Mark Wallace is Executive Editor of ConservativeHome. Click here to find the previous articles in this series.
As the previous four articles in this series have demonstrated, the prospect of trading on WTO rules – rather than staying in the Single Market, or having an instant Free Trade Agreement (FTA) with the EU – is not the apocalyptic landscape that some here in the UK portray it to be. It would be odd if it were such a dire prospect, given that vast numbers of people around the world live and thrive in exactly this system. The fact that it has been misunderstood or misrepresented in our domestic debate since the EU referendum is, if anything, a reminder of how long it has been since we controlled our own trade policy or played a full and free part in world trade.
The EU’s trade agreements
One element of these dire forecasts has been the assumption that there would be an instant and automatic rise in the tariffs faced by UK importers and exporters. Leaving aside the terms of trade with the EU itself, some warn that the UK would lose the benefits of any of the more than 60 trade agreements that have been agreed on its behalf by the EU during our membership. It should be noted that such arrangements aren’t just FTAs, but also include a variety of other trade agreements which apply a range of measures across varying mixtures of products and sectors to liberalise trade between the EU and third party countries.
These arrangements vary in economic value. Some relate to very small economies, but according to the House of Commons Library, “of the UK’s top 50 export markets for goods in 2015, 10 are covered by [EU] trade agreements” – not including, of course, CETA, the FTA with Canada which is yet to come into force, or the proposed FTA with the United States. This is self-fulfilling to a degree – having lower barriers to trade will of course make more trade happen, while the EU’s failure to lower barriers with other countries will simultaneously stunt our trade with them. And some of the agreements are lopsided – opening our import market to the exports of poorer countries without granting much freedom for us to export to them. But it’s still clear that a good number of these agreements are of sizeable value to the UK.
Refounding our own trade policy
It’s very easy to get bogged down in the jargon and TLAs (Three Letter Acronyms) of all this but, put simply, the WTO’s rules require that the normal format of trade is for a country to levy a consistent tariff on all its trade partners. Positive exceptions – lowering or eliminating tariffs – for particular countries have to be made through specific bilateral agreement. A country specifies the tariffs it intends to levy on trade in its WTO schedule, and then applies them (in our case, as a WTO member but currently without a schedule of our own, we can start applying our new schedule the day after Brexit, pending formal certification – the EU itself traded on an uncertified schedule from 2004-2016). If it has made bilateral agreements with other countries, it also includes these in its schedule.
In terms of the general tariff rates Britain might include in its post-Brexit WTO schedule, it seems likely that, to begin with at least, we would simply apply the same rates as the EU. The fact that the Great Repeal Bill will copy across the EU’s existing classifications and rules to ensure continuity of regulation would make this very simple to do, and administratively it would only involve HMRC applying the same processes, rules and rates as it currently does, reducing the need for major change in the processes and calculations – at least until we might choose to change our policies. In December, Liam Fox told the Commons the Government planned a schedule that would “replicate as far as possible our current obligations”, a position confirmed by Julian Braithwaite, the UK Ambassador to the WTO, in January.
Getting our share
Things get more complex when it comes to those bilateral agreements. We know that the Government has expressed its desire to agree new trade deals with many countries, potentially a major boon born of newly-repatriated rights thanks to Brexit, but what happens to those pre-existing agreements from which we currently benefit through our membership of the EU? These arrangements currently give us access to some tariff-free or tariff-discounted imports from outside the EU, and give some UK producers access to some non-EU markets on the same basis.
The pessimistic school of thought argues that we must wave goodbye to the whole lot – that we must therefore expect to impose tariffs on all these imports on Brexit Day+1, and similarly expect our exports to these markets to face tariffs, (and all the non-tariff barriers), too. The agreements are all in the EU’s name, and we will no longer be part of the EU, so if we want to replicate these deals then we must start over from scratch and bear the costs and delays in the meantime.
As other authors in this series have discovered on other topics, some of these bogeymen are in part at least theoretically possible. But they disregard some important legalities and practicalities.
In February, Fox told the International Trade Committee that “from our initial contacts with countries” with Free Trade Agreements with the EU, “we have not yet had a country that did not want to” ensure existing agreements can transition to a UK agreement when Brexit occurs.
Beyond pre-existing FTAs, we should also consider the backdrop of the WTO system of Tariff Rate Quotas (TRQs) in this context. For agricultural products, which are of particular importance and sensitivity, TRQs are common. TRQs are effectively an allocation of a certain quantity of goods which can be exported by a third-party country into the EU, or vice versa, with a sliding scale of tariff rates, agreed under the WTO’s agriculture agreement. Once a quota has been exceeded, a tariff then applies to – or is increased for – any further goods. So, for example, in 2016 New Zealand had a quota allowing it to export 228,254 tonnes of what the WTO’s rules charmingly term as “sheep meat” (overwhelmingly lamb, in normal English) into the EU without tariffs being levied. Where there is no FTA in place, UK exporters often make use of TRQs to sell outside the EU, and many UK importers bring in materials the same way. This is what a lot of the EU’s free trade looks like in practice.
Carving up quotas
When we leave the EU, will we really be completely cut out of these arrangements, with the EU hanging on to all of its import and export quotas with its various partners? It’s theoretically possible – the EU, or the partners in question, could refuse to even consider or discuss any dividing up of the TRQs. But in practice, that seems unlikely. The economics and politics both argue against it.
