the single market.

If necessary, and given the limits imposed by this process of negotiations, Copa and Cogeca supports the Union to proceed unilaterally to the apportionment of the tariff rate quotas.

Link to comment

18. National Farmers’ Union

— supports the EU approach, flexible on base period

TRQs are a sensitive trade issue for our members; our priority is to ensure that any negotiated outcome does not unfairly disadvantage UK producers. The NFU supports the Commission’s proposal for a regulation on the apportionment of tariff rate quotas (TRQs) included in the WTO schedule of the Union following the withdrawal of the United Kingdom from the Union.

We are supportive of the process and methodology that the EU and UK have agreed and presented to the other WTO members. Apportioning the EU28 TRQs based on how they were used in the three years prior the EU Referendum in the UK represents a defendable position at the WTO negotiating table. However, if it becomes apparent that the chosen reference period is unrepresentative of the current trade flows we reserve the right to ask the UK Government to consider a more recent reference period. We will keep this under close review.

Link to comment

19. Deutscher Bauernverband (German Farmers Association) (DBV)

— broadly supports the EU’s approach

Full adoption by future EU-27 of all WTO tariff quotas for agricultural products in the current EU-28 would significant market pressures in the EU single market and would be unacceptable to us.

The adjustment of the EU’s bound WTO tariff quotas requires a sharing of the existing volumes between the UK and the EU, which will take effect at the time when the UK is no longer covered by the EU’s WTO list. The DBV expressly welcomes the fact that the EU has started talks with the WTO trading partners to this effect.

The DBV also believes it is necessary to agree bilaterally with the UK on a common approach in the framework of the necessary talks with WTO trading partners.

We point out that the allocation of tariff quotas should be based on existing trsde flows for each tariff quota in a current representative period.

If necessary, we support the request of the European Commission to be able to unilaterally allocate tariff quotas. Ensuring legal certainty and smooth and continuous settlement of imports into the Union and the UK under the tariff quotas must be of the utmost importance.

(via Google translate)

Link to comment

20. Spiegeleer Consulting

— must include quotas in bilateral agreements too, base on real trade

As drafted, the explanatory memorandum of the proposal implies that the principle of sharing cannot exclude any category of import quotas.

This principle must logically apply equally to quotas arising from bilateral free trade agreements and especially to the free trade agreements recently concluded or being negotiated.

The universality of this principle seems reasonable in view of the fact that all international commercial commitments have been sized for a Europe of 28. If they were concentrated in a market reduced to 27, they would increase the burden borne by the latter and break the general equilibrium sought by the trade agreements concerned.

Finally if it wants to be fair and useful, the distribution requires that the import flows recorded by zone (UK and EU-27) be related to the real total imports, and not to the hypothetical nominal quota potential.

(via Google translate)

Link to comment

21. Anonymous (France)

— EU–27 quotas should be based on actual imports even if quotas unfilled, do the same for bilateral free trade agreements

The Commission’s calculation modality is surprising: the entire EU-28 quota is allocated to the EU-27 less the use made by the United Kingdom. But it is to forget that the entire quota has not been used every year. This means entrusting the EU-27 more than reality. Why not calculate the percentage upside down, ie allocate to the EU-27 what the EU-27 actually used between 2013-2016? The calculation method chosen is against the EU-27

In any case this draft regulation is welcomed, and invites to quickly build an identical project, but concerning the bilateral FTA!

(via Google translate)

Link to comment


Updates: None so far
Photocredits: Montage using public domain (CC0) components


A real beginners’ guide to tariff-rate quotas (TRQs) and the WTO

The first beginners’ guide was on tariffs. It was supposed to be for a “six-year-old” to understand. Sadly tariff quotas are more complicated, so perhaps you have to be seven-and-a-half for this one, and that’s just at the start


JUMP TO
BASICS
What are quotas?
What are tariff quotas?
Why have tariff quotas?
And in the WTO?

IN PRACTICE
When does the higher tariff kick in?
Are tariff quotas available to all suppliers?
What about the politics?
And Brexit?
Where can I find tariff quotas?

By Peter Ungphakorn
POSTED SEPTEMBER 9, 2018 | UPDATED SEPTEMBER 10, 2018

In trade policy, life can quickly become pretty complicated. The first beginners guide was on tariffs, and it was relatively simple. Move on to “tariff quotas” and we enter a complex, controversial and sometimes murky world.

But it’s useful to understand them because they feature in current debates about Brexit and Donald Trump’s trade policies. So let’s keep this as simple as possible.

First things first.

BASICS

What are quotas?Back to top

We are familiar with quotas. They are simply limits on numbers or amounts. Until recently, Britain had a quota on how many foreign doctors and nurses would be granted visas to work in the UK: 20,700 per year. (This limit was removed in June 2018 in order to tackle health staff shortages.)

Sticking with trade in goods (and ignoring services), quotas are limits on the quantities imported or exported (the technical term is “quantitative restrictions” or QRs, which includes outright prohibitions).

By and large, the world’s trading nations have agreed in the World Trade Organization (WTO)  to scrap import quotas. Export quotas are discouraged (although some countries use them legitimately to control exports that face tariff quotas in the importing country — we’ll see why in a moment).

Below is an imaginary quota on importing some types of live sheep. It could have been a number of animals, say 5,000. But instead, this quota is 196 tonnes (ie, the number of sheep is converted to an equivalent amount in tonnes by some formula.)

This hypothetical country allows 196 tonnes (equivalent) to be imported. Beyond that, imports are banned completely. (The imports will be charged whatever the normal import duty — or tariff — is.)

A quota: quantities outside the quota are not allowed
A quota: quantities outside the quota are not allowed

US President Donald Trump’s war against steel and aluminium imports has led to a quota on steel imports from Brazil and other countries. (Listen also to this podcast on Trump’s quotas.)

People often speak about “quotas” for short when they mean “tariff quotas”. They are not exactly the same. So …

What are tariff quotas?Back to top

The full name is “tariff-rate quotas” (TRQs), and they apply to imports of goods. Within the quota, the tariff rate is zero (duty-free) or low. Outside the quota the tariff rate is much higher. Importing outside a tariff quota is not impossible, but the tariff rate could be so high that it’s unprofitable.

