Financial Times WTO Article Critique

- Tuesday, 20th September 2016

 

Financial Times

Text in black is the original FT article: text in red is my commentary.

 

Can the UK just go ahead and trade under WTO terms as soon as it leaves the EU?

 

No. In practice, the UK would have to detach itself from the EU and regularise its position within the WTO before it could sign its own trade agreements, including with the EU. As Roberto Azevędo, the WTO's director-general, said recently, there is no precedent for a WTO member extricating itself from an economic union while inside the organisation. The process would not be easy and would likely take years before the UK's WTO position was settled, not least because no [I presume 'no' is a misprint for 'all'] other member states would have to agree.

 

This is alarmist nonsense.   Martin Howe QC has confirmed that the UK is automatically a member of the WTO beacause all countries which were members of GATT are founder members of the WTO, its successor.  As Martin points out, the ECJ has defined membership of the WTO as a mixed competence.  The boundaries between EU and member states' competence change over the years.   "If the EU's competence recedes or disappears, the external competence of member states correspondingly expands.  If we leave the EU we would not need to rejoin the WTO Agreements: we are and remain a member of the WTO but our external competence would expand to 100% of matters covered by the WTO Agreements."

 

How does the UK establish itself as an independent WTO member?

 

Each WTO member has a "schedule" of commitments for each of the agreements — including agriculture, industrial goods and services — setting out the terms on which it trades. Member states of the EU are bound by EU-wide schedules, negotiated by the bloc on their behalf. The UK could simply copy the EU commitments and slide seamlessly into membership exclusively in its own right, as long as no other WTO member objects.

 

For industrial goods, this is a relatively straightforward process: the UK would simply adopt the import tariffs set by the EU, for say, clothes and shoes.

 

Correct.

 

What about other sectors, such as agriculture?

 

For farming, which assumes a political importance in trade that far exceeds its economic import, matters are more complex and possibly antagonistic. Peter Ungphakorn, a former WTO official, says: "Recent negotiating experience suggests that willingness to accommodate each other's interests quickly is a scarce commodity in the WTO."

 

As well as straightforward tariffs, an important part of each country's agricultural WTO commitments are "tariff-rate quotas", which allow a certain amount of produce to enter at lower duties. Since the quotas are divided up and allotted to exporters country by country, this leads to a great deal of bilateral haggling.

 

London would probably have to negotiate to take over a portion of the EU quota, or add a new quota itself. If exporter countries see an opportunity to increase market access, the process could be held up by hard bargaining. 

 

One Geneva-based trade official said that Brazil, the world's biggest exporter of frozen chicken, had already signalled a post-Brexit interest in expanding its European poultry sales through a larger tariff rate quota.

 

Tariff Rate Quotas are a potential (transitional) problem.  There are nearly a thousand line items with tariff quotas.  

 

According to Prof Allan1 : "When a country joins a Customs Union (CU) … tariff rate quotas (TRQs),  are conventionally added to those of the CU. Similarly, commitments in the areas of domestic support and export subsidies are added to those of the CU. In practice, these changes in the CU's commitments will be reported in its annual notifications to the WTO and will not be challenged by other WTO members, even if the implicit changes to the CU's schedule of commitments are never formally approved. [emphasis added]

 

"Going in the opposite direction following the exit of a CU member is not so easy, particularly when that member was a member of the EU when the current WTO commitments were agreed following the Uruguay Round in 1994. There is no evident baseline to which these commitments can be rolled back. So how to establish what the UK's agricultural policy WTO commitments would be following a possible Brexit?

 

"In my view, this will require a two-stage process. The first stage will be a matter for negotiation between the UK and the EU27 (here used to mean the current EU28 member states less the UK, and not the EU prior to the accession of Croatia).  …

 

"One of the issues in negotiating the withdrawal agreement will be to decide how some of the EU28's WTO commitments (for example, on import access) … in the case of import TRQs there is a more realistic possibility that these might be divided between the UK and the EU27 if there were a will to do this. An allocation of the EU's current domestic support commitments would also be required.

 

"In such situations, there would then be a second stage within the WTO where other members would have to agree to this apportionment. This should not be taken as a foregone conclusion. If some WTO members felt that the agreed division of commitments discriminated against their market access entitlements or nullified some of their expected benefits under the WTO agreement, they might seek improvements or compensation in lieu."

 

As long as we retain the EU Common External Tariff we could, in principle, operate the existing EU wide quotas along with the rest of the EU just as at present.  Presumably each country reports to the EU Commission its imports of any items subject to the total EU tariff quota – we would continue to do this while the status quo lasts.

 

However, it the EU refuse to cooperate or when the UK decides we want to alter our external tariffs, one option would be for the UK to accept a fixed percentage of each of these quotas: say equal to our share of EU GDP or our share of total EU external trade.  

