Brexit and WTO – first steps

Posted in WTO and international trade

After five rounds of Brexit negotiations between the UK and the EU, the parties are yet to start discussions concerning their future trade relationship and we might need to wait until December to know when they will actually begin. But despite a general air of malaise about whether there will be sufficient time left before Brexit to conclude a trade agreement, the parties have already undertaken some important Brexit-related tasks at the WTO level. Those steps illustrate that even something as conceptually simple as the UK reclaiming its position as a full independent participant in WTO is not without significant complexities.

As reported a few weeks ago, the UK and the EU have agreed on a preliminary plan concerning the methodology they will follow to distribute the tariff quotas that the EU has notified to the WTO in Geneva and which are currently allocated to different countries. According to the plan, the tariff quotas will be split between the EU and the UK based on a criterion of trade flows under each tariff quota. This approach sounds sensible if only because of its simplicity.

During the Uruguay Round when the WTO Agreements were agreed, WTO members undertook a process of ‘tariffication’ for agricultural products. This required that all non-tariff barriers or protectionist instruments either be eliminated or translated into tariffs to be bound and incorporated into every WTO’s member schedule of concession for trade in goods. Also as part of those commitments, members had to improve market access in agriculture. For some cases, a system of tariff rate quotas (TRQs) was used. Tariff quotas or TRQs indicate a specific volume of imports for which no tariff or zero tariffs will be applied. Beyond that volume, imports of that same product will need to pay tariffs, normally set at a high level.

Some quotas are ‘erga omnes,’ meaning they applied to all countries, or they can be country-specific or preferential. The origin of country-specific or preferential quotas can also be traced to the Uruguay Round commitments, as TRQs were also used to preserve pre-existing levels of market access. Typical examples in the EU schedule of concession are the Hilton beef or High Quality Beef quota allocated to Australia, Argentina, Brazil, Uruguay, USA, Canada, New Zealand and Paraguay, and the New Zealand lamb quota. A methodology based on a percentage of domestic consumption during a specific three year period (1986-1988) was agreed for that purpose.

Returning to Brexit; the reallocation of tariff quotas is an important issue for resolution, not only concerning the divorce and the new relationship between the UK and the EU on agricultural trade, but also as an indispensable component of the new schedule of concessions for agricultural products that the UK will need to notify to the WTO, once it resumes its independent membership.

The EU and the UK have taken preliminary steps towards this. In a joint letter on 11 October 2017, the permanent representatives of the UK and the EU to the WTO communicated to all WTO members that the UK  “intends to replicate as far as possible its obligations under the current commitments of the EU”. The parties also emphasise that the UK’s separate schedules of concessions and commitments for goods and services will take effect immediately after the UK leaves the EU, and that the EU and UK will follow a cooperative and transparent approach to making adjustments so as to minimise disruptions to trade.

In the WTO, the certification of new schedules of concessions can take place either through a rectification or a modification process. The rectification process occurs when changes are of a purely formal character that do not affect the scope of the concession while the modification process is usually the effect of negotiations of concessions.

WTO members have the flexibility to change their concessions or even to withdraw them provided that they follow certain rules and conditions. Tariffs and TRQs are part of the schedule of concessions of those members (such as the EU) that currently use them. However, an important consideration is that, as the schedules of concessions are part of the WTO Agreements, changes may be deemed to alter the relevant member’s obligations and the balance of rights and obligations committed to at the WTO. The perception – real or imagined – that the changes to the EU schedules, and the depositing of new UK schedules, might create an imbalance with the status quo and restrict market access for another WTO to either market could therefore have significant implications under WTO processes.

The UK Government’s intention is that its new schedule will be certified at the WTO under the procedure of rectification. That is why, in its trade policy white paper (‘Preparing for our future UK trade policy’), the Government emphasised its intentions to maintain current levels of market access and restrict changes to the net position to those of a technical nature.

The challenge – and risk to this plan – is whether the allocation of TRQs between the EU and the UK, as part of the new UK schedule, can really be classified as changes of a technical nature or formal character only.

