Talking Trade blog
Special edition: Why becoming an independent trading nation is harder than expected
Published 12 July 2016
In the wake of the Brexit votes, the UK has been consumed with discussions about what sort of relationships are possible vis-à-vis the European Union. When the UK opts out of the EU, it will reset trade and economic relations with not just the 27 member countries of the EU.
Brexit also changes the relationships that the UK has with all of the existing EU trade agreement partners. These are not only the 58 existing free trade agreements, but also various preference schemes in place, mostly for least developed economies.
It also means that the UK will have to reset trade relations with most of the rest of the global trade system, since the UK will need to re-establish its independent seat at the World Trade Organization (WTO).
At the moment, most of the focus has been on the direct UK/EU connection, but as time passes, it will become increasingly apparently that disentangling the two is going to be more difficult than many seem to appreciate in other settings as well.
Across more than 40 years, the UK and the EU have made mutual commitments in different trading arrangements. Post-Brexit, it is not likely that the UK will be able to simply rely on these existing agreements continuing without change. To do so would be in the best interests of neither the UK, nor the EU, nor the partner countries.
The UK was one of the original members of the General Agreement on Tariffs and Trade (GATT) in 1948. The GATT eventually became the WTO in 1995. The UK’s independent membership was merged with the EU over the same time period.
The European Union has a unique structure within the WTO. It consists of 29 “members:” 28 member states plus the EU itself. They all share the “rights” and “obligations” of the organization. All EU member states participate at the WTO, even if as they are bundled together as a collective.
This shared structure extends to every level of their rights and obligations—effectively they share each and every commitment evenly as well. This is what makes it so challenging to just sever the UK from the EU.
Essentially, the UK (and the EU) will have to negotiate new terms at the WTO. This is a very complicated and challenging task as any newly acceded member can attest.
Because the WTO operates by consensus, any single member can torpedo negotiations. The UK will have to painstakingly negotiate terms of its commitments in goods and services and any other country-specific obligations with each and every one of the 161 other members.
The UK is already a member, so it is not quite engaging in a new accession process to the WTO. But, practically speaking, the experience of creating new schedules and commitments will end up being quite similar to joining the organization for the first time. Each obligation will have to be negotiated with all other WTO member states.
One solution that has been proposed has been for the UK to really practice free trade by unilaterally dropping all tariffs to zero. The country would essentially follow the footsteps of Singapore and Hong Kong.
This would certainly be a bold step. It could be deeply problematic to some domestic sectors in the UK, as offering up duty-free trade would provide tariff free concessions to all 161 other members (including the EU) to the UK market.
Do note that there is no reciprocal obligation for any other WTO member to make similarly bold commitments. The WTO does not operate like bilateral free trade agreements—when a country makes a pledge to set a tariff level within the organization, it is offering to extend this tariff level to every single WTO member. The rest of the membership would not offer up zero tariffs in return since it would mean granting tariff free coverage to all other WTO members and not just to the UK.
Hence a second, slightly more realistic option might be for the UK to just accept the tariff schedules automatically of the EU at the WTO. Note that the UK cannot offer duties higher than EU rates, as these would be rejected by other members.
So how might this work? As an example, the existing EU WTO tariff for sports shoes (like tennis shoes, running shoes, basketball shoes and the like) is 16.9 percent. The UK could simply copy this tariff rate and grant its own Most Favored Nation (MFN) rate of 16.9% to all other WTO partners.
Doing so would avoid a potential problem of having some members at the WTO argue that new UK commitments undermine current levels of access.
But getting 16.9% for sports shoes requires that all WTO members accept the UK offer of this tariff rate. If any of the existing WTO member baulk, the UK may have to negotiate a different rate for this tariff line.
The existing schedule for the EU is partly the result of a complex set of interconnected compromises across thousands of lines of commitments. Just transferring the existing EU commitments over to the UK may not work.