In other words the quota is a limit on the quantity eligible for lower duty.

Below is an actual tariff quota. The EU allows some types of live sheep to be imported at a 10% duty rate, up to a limit of the equivalent of 196 tonnes (yes, the previous example was based on a real figure*). Outside the quota, the duty is €805 per tonne. That would add €805 per tonne to the import price. The exporter could lower the price in order to try to sell the sheep, but often that would still be unprofitable either for the importer or the exporter.

Sheep tariff quota
A tariff quota: quantities outside the quota are allowed, but the duty adds €805 per tonne (equivalent) to the import price

Tariff quotas are used on a wide range of products. Most are agricultural: cereals, meat, fruit and vegetables, and dairy products are the most common. Sugar is not far behind. Not all are food: the US has tariff quotas on cotton. And not all are agricultural. The EU has around 100 tariff quotas: most are agricultural but they also include on fish (not “agricultural” in the WTO), glass beads and imitation precious stones, ferrosilicon, newsprint, and other products.

So far so simple (hopefully). Now it starts to get complicated.

Cotton
Cotton: US growers are a powerful lobby

Why have tariff quotas?Back to top

Essentially they are a compromise. On one side, they protect domestic producers from having to face competition from large quantities of imports. On the other, they allow exporters some access to the market. They also allow consumers and other producers in the importing country to get hold of some imports.

The US cotton tariff quota protects US cotton growers while allowing textiles manufactures to import some cheaper cotton.

The compromise would have come from international trade negotiations, leading to a balance between the interests of importing and exporting countries.

Inside a country it would also have come from the government balancing the interests of different groups of producers (those who compete with the imports, and those who use the imports as raw materials or components) and consumers. How that balance is struck depends on the country’s political processes, including lobbying and interests represented in parliaments.

In the US, cotton growers are a powerful lobby. From Canada eastward to Japan and in many countries in between, it’s dairy producers. In the EU, farmers groups lobby on a wide range of products. In Japan, it’s rice farmers. Sugar is protected in most producing countries, often with tariff quotas. And so on.

Different types of rice
Rice: Japan has a 500–600% tariff and tariff quota; the EU’s tariff quota is about 200,000 tonnes

And in the WTO?Back to top

The agricultural tariff quotas in the WTO have a particular history. They are the result of the 1986–94 Uruguay Round negotiations, which reformed international trade rules and created the WTO.

In the talks, countries agreed to scrap import bans and straight quotas, and to replace them with tariffs having a similar effect. (This conversion to tariffs was called “tariffication” — the full complexity is in Annex 3 of this non-binding document from the talks.)

How did tariffication work? If banning imports meant the domestic price was six times the world price, the equivalent tariff would be 500% — the 500% tariff would, in principle result in a price that’s six times the world price. That was approximately the situation for rice imports into Japan.

Importing with a 500% duty rate is clearly impossible (or almost impossible). So the negotiators compromised by opening up tariff quotas that would allow some imports. The unofficial target was 5% of domestic consumption, but that was never officially agreed.

The result was tariff quotas that were often considerably manipulated. (This could have been called “cheating” but because the target was not agreed it was just called “dirty tariffication” — the 5% target is in paragraph 5 of the same non-binding document.)

Raw sugar
Raw cane sugar: The US tariff quota is allocated among 40 countries

And now, I’m afraid, it gets really complicated.

IN PRACTICE

When does the higher tariff kick in?Back to top

Or, does the tariff quota have to be used up completely before imports are charged the higher duty? The short answer is “no”. Some imports can face the higher duty even if the lower-duty quota is not filled.

QUOTA ALLOCATION METHODS

WTO members identified all these methods in their notifications to the organisation (compiled in Secretariat document TN/AG/S/26/Rev.1)

  • Applied tariffs: unlimited imports at the in-quota tariff rate or below
  • Auctioning: importers bid for shares or licences
  • First-come, first-served: physical imports charged in-quota tariffs until the quota is filled
  • Historical importers: based past imports of the product
  • Licences on demand: allocated in relation to quantities demanded, often before the period specified for the quota — first-come, first-served or allocations trimmed proportionately if demand exceeds the quota
  • Mixed allocation methods: combinations of the above, none dominant
  • Non-Specified: no method notified
  • Other: methods not clearly within any of these categories
  • Producer groups or associations: if they import or control the country’s imports
  • Imports by state trading entities: if they import or control the country’s imports

It depends on how the importing country manages the tariff quota. Normally this means issuing import licences, and the way they are issued has an impact.

If the licences are issued automatically as shipments head for the importing port, and if they are issued first-come-first-served, then the quota would be filled before the higher tariff kicks in.

But there are many other criteria that countries use for issuing import licences. One is for this year’s licence to be based on the company’s previous years’ imports (“historical importers”). Another requires importers to pay for the licence by bidding — a controversial method that some argue that in practice raises the in-quota tariff, violating the country’s WTO commitment (explained here).

Among the questions countries ask each other most often in the WTO’s Agriculture Committee is why imports under their tariff quotas do not reach the limit (the quotas are “unfilled”).

The answer is usually because of supply and demand — domestic demand for the imports is too weak or the prices on imports are too high. A number of countries claim that the real reason is often the way import licences are allocated. They have tried to negotiate tighter disciplines, but as part of a wider agriculture negotiation which is largely stalled.

Are tariff quotas available to all suppliers?Back to top

Some are, some aren’t. Tariff quotas often specify which countries can supply the product. Sometimes the quota is defined by which country can supply, meaning there can be several quotas, one for each supplier. Sometimes a single quota is subdivided to show how much goes to each country, how much goes to other unspecified countries and how much is available for all countries (the dreaded “erga omnes”, abbreviated as “EO” — personally I prefer to think of “EO” as “everyone”).

The US recently announced how its 1.1 million-tonne WTO sugar tariff quota will be shared out among 40 countries in financial year 2019.

