What would trading on WTO terms mean for the UK

What would trading on WTO terms mean for the UK | LinkedIn

If you think you understand what this means then I recommend that you read the eye-opening report written by experts – Catherine Barnard and Anand Menon.

What-would-trading-on-WTO-terms-mean-Long-Guide.pdf (ukandeu.ac.uk)

Please note as demonstrated in the Diplomatic law Guide, which I wrote 4 years ago, see the section ‘The economic dangers of political wishful thinking?’ on the BREXIT page at:Diplomatic Law Guide – by Carl Islam LLM(Exon)(International Business Law)(see extracts below):

In theory 124 trade agreements (to be negotiated) x 5 years each = 620 years.

[Obviously it won’t take that long, however, 5 years (2 years for agreement and three for ratification and implementation), is the documented norm for a comprehensive trade agreement].

Hypothetically, all124 could be negotiated within 5 years (if negotiated in parallel).

How many trade negotiators does the UK [have] to resource this?’ – Not enough (see below).

Meanwhile watch out for the TRQ’s! because we are in for a very rough economic ride in the brave new world of international trade, and I speak as a lawyer who in his late twenties and early thirties negotiated major contracts with state entities in China and India www.ihtbar.com

The UK will be unable to have frictionless, tariff-free trade under World Trade Organization rules for up to seven years in the event of a no-deal Brexit, according to two leading European Union law specialists.

The ensuing chaos could double food prices and plunge Britain into a recession that could last up to 30 years, claim the lawyers who acted for Gina Miller in the historic case that forced the government to seek parliament’s approval to leave the EU.

It has been claimed that the UK could simply move to WTO terms if there is no deal with the EU. But Anneli Howard, a specialist in EU and competition law at Monckton Chambers and a member of the bar’s Brexit working group, believes this isn’t true.’

“No deal means leaving with nothing,” she said. “The anticipated recession will be worse than the 1930s, let alone 2008. It is impossible to say how long it would go on for. Some economists say 10 years, others say the effects could be felt for 20 or even 30 years:even ardent Brexiters agree it could be decades. …

Firstly, the UK must produce its own schedule covering both services and each of the 5,000-plus product lines covered in the WTO agreement and get it agreed by all the 163 WTO states in the 32 remaining parliamentary sitting days until 29 March 2019. A number of states have already raised objections to the UK’s draft schedule: 20 over goods and three over services.

To make it more complicated, there are no “default terms” Britain can crash out on, Howard said, while at the same time, the UK has been blocked by WTO members from simply relying on the EU’s “schedule” – its existing tariffs and tariff-free trade quotas.

The second hurdle is the sheer volume of domestic legislation that would need to be passed before being able to trade under WTO rules: there are nine statutes and 600 statutory instruments that would need to be adopted.

The government cannot simply cut and paste the 120,000 EU statutes into UK law and then make changes to them gradually, Howard said. “The UK will need to set up new enforcement bodies and transfer new powers to regulators to create our own domestic regimes,” she said.

“Basic maths shows that we will run out of time but any gap in our system will create uncertainty or conflict,” said Howard. “Some of these regimes carry penalties such as fines – even criminal offences in some sectors.”

Unless there is an extension to article 50, both these hurdles will need to be crossed by 29 March. This, said Howard, was an impossible task. “Negotiating and ratifying the international free trade deals with the rest of the world alone could take over seven years,” she said.

“A no-deal Brexit could double prices for some products like meat and dairy. There is also a greater risk of trade disputes and sanctions, resulting in reduced market access for UK businesses.

“It’s not just about money,” she said. “We are dependent on imports for a lot of things that we don’t make any more or don’t make enough of, or simply cannot make as they are patented or subject to rules of origin – like lifesaving drugs, radioactive isotopes, chemicals (such as helium for MRI scans), medical equipment, chemicals, electricity, petrol, even milk. Shortages and delays could cause panic buying or even civil unrest.””

See: https://www.theguardian.com/politics/2019/jan/27/uk-cannot-simply-trade-on-wto-terms-after-no-deal-brexit-say-experts.

