Mrs May’s speech in Florence on the 22nd September has thrown future trade arrangements back into the spotlight.
The WTO fall-back option
There are currently a plethora of articles (and MPs) suggesting that, should the UK be unable to negotiate the special customs arrangement it wishes with the EU (or agreement that we could remain part of the Customs Union or Single Market without accepting the free movement of peoples, the jurisdiction of the European Courts, and the resulting payments it would have to make to the EU coffers), then we can always fall back on the World Trade Organisation (WTO) rules, of which we are already a member, until we can agree our own Free Trade Agreements (FTAs) with the EU, and non-EU nations, which would then supersede the WTO rules. And for many of the thousands of traded products this could be true, both for the actual duties charged and for the commitments (more detail below) the independent UK will re-establish in the WTO. However a closer look at the way the WTO works makes it clear this will not be quite so straight forward for agriculture and many other products, even for trade we already do with non-EU countries through the EU under the EU’s membership of the WTO, and some complex negotiations will need to take place with all our existing trading partners in order for us to do this. Also Theresa May’s proposal for a new bespoke customs partnership cannot be appreciated without an understanding of the existing options already available to the UK.
Background to WTO and Agriculture
Agriculture was absent from the GATT (General Agreement on Tariffs & Trade) signed in 1947, of which we were one of the founder members, and which was the origin of the WTO. It was only included following the Uruguay Round of talks, which started in 1986 and ended in 1993-4, with the creation of the WTO as we know it today. As explained on the WTO website: “….. the agreed long-term objective of the reform process initiated by the Uruguay Round reform programme [was] to establish a fair and market-oriented agricultural trading system. The reform programme comprises specific commitments to reduce support and protection in the areas of domestic support, export subsidies and market access, and through the establishment of strengthened and more operationally effective GATT rules and disciplines. The Agreement also takes into account non-trade concerns, including food security and the need to protect the environment, and provides special and differential treatment for developing countries, including an improvement in the opportunities and terms of access for agricultural products of particular export interest to these Members.”
Agriculture and the WTO
The principle aim of the WTO agreement on agriculture was to eliminate most types of non-tariff barriers (essentially the “red tape” such as import licensing, rules for the valuation of goods at customs, pre-shipment inspections, further checks on imports, rules of origin & investment measures) to make it easier to import and export agricultural produce. This is done by the WTO member nations agreeing/negotiating between themselves “schedules” (essentially a negotiated commitment on how a WTO member agrees to curb protectionist policies) between them. In other words schedules are there to reduce tariff protection, agricultural subsidies and barriers to trade.
The negotiated schedules (see here for an example of EU MFN Applied Tariffs) between each country/trading body in the WTO set the maximum basic rate of duty that is agreed to be charged when importing each specific product/item. However some of these schedules, for specific items where farmers’ lobbies have demanded to be shielded from having to compete with cheap imports, have higher tariffs/taxes (with legally binding “ceilings”) that can be charged on specific imports (which can also vary depending on the time of year), and set out legally bound duty rates that will be charged for quantities imported over and above tariff quotas. Tariff quotas (or tariff rate quotas – TRQs) in the schedules specify the quantity that can be imported at a lower duty or duty-free, with imports over and above the quota being subject to much higher tariffs. The schedules also set an agreed ceiling for the total amount of “trade-distorting” support (subsidies) that can be provided to farmers, known as AMS (aggregate measurement of support). Many countries do not mention AMS in their WTO schedules with other countries, as they were not major subsidisers when the schedules were being negotiated in the 1980s and 1990s, and others (such as the EU, US etc.) were permitted AMS support, but had to reduce it as part of the negotiations. All countries are however permitted a small amount of trade-distorting support, with developed countries permitted 5% of the value of production, rising to 10% for developing countries.
So can the UK rely on the “fall-back” of the existing WTO rules?