Dairy products: protected in the EU, US, Canada and elsewhere
Dairy products: protected in the EU and around the world

What about the politics?Back to top

On the face of it, this is about protectionism versus access to markets (or to imports). But there’s more to it.

THAI TAPIOCA

In the 1980s and 90s, Thailand exported millions of tonnes of tapioca pellets to the EU through a tariff quota. (Tapioca is called manioc in the EU; elsewhere it’s also called cassava.) The tapioca fed pigs in Europe because it was cheaper than barley and other feed ingredients, whose imports faced high tariffs.

Thailand was also allowed to control its exports to match the EU’s import quota, under a voluntary export restraint (VER) agreement, and this transferred control of the quota rent to Thailand. (VERs were largely outlawed when the WTO came into being in 1995, but they have reappeared in response to Trump’s threats against imports.)

Various controversial and allegedly corrupt schemes were devised by the Thai government to allocate shares of the exports among various companies.

In one method, companies could export in proportion of the stocks they held. This led to a race to stock tapioca, drove up warehouse rental and produced official figures for total stocks that exceeded total warehouse capacity. The quota rent went to warehouse owners, and perhaps officials who checked the stocks.

Thailand also exported its poorest quality tapioca to the EU at a high price, inflated by the quota and the captive market created by import barriers on alternative feed ingredients. It exported its best quality tapioca cheaply to South Korea. South Korean importers got a share of the quota rent both through the lower price and the better quality.

That battle is over. Tapioca is now traded mainly as starch for use in food processing. But it is a vivid example of how quotas create a battle ground for economic, political, and sometimes corrupt interests.

Quotas (including tariff quotas) create a free gift for someone. They are themselves valuable.

Part of the controversy is about the fight for that additional value, which economists call “quota rent”.

Quotas restrict the supply of a product. Buyers compete for shares of the restricted supply and bid up its price. That higher price produces quota rent for the amount supplied, as a free gift.

The fact that governments are able to open bidding for import licences shows companies are willing to pay extra in order to get their hands on products that have become more scarce as a result of a quota or tariff quota.

Who gets this free gift? It depends.

If the government allocates import licences by bidding, then some or all of the quota rent goes to the government.

Some economists argue that this is the most useful way of dealing with quota rent. It should not be seen as an extra tariff, they and some governments argue. Otherwise the free gift just goes to the private sector.

Sometimes companies receive import licences and sell them on to other companies for a profit. That profit comes from the quota rent.

Sometimes it’s the exporting county that controls the quota rent by controlling the quota (see box).

The bottom line: whoever controls the quota also controls who gets the quota rent.

And Brexit?Back to top

Tariff quotas have emerged as part of the UK’s need to re-establish itself as a WTO member independent of the EU. In particular, the UK has to separate its own tariff quotas from those of the EU’s. London and Brussels have agreed on a method which would be a straight post-Brexit split of the present pre-Brexit tariff quotas of the EU–28.

Some other WTO members are unhappy with the method and have promised tough negotiations to produce something different.

This is discussed here.

Where can I find tariff quotas?Back to top

Every year, WTO members have to notify what’s been happening with their agricultural tariff quotas. A useful tool for searching for these notifications is here  — look for “Search documents online” and “Notifications on tariff and other quotas under Article 18.2 (MA:1, MA:2)”

Some importing countries have information on their websites. The EU’s is here, but searching the EU’s databases is complicated because of the need to look up tariff code numbers first rather than key words. So good luck! (If anyone knows a simpler source, please let me know.)


* The EU’s actual commitment in the WTO is 5,676 tonnes, but that is for the 25 EU members before Bulgaria, Romania and Croatia joined. The EU’s commitment for the EU–28 has not yet been cleared by WTO members but it is applying the 196 tonnes specified for “other countries” in its commitment.

Updates: September 10, 2018 — added box on quota allocation methods (thanks to Derrick Wilkinson for remining me about the WTO Secretariat paper); tweaked the list of products with tariff quotas, based  on another Secretariat paper, TN/AG/S/5

Photocredits:
• Public domain or CC0: customs barrier (YvonneH | Pixabay), hake (Freshwater and Marine Image Bank), wheat (Pixabay), newsprint (Samuel J Hood | Australian National Maritime Museum), glass beads (cocoparisienne | Pixabay), rice (strecosa | Pixabay)
Ferro-silicon (FocalPoint | Wikimedia commons CC BY-SA 4.0)
• Raw sugar (Giridhar Appaji Nag Y | Wikimedia commons CC BY 2.0)
Cotton (S Aziz123 | Wikimedia commons CC BY-SA 4.0)
• Sheep in front of a cattle grid — looking over the Duddon estuary, Cumbria (SKITTZITILBY | Wikimedia commons CC BY 2.0)
• Cheeses (Chris Buecheler | Wikimedia commons CC BY 2.0)


Standards, regulations and trade in goods — a primer

As import duties fall, other trade barriers appear. Some have compared this to rocks emerging at low tide. Among the most important of these ‘non-tariff barriers’ are standards and regulations. How do they work?

JUMP TO
What are product standards?
Are standards compulsory?
What about regulations and legislation?
Who sets the standards?
Who sets international product standards?
Do those two agreements only deal with standards?
Are CE marks EU standards?
Are international standards compulsory or voluntary?
Surely we should try to make life simpler?
Does reclaiming sovereignty have a cost?
And standards in services?

By Peter Ungphakorn
POSTED SEPTEMBER 5, 2018 | ORIGINALLY PUBLISHED ON UK TRADE FORUM, MAY 8, 2018 | UPDATED SEPTEMBER 5, 2018

“Standards” and “regulations” are critically important for trade and have entered the public discussion about Britain’s future trade relationship with the EU and the rest of the world. But what are they? Are they the same? Are they compulsory or voluntary?

This is an attempt to explain as simply as possible how they work in international trade. And to keep it simple, it only deals with standards for goods — key, for example, to what happens on the Irish border after the UK leaves the EU — even though standards also exist in services.

Standards and regulations were part of the Brexit debate from the start. Many standards applied in the UK are the EU’s, although quite a lot are the UK’s own. One purpose of Brexit is supposed to be to allow the UK to have its own standards or even to scrap some standards completely. That might be easier said than done.

