2Establishing the UK’s position at the WTO
WTO membership
8.The WTO is founded on agreed sets of multilateral rules which govern trade between members, the foremost being the General Agreement on Trade and Tariffs (GATT) and the General Agreement on Trade in Services (GATS). Under GATT and GATS, WTO members are bound to observe the “most favoured nation” (MFN) principle—meaning that they must give each other the same trading terms as those they have granted to their most-favoured trading partner. Under GATT, members may only deviate from this “non-discrimination principle” and apply lower-than-MFN tariffs in the case of:
- an FTA or customs union agreement;
- the granting by a developed country of unilateral or non-reciprocal trade preferences to developing countries in order to assist the latter’s development;
- a specific waiver agreed by (in practice) all WTO members.
In addition to general rules that apply to all WTO members (for example on technical standards and subsidies), individual members lodge with the WTO “schedules” (one each in respect of goods and services), which reflect specific tariff concessions and other commitments that have been given.
9.Regarding the UK’s status as a member of the WTO, the Director General of the WTO, Roberto Azevêdo, stated as follows in October 2016:
The UK is a member of the WTO today, it will continue to be a member tomorrow. There will be no discontinuity in membership. They have to renegotiate [their terms of membership] but that doesn’t mean they are not members. Trade will not stop, it will continue and members negotiate the legal basis under which that trade is going to happen. But it doesn’t mean that we’ll have a vacuum or a disruption.12
He had previously stated, during the referendum campaign, that, while “Britain is a member of the WTO and will continue to be a member of the WTO” in the event of a vote for Brexit, its status in that circumstance as “a member with no country-specific commitments” would be unprecedented: “We have had no other situation like that”.13 He was also quoted to the effect that “the likely complexity of” negotiations to establish the terms of the UK’s WTO membership “made them akin to the tortuous ‘accession’ negotiations countries go through to join the WTO”.14
WTO schedules
10.While the UK’s status as a member of the WTO is beyond doubt, there remains to be settled, as Mr Azevêdo indicated, the terms of the UK’s membership. This relates to the establishment of the UK’s own schedules of concessions and commitments. This is a necessary and inevitable technical aspect of Brexit, which is concomitant upon the UK ceasing to be a member of the EU, irrespective of the terms on which UK-EU trade ends up being conducted after Brexit.15 The accomplishment of this task falls within DIT’s remit and in December 2016 the Secretary of State for International Trade, Rt Hon Dr Liam Fox MP, informed the House that it was initiating the process for doing so:
In order to minimise disruption to global trade as we leave the EU, over the coming period the Government will prepare the necessary draft schedules which replicate as far as possible our current obligations. The Government will undertake this process in dialogue with the WTO membership.16
Bound tariffs
11.There are two aspects to the process of establishing the UK’s goods schedules at the WTO. The first concerns the setting of maximum tariff levels (often referred to as “bound tariffs” or “bindings”), which are annexed to the GATT.17 There seems to be general agreement that this is a straightforward matter. When the Secretary of State appeared before us, he said:
All members of the WTO trade under schedules, which are effectively the commitments we make in terms of maximum bound tariffs, and we have decided to go for a technical rectification, rather than a modification. That is for two reasons. First is it will be easier for us to achieve and will therefore have less chance of creating any turbulence whatsoever in global trading as we leave the EU; secondly, because going for EU bound tariffs means that if we change our trade policy, we can only move in the direction of liberalisation, so we do not have the option of increasing our tariffs once we are outside the EU.18
The Department explained to us in written evidence that “rectifications mean changes of a purely technical character that do not alter the scope or the substance of the existing commitments”. Modifications, on the other hand, “mean new commitments or improvements to existing ones” and “WTO Members are allowed to modify or withdraw concessions from their Schedules through negotiation and agreement with other WTO Members”.19
Quantitative adjustments
12.The second aspect of establishing UK schedules concerns upper limits for Tariff Rate Quotas (TRQs) and Aggregate Measurement of Support (AMS). Both of these are expressed as quantities and appropriate UK shares need to be extracted from the TRQ and AMS amounts shown in the EU schedules as they currently stand.20
Tariff Rate Quotas
13.TRQs set quantities of a (usually agricultural or fish) product that are allowed to be imported tariff-free or at a reduced tariff. TRQs have arisen for a range of complex historical reasons.21 The EU has a number of TRQs of which the UK is a disproportionately large user, notably country-specific TRQs in relation to some New Zealand agricultural products.