Given the above, what does that mean for the UK’s option of relying on WTO rules for agricultural trade with the EU and the rest of the world following a “hard” Brexit? Although we are a member of the WTO, our current WTO commitments are merged with the EUs and do not exist for the UK as a separate nation, therefore this will need to be rectified before we can start using the WTO rules. The situation of a member nation wishing to disentangle themselves from a larger collective has never arisen before with the WTO, and the WTO does not actually have a procedure for “amending” our membership to recognise our independence from the EU and separating our own schedules from the collective EU ones. The only procedures defined with the WTO rules are “withdrawal, rectification and modification”, so over and above asking the WTO secretariat to modify our membership basis (which is not necessarily a speedy process), we will then also have to negotiate with each WTO member to modify the schedules the UK has with them as part of the EU, and this process will also require they modify and agree all the EUs schedules as they have lost one member. It is very unlikely one will be agreed without the other, and indeed the WTO may prefer to negotiate with the EU first as it is the larger trading block. It may be argued by the other WTO members that the UK is not in a position to expect the same concessions that it had as part of the much larger EU block. It also may be taken as a good opportunity by the WTO to review all EU schedules, as some of the current EU tariffs are incredibly complicated. And of course over and above re-establishing all our existing schedules with non-EU members, we would also have to negotiate brand new schedules of our own for trading with the EU-27.
Opinion of WTO Director-General
As was said by WTO Director-General Roberto Azevêdo in his speech at the World Trade Symposium in June 2016 prior to the Brexit vote: “To begin with, I would say that trade negotiations are highly complex. Conducting multiple negotiations simultaneously would bring a further level of complexity. In addition, you need willing partners. Other countries already have their negotiating priorities and may not be ready to shift resources to a new negotiation overnight. Of course, speaking of resources, all of this presumes that your own resources and negotiating infrastructure are already in place and fully operational. Moreover, if you need to complete a deal quickly when the other side can wait, you are negotiating from a very weak position. So, on this basis, it could take quite some time before the UK got back to a similar position that it has today in terms of its trading relationships with other countries.” Following the Brexit vote Mr Azevêdo held a press conference in late July 2016 and further added: “We have no precedent for this,” he said. “We would have a WTO member without a schedule of commitments.” He described membership as “a contract. Members have contracts with each other. We would have a member of the organisation without a very important part of that contract which is the list of commitments. That would have to be negotiated with everybody else. You don’t unilaterally decide what your commitments are.”
EU-27 agreement needed before WTO negotiations with Non-EU countries
We may have to first agree with the remaining EU-27 what proportion/quantity of the current EU WTO schedule for each exported and imported product is currently used by/allocated to the UK. In addition the EU has negotiated 86 agricultural TRQs to protect specific products that are produced somewhere in the current EU-28 member states. These are politically contentious items such as cheese, butter, beef, poultry, other meat, live animals, sugar, citrus and other fruit, fruit juice, eggs, cereals and more. This negotiation is not expected to be easy, although detailed records are obviously kept on the amounts imported/exported by each EU member state, so in theory you would have thought they could refer on these figures, perhaps averaged out over a few years. However even if we do present the WTO with figures agreed jointly with the EU-27, the WTO members do not have accept the proposals, and could easily haggle over concessions they would expect in return, particularly from the now less powerful independent UK nation (compared to the large EU collective).
Will the UK need all existing WTO tariff rate agreements?
The UK will also want to consider if it actually wants to retain all of the TRQs it currently is party to: for instance there are schedules for agricultural products we simply do not grow commercially in the UK, such as, for instance, oranges. The EU WTO schedule for the import of oranges has complicated tariffs for other countries wishing to import oranges to the EU, with the sole aim of protecting the Mediterranean members (Spain, Italy, Greece & Portugal) who grow oranges (their harvest season is from Mid-October to end of March), and a high tariff is currently charged of 16% on all imports during their harvest period, dropping to 3.2% from mid-May to mid-October.