A smooth-running Brexit will require the UK and its trading partners, including the EU, to try to recognise each other’s standards and regulations or to pool them in some way. And if standards diverge on either side of the Irish border, the border will no longer be frictionless.

plugs_1080
Round holes and square pegs: over 30 standards cover safety but create compatibility problems

What are product standards?Back to top

They are descriptions of criteria or specifications that products may have to meet for various purposes such as health and safety, or compatibility.

For example, food safety — 0.2ppm pesticide residue. On April 25, 2018 the US notified the World Trade Organization (WTO) that it intended to apply a new food safety standard that would set new limits in residues of a pesticide called clethodim in products ranging from almonds to brassicas and other vegetables. For almond husks it would be 0.2 parts per million (ppm); for green onions 2.0 ppm; and so on. The notification also says there is no equivalent international standard, so this is a US standard.

This was the 2,779th time the US notified the WTO about its draft, new, revised or updated pesticide residue standards and regulations since the WTO was set up in 1996.

For example, compatibility — plugs. When we travel we soon come across a problem — our plugs often don’t fit into the power sockets in other countries. Wikipedia lists over 30 different types of plugs used as standard in countries around the world. Although there will be safety aspects for all of them, that does not determine the number of pins (there are even two-pin plugs with separate earth contacts), or the pins’ sizes and shapes, or the dimensions of the plugs themselves. Note that the UK has its own unique plug standards as do several other EU members.

Are standards compulsory?Back to top

Some are, some aren’t. When a country adopts standards for food or electrical safety they are usually compulsory: all suppliers have to meet the standards by law. But standards can also be voluntary.

Standardising the electrical plugs and sockets in various countries is for convenience (within the country) as well as safety, but we often see other types of plugs used as well. It all depends on the country’s rules.

Even with food, some standards are not compulsory. Take “fair trade” and “organic” food. Or the UK’s voluntary standards for “Red Tractor”, “Lion Eggs” and other labelling. They are voluntary because producers can sell the products without complying, but compulsory if the producers want to use the label.

What about regulations and legislation?Back to top

Many regulations have nothing to do with standards. But when a country adopts a standard, either compulsory or voluntary, it usually does so through a regulation, which says what the adopted standard is. That regulation often comes under a law, for example saying the country’s food and drug authority or food safety agency has the power to issue regulations to ensure food is safe to eat.

So the hierarchy is usually:

  1. law assigning power or authority — but sometimes with more specific details;
  2. rules and regulations under the law;
  3. standards cited in the rules and regulations.

In other words a “standard” is a description; a regulation makes the standard a requirement.

Pesticide application
Spraying lettuces in Arizona: the US has close to 2,800 WTO notifications on pesticide residues

Who sets the standards?Back to top

In the WTO, countries are free to choose what standards to adopt, but with some conditions. They are encouraged to use internationally-recognised standards. Or they can set their own provided they can justify the standards with scientific evidence and risk assessment. The purpose is to ensure the standards are genuine, not arbitrary or an excuse to be protectionist.

Who sets international product standards?Back to top

A common misunderstanding is that the WTO sets product standards. It doesn’t. The international standards-setting bodies are outside the WTO. To see how this works, it’s best to separate two sets of standards.

  1. Food safety, and animal and plant health (sanitary and phytosanitary measures — SPS). The WTO’s SPS Agreement identifies “three sisters” as recognised standards-setting bodies in its preamble:

The agreement leaves open the possibility of adding others. Countries are free to adopt standards from the “three sisters” or set their own — as the US has done with the pesticide residue. If they do use these international standards they are more or less safe from a legal challenge in the WTO.

Jaques_Paysans_fribourgeois
Health labelling: tobacco has it — should alcohol?
  1. Other standards. These come under the WTO agreement on Technical Barriers to Trade (TBT) whose coverage also extends beyond standards to labelling, regulations, and how regulations are created.

Both SPS and TBT deal with human health. If it’s food safety, it’s SPS. If it’s nutritional requirements or labelling, or the safety of non-food products, it’s TBT.

The situation with TBT is much more complicated than with SPS. There are hundreds of standards-setting bodies around the world, many specialising in specific industries, many involving the private sector.

The TBT Agreement doesn’t mention any particular bodies. Instead, it creates a “Code of Good Practice for the Preparation, Adoption and Application of Standards” and says any standard-setting body complying with the code is considered to be complying with the agreement. Note that the Code of Good Practice is itself a set of standards, and is required for more or less automatic safety against legal challenge in the WTO.

So who set the standards for those plugs? One set of standards is “CEE 7”. They come from the International Electrotechnical Commission (IEC), a not-for-profit, “quasi-governmental” organization whose delegates include representatives of government and industry.

Plugs are only a small part of IEC’s work. It has 203 technical committees and subcommittees working on standards and technical specifications of everything from miniature fuses and overhead cables to nuclear instrumentation. And that’s only in electrical technology. The International Organization for Standardization (ISO) lists over 22,000 standards in around 300 categories.

fruit-flies-1080
Pests: some say eradicating fruit fly is the key to development

Do those two agreements only deal with standards?Back to top

No. Both cover broader regulations as well. For example in SPS, the OIE’s animal health measures include how to deal with an outbreak of disease such as foot-and-mouth: establishing zones to deal with different degrees of infection and risk, quarantine, treatment, how other countries might react and more.

The TBT Agreement includes broader provisions on regulations and labelling — such as nutritional information. Health warnings on labels have been debated intensively. They are now accepted widely on tobacco products, but there are moves to use them on junk food and alcoholic drinks..

Are CE marks EU standards?Back to top

Not exactly. They are certificates. Many — but not all — products sold in the European Economic Area (EU plus Iceland, Liechtenstein and Norway) have to have the CE mark. They are declarations by the manufacturer that the products meet the EU standards that apply to those products. They are not a guarantee that the products can be sold.

Because the EU and its EEA partners are such a large market, manufacturers outside the area use the CE mark even if some of their production is sold in countries that don’t require it.

