In
1973, the UK joined the EEC
(as
the EU was known then) and became the member of a customs union –
the so-called “Common Market”.
By
contrast, the Single Market is a more recent development. In
1987, the Single
Europe Act came
into effect and paved the way for the completion of the
Single Market in 1992 (in fact it is still not complete even now –
but that's another story).
It
is perhaps surprising
then
that so
much attention has been given to the Single Market, yet so little
attention has been paid to the EU Customs Union. Particularly
as leaving
the EU Customs Union has potentially
greater
impacts
on
UK
trade than
leaving the
Single Market :
-
A repatriated trade policy will need new WTO Schedules and new 3rd country trade agreements.
-
Trade with the EU will face imposition of tariffs or Rules of Origin processing and a new customs border.
In
this post, I will look at the impact of leaving the Customs Union and
a repatriated trade policy.
WTO
Schedules
The
UK is a member of the WTO in its own right. But as a member of
the EU's Customs Union and the Common Commercial Policy (CCP), the UK has no independent trade policy –
all the UK's current WTO trade schedules are registered via the
EU's WTO membership. In order to trade as an independent nation, the
UK will need to establish it's own WTO schedules.
Prior
to the Referendum,
WTO director-general Roberto Azevêdo warned that
the UK would face “long and difficult” negotiations. It was
reported that unanimous consent from all 164 WTO members would be
required to ratify new UK schedules – leaving UK in trade limbo for
years.
This
issue has been fully addressed by Dr Richard North (who takes an apocalyptic vision of UK trade outside the
Single Market) and Peter
Lilley. Depite the fact that North contemptuously dismisses the
“likes of Lilley”, they arrive at a similar view. Lilley
describes this as “an exaggerated scare story”. North says
it is remarkable that “so much is being made of what is actually
a relatively small problem in the grander scheme of things”.
Post-Referendum,
in a marked change in tone, Robert
Azevedo has confirmed that there will be no disruption to UK trade.
Thre
reality is, it is possible to trade using draft WTO schedules
awaiting full ratification. The EU's schedules were amended following
the accession of Romania and Bulgaria but have still not been
ratified. WTO members can only raise objections on the grounds that
a draft schedule leaves them materially disadvantaged. The UK can
adopt a draft schedule based on current EU schedules to present a
“no-change” scenario:
-
Tariffs. These are the tariffs that apply to third countries with which the particular WTO member does not have a Free Trade agreement. The UK should replicate the EU's tariffs schedule (as per the EU's Common External Tariff) into the new UK schedule.
-
Services: Extract the UK schedule of commitments and exemptions on services from the EU schedule (see WTO web page on services schedules).
-
Agricultural Tariff Rate Quotas (TRQ). TRQ's provide lower tariffs on a given product up to the specified quota or volume of imports, after which a higher tariff applies. The UK and EU will need to agree an apportionment of the EU's 87 TRQ's, which will involve some haggling:
-
A protectionist EU might wish to offload a high proportion of these quotas to the UK.
-
In some cases the UK uses a relatively high share of the EU's quotas (e.g. imports of New Zealand butter).
-
Other WTO members may object if the apportionment results in a higher tariff for access to the EU or UK market.
-
Should
the haggling result in an impasse, a unilateral solution would be for
the UK to forego TRQ's entirely by abolishing the higher tariff and
allowing unlimited imports at the lower tariff.
-
Agricultural subsidies. WTO identify 3 categories of subsidy :
-
“Amber-box” (trade-distorting subsidies);
-
“Blue-box” (trade-distorting subsidies as part of schemes to limit production via quotas or land set-aside);
-
“Green-box” (non-trade-distorting, including payments for environmental protection and regional development).
-
While
Amber-box
subsidies are limited (to 5% of agricultural production for developed
countries), there
are no limits on Blue-box
and Green-box subsidies.