14.Roderick Abbott, a former senior official at the WTO and the European Commission, told us he thought major difficulties were unlikely. He said that, in extracting the UK element from EU TRQs:
[Y]ou have to look at the trade, and at what has actually happened. If you had 50,000 tonnes actually imported, how much of that went to the EU and how much of that went to the UK? This is not rocket science. This is really just high school mathematical people with calculators, calculating over three years the data you have and what the shares are. If you then follow that exactly, or even being slightly generous—you can add a little bit on both sides—you should not get into major trouble. I say “should not” because there is always something that goes wrong.22
15.Professor Jim Rollo of the UK Trade Policy Observatory (UKTPO) took a more pessimistic view. He told us:
we currently have a more or less self-sufficient production of lamb in this country. We import lamb under these TRQs from third countries23—New Zealand mainly but others—and we export just about as much as we import of high quality British lamb to the rest of the EU. You can see immediately there is a whole series of potential trade policy issues that could arise out of that. British farmers might not be terribly interested in extending the TRQ system, if they can’t, after Brexit, export fully to the EU. Then we get surplus on the UK market that will drive prices down, so I can imagine quite a lot of what economists call political economy in that.24
16.Professor Fiona Smith, of Warwick University Law School, also explained that where:
quotas are split and the UK gets the benefit of the quota, that product will only gain access to the UK and will not be allowed to freely circulate through the EU unless the UK has gone further and negotiated that preferential access with the EU.
Consequently, “the conditions of competition for that product are different as far as the exporting state is concerned” and this could be an issue for the WTO member concerned.25
17.An additional consideration is the UK’s interest in the determination of the EU’s revised TRQs after Brexit. This stems from the need to ensure that the EU’s TRQs contain enough capacity to take account of UK exports, in the event that a UK-EU FTA is not in place from 2019. Peter Ungphakorn, a former Senior Information Officer at the WTO, told us that in 2015 the UK had exported 75,000 tonnes of lamb to the EU. In the absence of a continued tariff-free arrangement for such exports after Brexit, the following question arose:
if you want to continue to export 75,000 tonnes of lamb to the EU duty-free, which you might, how can you get it in there when the tariff quota is allocated between all these countries and only 200 tonnes is left for others? Where does the UK fit into those others? That is why the negotiation over the tariff quota then becomes more complicated.26
Marcus Dolman, Co-Chair of the British Exporters Association, explained that the same issue arose regarding the EU’s TRQ in respect of cheddar cheese, 40% of the UK’s exports of which go to the EU.27 These points raise the interesting issue of whether it might actually be easier for the UK to establish its position at the WTO after concluding an FTA with the EU27.