The UK imported about $246.5 million-worth of oranges in 2013, and these figures include 89.2 million oranges imported from Spain, and 10.2 million imported from the Netherlands, which, like the UK, does not commercially grow oranges. Much of the Netherland shipments come through the Rotterdam port from countries outside the EU, but some could have come from within the EU and this makes it difficult to pin-point the country of origin, another vital issue for the WTO schedules. However as a rough guide we can assume that in 2013 around $100m of UK imports were EU-produced oranges. After Brexit, more non-EU exporters might want a share of that trade, since the UK would no longer be in the business of protecting Mediterranean EU producers. But what agreement is made on how this works would depend partly on what the UK offers, and partly on the relationship the UK develops with the EU post-Brexit. If we end up with a “hard” Brexit, outside of the Customs Union and the Single Market and with no special customs arrangement in place, then the UK would not have to give any concessions to the EU-27. However if the UK ultimately agrees to a special customs arrangement, or remains in either the Customs Union or the Single Market, then concessions would need to be agreed with the EU about how much non-EU produce it can import, and this will then affect the FTA negotiations with non-EU countries, with everyone wanting as large a slice as possible.
What are the pros and cons of the Single Market?
Being outside of the EU but remaining in the Single Market (like Iceland, Norway and Liechtenstein) would mean we could continue to avoid tariffs, quotas or taxes on trade with the EU, and would avoid non-tariff barriers once goods are in the EU, but we would also have to accept the free movement of goods, services, capital and people, and the UK specifically wishes to control immigration and no longer allow free entry to EU nationals. Another major headache would be the “rules of origin” regulations; having to prove what country the goods being shipped came from before they can enter the EU, involving extra administration before goods are shipped, and checks and delays at the border. This should not be too complicated for agricultural produce, but would cause major headaches for other exporting businesses in the UK who often build products out of parts that come from all over the world. Membership of the Single Market also normally involves making annual payments towards the EU’s budget and accepting the jurisdiction of the European Court of Justice (ECJ). Various EU members have suggested this may be an option they would be prepared to offer the UK, but only if the UK accepts at least the free movement of EU workers and the ECJ’s jurisdiction.
What are the pros and cons of the EU Customs Union?
The other “soft” option is remaining outside the EU but staying in the EU Customs Union (like Turkey, Andorra & San Marino), which means that once goods have entered the EU they can be shipped to any country within it with no further customs duties being due. The agreement reduces administrative and financial trade barriers such as customs checks and charges. However this option also has major drawbacks. It would mean that the UK couldn’t negotiate its own free trade deals with other countries, as the EU would do that, and it also is likely to mean continuing to pay money to the EU and accepting ECJ judgements when they relate to trade, without having any say on the decisions. It is also unlikely to cover farm produce or fish (unless this is made part of the negotiated arrangement) since the UK would not be in the Common Agricultural Policy or Common Fisheries Policy, so would not help with agricultural imports or exports. It would however help with the Irish border issue, as there would be no need for a customs barrier between Northern and Southern Ireland. The EU has said, however, that the UK does not have the option of remaining in the customs union without accepting free movement of people. Switzerland and Norway, for example, do enjoy tariff-free access without being part of the customs union, but both accept free movement and make contributions to the EU budget.
Invitation to re-join EFTA
Recently there has been an invitation from Iceland to re-join EFTA (European Free Trade Association) which currently has four members (Iceland, Norway, Liechtenstein and Switzerland) which could give the UK access to 27 signed free trade agreements with 38 global partners, including the EU. Members are still able to negotiate their own bi-partisan FTAs as well as taking part in the joint ones. However being a member of the EFTA EEA (European Economic Area of which the EU is also a party) means you have to accept the core principle of free movement of goods, services, capital and people across the whole area (a tough sell to the Brexiteers) and whilst Schengen is not a part of the EEA Agreement, all of the four EFTA States currently participate in Schengen and Dublin through bilateral agreements. And although EFTA does not include EU common agriculture and fisheries policies, it does contain provisions for trade in agricultural and fish products. It does not entail a customs union, and nor does it include, as now with our full EU membership, a common trade policy, common foreign and security policy, justice and home affairs, harmonised taxation or the economic and monetary union of the EU.