For example, the UK market for sports shoes is likely to be quite lucrative. A WTO member like Vietnam might prefer to have better access than 16.9% and could be willing to hold up the negotiations with the UK across the entire package just for improved access to this one tariff line.
Translating the EU schedules directly onto the UK also negates some of the benefits that the UK thought it was going to receive from the Brexit process. After all, if the UK gets exactly what it had from the WTO prior to exit, without preferential access to the EU, then what was the point of leaving the EU?
Turns out, negotiating tariffs is some of the easy stuff. Working on other aspects of WTO pledges will be even harder. The most challenging elements are likely to be found in the intermingled UK/EU agricultural commitments.
Two elements are particularly problematic: domestic subsidies (aggregate measures of support or AMS) and tariff rate quotas (TRQs). Both get rather technical, but both issues have some significant implications for agricultural trade for the UK and the EU.
In short, the EU has specific commitments in the WTO for each. The very tricky part is determining how much, if any, of the allocated amounts granted to the EU for subsidies and quotas should reside with the UK?
This is much more challenging that it might first appear. In both cases, the EU negotiated commitments back in 2004 when the Union had only 15 member states. The specific allocation of benefits across the member states today is not known (or is not publicly known).
In each case—for every subsidy and every quota—the EU has a strong incentive to keep the full amount for reallocation among the remaining 27 members. And, it might be remembered, if the two year time horizon for Article 50 negotiations passes without resolution and is not extended by the EU, the bargaining between the EU and UK ceases. Presumably, the WTO allocations would automatically revert to the EU in this situation.
If the UK is not granted a legacy “share” of quotas and subsidies, it will likely be harder to set up new quotas or subsidies in the WTO as an independent state. These have to be negotiated with all WTO members.
The UK could decide to just walk away entirely from both practices: no more domestic agricultural subsidies and no more quotas. This would be easier for the UK to negotiate within the WTO, but could be quite hard to manage at home.
[It could also, it should be noted, make the parallel WTO negotiations for the EU more challenging, as many WTO members would surely press the EU to either reduce or eliminate their own subsidies and quotas. And, if the UK is granted “legacy” rights to either quotas or subsidies, EU amounts should similarly be reduced in any case.]
While other WTO commitments may be less problematic for the UK to negotiate than agriculture, these will also not be easy. For instance, the last time WTO members made commitments in services was in the mid-1990s. But if the UK intends to set up its own schedule, other WTO members are likely to expect the UK to agree to a higher level of commitment and market access than the original EU schedules.
A similar upward pressure on services commitments can be seen in the schedules of other recently acceded members like Vietnam and China.
Most of the remaining WTO commitments are likely to be reflected in the UK in any case, such as rules on protecting intellectual property rights, procedures for customs, regulations on food and food security (sanitary and phytosanitary or SPS rules), and so forth. The UK would have to schedule its own commitments on government procurement and a few other specific areas.
But setting out all these terms would just be the start of launching the UK on a path to independence. Many of the EU’s current trade arrangements build upon WTO rules as well. Most of these bilateral and regional trade deals will also have to be adjusted or even renegotiated in the wake of Brexit.
The EU has many different types of agreements, stretching back decades, that have trade components including long-standing economic arrangements with neighboring countries in Europe. The EU has signed and implemented a comprehensive agreement with Korea and has several more deals, with Canada, Singapore and Vietnam, awaiting ratification. Negotiators have been very active with the United States in the Trans-Atlantic Trade and Investment Partnership (TTIP), and with 23 WTO members in the Trade in Services (TiSA) negotiations.
The UK will lose access to most of these agreements as well. The parties involved in each may be willing to negotiate separate access for the UK, or they may not. (For more details on negotiating with an independent UK, see our Talking Trade blog post here.) In any case, sorting it all out will take a long time and many, many hours around countless negotiating tables.
It turns out that creating an independent trading nation in a world of interlocking trading states is a lot harder than some enthusiastic Brexiteers suggested.
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