18.In written evidence, the UKTPO argued that “a complex disentangling process will be unavoidable” in respect of agricultural TRQs and urged that “The UK and EU should act together to negotiate these with other [WTO] members”.28 However, Dr Fox indicated to us that he did not foresee any major problems in this respect:
There are a number of countries who will have questions over quotas in relation to that and we wanted to deal with them and talk to them privately before we acted in a public way. We did that and I am happy to say that our discussions have been extremely useful and I think productive. As the Director General said, we are on course now for no turbulence and no vacuum.29
Aggregate Measurement of Support
19.AMS relates to trade-distorting subsidies paid to domestic agriculture, in various forms.30 Mr Ungphakorn told us that he did not expect the negotiation of these to cause difficulties:
The EU uses only 8.2% of its entitlement on trade-distorting subsidies and there is huge room for manoeuvrability. I have used the word that it is eminently “fudgeable”. If people were going to haggle over the 90% of space that is not being used at the moment, that means there is a huge amount of ill will in the negotiations. I sincerely hope we never reach that point.31
Risk of political obstructionism
20.It has been suggested that political “ill will” might be shown towards the UK at the WTO by some countries wishing to use the establishment of UK schedules as a means of exercising leverage over other (geopolitical) matters.32 Sir Andrew Cahn, a former head of UK Trade and Investment, thought that the process did offer “some opportunities to […] ill-wishers, who simply want to make difficulties for us” to cause delays.33
21.However, when we questioned Lesley Batchelor, Director General of the Institute of Export and International Trade, who was quoted in a newspaper article on this, she indicated that the report had been somewhat overegged.34 She told us: “I have no idea what is going to happen, but I can say that it is not unheard of for people to use things like this in terms of diplomacy or political gain.”35
Certification
22.Although the Government has already begun the process of establishing UK schedules at the WTO, Mr Abbott told us:
You have to do it after you have left the EU, because you are no longer covered by the EU’s tariff and services commitment that covers all member states. What is involved is extracting from the EU collective commitments to what you want for the UK, but there is no timetable. You don’t have to do any of this before the end of Article 50.36
23.The end point of the process of modification or rectification of a WTO schedule is its certification.37 It has been suggested that if separate UK schedules have not been established by the point of Brexit in 2019, it would be unclear what tariffs, TRQs and AMS would apply to the UK at that point.38 In this regard it should be noted that the EU’s own schedules have been consistently out-of-date. It took until 14 December 2016 for them to be updated to take account of the EU accessions of 2004 (expansion to EU25). It is unclear when they will be updated to take account of the accessions of 2007 (expansion to EU27) and 2013 (expansion to EU28)—they will then, of course, need to be further updated to take account of Brexit in 2019 (contraction to EU27).39 In this case, the most recently certified schedules have been deemed to be still valid.
Other issues
Government Procurement Agreement
24.Establishing the terms of the UK’s membership of the WTO in its own right also raises other issues. One such is whether the UK will remain a party to the WTO Government Procurement Agreement (currently the UK is subject to the Agreement through the EU).40 DIT could only tell us that it was “considering the UK’s position” in this regard.41
Trade defence instruments
25.Trade defence instruments (also known as trade remedies) are policy tools which governments can use to take remedial action against imports that cause damage to domestic industry. Under WTO rules these are permitted as follows:
- anti-dumping measures (against imports that are sold at less than cost);
- anti-subsidy measures (against imports underpinned by government subsidies); and
- safeguard measures (against imports that have increased sharply and suddenly as a result of unforeseen developments).
26.In written evidence to us, Liverpool Law School explained that trade defence instruments are an area of exclusive EU competence and that, consequently, after Brexit the UK will have to make its own arrangements in this regard. There is a risk that trade defence instruments can slip into what would be regarded under WTO law as illegal protectionism. There is also the difficult and contested issue of whether China should be treated for the purposes of trade defence instruments as a “market economy” or a “non-market economy” (the WTO rules being different in respect of each of these classifications). Trade defence instruments may be complicating factors in any FTA that the UK enters into after Brexit. The Law School argued that:
The UK will require a UK Trade Act that will set out the procedure for industry to request government support. These requirements will need to reflect UK trade, industrial, and labour policy.
27.In addition, “a UK Trade Commission [i.e. investigating authority] to determine the validity of industry requests and the responses available to government”42 would need to be established.
28.The British Ceramic Confederation told us that trade defence instruments were of particular importance for the British ceramic industry in combatting dumping activity on the part of China.43
29.DIT stated in evidence only that it was “preparing a trade remedies framework that supports UK industry against injurious trade practices”.44
Parliamentary scrutiny
30.When the Secretary of State gave evidence to us, he told us that, since UK bound tariffs at the WTO would simply replicate those of the EU (involving a technical rectification of schedules, rather than a modification), this was not a matter for Parliament to decide on. However:
Were Parliament to change tariffs it would need to be done under legislation in the House of Commons. One of the things that we will have to do as we go through the Great [Repeal] Bill is to look to see whether we still have powers and, if necessary, where we have to take new powers to set tariffs at a different level than we inherit from our EU arrangements. Were they to be altered, it is correct; they would have to be done by primary legislation […]
[A]s part of the Great [Repeal] Bill we will need to see which powers, including trade defence and trade remedy powers for example, we needed to take because we would not in our own right have the legal abilities to do those as the United Kingdom.45
31.In the Brexit White Paper, the Government states that it will be bringing forward a Customs Bill—but it is left unclear what exactly this will be concerned with.46
Conclusions and recommendations
32.The UK’s position in the WTO will be the foundation stone for all our future trading relationships after Brexit. DIT was, therefore, quite right to start work on this as soon as possible. There is no doubt that the UK is a member of the WTO in its own right, and establishing the bound-tariff element of separate UK schedules appears to be a straightforward matter. However, there is rather less certainty about how quickly and easily it will be possible to disaggregate the UK element from the quantitative aspect of the EU’s schedules, in respect of Tariff Rate Quotas and Aggregate Measures of Support. Nothing should be left to chance and the devil will be very much in the detail of these arrangements. DIT ministers should report to this Committee regularly, and at least every quarter, regarding the progress of this work.