Theresa May’s speech on 22.9.2017
Theresa May reiterated in her speech on the 22nd September in Florence, Italy, that the UK is not seeking to stay in the customs union or the single market, or sign an FTA with the EU such as Canada’s, but instead wants to create a new customs partnership that recognises our existing close relationship. She believes the fact that the UK already has the same rules and regulations as the EU in respect to trade should be acknowledged in the negotiations, and that the UK’s already signed EU Withdrawal Bill will ensure these rules and regulations are carried over into our domestic law at the moment we leave the EU on 29 March 2019. And to try and break the stalemate over the EU demand that the divorce bill, EU citizens’ rights in the UK, and the Irish border issues are resolved before we can start talking about our trade relationships, she gave reassurances on the rights of EU citizens (which has been warmly received by Bernier in Europe), confirmed that the “UK will honour [financial] commitments we have made during the period of our membership”, and also said that “we and the EU have committed to protecting the Belfast Agreement and the Common Travel Area and, looking ahead, we have both stated explicitly that we will not accept any physical infrastructure at the border”. Hopefully these assurances will break the current deadlock and allow the delayed trade negotiations to begin.
However Mrs May acknowledged that there will not be time to complete all the negotiations before the 29th March 2019, and so is suggesting a strictly limited two-year implementation/transitional period following Brexit, and she further suggested that during the transitional period access to one another’s markets should continue on current terms and Britain also should continue to take part in existing security measures. Some commentators believe her statement has also opened the door to Britain paying between €20-40bn to the EU after it leaves in 2019, and since roughly 50% of the current EU budget is used for CAP agricultural subsidies, this could be good news for those farming businesses who rely on BPS claim payments, because a transitional period may include the UK continuing with the current BPS in 2019 and maybe even for a further two years until the transitional period is over, although this has not yet been explicitly confirmed.
The UK’s trade options post-Brexit
The UK therefore has a number of options to pursue in respect to trading with the EU post-Brexit: the government’s primary option is to agree a new type of customs partnership that recognises our existing close trading relationship. If this fails we could try to remain in the Single Market and accept EU conditions, or request to remain in the EU customs union, again accepting the terms offered by the EU, but both these options have already been rejected by the UK government. We could re-join EFTA which would give us ready-made trade agreements and freedom to negotiate new ones, but would still require free movement of EU citizens. Or finally, if all else fails, we could use the WTO trading rules (which will require some complex negotiations). If the UK is unable to put in place its primary objective of a new customs partnership with the EU, then none of the other options are ideal, but at some point soon the UK government must decide which is most likely to produce the best outcome for the UK post-Brexit, and pursue it. So far the UK Government has confirmed the UK will be leaving the single market and customs union, which sets out our stall for future trade with the EU. However this does not address the issue of our existing trade agreements with the rest of the world under WTO rules, which currently are combined with the EUs and will presumably still need to be disentangled under this suggested “new customs partnership”. Time is not on the UK’s side, even with the two-year implementation period Theresa May is now requesting beyond the end of March 2019, as although no formal negotiations with non-EU countries can really begin until we are no longer part of the EU, one hopes the UK is well prepared for these inevitable discussions. As the WTO Director-General Roberto Azevêdo pointed out in June 2016, “…if you need to complete a deal quickly when the other side can wait, you are negotiating from a very weak position..”
Time for action
Despite the complexity of the WTO, which is only touched on above, all of the negotiations necessary for the UK to rely on WTO rules post-Brexit are of course possible, and it is highly likely that most countries, (including the EU if we are unable to agree a new customs partnership), will ultimately want to establish FTAs with an independent UK, still the seventh largest economy in the world. But it would be foolish to assume “default” trade agreements are already set up which can quickly and easily slot into place should the UK fail to agree acceptable terms for trading with the EU, or that there are already terms in place for continuing to trade with non-EU countries once we are out of the EU.
There is a lot of talking, consulting and negotiating to be done by the UK, WTO and EU bureaucrats, and, even if a two year implementation period is agreed with the EU beyond the March 2019 Brexit deadline. The sooner the UK government starts getting down to the nitty gritty to avoid substantial problems for its agricultural and other exporters come April 2021, the better.
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