The initial reaction by some WTO members to the EU/UK plan that was the subject of soundings in Geneva prior to the joint EU/UK letter being sent by was not positive. Indeed, on 26 September 2017, the USA, Brazil, Argentina, Australia, Canada, New Zealand, Thailand and Uruguay sent a somewhat pre-emptive joint letter to the UK and the EU WTO representatives, in which they expressed serious concerns above the mooted allocation of TRQs based on historical averages.

The letter noted that TRQs “were achieved through a delicate balance of concessions and entitlements that is fundamental to the global trade architecture today” and calls on the UK and the EU to honour their commitments in terms of both quantity and quality of access.  Most importantly, they state that “the modification of these TRQs access arrangements cannot credibly be achieved through a technical rectification”. This implies the need for re-negotiations of concessions in case of substantial changes affecting the balance of concessions, and the signatories state that neither a bilateral understanding between the UK and the EU nor a technical rectification process will be acceptable.

This is worrying. What the signatories to the letter are telling the UK and the EU is that there is a significant probability that they will need to follow the rules for negotiating concessions contained in the GATT to disentangle themselves within the WTO. This means that the certification process will need to follow the process of modification of concessions.

Why is this important and how does it affects the Brexit negotiations?

GATT Article XXVIII is perhaps the most important GATT provision concerning tariff negotiations. It provides for a negotiating process to be followed if a WTO member wants to modify or withdraw a concession. The member wishing to modify its concessions – such as the UK – needs to notify the WTO. Importantly, Article XXVIII states that during those negotiations and agreement, parties “shall endeavour to maintain a general level of reciprocal and mutually advantageous concession not less favourable to trade than that provided for in this agreement prior to such negotiations”.

The same Article stipulates that some categories of WTO members are entitled to negotiate with the requesting member. Those members can be countries with “initial negotiating rights” (with which the concession was initially negotiated), countries having ”a principal supplying interest” and countries determined to have “a substantial interest” by the requesting member and those with initial negotiating rights.

There is no specific process to determine which countries are entitled parties for each tariff line. This too then could end up being subject to negotiation. For example, in a recent case brought in the WTO by China against the EU, the EU negotiated changes to its import commitments on prepared poultry meat products and allocated new specific TRQs to Thailand and Brazil. China challenged the EU’s amendments because – amongst other things - they didn’t recognise China as a ‘supplier with substantial interest’. The findings of the WTO panel convened to decide the dispute provide some useful insight for how the UK/EU Brexit questions might be resolved at the WTO.

In the poultry case, the Panel upheld China’s argument that its increased ability to export poultry products to the EU was a ‘special factor’ that should have been taken into account by the EU when determining which countries have a “substantial interest” in supplying the products concerned, or when determining the allocation of specific TRQs in accordance with GATT Article XIII.

We don’t know yet how TRQs will end up being divided between the EU and the UK, but the letter sent to the UK and EU by those seven WTO members and the Panel’s findings in the poultry case suggest that the future UK allocation of country specific quotas and the certification process of the UK new schedule is unlikely to escape challenge. In fact, these issues might take many years to settle and it is very likely – contrary to the UK Government’s intentions – that time-consuming negotiations with WTO members will be required to smooth the way. 

The UK could end up having to offer additional market access concessions to the complaining WTO members to reach a resolution. This is because of GATT Article XXVIII, which states that negotiations of concessions can include compensation adjustments.  If there is no agreement concerning compensation (as might be the case if the complaining WTO member does not consider it adequate to maintain the concessions in a way not less favourable to trade than it was before negotiations started) the complaining member would have a right to withdraw equivalent concessions, a sort of retaliation. This could reduce UK (and EU) market access to third countries under WTO rules. The only upside in this scenario is that the certification process is not a legal requisite for the new UK’s scheduled and concessions to enter into force.  So the UK will, at least, be able to implement those changes and trade on WTO terms on the basis of its new schedule, even if the certification process – and resolving objections from other WTO members – ends up taking a considerably longer period of time.

Brexit: planning for the future as negotiations continue

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