US objects to new UK- WTO agricultural quotas schedule being established using “technical rectification”

·    Introduction

·     Requests for compensation

·     No impact assessment

·     The TRQ challenge

·     US objection

Introduction

The EU has taken the final formal step to implement the decisions taken at the Nairobi World Trade Organisation (WTO) Ministerial Conference in 2015 on eliminating farming export subsidies. In a Press Release 06.10.2017 the European Commission announced,

‘The EU today submitted its revised goods schedule to the WTO which, on top of reconfirming the elimination of export subsidies, also includes the outcome of other recent negotiations, including those linked to EU enlargements.

This will bring the commitments on things like tariffs and farming subsidies that the EU and the 28 Member States have toward our trade partners up to date under WTO rules. This is ahead of the next Ministerial Conference which will take place in Buenos Aires from 10 to 13 December 2017.

The decision to eliminate farming export subsidies was taken by Trade Ministers in December 2015 during the 10th WTO Ministerial Conference in Nairobi, Kenya. The decision, apart from eliminating farming export subsidies, also introduced new rules regarding other types of farming export support, including export credits.’

In ‘Brexit, Trade and Agriculture: Waiting for Answers’, published 04.12.2017, Joseph A McMahon, Full Professor of Commercial Law, UCD Sutherland School of Law, University College Dublin wrote,

‘In the absence of agreement on the proposed trade agreement at the end of the withdrawal negotiations, or an interim agreement, the default position will be that the UK would have to trade with the EU on World Trade Organisation (WTO) terms. These terms will also apply to the UK’s trading relationship with all other countries once it leaves the EU as it will no longer be able to benefit from trade agreements concluded between those countries and the EU…

When the UK leaves the EU, it will have been just over forty-six years since it had its own Schedules in the GATT, so a new Schedule of Commitments will be needed as will an amendment to the EU Schedule. These will be submitted to the WTO’s Director General who will inform other WTO members of the Schedules. The Director General will certify/record these unless another Member objects to certification; in this event there will be informal consultations and if these fail there will be formal negotiations under Article XXVIII GATT and if these fail, recourse can be had to the Dispute Settlement Understanding.

a. Market Access

Under Article 4.1 AoA, the market access concessions contained in Schedules relate to bindings and reductions of tariffs. In answer to the question as to level of tariffs that the UK will impose with respect to agricultural products, it should be noted that the EU Agricultural Tariff Schedule is extraordinarily complicated, so the UK might take the opportunity to reduce the level of tariffs on certain products e.g. those not produced in the UK. It must be remembered here that the UK is a net-food importing country and once it leaves the EU as it is no longer bound by the principle of Community preference, imports may come from any source.

In addition to reducing the level of tariffs, Article 4 also provides for the tariffication with Article 4.2 providing that members are not to “maintain, resort to, or revert to any measures of the kind which have been required to be converted into ordinary customs duties” which are detailed in a footnote to this provision as being:

… quantitative import restrictions, variable import levies, minimum import prices, discretionary import licensing, non-tariff measures maintained through state-trading enterprises, voluntary export restraints, and similar border measures other than ordinary customs duties, whether or not the measures are maintained under country-specific derogations from the provisions of GATT 1947, but not measures maintained under balance-of-payments provisions or under other general, non-agriculture-specific provisions of GATT 1994 or of the other Multilateral Trade Agreements in Annex 1A to the WTO Agreement.

So, these are measures that the UK will not be able to rely on post-Brexit.

To maintain the situation prevailing at the time of tariffication, the AoA provides that quantities imported before it took effect could continue to be imported, and it guaranteed that some new quantities were charged duty rates that were not prohibitive. This was realised through tariff-quotas i.e. lower tariff rates for specified quantities, with higher rates for quantities that exceed the quota. So, all of the current 87 existing EU agricultural tariff quotas have their origins in the implementation of Article 4 and in the latest EU notification concerning imports under tariff quotas for 2016, some 27 products are listed as having a fill rate of 100% and of the remaining 37 products in the notification, eleven had a fill ratio of 0%.