Report by Catherine Barnard and Anand Menon

What-would-trading-on-WTO-terms-mean-Long-Guide.pdf (ukandeu.ac.uk)

·       ‘There is a difference between ‘WTO rules’ and ‘WTO terms’. WTO rules govern all trading relations between the UK and the EU, including the single market, customs union, any other form of free trade agreement or even ‘no deal’. Agreements can go beyond WTO rules in some areas, but not in others. The rules remain the foundation for any arrangement. WTO terms means particular conditions that countries have agreed in the WTO, such as their individual ‘commitments’ (pledges) on tariffs, agricultural subsidies or opening up of services markets. Its meaning is therefore much narrower than WTO rules.’

·       Negotiations over tariff quotas Sorting out the 100 or so ‘tariff quotas’ (or tariff-rate quotas—TRQs) is the most complicated part of the UK establishing its own schedules of commitments in the WTO. Among WTO members, the method proposed jointly by the UK and the EU is controversial. The quotas allow limited quantities of a product to be imported at a low tariff or duty free, while anything outside the quota is charged a much higher duty.

For example – New Zealand lamb:

The present tariff quota for New Zealand lamb imports into the EU (currently including the UK) is around 230,000 tonnes. Inside the quota, imports are duty free. Outside of this quota, a mixed tariff is charged: up to 12.8% of the price, plus up to €902 to €3,118 per tonne. That is fairly complicated, but the bottom line is that it is much more expensive.After Brexit, what should the UK’s tariff quota for lamb (or any other product) be? And what about the EU27? The UK and the EU have jointly proposed in the WTO that their quotas should be split in a way that keeps the same total — so for New Zealand lamb, that is still 230,000 tonnes. The UK and EU say that the share each gets should be in proportion to the percentages that ended up in the UK and the EU27 on average in 2013–15 using EU data. The result is a 50:50 split — about 115,000 tonnes in each quota. New Zealand and a number of other countries have complained that this method weakens the trading rights that they negotiated in the WTO because it reduces the quotas’ commercial value. While the UK is a member of the EU and its customs union, New Zealand can choose to sell anywhere in the EU where the prices are more profitable. Splitting the quotas in the proposed way limits exporting countries’ flexibility to choose between selling to the UK and, say, Germany, wherever is more profitable. There are other objections too. [See the Diplomatic Law Guide Brexit page].

What would ‘trading on WTO terms’ mean for the UK? Sorting out the tariff quotas means difficult negotiations. They ought to be sorted out in practice — if not legally — by March 2019, unless the UK and the EU continue with a customs union beyond Brexit day (which they will if the transition period and proposed ‘backstop’ apply).

The sting in the tariff-quota tail – New Zealand may be unhappy with the proposal for splitting quotas on lamb and other products, but for UK and EU farmers it is, in fact, much worse.

The tariff quotas mean that, with no deal between the UK and the EU, trade between them in some agricultural products would dry up completely.

In others, it would be severely reduced.

None of the WTO tariff quotas takes into account current trade between the UK and the rest of the EU.

For example, over 80,000 tonnes of lamb is exported duty free and quota free from the UK into the EU27 and about 11,000 tonnes goes from the EU to the UK. All of the lamb quotas, except some tiny amounts, are reserved for specified countries. None is for the UK or the EU27, since they currently trade within the single market. Under present proposals and without a UK-EU trade deal, after Brexit the EU and the UK could only trade lamb duty free with each other through left-over tariff quotas opened to unspecified countries. The amounts available to unspecified countries can be tiny. For lamb, for example, this amounts to just 400 tonnes out of the total EU28 quota of about 281,000 tonnes.

·       The UK currently exports 80,000 tonnes to the EU27. After Brexit the EU27’s quota available to the UK and others is only a proposed 378 tonnes. The UK currently imports 11,000 tonnes duty free from Ireland, France and other EU members. After Brexit, those EU countries could only export duty free to the UK through a miniscule 22-tonne UK tariff quota available for all-comers.

·       However, a UK-EU customs union would avoid this bottleneck.

· An under-reported fact is that the UK already has free trade agreements with many countries, both big and small, via the EU. There are a number of questions for the UK.

·       Should it try to sort out existing agreements first (which would be quicker) and then embark on new agreements with the same countries? Or should it start from scratch with new agreements (which would take much longer)?