Incidentally, this is different from the UK’s Kite Mark, which is owned by the British Standards Institution otherwise known as the BSI Group, and is intended to assure consumers that a product is safe but not necessarily that it meets any official requirements.

Crash test | Pexels | CC0
Car safety: UNECE is working on global standards

Are international standards compulsory or voluntary?Back to top

As far as the WTO is concerned, they are voluntary. Countries can choose whether to adopt them or not, but have to justify using alternative standards. The IEC says its standards are “entirely voluntary.”

But once adopted, a country’s standards — or the EU’s in the case of its member states — are compulsory for suppliers. So producers exporting almonds, green onions or brassicas to the US will have to meet the 0.2ppm to 3.0ppm maximum levels for clethodim residues, which apply only to the US.

Surely we should try to make life simpler?Back to top

Yes. Or as one person said on Twitter the aim should be to allow producers to “test once and export everywhere”.

The WTO’s TBT and SPS agreements encourage countries to move towards “harmonising” their standards. This can mean, for example, adopting identical standards, “regulatory alignment” or simply recognising that another country’s standards or methods of testing are equivalent to one’s own for a given purpose — such as protecting health — even if they are not identical.

One international body is working towards closing international gaps in regulations for cars. This is the UN Economic Commission for Europe (UNECE), which hosts the World Forum for the harmonisation of vehicle regulations. UNECE regulations for cars are increasingly cited in trade agreements such as the EU-South Korea pact, which lists EU regulations alongside the UNECE equivalents.

But countries often prefer tighter criteria, particularly if they are large enough and have enough bargaining power so that exporters have to meet their requirements. It’s easier to get the world to accept EU, US or Japanese standards than those of a smaller country such as Switzerland.

Does reclaiming sovereignty have a cost?Back to top

This is important for Brexit. Part of Brexit is about reclaiming the power to set the UK’s own product standards, in addition to the areas — like plugs — where the UK already has its own.

Achieving that comes at a price: in fact at two prices.

One price is creating costs and infrastructure for goods crossing the Irish border. It’s why the talk is now about recognition and harmonisation of UK-EU standards (or “regulatory alignment”). This might even mean the UK continuing to use EU standards, but from outside, unless another solution is found. As an EU member the UK always had a say in EU regulations.

The other price is more complexity and red tape in trade with the EU and other parts of the world more generally.

When British producers sell domestically and export to the US, at the moment they only have to consider two sets of standards, typically EU and US. If the UK has its own standards, they will have to consider three. In some sectors that will be easier to handle than others.

It will also be tougher for UK producers who currently only sell in the EU and want to replace some lost EU sales with exports to the US. They will face two sets of standards instead of one – at least.

And standards in services?Back to top

There are also standards and regulations in services. Financial regulations designed to make bank customers’ deposits secure can include requirements for how much capital a bank should have in proportion to its assets, and to its risk weighted assets. The US and Eurozone both have these requirements.

There is even an international standard-setting body — the Bank for International Settlements in Basel, Switzerland — whose “Basel I” to “Basel III” regulatory frameworks include standards for capital requirements. The EU applies these standards through Regulation (EU) No 575/2013 and other documents. The parallels with standards and regulations in goods are clear. But this deserves separate treatment.


Updates: September 5, 2018 — correction to penultimate paragraph on bank capital requirements

Photocredits: All public domain or CC0, including
• Tomatoes: Jametlene Reskp on Unsplash
• Pesticide application on leaf lettuce in Yuma, Az: Jeff Vanuga
• François Louis Jaques (1877–1937): Paysans fribourgeois au bistrot (Switzerland, 1923)
• Fruit flies: Skeeze onPixaba


How does the Trade Facilitation Agreement really affect Brexit?

Those who see no problems if the UK and EU fail to strike a deal regularly claim the WTO’s Trade Facilitation Agreement will come to the rescue. They are wrong.

By Peter Ungphakorn
POSTED AUGUST 16, 2018 | UPDATED AUGUST 19, 2018

“The new Trade Facilitation Treaty commits members to facilitating trade, not obstructing it.” So wrote Iain Duncan Smith, former cabinet minister, Conservative Party leader and vocal Leave campaigner, in the Telegraph on August 15, 2018.

The argument is made with increasing frequency by “hard” Brexiters, who claim trade between Britain and the EU will not be disrupted, even if there is no agreement between them about their trading relationship when the UK leaves the EU.

Similar claims have been heard from former UK trade minister (1990–92) Lord (Peter) Lilley in the Times the previous day, economic adviser Ruth Lea on Brexit Central, and international economic law professor David Collins, on Brexit Central and in the Spectator.

JUMP TO
What is it?
‘To the extent possible’
‘Shall’

A number of other arguments have been challenged, particularly on what WTO rules might or might not say about checks on product safety and standards and other issues.

This comment focuses only on the WTO’s Trade Facilitation Agreement because the claims are so wrong we can wonder if those making the claims have actually ever looked at the agreement or a summary.

Basically, the Trade Facilitation Agreement is irrelevant to the question of whether the UK and EU can check each other’s goods.

It’s not difficult to find. There’s a whole section of the WTO website on the subject, with links to an even better site, the TFA Facility.

What is it?Back to top

The agreement is important. The main purpose is to slash the costs of trading by cutting red tape when goods cross borders. So it calls for streamlined procedures, paperwork handled electronically and as simply as possible, and so on. It also breaks new ground by allowing developing countries to promise to reform their procudures on condition they receive aid to implement it.

Because customs and other procedures in developing countries tend to be slow and cumbersome, it’s these countries that stand to gain the most from implementing the agreement.

But it would be wrong to say the agreement is targeted at only or even mainly developing countries. Far from it. There are important provisions that developed countries like the EU and UK have to respect or face legal challenges.

It’s just that the provisions dealing with electronic paperwork and streamlined procedures don’t fall into that category. They are written in a way that only requires countries to do their best to comply. And what “doing their best” means is left up to them.

To see how this works, it’s useful to compare how different parts of the agreement are written. In some parts the compulsory “shall”, meaning “must”, appears frequently. In other parts it’s phrases like “to the extent possible”. Let’s see which they are.