So the UK and EU will need to agree an apportionment of current
Amber-box limits. This is unlikely to be contentious, as the EU has
only used €8.76 billion of the €72.2 billion limit agreed with
the WTO in 2009/2010.
Furthermore, 94% of subsidies paid under the 2010 CAP reforms fall
outside the Amber-box limits.
-
Agricultural special safeguards (SSG). The EU has negotiated 539 SSGs, which provide protection against a surge of imports by allowing higher tariffs when import volumes rise above a certain level, or if prices fall by below a certain level. The UK has a case for inheriting these safeguards, but this may prove contentious for other WTO members – it may also be more in line with a liberalising approach to Brexit to forego SSGs.
3rd
Country Trade Agreements
Customs
Union are not
simply Free
Trade
Zones.
The EU
Customs Union removes tariffs and import restrictions between member
states, but
also
has a Common External Tariff (CET), set by Brussels. The EU's Custom
Union also has a Common Commercial Policy (CCP), which
means that Brussels has sole power to broker any new Free Trade
Agreement (FTA) with third countries. In
short, all external trade policy is the preserve of Brussels, not EU
member states.
The
Government
dossier “HM
Government Alternatives to EU membership” emphasised this point
during the EU Referendum campaign:
The
EU forms a Customs Union, with no tariff barriers between Member
States, and a common external tariff on imports from countries
outside. Aligning these is an inherent part of any Customs Union and
is necessary to ensure consistent treatment of imports into any EU
country. For this reason the EU negotiates and agrees Free Trade
Agreements with other countries on a collective basis. To date the EU
has 36 such agreements covering 53 markets. (page
9, section 2.10)
The
process of withdrawal from the EU means that all existing trade deals
with third countries would cease were the UK to leave the EU. This
means we would no longer benefit from the trade deals which the EU
has negotiated with 53 markets like Mexico, South Africa or South
Korea, and those which it is currently negotiating with the United
States and Japan.(Page
28, Section 3.40)
Free
Trade Agreements (FTA's)
with 53 nations sounds
impressive, until you realise many are very small economies (e.g.
Andorra, Monaco, San Marino, Iceland, Lichtenstein, St. Kitts and
Nevis, St Lucia etc) or less than stellar performers (e.g. Zimbabwe,
Occupied Palestinian Territory). The biggest economies in the 53 are
South Korea, Mexico and
Switzerland
- all of whom are comfortably smaller than the UK's economy. The
list of 53 does not include major trading partners like the USA,
Japan, Australia etc.
However, these 53 FTAs, which specifically include tariff agreements, are not the full story. The EU has a plethora of “technical” trade agreements with countries around the world which facilitate “frictionless” trade (but do not include agreements on tariffs). The website for the EU's Treaties Office Database shows that the EU has 23 such agreements with the USA categorised as trade agreements. Some of the more important types of agreements include:
-
Mutual Recognition Agreements (MRAs) on Conformity Assessment. Allows certificates issued by 3rd country Conformity Assessment Bodies to be recognised in the EU (and vice-versa).
-
MRAs on World Customs Organisation (WCO) Authorised Economic Operator (AEO), Customs Co-operation agreements. Provides for faster & more secure customs processing of imports/exports.
-
Sanitary and Phytosanitary Equivalence Agreements, Organic Farming equivalence agreements. Allows agricultural and animal products to be imported/exported without safety checks at the border.
Can
UK retain EU's 3rd Country Trade Agreements ?
Clearly,
the UK would wish to retain
current trade agreements with 3rd
countries.
But as Luis
Gonzalez Garcia,
Alan
Matthews
& Steven
Peers
(among others) point out, the
UK’s rights and obligations under these treaties only apply to the
UK in its capacity as an
EU
Member State.
-
Most of the EU’s FTA’s are “mixed” agreements, meaning individual member states are signatories as well as the EU. However, the vast majority of FTA content falls under the Common Commercial Policy (CCP), rather than individual member state competence. When the EU treaties cease to apply to the UK, the rights and commitments conferred under the CCP will also cease to apply.