·       According to the EU’s latest information, it has free trade agreements: – in place with 35 countries (including Iceland, Norway, Switzerland, South Korea and Mexico). Switzerland’s deal, by contrast, is not one agreement but a large set of agreements accumulated gradually over decades; – partly in place with 48 countries, and with many provisionally applied, for example, because they have not yet been fully ratified (including with Canada, Colombia, Ecuador, Peru and Ukraine); – pending with 22 countries (including Japan, Singapore and Vietnam); and – under negotiation with 21 countries, half of them suspended or paused (including with the US and India, and recently launched new talks with Australia and New Zealand). The UK will lose the benefits derived from all of these deals unless it can reach agreement with each of the countries to roll them over for the UK.

·       This is more complicated than it sounds.

·       What would ‘trading on WTO terms’ mean for the UK?

·       First, the other countries would obviously have to agree.

·       Many have said that they want to reach a deal with the UK in principle, but they would also have to agree on the details, which is an entirely different task with no guarantee of success.

·       [NB WTO members vote by unanimity. It only takes one objection to block agreement i.e. because of TRQ’s – this could be political e.g. by Russia through a proxy state, see my blog: July | 2020 | Carl’s Wealth Planning Blog].

·       Second, many of the details in the EU agreements refer to or recognise EU rules, regulations, standards, institutions and legal procedures for goods, services and intellectual property. When rolled over to UK agreements, these references would have to be converted to their UK equivalents.

·       And if the UK wants to deviate from those EU arrangements — one of the purposes of Brexit, after all — then this would have to be renegotiated with each of the trade partners.

·       Third, many of the free trade agreements also include the tariff quotas discussed above.

·       The issues raised in the WTO about sorting out tariff quotas are likely to arise in these bilateral talks as well.

·       Fourth, one of the problems with free trade agreements is ‘rules of origin’.

·       Rules of origin — ‘Made in the United Kingdom’.

·       To understand the problem of rules of origin, let’s look at the free trade agreement between the EU and South Korea.

In that agreement, rules of origin take up 65 (excruciating) pages of the 1,400-page document. One of the points of the EU-South Korea agreement is to allow the EU and South Korea to trade goods with no or minimal barriers, including no tariffs. To qualify for duty-free access to the South Korean market, or for recognition of standards under the agreement, a product has to be shown to have been ‘made in the EU’. The same goes for South Korean products entering the EU: they have to be ‘made in South Korea’. Under any future UK-South Korea deal, British products would have to be declared ‘made in the UK’. These rules vary according to the product. They can say something like ‘if over 55% of the value has been added in the EU’, then that is enough to be considered made in the EU. That 55% is broadly speaking the requirement for cars under the EU-South Korea agreement, for example. A Land Rover or Mini exported from the UK before Brexit qualifies for reduced tariffs because the 55% EU content in the car’s value comes from components from anywhere in the EU. After Brexit, under a rolled over agreement, the 55% requirement would be for UK content alone, a much tougher ask.Parts sourced from Germany, France or Spain would no longer count. Under present manufacturing methods, that would be almost impossible and so the car would not count as ‘made in the UK’.

·       In other words, simply rolling over existing EU free trade agreements on current terms would make them much less valuable to the UK.

·       One solution would be for the Land Rover or Mini to continue to be considered ‘made in the EU’ (not just the UK) even though the free trade agreement is between the UK and South Korea. But getting there would be far from simple. It requires an agreement on what is called ‘diagonal cumulation of origin’. The car could be declared ‘made in the EU’ and qualify for free trade with South Korea if 55% of its value comes from components made in the UK or the EU27. The parts could still criss-cross between the EU27 and the UK before everything is assembled into a complete car and shipped to South Korea. Clearly, the EU would have to be brought into this part of the UK-South Korea talks.

·       And that is just one product.

·       The same would have to be done for most, if not all, of those 65 pages of rules of origin for all the other products in the present EU-South Korea agreement. But that is just one deal.

·       There are over 100 EU free trade agreements wholly or partly in place, or pending.

·       The UK would probably have to handle them in phases.

·       In practical terms, it is unlikely to have enough staff to do them all at the same time while they are also working on all the other aspects of the Brexit negotiations.

