Continuing a look at what lies behind the sudden surge in interest in the UK’s and EU’s relationship with the World Trade Organization. Part 2: the ABCs of tariff quotas

There are newer versions of this article:

(1) an explanation of tariff quotas

(2) an update of what has happened with the UK’s and EU’s talks with WTO members on their post-Brexit goods schedules

By Peter Ungphakorn

POSTED OCTOBER 7, 2017 | UPDATED NOVEMBER 25, 2017



When the press learned that the UK and EU had agreed on a common approach for their talks with other World Trade Organization (WTO) members, the headlines spoke of a “breakthrough” and a “deal”. A closer look suggests this was an exaggeration. But the issue is important, nonetheless.

What the two had agreed was a joint approach for handling something called “tariff quotas” when dealing with other WTO members.

On October 12, that joint approach was published in a letter to WTO members (pdf). The following week it was the basis of the first proper round of talks with other WTO members.

No sooner had the story broken than opposition emerged in a letter that the US, New Zealand and some other countries had sent to the British and EU ambassadors in Geneva.

Suddenly tariff quotas were really juicy. Critics saw the developments as proof that London’s Brexit plans were in disarray, and that ministers were misguided (or deliberately misleading the public) in claiming it would be easy to secure future free trade deals with the likes of the US and New Zealand. Politico’s headline said “post-Brexit trade woes deepen”.

This was “a complete, unmitigated disaster for the Brexiteers, Liam Fox, and the UK as a whole”, one member of parliament initially tweeted. She subsequently toned her comment down by clarifying “this is technical. UK has to lodge new schedules at WTO. Gov was planning to do this using method that requires little approval,” before continuing to criticise the government for getting it wrong.

This is technical. UK has to lodge new schedules at WTO. Gov was planning to do this using method that requires little approval. https://t.co/jg0bCn3o7s — Kirsty Blackman (@KirstySNP) October 5, 2017

As Adam, my editor at IEG Agribusiness Intelligence, said: tariff quotas were now mainstream. Even The Guardian had an editorial on the subject.

The excitement partly arose because this issue is so esoteric and technically complex that its significance is difficult to assess. Little wonder people struggled to judge realistically what it meant. It was easy fodder for the emotions Brexit has been stirring for months.

The use of “breakthrough” was defended on the grounds that it was the first time the UK and EU had agreed on anything in their fraught separation talks.

Perhaps a valid point, but this was not really about their future relationship, and “breakthrough” suggests the UK and EU had previously been deadlocked on this issue as well.

There is little public evidence to support that, although a Dutch official indicated on Twitter that some differences did need sorting out, so perhaps there was a breakthrough of a kind. Another tweet suggests the agreed approach was vaguer than the original reports suggested and might fall short of a “deal” (confirmed when the UK-EU letter was published — see details below).

Basically, the issue is so complex that much of it could easily have been left to civil service trade technicians on the two sides to come up with a common approach.

It’s unlikely David Davis and Michel Barnier would get their hands dirty on this one. But it was part of phase 1 (on separation terms) of the “Article 50” Brexit talks. Paragraph 13 of the EU’s negotiating guidelines deals broadly with honouring international commitments. The WTO is only one of these.

13. Following the withdrawal, the United Kingdom will no longer be covered by agreements concluded by the Union or by Member States acting on its behalf or by the Union and its Member States acting jointly. The Union will continue to have its rights and obligations in relation to international agreements. In this respect, the European Council expects the United Kingdom to honour its share of all international commitments contracted in the context of its EU membership. In such instances, a constructive dialogue with the United Kingdom on a possible common approach towards third country partners, international organisations and conventions concerned should be engaged.

Free from political supervision, technical-level officials often collaborate well to produce a shared result. After all, for tariff quotas there is nothing mysterious about the possible approach. I even explored it here.

Tariff quotas

Basically, “tariff quotas” are where limited quantities of imports are allowed into a country duty-free or at low duty. Quantities beyond those limits would normally be charged high duties. Because they are all about tariff rates for specific quantities, they are also called “tariff-rate quotas” or TRQs.