-
EU FTAs use the term “the territory of each Party” defined as the “European Union and its Member States” with the third country as the other party. A post-Brexit UK will clearly no longer be within the territory of the EU and its member states.
-
Some commentators quote the “presumption of continuity” and the “Vienna Convention on Succession of States in respect of Treaties” as a way for the UK to retain these trade agreements, citing the example of the “velvet divorce” of the Czech Republic and Slovakia. While the EU may be a super-state under construction, it is not yet recognised as a state in it's own right and similarly the UK continues to be recognised as a separate state. Technically and legally the UK is leaving a customs union and cannot claim to be a successor state, so the Vienna Convention does not apply.
There
are also technical issues which would prevent these agreements from
being adopted “as-is” by a post-Brexit UK:
-
Institutional arrangements created for on-going co-operation and management of the agreement, dispute resolution etc. are of a bi-lateral nature (between EU and third country) and so inappropriate for UK outside the EU.
-
Cumulation. The EU’s FTA’s often contain arrangements for bi-lateral cumulation (e.g. South Korea) – this allows supply chains distributed across the 28 EU member states and the third country to qualify for preferential tariffs under Rules of Origin. To continue these arrangements would need the bi-lateral treaty to be converted to a tri-lateral treaty (rEU27+UK+3rd country) with “diagonal cumulation” allowed.
-
Many EU FTA’s both give and receive market access via TRQ’s. Getting the EU and third party to apportion these TRQs between the rEU-27 and the UK would involve amending the FTA and re-ratifying – which seems unlikely. More probably, the UK would have to negotiate additional TRQ access or alternatively the UK could scrap the higher tariff rate and effectively remove the need for TRQs.
Replacement
3rd Country Trade Agreements
In
practice, the UK will need to replace the EU’s FTAs and technical
trade agreements.
The
good news is that the UK
Government is already looking at replacing the EU's FTAs by
transitioning current trading terms, with initial focus on the Korea
and Switzerland FTAs as they cover almost 80% of UK’s trade by
value via EU FTAs. Fortunately it is possible to create WTO-compliant
transitional arrangements in line with Article
XXIV(5) of the General Agreement on Trade and Tariffs (GATT),
which states that,
“The
provisions of this Agreement shall not prevent, as between the
territories of contracting parties, the formation of a customs union
or of a free-trade area or the adoption of an interim agreement
necessary for the formation of a customs union or of a free-trade
area […] Any interim agreement […] shall include a plan and
schedule for the formation of such a customs union or of such a
free-trade area within a reasonable length of time.”
A
memorandum of understanding between the UK and third country could be
deposited with the WTO stating that existing trading terms will
continue (with new arrangements for institutions, cumulation, TRQs
etc as required) – allowing time for a full FTA to be agreed.
In
addition, the UK will also need to agree a continuation of current
trading with other trading partners with which the EU has purely
“technical” trade agreements. Once again a Memorandum of
Understanding should suffice (stating that existing “technical”
agreements will be continued with new institutional arrangements as
required) and then deposited with the UN rather than the WTO (since
these agreements do not cover tariffs).
For
some third countries where the EU does not currently have an FTA
(e.g. Australia, New Zealand etc.), we may wish to enter into an
interim free trade agreement with “zero-for-zero” tariffs
alongside the “technical” agreements ahead of negotiating a full
and comprehensive FTA.
Conclusions
As
a result of leaving the EU's Custom Union and Common
Commercial Policy, the UK re-patriates control of trade policy but
has to reconstitute all external trade arrangements: WTO schedules;
53 FTAs; and a plethora of technical trade agreements with almost
every other WTO member. Staying in the Single Market via the EFTA EEA
option does not help one iota with these issues.
Fortunately
there appear to be solutions to these challenges - and crucially these solutions are not dependent on agreement with the EU. But it is also
clear that Liam Fox as Secretary of State for International Trade has
his work cut out in the next 2 years.