So, the question is; can the EU’s tariff quotas be “divided” between the UK and the EU? One starting point is to undertake a detailed examination of the existing tariff quotas in the EU Schedule to determine if the UK is the major/principal beneficiary of those quotas. If so, there is an argument that the tariff quota in the new UK Schedule should match the traditional pattern of trade for a particular product with a consequent reduction in the EU Schedule for that product. One example here is the tariff quota for Angus Beef in the Korean Schedule – maintaining this tariff quota will require the EU to agree to allocate this tariff quota to the UK and if it does not, this would require the UK to undertake negotiations with Korea to retain its existing market access for this product.10 If one Member State were to object to the allocation of this particular quota to the UK, it is unlikely that the UK will be able to demand that its current status on the Korean beef market be maintained. In answer to the question of whether the existing tariff quotas can be divided, it is not clear whether tariff quotas arising under the AoA can in fact be split. If possible, it is probable that some WTO members may object to new tariff quotas coming into existence in 2019 rather than 1995.

This has indeed happened. On 11 October the UK and the EU notified the other members of the WTO that the UK would leave the EU at the end of March 2019 by which time the UK will have notified the WTO of its own separate schedules of commitments for goods and services. Until 2019 the UK will have to respect the EU’s Common Commercial Policy. The notification went on to note:

… the EU and UK intend to maintain the existing levels of market access available to other WTO Members. To this end, we intend that the future EU’s (excluding the UK) and the UK’s (outside the EU) quantitative commitments in the form of tariff-rate quotas be obtained through an apportionment of the EU’s existing commitments, based on trade flows under each tariff-rate quota. In doing so, we propose to follow a common approach, inter alia to data and methodology, and to engage actively with WTO Members on these.

The notification concluded by committing the UK and the EU “to engaging with the WTO Membership in a spirit of cooperation, inclusiveness and openness on these matters over the course of the coming weeks and months.” It is clear that some WTO members are not happy with the proposed approach to the division of tariff quotas as even before the letter from the UK and the EU, seven WTO members had expressed their concerns.

A letter from the Geneva representatives of Argentina, Brazil, Canada, New Zealand, Thailand, the United States and Uruguay suggested that the proposed division of tariff rate quotas based on historical averages was unacceptable as it would not fully honour existing tariff quota commitments. The proposed technical rectification was deemed unacceptable with the seven arguing that negotiations were needed between the UK and the EU on the one hand and, on the other hand, “the countries which are holders of Country-Allocated Tariff Rate Quotas into the European Union market, users of Most Favoured Nation Tariff Rate Quotas as well as holders of initial negotiating rights and principal and substantial interests in several concessions.” It seems that further discussions will be necessary before a definitive answer emerges to the question of what will happen to existing EU tariff quotas.

Another problem arises as a result of the process of tariffication, namely the ability to use Article 5 AoA which offers protection against import surges, provided that the products has been designated in a Member’s Schedule with the symbol SSG. Thirty-nine WTO members have reserved the right to use Article 5, including the EU who indicated that it could be used for a total of 539 products. The latest notifications by the EU indicates that the SSG had been used 36 times in the 2015/16.14 In answer to the question whether the UK would be able to use Article 5, it is difficult to imagine other WTO members agreeing that after 24 years of not being able to use Article 5 that the UK can rely on Article 5. So, it may be unlikely that the UK will be able to invoke a special safeguard measure…