Easily accessible: screenshot of articles applying to all countries as presented on the TFA Facility website
Easily accessible: screenshot of articles applying to all countries as presented on the TFA Facility website. Click the image to see it full size

‘To the extent possible’Back to top

This is what the agreement’s Article 7 (“release and clearance of goods”) paragraph 1 says on “pre-arrival processing”:

1.1. Each Member shall adopt or maintain procedures allowing for the submission of import documentation and other required information, including manifests, in order to begin processing prior to the arrival of goods with a view to expediting the release of goods upon arrival.

1.2. Members shall, as appropriate, provide for advance lodging of documents in electronic format for pre-arrival processing of such documents.

Note “with a view to” in paragraph 1.1 and “as appropriate” in 1.2. These phrases allow countries quite a lot of leeway in implementing pre-arrival processing, particularly in electronic form.

Phrases like “as appropriate”, “as rapidly as possible”, “within the shortest possible time”, “to the extent possible”, ”wherever practicable”, and “encouraged to” appear throughout this article, all the way down to paragraph 9, which deals with perishable goods:

9.1 With a view to preventing avoidable loss or deterioration of perishable goods, and provided that all regulatory requirements have been met, each Member shall provide for the release of perishable goods:

(a) under normal circumstances within the shortest possible time; and
(b) in exceptional circumstances where it would be appropriate to do so, outside the business hours of customs and other relevant authorities.

9.2 Each Member shall give appropriate priority to perishable goods when scheduling any examinations that may be required.

9.3 Each Member shall either arrange or allow an importer to arrange for the proper storage of perishable goods pending their release. The Member may require that any storage facilities arranged by the importer have been approved or designated by its relevant authorities. The movement of the goods to those storage facilities, including authorizations for the operator moving the goods, may be subject to the approval, where required, of the relevant authorities. The Member shall, where practicable and consistent with domestic legislation, upon the request of the importer, provide for any procedures necessary for release to take place at those storage facilities.

9.4 In cases of significant delay in the release of perishable goods, and upon written request, the importing Member shall, to the extent practicable, provide a communication on the reasons for the delay.

We could also take a look at Article 8 on border agency cooperation. Note “to the extent possible and practicable”, “mutually agreed terms” (relevant for “no deal” between the UK and EU), “with a view to” and “may include”. Again, not exactly compulsory:

1. Each Member shall ensure that its authorities and agencies responsible for border controls and procedures dealing with the importation, exportation, and transit of goods cooperate with one another and coordinate their activities in order to facilitate trade.

2. Each Member shall, to the extent possible and practicable, cooperate on mutually agreed terms with other Members with whom they share a common border with a view to coordinating procedures at border crossings to facilitate cross-border trade. Such cooperation and coordination may include:

(a) alignment of working days and hours;
(b) alignment of procedures and formalities;
(c) development and sharing of common facilities;
(d) joint controls;
(e) establishment of one stop border post control.

The fact is, developed countries like the UK and EU already implement these provisions, and if anyone is dissatisfied with how well they are complying there’s little they can do about it under this agreement.

‘Shall’Back to top

But note that the provision on release and clearance of goods doesn’t appear in the agreement until Article 7. That’s a pretty low priority.

What do the previous six articles deal with? Answer: rule-making, decision-making, transparency and the ability to comment. Here’s the list:

  • Article 1: Publication and Availability of Information
  • Article 2: Opportunity to comment, information before entry into force and consultations
  • Article 3: Advance Rulings
  • Article 4: Procedures for appeal or review
  • Article 5: Other measures to enhance impartiality, non-discrimination and transparency
  • Article 6: Disciplines on fees and charges imposed on or in connection with importation and exportation and penalties

In these articles, the compulsory “shall” appears much more often. For example, new regulations must generally be published in advance. Or, if an importer asks for an advance ruling on what the customs category a particular product, and therefore what the customs duty is, Article 3 begins:

“Each Member shall issue an advance ruling in a reasonable, time-bound manner to the applicant that has submitted a written request containing all necessary information. If a Member declines to issue an advance ruling, it shall promptly notify the applicant in writing, setting out the relevant facts and the basis for its decision.”

The UK and EU will have to (or “shall”) comply with these requirements each time the situation arises in the future. Even then, Article 2 on the opportunity to comment features “to the extent practicable” in its two key paragraphs.

In other words the compulsory bits have nothing to do with frictionless border procedures.

But they are important to help traders understand what each countries’ rules are.


See also: Does the WTO require countries to control their borders?

Updates: August 19, 2018: minor edit for clarity
Photocredit: Port photo by Martin Damboldt, Pexels, public domain (CC0)


A real beginners’ guide to tariffs and the WTO

‘Can someone explain to me international tariffs and WTO law as if I were a six year old? Seriously. I don’t get it. At all. No frame of reference whatsoever. Any takers?’

By Peter Ungphakorn
POSTED JULY 28, 2018 | UPDATED JULY 28, 2018

All too often we assume people know what we’re talking about. A question someone asked recently on Twitter showed how wrong those assumptions can be.

One of the assumptions is that everyone knows what “tariffs” are. The BBC prefers “trade tariffs” in case we confuse them with energy rates or other prices.

Tariffs are part of the Brexit debate, and are central to Trump’s trade war. But the fact is, most of us never had to deal with this before.

So for the benefit of Dr Dominic Pimenta and six-year-olds everywhere, here goes.

What are tariffs?Back to top

JUMP TO
What are tariffs?
Why are there international rules on tariffs?
How were the rules on tariffs created?
What does this mean legally in the WTO?
1. They are ceilings
2. They are the same for imports from all countries
Follow-up questions

SEE ALSO
What is the WTO? And is it undemocratic?

When goods are imported into a country, the government charges a customs tax or duty, often also called a tariff. For example the EU charges 8% of the price per pair on some types of shoes.

So does the UK until it leaves, because all EU members have the same tariffs.

Here, the EU is a special case, a “customs union”. EU members (such as the UK) collect the tax, hand it over to the EU because it’s an important part of the EU budget (and a lot of that is spent in the member states), but they are allowed to keep about 20% to cover administrative costs even though the actual costs are much smaller.