·       The reality of US trade — 20 or so additional agreements For many, Brexit’s big prize is improving trade relations with the United States. The US and the EU have tried and failed to negotiate a free trade agreement. A key question is what the UK would be able to offer the US that the EU cannot in order to strike a deal. Over the years, the US and the EU have accumulated about 20 smaller bilateral trade agreements (the exact count depends on what is meant by ‘trade’). These include mutual recognition pacts — where each side recognises that the other’s standards and methods of assessing whether the products conform as being the same or equivalent to its own. They also have agreements to protect ‘geographical indications’ — the names identifying the origin and characteristics of products, such as Bordeaux or Cognac — for some wines and spirits. If the UK wants to preserve the benefits of those agreements, for example on standards and regulations, or to keep some names protected in the US, then it will have to renegotiate those agreements — although Scotch Whisky will remain protected because it is already registered in the US. Negotiating beyond these is unlikely to be easy. The US-EU trade talks stalled on issues such as services, how to deal with safety and health standards, and procedures for handling disputes between companies and governments. The crunch issue with things like food safety is different approaches. The EU prefers avoiding risk when the impact is uncertain, whereas the US emphasises what is known scientifically — think of the famous differences over chlorine-washed chicken, hormones in meat and other food safety standards. All of these are controversial in the UK as well as the rest of the EU, meaning UK-US talks could fail too on the same grounds. Some experts warn that a UK-US deal would require the UK to adopt an approach on food safety and animal and plant health closer to the US’s, and this might cause difficulties for producers wanting to export to the EU with its different approach. There are also fears that the US will want more private sector competition in health services. And there is more. The latest revision of the agreement between Canada, Mexico and the US includes a clause that appears to prevent signatories from negotiating an agreement with China. Some see this as a precedent the US could insist on when negotiating with other countries, including the UK. But one of the UK government’s Brexit objectives is a deal with China, as one of the world’s fastest-growing economies. We will not know for sure about any of this until any talks actually take place.

·       WTO terms provide a basic floor for world trade. However, their inadequacies provide incentives for countries to go further and seek preferential access and the tackling of issues inadequately covered through WTO rules. This may undermine, to a degree, the multilateral system, but this has been the direction of travel for some years. In this situation, the UK will want to seek, as other members do, the closest relationship possible with the EU given political constraints. No deal Brexit is clearly an unsatisfactory solution and falling back on WTO terms suboptimal politically, economically and socially.’

In the event of no-deal the task of catching up with the EU, let alone overtaking it is herculean, and in the real world will take years to accomplish, see my website the Diplomatic Law Guide: Brexit – Diplomatic Law GuideBREXIT page about half way down

‘The economic dangers of political wishful thinking?’

 In theory 124 trade agreements x 5 years each = 620 years.

Hypothetically, all 124 could be negotiated within 5 years (if negotiated in parallel).

How many trade negotiators does the UK need to resource this?

‘The EU typically sends 20 commission negotiators to any round of trade talks, backed up by between 25 and 40 technical experts, she wrote in the FT earlier this year. The UK has 40 trade negotiators, compared with the 550-strong trade department in Brussels’: https://www.theguardian.com/business/2016/aug/17/brexit-trade-deals-gruelling-challenge-taking-back-control.

Assuming that each UK negotiating team will include at least around 25 negotiators (plus technical experts), 124 x 20 = 2,480 negotiators.

One former EU trade negotiator Miriam Gonzalez Durantez, estimated more precisely (17 August 2016) that for the progressive negotiation of priority agreements (i.e. not all 124) the UK would need an operational cadre of least 500 negotiators.

How many do we have?

‘Lord Price, the minister for trade and investment, has said that the Government has about 40 trade negotiators, compared with the 550 employed by the EU. [This has of course since been increased through recruitment but by how much? And are they experienced trade negotiators?]

Yet even these figures may exaggerate the number of people qualified to go into the room for Britain and agree trading deals for a post-EU era. Lee-Makiyama estimates that there cannot be more than 200 actual negotiators in the world as a whole.

This shortfall will require the civil service to look far and wide, and is indicative of the kind of skills shortages Whitehall will struggle with in the years ahead. Dealmakers have to know what strategy they will use, if they will scope out the negotiation, what they will scope, and how they will do it. They must have an idea of what they want to propose, in what order, and which sections of a trade deal they want to debate first. Developing an understanding of how to do this can take years.

“Even the European Commission has been accused of not being able to draft” proper agreements, Lee-Makiyama says. “This is why all the European free trade agreements include language copied and pasted from the US agreements.”