In the context of the Agreement on Agriculture, the proposed division of existing EU tariff quotas between the UK and EU has been objected to by a number of WTO members. Further discussions will be needed to ensure that the final agreement is more than a technical rectification. Whilst it is unlikely that the UK will seek to use export subsidies as the EU has already moved to implement the Nairobi decision, it is less clear what the UK’s commitment on domestic support will be. A decision on this matter will reflect the nature of UK agricultural policy post-Brexit. Discussions on this to date suggest that an ecosystems services approach will be taken to domestic support which will have to be compliant with the terms of the Green Box. However, discussion on the future shape of UK agricultural policy have not yet progressed sufficiently for the promised Agriculture Bill to emerge. Whether the Bill provides for a UK-wide policy or allows each of the devolved administration to pursue a more nuanced approach to domestic support remains an unanswered question. It entirely possible that the Agriculture Bill could provide for the transfer back to the devolved administrations of competence in agriculture if common provisions are not needed. It also far from clear what the nature of the future trading relationship between the EU and UK and whether it will be a new deep and special relationship as suggested by the UK Prime Minister. Whilst the EU (Withdrawal) Bill provides for regulatory convergence as the UK leaves the EU, regulatory divergence is bound to emerge, if for example, new rules are adopted post-Brexit by the EU or when the UK relaxes existing rules as part of trade deal post-Brexit with a third country.’

Requests for compensation

‘When a panel or the Appellate Body concludes that a measure is inconsistent with a covered agreement, it “recommends” that the member bring the measure into conformity with the agreement, and may “suggest” ways in which the member could implement the recommendation … Within thirty days of the adoption of a panel or Appellate Body report , the member must tell the DSB of its intentions as regards the implementation of the recommendation.

Compensation is voluntary. But if the member fails to comply with the recommendations and rulings within the reasonable period it must, if so requested, enter into negotiations with the other party with a view to agreeing compensation. If that cannot be agreed, any complaining party may ask the DSB to authorize it to take countermeasures (Article 3(7) and 22). Countermeasures (coyly referred to in the DSU as “retaliatory action” or “suspension of concessions”) are temporary measure available in the event that recommendations or rulings are not implemented.’ Handbook of International Law by Anthony Aust, page 357.

No impact assessment

The government has not carried out any impact assessments of leaving the EU on the UK economy, Brexit Secretary David Davis told MPs 06.12.2017.

It therefore appears that no economic impact assessment has been undertaken of the consequences of trading under WTO rules.

The TRQ challenge

‘Defining the problem

When a country joins a customs union (CU), the acceding member adopts the CU tariff schedule. Where this results in a loss of market access for third countries, because custom union tariffs are higher than the bound tariffs the acceding country had scheduled in the WTO, third countries have a right to seek compensation (for example, countries such as Australia, Argentina, Brazil, China and Uruguay submitted claims for compensation when Croatia acceded to the EU in July 2013). All contingency trade measures (antidumping, anti-subsidy and safeguards) equally apply to the acceding members.

In the case of quantitative market access commitments, such as tariff rate quotas (TRQs), these 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.

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)… [The] procedures for leaving the EU were first set out in the Treaty on European Union, whose Article 50 provides, inter alia:

The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.

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) and concessions it has obtained (for export sales) should be apportioned between the UK and the EU27. Where the latter has obtained dedicated export rights (for example, through pre-allocated quantities in a bilateral tariff rate quota (TRQ)), changing this would require the consent of the importing country which seems an unlikely expectation. In these cases, the most likely outcome is that the TRQ would remain with the EU and the UK would lose its market access under that TRQ following Brexit. However, 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.

WTO agricultural policy commitments

Let us conduct a thought experiment to see how these two stages might play out in the case of the WTO agricultural policy commitments.

With respect to tariff bindings, the UK would most likely inherit the EU’s bound tariffs which for most tariff lines are also the EU’s applied tariffs. This is not likely to be controversial in a WTO context. The UK could of course set its future applied MFN tariffs below this level but it could not exceed them.

There might be less agreement that the UK could inherit the ability to use the special safeguard on selected imports but the UK would have a strong case that it would be entitled to these provisions if it wished to make use of them.