They are used on products that are sensitive: typically food and other agricultural goods. They are a compromise between: protecting domestic farmers and other producers with high import duties; and demands from exporters to be allowed full access to the market. The compromise is to have low or zero tariffs, but only for limited quantities. This also allows consumers to buy some cheaper or more varied food than if there were no quotas.

When a WTO member has tariff quotas, they are included in its “schedules” or lists of commitments (explained in part 1).

The EU has around 100 — the exact figure depending on how they are counted — on cheese, butter, beef, poultry, sheep and goat meat, other meat, live animals, sugar, citrus and other fruit, fruit juice, some vegetables, eggs, cereals and more.

So does the UK because as an EU member, the UK’s commitments are part of the EU’s.

When it leaves, the UK will need to have its own independent set of commitments. Most of this can be copied from the EU’s, meaning the UK would simply continue with the tariff ceilings and commitments on opening services markets that it currently has through the EU.

But for a handful of items, copying is not possible. Perhaps easier to handle among these are farm subsidy limits. The most complex and contentious are tariff quotas. This is where the common UK-EU approach comes in.

Take lamb (strictly speaking, “sheep and goat meat”). The EU currently allows around 300,000 tonnes to be imported duty-free. Some of that goes to the UK, some to other EU members. Once imported into one EU country it can be shipped on freely to another.

After Brexit, the UK and EU would normally have separate tariff quotas. What size should the UK’s be? And what about the EU’s?

A basic intuitive approach would be this. If 40% of the EU’s imports go to the UK and 60% go to the other countries, then the quota might also be split 40:60 — the UK’s tariff quota would be 120,000 tonnes and the EU’s would be 180,000. (The actual ratio seems to be closer to 50:50.)

This particular quota is actually subdivided between different suppliers, New Zealand having just over 200,000 tonnes. Although New Zealand could export all of that to any single EU member, in practice around 48% goes to the UK and 52% to the rest of the EU. So the UK’s tariff quota for New Zealand lamb could be 48% of 200,000 tonnes (96,000 tonnes) leaving the EU with a quota of 104,000 tonnes.

It ought to have been easy for the technicians on both sides to agree to those principles for their common approach.

The real challenge would have been grappling with the numbers, a much more difficult and time-consuming task, but a technical one.

Should the trade data be based on a certain number of years (perhaps an average of three or five) and if so which years (up to the start of the separation talks or to the date of the actual separation)? What kind of average should be used for the data (a straight three-year average, or a five-year “Olympic average” which excludes the highest and lowest numbers)? How should imports that enter the EU through other countries but end up consumed in the UK be identified, for example imports via Rotterdam? What should be done when data is unavailable? And so on.

It turned out that these were precisely the kinds of questions that occupied UK’s and EU’s economic statisticians and other officials for months. But unless they actually have a significant impact on UK and EU commercial interests, they are unlikely to attract the attention of the political masters.

The agreement on a commont UK and EU approach was described as preliminary (which Sprenger’s tweets seemed to confirm). Securing the approval of EU member states was apparently straightforward. The UK and EU followed up, as planned, by submitting it to WTO members in the third week of October on the sidelines of the WTO Agriculture Committee’s meetings.

Agreeing common solutions to statistical problems is not what most people would consider a breakthrough in Brexit talks. Nor is it a “deal”, in the sense that a deal usually involves paying something in order to get something else in return.

It also tells us next to nothing about the actual Brexit separation terms or the future relationship between the UK and EU.

The real deal

It’s what happens next that will involve payment. This could take months at least.

And the bargaining will not be between the UK and the EU since their own bilateral trade is for now being kept out of the picture — an important point since it implies the UK and EU assume free trade between them in goods will continue after Brexit.

The bargaining will be between the UK (and separately the EU–27) and the rest of the WTO. Those talks began in the week of October 16–20, when the UK and EU together met other delegations individually to present the data they had been working on, and to explain their joint approach. To what extent the UK’s and EU’s negotiations with other WTO members stay merged remains to be seen.

Already on September 26 — before the UK and EU sent out their joint letter — seven countries had publicly rejected (pdf) the UK-EU 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.”

The letter includes a number of legal justifications including this assertion: “The modification of these TRQ access arrangements cannot credibly be achieved through a technical rectification. None of these arrangements should be modified without our agreement.” And “the whole membership of the organization may take an interest.”