Most countries don’t have that complication. Their governments just collect the tax, full stop.

The UK says that after it leaves the EU it will stick to the EU tariff rates in general, and has now officially confirmed that with the World Trade Organization (WTO).

Extract of the EU's WTO commitment on tariffs for some shoes
Click the image to see it full size
Why are there international rules on tariffs?Back to top

Once upon a time there were no disciplines on tariffs. Countries could set them at any rate, and raise or lower them at will.

Then came the depression when countries complained about imports unfairly hurting their producers and workers. So they raised tariffs against each other to protect their producers, first one, then another in retaliation. It was a trade war.

Sounds familiar? ’Fraid so.

Rather than protect jobs, the trade war just slowed down trade and worsened the depression everywhere. And that meant jobs were lost.

To cut a long story short, the Second World War followed, and afterwards world leaders decided they needed to do something about it.

One thing they did was to negotiate to get rid of the free-for-all in tariffs, and to reduce them gradually.

(They felt the whole international economy needed sorting out so they also set up the World Bank and the International Monetary Fund.)

How were the rules on tariffs created?Back to top

The negotiations produced agreements, in which each country agreed to set limits on its tariffs.

From 1947 until now more products were brought into these agreements, and the ceilings were gradually lowered. That’s how the EU’s tariff for those shoes has ended up at 8%

In other words, the EU’s 8% import duty on shoes was the result of negotiations with other countries in what is now the WTO. The others agreed in return to set lower tariffs on products the EU (and UK) wanted to sell to them.

Because it was the result of a negotiation, the 8% tariff on shoes is part of an agreement. All the negotiated rates are legally binding commitments in the WTO.

Each WTO member has lists of tariffs on thousands of products, and they are different for each country except those in groups like the EU.

What a world trade agreement looks like
Click the image to see it full size
What does this mean legally in the WTO?Back to top

To keep it simple, the tariff rates have two legal implications in the WTO.

1. They are ceilingsBack to top

The 8% tariff on shoes (and all other agreed tariff rates) is a legally “bound” ceiling. The EU can reduce it to, say 5% or scrap it completely without breaking its promise.

But to raise it to 20% would be breaking its promise, or violating the WTO commitment. Except …

… except it could go back to WTO members to renegotiate the ceiling in order to raise the tariff above the 8% ceiling.

It might have to give something in exchange such as a lower tariff on another product.

(There are rules about which WTO members would have the right to negotiate, but I won’t go into that here.)

2. They are the same for imports from all countriesBack to top

Secondly, the legal obligation is for that 8% tariff to apply to imports from all other WTO members, equally, without discrimination.

MFN
Most-favoured-nation (MFN) treatment is probably the most important WTO rule.It means not discriminating between one’s trading partners

Article 1 of the General Agreement on Tariffs and Trade (GATT), for trade in goods
Article 2 of the General Agreement on Trade in Services (GATS)
Article 4 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

But in each agreement the principle is handled slightly differently

Trade specialists talk about “MFN”. This stands for “most-favoured-nation” treatment and it’s so important that it’s the very first article of the WTO agreement on trade in goods.

The phrase sounds weird, but it means not discriminating between trading partners, treating them equally. Favour one, favour all.

There are exceptions.

You can have a free trade agreement (such as the EU-Japan deal, which recently took effect), or even the EU single market, which is a very sophisticated and far-reaching free trade agreement.

Or you can discriminate in favour of poorer countries by cutting tariffs on their products or allowing their imports to enter duty-free without doing the same for other countries.

The EU has numerous “preferences” schemes for developing countries allowing their products to be imported duty-free or at lower than normal duty. So does the UK so long as it’s an EU member — and it’s already announced it will continue with the preferences after leaving the EU.

There are other exceptions in special circumstances but those two are the basics.

Follow-up questionsBack to top

Q. When you say 8% on shoe imports, is that the agreed rate for all WTO members to import shoes at or just a ceiling for that one country on all WTO imports?

A. Each WTO member has its own tariffs. So this 8% is charged by the EU on shoes imported from all other WTO members (except under a free trade agreement, such as EU-Japan, or preferences on shoes from developing countries). The import duty rate in other countries will be different. The US’s import duties on shoes vary from duty-free to around 10% or higher. Japan charges 20%–30% duty on many shoe imports

Q. Can you explain a bit more about free trade agreements (FTAs)? That exempts you from WTO rules?

A. Not exactly. It’s about being exempt from the non-discrimination rule (MFN). WTO rules allow pairs or groups of countries to set up free trade agreements subject to certain conditions. When they trade among each other duty-free, they can still charge duties on imports from others.

So free trade agreements are within WTO rules provided the conditions are met. For example a free trade agreement has to cover all or most trade. You can’t have a free trade agreement in cars alone

Q. So essentially the UK already operates on WTO rules — the EU single market is like a big free trade agreement for us and acts like a single entity for making other FTAs? How does being an EU member now affect trade with WTO countries? Eg, the USA?

Correct. Even the single market is under WTO rules.

UK trade is currently

  • within the EU internal market (or single market)
  • on terms the EU has negotiated in the WTO — on tariffs that includes with the US
  • though free trade agreements (eg EU-Canada, EU-Japan)
  • through unilateral preferences for developing countries

I’m sticking to tariffs because the question asked for a simple explanation, but there are many other important issues such as product standards and food safety, which also come under WTO rules.

Note that until the referendum the UK was active and influential in EU trade policy.

Chart showing range of depths of free trade agreements and integration
The spectrum of free trade agreements and integration. Click the image to see it full size


Updates: None so far
Photocredits:
• School children: Bill Wegener on Unsplash, CC0
• Other images by the author 


Does the WTO require countries to control their borders?

Among the arguments that politicians are making about the Irish border are the claim either that WTO rules require countries to control their borders, or that the UK can drop border controls and wait to see what Ireland does. One is partly false, the other totally.

By Peter Ungphakorn
POSTED JULY 18, 2018 | UPDATED JULY 19, 2018

On Monday (July 16), MP Anna Soubry launched a vigorous attack in the House of Commons against hard-line Brexiters. There was a lot of truth in what she said, except on one point.