Part of the arsenal of any good negotiator is a formidable contacts book. Given the small number working in this area, negotiators tend to know each other, and those personal relationships can be as important as their technical abilities. Homegrown British negotiators would lack the access of their more seasoned adversaries.’

Government faces worldwide hunt for trade negotiators, experts warn: http://www.telegraph.co.uk/business/2016/07/03/government-faces-worldwide-hunt-for-trade-negotiators-experts-wa/

‘“Serious multilateral negotiating experience is in short supply in Whitehall …

Why do these agreements take so long? The last generation of trade agreements was focused mainly on removing tariffs. Multilaterally, the single biggest recent event at the increasingly ineffectual World Trade Organisation has not been the conclusion of a successful round, but, rather, China’s accession in 2001. The next generation of bilateral agreements, of which Ceta is the template, is complex. They reflect the realities of modern commerce and go beyond trade, touching upon behind-the-border issues such as standards, regulation and opening government contracts to competitive bidding. This complexity means that the deals take years to negotiate and conclude. In our amped up media environment, there are special interests making noise at each step in the process, ensuring that trade and investment deals are a marathon, not a sprint.

The EU’s chief negotiator, Michel Barnier, has stated that the ratification process alone for a UK-EU deal would take six months. Based on the experience of Ceta it will certainly be longer.

An interim deal is surely now the target – but it seems impossible to achieve without UK flexibility on freedom of movement and the role of the European courts. This means that a reversion to WTO rules and the common tariff schedules is the most likely scenario for the UK. Estimates are that this will mean a 4% drop in UK GDP versus a 1% loss in the EU, due mainly to the relative sizes of their economies. While it would be diminished by the loss of one of its most dynamic members, the EU can take the hurt. It has no choice but to do so.

In addition to paving the way for similar deals across the Union which could lead to its fragmentation, a sweetheart deal with the UK would be a missed opportunity to extract industries back to the continent – banking, autos and aerospace to name a few. The Brexit camp seems to be divided into two groups – those who believe that an interim deal is possible and those who are not only resigned to a WTO outcome, but have actually convinced themselves that the UK will be as strong or stronger as a result. This view is held despite the higher tariffs, a loss of passporting rights for UK financial institutions and the disappearance of agricultural subsidies such an outcome will represent.’

As a trade negotiator, I’m shocked at Brexiters’ ignorance: https://www.theguardian.com/commentisfree/2017/jan/08/trade-negotiator-shocked-at-brexiters-ignorance

Are the UK’S plans so ambitious as to prove unrealistic?:

https://economic-research.credit-agricole.com/medias/Persp17_019_UK_Brexit_20170120_EN_r.pdf

In which case what are the dangers of political wishful thinking?

‘British Brexit negotiators risk signing trade deals that are damaging, politically-motivated and “unlikely to have many economic benefits”, according to the expert who is training the Government’s officials on negotiations.

Steve Woolcock, a professor at the London School of Economics, who leads the advanced trade negotiation course that has been attended by more than 60 officials from Liam Fox’s Department for International Trade, said the risk of rushing into politically motivated deals within two years of triggering Article 50 could damage British industry.

“The greatest danger in trade policy at the moment is that there’s a political imperative to conclude agreements with other countries to show that Brexit works,” Mr Woolcock told the Times.

“These are unlikely to have many economic benefits or enable the UK to keep up with other preferential trade agreements,” he added.

Mr Woolcock’s warning comes as Prime Minister Theresa May prepares to trigger Article 50 on Wednesday, officially kick-starting Britain’s two-year timeframe to negotiate its formal exit from the EU.

“At a political level there is still no recognition of the difficulties,” Mr Woolcock said, adding that the Brexit debate is currently far too focused on tarrifs.

“All the debate was about tariffs. But tariffs are a minor aspect of doing business internationally today,” he said.

“The problem is on regulatory issues. The UK has to negotiate some kind of arrangement that can help to continue to ensure that UK regulatory standards will still be seen as equivalent. Without that it’s too easy for the EU to simply say ‘no, that doesn’t apply anymore’.”’

Britain risks rushing into ‘politically-motivated’ trade deals ‘unlikely to have many economic benefits’ – The man training our politicians to negotiate Brexit, says that we risk missing the point: http://www.independent.co.uk/news/business/news/brexit-talks-negotiators-ukeu-trade-political-motivations-economy-benefits-deals-a7651741.html