As noted above, tariff rate quotas (TRQs) would be a more problematic issue. Some EU import TRQs are particularly important for the UK because a significant share of in-quota imports is destined for the UK market, such as butter from New Zealand. Whether the EU would want to share these quotas would be a matter for negotiation in the withdrawal negotiations. One could envisage that a more protectionist EU might be only too delighted to offload a larger than pro-rata share of its TRQs to the UK.

Getting agreement on any TRQ divvy up at the WTO would be more difficult. This is because different countries have different dependencies on the UK vs EU27 markets. No matter what allocation key is used, some third countries are bound to be aggrieved and feel that their exports (either to the UK or EU27 markets) would now face greater market access difficulties than before. If no agreement is forthcoming at the WTO, this could lead to a formal dispute over claims for compensation. To avoid this, or to be in a better position to defend such cases, the more objective the basis for the allocation and the more consistently it is applied across all TRQs, the better the chance of a successful defence.

Note my conclusion above that, in the case of bilateral export TRQs, these would probably stay with the EU and the UK would lose its existing market access rights. At this stage, I have not investigated how many such bilateral TRQs exist and how important they are for the UK. The UK could still compete, of course, for access under WTO multilateral TRQs as a WTO member outside the EU.

The UK will also want a share of the EU’s Bound Total AMS 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 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.

The apportionment of export subsidy entitlements will not be an issue. Following the Nairobi Ministerial Council meeting of the WTO in December last year, the EU and all other developed country members agreed to eliminate remaining scheduled export subsidy entitlements with immediate effect (with some limited exceptions which will expire in 2020). As the negotiations leading to a withdrawal agreement are very unlikely to be completed by then (in my previous post I speculated that the date for a possible Brexit would be 1 January 2021), subsidies on agricultural exports will be prohibited by the time that this happens.

Bilateral trade agreements

The most complicated set of issues relates to the extent to which the UK will inherit the rights and obligations under the EU’s bilateral and regional trade agreements (RTAs). This is simply because of the number and detail of the provisions of these agreements, compared to a single WTO agreement (albeit with many individual chapters). I assume that in all cases the UK would intend to continue these agreements after Brexit to the extent that the other partners agree.

In all cases, because these are mixed agreements (meaning that they cover provisions that fall under member state responsibility under the Treaty of Lisbon) the UK is already in a legal relationship with the partner countries having separately ratified these agreements. Nonetheless, at a very minimum, a Brexit would imply textual changes to these agreements to recognise that the agreement is now with the UK directly and not through the EU. This would imply a process of ratification both by the UK and by each of the individual partner countries.

However, more than textual changes are likely to be required. Take again the issue of TRQs. which are widely used in bilateral trade agreements to address market access for sensitive agricultural products. Through its RTAs, the EU both gives and receives TRQ access to and from its trading partners. TRQ imports are important to the supply chains for various food processing industries in the UK. The notable example is sugar where the Tate and Lyle sugar refinery depends on access to duty-free sugar imports from ACP countries for its viability.

These sugar imports enter under Economic Partnership Agreements which are the EU’s RTAs with these countries (in this specific case, the UK could continue to import sugar from the least developed ACP countries under WTO rules but it could not offer duty-free access to other ACP countries without a comprehensive RTA with these countries). Of course, without separate UK RTAs with these countries, it could lower its applied MFN duty on sugar which would then apply to all countries including Brazil. Brazil would likely take the lion’s share of UK sugar imports under that scenario.

It is unlikely that the UK’s exit would require any alteration of the TRQ quantities in existing EU RTAs even if the agreements would now be only with EU27 rather than EU28 (in the same way as enlargement of the EU does not lead to any automatic change in these TRQ quantities in existing RTAs).