The concerns were echoed by Australian trade minister Steven Ciobo on BBC Radio Four’s Today programme on November 25.

What these countries are arguing is that dealing with post Brexit tariff quotas is not just a technical correction (“rectification”) of the implied commitments of the EU–27 and the UK. Under WTO procedures, rectification is quick and requires little or no negotiation. On the other hand, a “modification” does require talking particularly with countries that were part of the original negotiations or have a substantial interest.

The key difference between the two sides is on the meaning of leaving other WTO members “no worse off” and honouring “the existing access commitment”.

Take that example of splitting the 300,000-tonne EU–28 quota into 120,000 tonnes for the UK and 180,000 tonnes for the EU. The combined total is still 300,000 tonnes.

But the seven are arguing that the commercial value to them would be reduced because they have less flexibility to choose where to export their product to. While the UK is still in the EU, they can switch from selling less to the UK and more to Germany or France if the price is better, for example. Under the joint UK-EU approach that freedom would be constrained by the separate quotas.

At the very least, this suggests the seven would want: either, quotas that are larger than 120,000 tonnes (UK) and 180,000 (EU–27), meaning more than 300,000 tonnes in total; or, continued freedom to choose where to sell their products in the 28 countries that are now the EU.

That freedom would continue to exist, for example, if the UK ends up back in the single market and customs union with unchanged tariff quotas. In that case, the seven would drop their demand to negotiate.

The rejection does not mean the talks in the WTO are deadlocked, doomed or an “unmitigated disaster”. They haven’t even really started yet.

The UK, EU and some of the rest of the WTO have now declared their starting positions. Months of negotiations will follow. Any agreement reached after that will be the real deal. It will clear the way for trade to continue.

Since the new WTO commitments, including on tariff quotas, will be needed when the UK leaves the EU on March 29, 2019, and since they would normally need three months to be processed in the WTO, officials say they expect an agreement by the end of 2018.

Months of talk ahead

One journalist I spoke to was surprised that we might have to wait until this time next year at the earliest to find out what the deal is. We should not be surprised. Nothing happens quickly in the WTO.

These are pretty complicated issues. There are around 100 tariff quotas. At each stage, the negotiators in Geneva will have to consult officials, governments, farmers’ groups and exporters back home. The EU will have to consult the 27 member states too. The UK is understood to be aiming to submit its draft schedules of commitments sometime next year.

Even the first stage of preparing the data has taken so long that some sources say it was still incomplete at that first round of talks in the week of October 16–20. Other WTO members then started to look at their own data on their exports to the EU and UK to see if they tallied.

What if there is no agreement by Brexit day? Some lawyers argue that so long as the UK and EU have constructed their proposed tariff quotas according to legal principles and the case history of WTO disputes, London and Brussels can simply go ahead without needing other countries’ approval. Objecting countries would struggle to win a legal challenge against the two in the WTO, according to this argument.

Other trade experts and experienced negotiators disagree. They believe a legal challenge might be possible, with the risk that trade could be disrupted. Some argue that WTO dispute settlement rulings are not always predictable. In this case the adjudicators would be asked how WTO law would handle tough questions such as “no worse off” and honouring “the existing access commitment”. The worst outcome would be a soured atmosphere leading to tit-for-tat restrictions on imports.

For the time being the point is moot. Those actually involved in the talks say they want to avoid both disruption to trade, and litigation in the WTO. That would require some sort of deal by Brexit day.

The UK’s and EU–27’s schedules of WTO commitments would not necessarily need to be certified in the WTO by that date. The EU has been trading smoothly despite its schedules for various phases of enlargement remaining uncertified for years. To work in practice, the UK and EU would have to have learnt from the negotiations what tariff quotas would be reasonably acceptable to the other WTO members concerned.

One other point that has received little attention: if other WTO members have tariff quotas that specify the EU as a supplier, then those quotas will have to be split between the UK and EU–27 too. But that’s another story.