33.In addition, the Government must seek early legal clarity on the consequences for the UK in the event that separate UK schedules at the WTO have not been agreed or certified by the time that Brexit occurs. The Government should make sure it has whatever contingency arrangements may be necessary.
34.The Government should consider that negotiations concerning the establishment of the UK’s position at the WTO are appropriately sequenced with those concerning a UK-EU Free Trade Agreement (FTA)—for instance in respect of the UK’s interest in the determination of the EU’s revised Tariff Rate Quotas after Brexit.
35.DIT must give a full account of the legislative and administrative preparations that the Government is making in respect of arrangements for UK trade defence instruments to take effect at the point of Brexit.
36.Material changes to the UK’s position at the WTO should be subject to appropriate parliamentary scrutiny. If applicable, the Government will need to consider how this will be achieved in respect of bound tariffs, Tariff Rate Quotas and Aggregate Measurement of Support. The Government should also clarify, when appropriate, what the purpose is of the Customs Bill that it proposes to bring forward.
12 “Brexit will not cause UK trade ‘disruption’ – WTO boss”, Sky News website, 26 October 2016. The UK’s Ambassador and Permanent Representative to the UN and other international organisations in Geneva, Julian Braithwaite, has stated: “The UK is a full and founding member of the WTO […] Under the EU treaties, Member States have agreed that the European Commission will represent them on most things in the WTO. As a full member of the WTO, the UK has its own seat […] But for most WTO business, the Commission speaks for all of us collectively”—“Ensuring a smooth transition in the WTO as we leave the EU”, Foreign and Commonwealth Office, 23 January 2017.
13 “WTO chief says post-Brexit trade talks must start from scratch”, Guardian website, 7 June 2016
14 “WTO warns on tortuous Brexit trade talks”, Financial Times website, 25 May 2016
16 “UK’s Commitments at the World Trade Organization”, Written Ministerial Statement, 5 December 2016, HCWS316. See also HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, paras 9.16–18.
17 The actual tariffs levied by countries (within the bound tariff limits) are known as “applied tariffs”. Tariffs are either ad valorem (levied as a percentage of the price of a product) or specific (levied per quantity of a product or per item).
23 A “third country” is one which is not party to an agreement between two other countries.
30 These are known as “amber” subsidies in the “traffic-light” classification operated by the WTO. The intention is that the extent of such subsidies will reduce over time. In respect of a developed country, WTO rules do not allow such subsidies to be set at more than 5% of agricultural GDP (known as the de minimis level).
32 Ian Dunt, Brexit: What the Hell Happens Now? (London, 2016), p 94; “Brexit: UK’s WTO status ‘could be blocked over territorial disputes’”, Independent website, 12 December 2016
39 Peter Ungphakorn, “12 years on, EU’s certified WTO goods commitments now up to date to 2004”, 4 February 2017
42 Liverpool Law School (UKT0034). See also UK Trade Policy Observatory (UKT0019); Freight Transport Association (UKT0033).
45 Qq487, 489. The “Great Repeal Bill” will repeal the European Communities Act 1972 and incorporate (transpose) European Union law into domestic law, “wherever practical”. These legal changes will take effect on the day that the UK formally leaves the EU.
6 March 2017