There are two conceivable options. One is that the EU27 and the third countries concerned voluntarily agree to renegotiate a division of the existing TRQs (both those of the partner country giving access to EU28 exports and those of the EU28 giving access to the partner country). This strikes me as highly implausible. On the EU side, it is very unlikely to want to go through the process of re-ratifying its 33 regional trade agreements to date. Approval of trade agreements now requires a time-intensive process including impact assessments and the involvement of both the Parliament and the Council, with the risk of unexpected pitfalls along the way.

The time pressure on the EU which is already engaged in negotiating a wide range of complex new agreements also means that it has no incentive to adjust its existing RTAs just to facilitate the UK which, after all, would be the one wanting to walk away from the EU. This option is also not attractive to the partners because, by definition, it reduces their market access. A TRQ dividing into binding limits in two markets is less valuable that the same TRQ with the flexibility to switch exports between two markets. I thus cannot see an incentive on either side to pursue this option.

The other option is for the UK to negotiate its own market access arrangements for these sensitive commodities as part of a full renegotiation of bilateral RTAs with these countries. It could decide to offer an additional TRQ or even abolish the sensitive status of the import and offer duty-free access. However, this implies simultaneous negotiations with the same 50 or so partners that are party to the EU’s over 30 RTAs.

It is important to underline that the UK cannot simply offer a bilateral quota to supplier countries to ensure continued access to supplies. Bilateral quotas are only WTO-compatible if agreed within the context of an RTA and, in turn, an RTA is only WTO-compatible if it covers ‘substantially all trade’ and if it is phased in ‘within a reasonable period of time’ (often taken to mean ten years). There is thus no alternative to concluding new comprehensive RTAs with these trading partners if the market access provisions (in both directions) are to continue.

To put it mildly, this will be a difficult balancing act to be achieved under considerable time pressure during the prescribed renegotiation period for withdrawal once the UK formally announced it wished to exit. All of these new agreements would have to be in place by the time of the formal end of the exit negotiations to avoid disruption of supply chains. While countries routinely use the possibility to provisionally apply the tariff concessions contained in an RTA before all the formal ratification steps are completed, there must be a strong possibility of disruption to particular UK supply chains which are dependent on access to duty-free supplies under existing EU RTAs in the wake of a possible Brexit.

Conclusion

Advocates of a UK withdrawal from the EU argue that the WTO provides a clear alternative to EU membership. This post asks the question what would its WTO commitments be with respect to agricultural policy in the event of a Brexit, and how would WTO rules affect its current trade flows?

The answers are not likely to be controversial in the case of tariff bindings or domestic support commitments, but its WTO commitments could create difficulties in the case of imports and exports under tariff rate quotas.

Also, WTO rules on non-discrimination imply that it may not be easy to maintain the market access granted under the EU’s RTAs without full-fledged negotiations to agree parallel agreements with the 50 or so countries that have signed free trade agreements with the EU. While signing new agreements outside the EU is certainly feasible, whether these can be in place before the end of the withdrawal period from the EU is a moot point.

There must be a high risk that Brexit would lead to disruption to supply chains (in the case of imports) and to export sales. Also, the time pressure on the UK to secure agreements will leave it in a relatively weak bargaining position vis-à-vis its trade partners implying that it may have to yield more concessions than might otherwise be the case in order to secure these agreements.’

WTO dimensions of a UK ‘Brexit’ and agricultural trade by Alan Matthews 05.01.2016. http://capreform.eu/wto-dimensions-of-a-uk-brexit-and-agricultural-trade/

(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).