 

This would cause no problem for items of which we import a smaller share of EU imports than whatever fixed percentage we adopt.   However, this would create problems for items where we import more than our fixed/average share.   For example, the vast majority of all NZ butter comes to the UK so NZ would lose out if we accepted only, say, 20% of the total EU quota. 

 

So we could say we will take the higher of - the fixed percentage or the percentage of imports of that product which came to the UK.   That begins to get complex but it would mean no WTO members would be losers.

 

Better still and simpler would be for the UK to abolish tariff quotas entirely – this amounts to abolishing the higher tariff and allowing unlimited imports at the lower tariff.   This would also be most acceptable to the WTO which tolerates but does not like tariff quotas since it aims to abolish all quotas.

 

The same is true of the EU's allowances for farm subsidies, for which the UK would have to try to negotiate a share. Britain could make this process easier by accepting large quotas and eschewing generous agricultural support, but it would then run straight into trouble with its own farmers.

 

According to Alan Matthews: "The UK will also want a share of the EU's Bound Total Agricultural Market Support commitments which, together with its de minimis limits of product-related and non-product-related distorting support, represent the limit on the amount of trade-distorting support it can provide. At the moment the EU28 does not make full use of its Bound Total AMS, and its Current Total AMS is well below its bound ceiling. The apportionment of the AMS is unlikely to prove contentious [emphasis added] as the UK is not likely to want to increase its use of trade-distorting support after Brexit. Some allocation key such as the relative shares in the value of gross agricultural output is likely to be used and would not meet with objection at the WTO."

 

What about services, where the UK is the world's third-largest exporter?

 

The UK could extract its own existing promises from within the EU's schedule and turn them into standalone commitments. This would allow, say, foreign consultants or engineers to operate in the UK, though in fact the degree of liberalisation in the WTO services agreement is low and the EU's schedule is riddled with exceptions for individual member countries.

 

Hosuk Lee-Makiyama, director of the European Centre for International Political Economy and a former EU trade negotiator, says: "In theory it's not hard to create a services schedule for the UK out of the EU schedule. But while it's intellectually quite easy it's an excruciating legal process."

 

Mr Lee-Makiyama notes that it took five years to integrate Bulgaria and Romania into the EU services schedule after they joined the bloc. While some trade officials say it may be easier to create a schedule for a leaving member than one arriving, they seem to agree the process can be measured in years rather than months.

 

The process of drawing up schedules from scratch for countries like Bulgaria and Romania might well take years, not least because those countries would have to make a large number of decisions about which sectors they wanted to liberalise and which they wanted to retain exemptions.

 

By contrast the UK has already made those decisions.  I can't see why it should take "years rather than months" to extract the UK commitments and exemptions from the EU schedules.  That is a straightforward, if tedious, task.

 

So what is the realistic short-term prospect for WTO access to European and other markets?

 

As Mr Ungphakorn says: "None of this is impossible, but it won't be sorted out quickly." While the schedules are being agreed, the UK's legal status as a trading nation will be undetermined, with all that implies for uncertainty and business decisions.

 

The speed of the UK being able to trade on WTO terms in its own right will partly depend on political will. Yet even if other governments co-operate and accept London's proposals, the legal processes and paperwork are likely to take years.

 

Brexiters want to turn the UK into a global trading powerhouse. But until the country has sorted out its legal standing, it risks merely sitting on the sidelines.

 

Conclusion:  

 

In short, this is an exaggerated scare story:

 

  • the UK will not have to rejoin the WTO,
  • extracting the EU tariff schedule for industrial goods is, as he accepts, "a relatively straightforward process",
  • extracting the UK schedule of commitments and exemptions on services from the published EU schedule is tedious but not remotely as time consuming as for a country deciding such a schedule in the first place,
  • tariff quotas do not present an insuperable problem: - once we go to WTO basis we simply abolish both the quota for the lower rate tariff and the higher rate tariff,
  • apportionment of the EU's Bound Total Agricultural Market Support commitments is unlikely to prove contentious since the EU does not use its full entitlement.

 

1 WTO dimensions of a UK 'Brexit' and agricultural trade:   January 5, 2016 Written by Alan Matthews Blog posts.   Alan Matthews is Professor Emeritus of European Agricultural Policy in the Department of Economics at Trinity College, Dublin, Ireland. His major research interests are agricultural policy analysis, the impact of international trade on developing countries, and computable general equilibrium analysis of trade and agricultural policy reforms. He has worked as a consultant to the European Parliament, the OECD, the Food and Agricultural Organisation of the United Nations and the UN Industrial Development Organisation, and has been a panel member in a number of WTO Dispute Settlement procedures. He is a former President of the European Association of Agricultural Economists but writes here in a personal capacity.

 

 

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