She turned to the likelihood that if the UK simply trades with the EU on WTO terms, and without an adequate form of free trade agreement, it will have to impose border controls on trade between the Republic of Ireland and the North.

WTO “rules say every member must secure their borders,” she said.

It’s a commonly-held view.

 

Two days later Independent.ie reported that the Irish government was “gearing up for a major confrontation with the World Trade Organisation (WTO) over the commitment to retain a soft Border in Ireland in the event of a no-deal Brexit”.

It went on: “Government sources say they are prepared for major confrontation with WTO officials, who will insist on a Border with the North as part of strict trade laws.”

The truth is that whatever happens, there will be no confrontation with the WTO or its officials.

Soubry’s comment was partly a reaction to some Brexiters claim that when trading purely under the WTO rules, the UK can simply decide not to check trade crossing the land border into Northern Ireland. It would be up to Ireland, according to this argument, to decide whether to set up its own checks, add friction and infrastructure to the border and put the Good Friday Agreement at risk, or to follow the UK.

Soubry was right in one respect. There is a problem with those Brexiters’ claim. Time to look at the rules.

WTO Agreements
Member-driven: the WTO agreements are administered by the members themselves
What WTO rules sayBack to top

First, a fact:

There is no rule in the WTO requiring its member governments to secure their borders.

After Brexit, the UK could drop all border controls for traded goods and services and it would be perfectly within its WTO rights.

And yet there was some truth in what Anna Soubry said. Independent.ie was much farther off the mark. And the hard Brexiters are completely at sea.

Here’s why:

  • The WTO does not tell countries what to do other than to keep their promises (abide by the WTO agreements and their WTO commitments)
  • Even when countries break their WTO promises, there is no “confrontation” with “the WTO” and least of all with “WTO officials”
  • The WTO is member-driven. If in the future other WTO countries believe the UK is violating an agreement, it is they, not the WTO bureaucracy, who will act. They can do so by complaining in a WTO meeting or filing a legal challenge in WTO dispute settlement
  • Since there is no WTO rule requiring governments to secure their borders, failing to do so would not break any specific agreement
  • Where the UK might run into trouble is under the WTO’s non-discrimination rules, particularly “most-favoured-nation” treatment (MFN), which means treating one’s trading partners equally

Suppose the UK and EU trade on WTO terms after Brexit. Suppose American apples arriving in the UK at an English port have to go through controls, but Irish apples crossing the border into Northern Ireland (also the UK) do not. Then the US could complain that its apples were discriminated against. They weren’t given equal treatment with Irish apples when they entered the UK.

MFN

Most-favoured-nation (MFN) treatment is probably the most important WTO rule.It means not discriminating between one’s trading partners

Article 1 of the General Agreement on Tariffs and Trade (GATT), for trade in goods
Article 2 of the General Agreement on Trade in Services (GATS)
Article 4 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

But in each agreement the principle is handled slightly differently

The US might seek a legal ruling in WTO dispute settlement. Months or years later, the ruling might conclude that the UK had discriminated. So either checks at the English ports would have to be dropped, or checks at the Irish border would have to be set up.

In other words, while no WTO rule actually says the UK will have to set up border checks, the non-discrimination rule may force it to.

That’s quite different from saying “every member must secure their borders”. In a system where nuance matters, the difference is important.

(Note the “might” and “may”. It’s possible that an in-depth legal ruling might disagree with the US’s claim in that example. After all, the difference is at the ports and not with the products themselves, although the US could counter that having to ship through Ireland in order to avoid checks adds to its costs. Until there is a real case we cannot say for certain. But legal opinion seems to take the view that the UK would be violating non-discrimination.)

Mexico-US border wall at Tijuana
National security: could the UK and EU legitimately cite it in the WTO?
National security?Back to top

There may be an alternative way to do this within WTO rules, only let’s not take this too seriously just yet, not least because there are conflicting opinions.

I’m not a lawyer but some trade lawyers have discussed the possibility. This is what I understand.

The idea is that the UK and EU could cite national security as a justification for breaking the non-discrimination rule at the Irish border.

London and Brussels (and Dublin) could seek a “waiver” in the WTO for the purpose, citing security exception clauses such as Article 21 of the General Agreement on Tariffs and Trade (GATT).

For this to be agreed in the WTO, at the very least both Britain and the EU would have to agree. It would probably have to apply only to Northern Ireland, not the whole United Kingdom, meaning there would probably have to be controls between Northern Ireland and the rest of the UK.

The national security argument would be undermined if controls were dropped only on one side of the border. The UK and Ireland would need to confirm that they were both acting in the security interests of the Good Friday Agreement, which they both signed. Otherwise, acting unilaterally would put the UK into conflict with WTO non-discrimination rules.

Some lawyers disagree. Shortly after this article was posted, Mark E Herlihy of Georgetown University challenged the idea that GATT Article 21 could be cited, although he said the UK and EU could obtain a waiver in the WTO.

“A waiver could be sought for what otherwise would be violations of non-discrimination obligations at the Irish/NI border, but that waiver could not be based on ‘national security’ under Art. XXI, which is narrow, and has no application here,” he tweeted.

Whether or not this is legally safe, there are a number of political problems. The most obvious is securing agreement from the EU and Ireland. Simply acting within WTO rules only the start. A number of other political and administrative complexities are involved, which are beyond the scope of this article.

And if the chosen route is “national security” then this is complicated by the fact that both the UK and EU are accusing the US of abusing the national security provision by citing it to justify tariffs on aluminium and steel.

Those political problems alone, particularly getting the EU and Ireland to agree, might prevent the idea from being considered seriously.


Updates:
• July 19, 2018 — comments from Mark Herlihy added, with minor tweaks to other parts of the final section

Photocredits:
• Southampton docks at night, by Geni GFDL CC-BY-SA

• WTO agreements: WTO publications
• Mexico-US border wall at Tijuana, Mexico © Tomas Castelazo, http://www.tomascastelazo.com / Wikimedia Commons / CC BY-SA 4.0