See also Agriculture & Horticulture Development Board (‘AHDB’) Horizon Report, ‘The WTO and its implications for agriculture’: https://ahdb.org.uk/documents/Horizon_june2017.pdf

US objection 

‘The Trump administration has joined a group of countries objecting to a deal between the UK and EU to divide valuable agricultural import quotas, in a sign of how the US and others plan to use Brexit to force the UK to further open its sensitive market for farm products. President Donald Trump has been one of the most prominent international backers of Brexit and has vowed quickly to negotiate a “beautiful trade deal” with the UK after it leaves the EU. But his administration’s objection to a preliminary plan, agreed to by Brussels and London over how to split the EU’s existing “tariff rate quotas” under World Trade Organisation rules after the UK assumes its own WTO obligations following Brexit, illustrates how Washington is likely to drive a hard bargain. It also undermines efforts by Theresa May’s government this week to portray the WTO deal with the EU as a significant win, something made doubly painful by Mr Trump’s past backing of Brexit. The risk for the UK is that as part of its post-Brexit transition in the WTO it may have to accept opening up access to agricultural goods from third countries far more than it wants — even before it agrees any new trade deals with such countries. A spokesman for Britain’s department for international trade said on Thursday that the EU-UK plans would be discussed “extensively with our partners in the WTO before proceeding”, in a reference to the UK’s desire to avoid a bruising battle in the WTO on the issue. Britain was seeking a “smooth transition which minimises the disruption to our trading relationships”, he said. But the US joined other major agricultural exporters including Argentina, Brazil and New Zealand in signing a letter sent last week to the EU and UK’s WTO ambassadors objecting to the plan to split the quotas that cover everything from New Zealand butter and lamb to US poultry and wheat. Under WTO rules, those country-specific quotas allow low-tariff imports up to a certain volume with tariffs increasing after that. As such, they are hugely valuable to countries such as Argentina and New Zealand that depend heavily on agricultural exports and the powerful farm lobby in the US. While the UK was a founding member of the WTO and one of the first signatories of its predecessor, the General Agreement on Tariffs and Trade, its membership obligations until now have been managed by the EU. The EU-UK plan calls for the existing EU quotas to be split between the EU and UK after Brexit based on historical imports and consumption patterns. The US and others, however, argue that method is unfair as it would effectively allow the EU to reduce its obligations to fellow WTO members and set a low bar for the UK as well. “Such an outcome would not be consistent with the principle of leaving other [WTO] members no worse off, nor fully honour the existing TRQ access commitments. Thus, we cannot accept such an agreement,” the countries wrote. Emily Davis, spokeswoman for Robert Lighthizer, the US trade representative, said neither the EU nor the UK had presented any written plan for how to handle the WTO quotas to Washington. But the Trump administration was “actively engaged with its trading partners on the future of UK and EU tariff rate quotas following Brexit”. “Ensuring that US exporters of food and agricultural products have the market access in Europe due to them even after Brexit is a high priority for the administration,” she said. The UK and EU are due to present their plan to other WTO members during the week of October 16 when trade negotiators descend on Geneva for what is known as agriculture week. European diplomats have emphasised the importance to both the EU and the UK of striking a deal on dividing up of TRQs.

Brussels is keen to avoid having to maintain EU TRQs at their current size after Brexit, something that would put increased pressure on its farmers once Britain leaves. For Britain, the stakes are potentially much higher, given the UK’s need to establish itself independently at the WTO in any Brexit scenario. The talks are bound up with other WTO issues that Britain needs to settle, such as what share it should take of the EU’s rights to subsidise its farmers. Among the UK’s plans is to ask that its new agricultural quotas schedule be established using a method called “technical rectification”, which would avoid having to secure approval from other WTO members. But in their letter to the EU and UK ambassadors the US and other signatories objected to that method as well. “The modification of these TRQ access arrangements cannot credibly be achieved through a technical rectification,” they wrote. “None of these arrangements should be modified without our agreement . . . In the case of substantial changes affecting the balance of concessions, the whole membership of the organisation may take an interest.” The UK redoubled its backing for the approach on Thursday. “We still believe that technical rectification remains the most appropriate procedure for introducing UK schedules into the WTO,” the UK trade department spokesman said, adding that Britain was “committed to working constructively and openly with our international partners throughout the process.”’

Trump rejects May’s post-Brexit agriculture deal with EU – US expected to drive hard bargain as UK assumes its own WTO obligations, FT, 05.10.2017.