Take that example of New Zealand lamb. Officially, its quota is exported to “the EU” – but its destination market is not spread evenly across the member states. In practice, according to the Agriculture and Horticulture Development Board, “approximately half of total sheep meat imports to the EU from New Zealand come to the UK”. What happens if the UK Brexits, and the quota is entirely retained by the remainder of the EU? For New Zealand, its exports would suffer – it would still have the right to export the same amount tariff-free, but the destination market for those exports would now lack half of the previous demand. New Zealand farmers would be forced to drastically reduce prices, or they would sell many fewer tonnes of lamb, or more likely both – either way, the outcome would be undesirable. At the same time, the remainder of the EU would find its market oversaturated with New Zealand lamb looking for a buyer. At both ends of the arrangement, the farming lobby would be up in arms – New Zealanders because of lost exports, Europeans because of a sudden and drastic increase in competition from imports. Indeed, MEPs have already been questioning the European Commission about the impact of this effect – concerns that will grow much louder as Brexit approaches.
The sensible solution, therefore, would be to agree trilaterally between the UK, the EU and New Zealand to divide up that quota, to ensure continuity of trade in our mutual interests even as Brexit occurs. As William Norton argued yesterday, this will involve plenty of haggling. There will be competing national interests – producers who want to open up exports but protect from imports, consumers who want the benefit of imports to reduce the cost of living, processors who benefit from tariff-free imports of their raw materials and tariff-free exports of their products, and so on – but it was ever thus for trade, and each party has something to lose from flatly obstructing the process.
Moreover, the haggling process can itself play a role in pursuing the UK’s broader trade policy goals. For example, we will also be looking to agree an FTA with New Zealand – if British negotiators are able to signal that wider trade and investment benefits are available in future as we will soon be looking to reduce our tariffs on things like wine and dairy products, that should help reach a pragmatic solution with New Zealand on TRQs.
There will be, as Norton wrote, “a lot of paperwork” – particularly given that while New Zealand lamb is one product, the share of TPQs the UK would have a claim to would vary from product to product. The complexity seems more likely to be on how to divide the quotas – trying to benchmark against historic data, taking the last year’s consumption figures, averaging over time, projecting for future developments etc – than on whether to do so at all.
Rectification and ratification
There is a reasonable question about the legal implications of dividing up quotas. As Shanker Singham and Victoria Hewson of the Legatum Institute note, the language used is important to deciding the ease or difficulty of the process at the WTO. If proposed changes “alter the scope of a concession”, then there must be negotiations with other countries about the impact on them and possible compensation. If, however, the changes constitute “rectifications of a purely formal character” then things are simpler – the proposed new schedule is approved after three months if no WTO member objects on relevant grounds. So again, it is better for all involved to divide the existing quota totals and for the UK to pursue rectification, helping a case that this is simply a “purely formal” reorganisation of the same level of trade between the same markets, than to try to raise or lower the levels of the quota, which would look like “alter[ing] the scope of a concession”. Notably, the Government has already said it intends to follow this rectification route.
On the EU and national level, there is also the matter of ratification. Trade treaties and agreements can be famously controversial – raising the ire of protectionists, vested interests and even, in some cases, conspiracy theorists – which can make them difficult, or at least irritating, to steer through ratification. In search of swift progress, we would want as little delay as possible, while for obvious reasons the governments of partner countries would be unlikely to be gleeful about an extra political challenge. Ensuring new arrangements are quantitatively the same or close to those they’re succeeding would help with that latter issue – domestically, just as internationally, a technical change that keeps the outcome the same is less controversial than a whole new proposal. There may in some cases even be ways to avoid the question of delay – it has been suggested that some of the EU’s trade partners might find ways to simply update or append to their pre-existing agreements without having to go through full re-ratification.
A chore, not a predicament
Perhaps unexpectedly, one factor which makes this process less rather than more tricky is the way in which the WTO’s own bureaucracy works. Rather than a “cliff-edge” by which all trade comes to a halt the day after Brexit, if anything the WTO system offers room for some continuity even if the process proves to be troubled. For example, if the UK’s proposed schedule hits objections – another country wishing to oppose it, either for trade or other reasons – then it doesn’t shut down our trading system (as alarmists have implied) or even forbid us from operating under the proposed terms. Rather, a series of mediation talks and hearings begin. These can take years to resolve, and in the meantime we are allowed to proceed on the basis of the proposals – albeit with the attendant risk of having to pay compensation to the aggrieved party if our schedule is eventually judged to be harming their trade in breach of the quite specific rules.
Similarly, while it would be ideal to mutually agree the division of quotas with the EU, if they choose not to play ball (despite the internal pressures they will face to reach a sensible agreement), then they don’t have the right to stop us seeking bilateral agreements to replicate our desired outcome while they do their own thing.
All in all, the process will be tricky and complex and burdensome, but it ought not to be terrifying – as David Allen Green called it in the FT, “not a predicament but a chore”. Notably, a lot rests on exactly how we approach it. Not only does getting off on the right foot matter in terms of the swift and productive resolution of the immediate matter at hand, but it will set the tone for the later and longer negotiations over full-blown Free Trade Agreements. Indeed, it’s not inconceivable that, in return for agreeing to our requests in dividing these quotas now, our trade partners might receive promises from London about the terms of future FTAs. It may be a steep learning curve, but after more than 40 years we will be returning to take a full role in controlling our own trade policy.