Part 1 on WTO membership is here

Follow-up 1: Jochem Sprenger’s tweets

After this article was published, Dutch Foreign Ministry official Jochem Sprenger tweeted:

Actually, there was quite a lot of debate between EU and UK. So “deal” is not very unaccurate. UK insisted on “rectification” — Jochem Sprenger (@jochemsprenger) October 8, 2017

Note “rectification”, which the US and others rejected.

The discussion included the UK asking the EU for help in transferring its free trade agreements with other countries (such as Canada and South Korea) to the UK, Sprenger went on.

Furthermore, UK asked for EU support te renegotiate UK access to EU’s FTAs. — Jochem Sprenger (@jochemsprenger) October 8, 2017

And he confirmed that there was no attempt to include UK-EU trade in the tariff-quotas.

Lastly, no agreement on EU’s access to UK’s TRQs or vice versa — Jochem Sprenger (@jochemsprenger) October 8, 2017

Then he said there is still no consensus on how to split the quotas. Only a “common letter”.

Oh, and btw: there is no concensus yet between the UK and the EU on the actual devision of the TRQs. Only a common letter. — Jochem Sprenger (@jochemsprenger) October 8, 2017

And finally he said the EU Commission should have published the UK-EU letter

There is no deal – only a common letter about the approach. But even of that one, the Commission ought to have made the EU proposal public — Jochem Sprenger (@jochemsprenger) October 8, 2017

The letter was published three days later on October 11 (pdf). It seems to confirm Sprenger’s tweets. “Rectification” does not appear in it, and nor does any specific reference to “modification” or negotiating rights. If the two sides (UK and EU versus other WTO members) haggle over the legal status of the talks, then we can expect delays to the discussion of the actual tariff quotas.

Follow-up 2: the October 16–20 talks

The first round of proper talks took place on the sidelines of the WTO Agriculture Committee meetings in the week of October 16–20. They were between the UK and EU together, and a selection of individual WTO members with the most interest in the tariff quotas.

The main purpose for the UK and EU was to present their data and explain their joint position. They also heard other countries’ reactions. Briefly, these issues emerged:

data : the immediate and tough challenge of how to arrive at figures that accurately reflect imports and subsidies separately in the UK and remaining EU–27, particularly for calculating how to split tariff quotas between them. This has been the focus of the first round of talks where a range of technical difficulties have arisen

: the immediate and tough challenge of how to arrive at figures that accurately reflect imports and subsidies separately in the UK and remaining EU–27, particularly for calculating how to split tariff quotas between them. This has been the focus of the first round of talks where a range of technical difficulties have arisen tariff quotas and honouring “access” commitments : whether the UK and EU will be able to stick to their position that they can simply divide the present tariff quotas into UK and EU–27 portions while keeping the combined totals unchanged, in the face of opposition from some other WTO members

: whether the UK and EU will be able to stick to their position that they can simply divide the present tariff quotas into UK and EU–27 portions while keeping the combined totals unchanged, in the face of opposition from some other WTO members agricultural subsidies : how to divide the EU’s present entitlement between the UK and remaining EU–27

: how to divide the EU’s present entitlement between the UK and remaining EU–27 negotiating rights: whether the UK and EU should recognize other countries’ claim to legal rights to negotiate over the revised commitments — for the time being at least, this only seems to have been mentioned in passing

And on the data, among the objections raised by other WTO members were:

at least some of the data did not accurately reflect how much of EU imports went to the UK and how much to the EU–27

in some cases the proposed period of 2013–2015 was challenged because it could give exporting countries smaller quotas than if other years were used. Several delegations wanted to test the data for different and longer periods, including up to 2016, to see how that affects the outcome. Some rejected the argument that a three-year period is traditionally used in the WTO, countering that this is a process without precedent

some of the presentations were incomplete because they dealt with only a small proportion of tariff quotas allocated specifically to some countries

the way the quotas are administered — how they are allocated to individual companies or countries — could have distort the data

(A comprehensive report is available to subscribers of IEG Policy here.)

Updates:

• October 9, 2017 — adding new information from Jochem Sprenger’s tweets

• October 12, 2017 — adding UK-EU letter and references to it in the story

• November 21, 2017 — adding information on the October 16–20 first round of WTO talks

• November 25, 2017 — adding Australia’s concerns aired on the BBC’s Today programme

Photocredits: Pixabay, Pexels CC0



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