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Brexit: trading places

2016-08-18 04:37:32

Having for so many years been discussing the complexity of leaving the EU, it is intriguing now to see so many pundits doing the same thing - albeit for entirely different reasons.

One of the latest offerings comes from Ben Wright of the Telegraph although such is grip of media coprophagia that we are seeing something remarkably the similar from Jennifer Rankin in the Guardian.

By some strange coincidence, at the heart of their gripe is a tale of woe originated by Charles Grant published at the end of July by his Centre for European Reform. This followed on from an intervention prior to the referendum by WTO director-general, Roberto Azevędo , who warned that talks over regularising the UK position with the WTO could be "long and difficult".

What emerges from this, which is gaining a great deal of traction, is the problematic relationship with the WTO, and the need to agree what are known as "schedules" of tariffs, quotas, subsidies and other concessions on market access with the WTO.

Currently, these "schedules" are held by the EU, so that the UK must negotiate with both the EU and the WTO as to its new national levels. And, with not a little glee, Grant recounts how negotiations could be stalled if, for example, Argentina or Russia wanted to create difficulties.

Any one country could block the British schedules, in theory making it extremely difficult for the UK to normalise its WTO membership within the two years of the Article 50 negotiations. Wright lovingly dwells on this, as does Rankin, presenting this as yet another complication to add to all the other complications that Mr Grant has dreamed up for us.

The potential problems are explored in more detail by former WTO press officer Peter Ungphakorn who has attracted many plaudits for his analyses and his suggestions for resolving the issues which could arise. What is remarkable, however, is that so much is being made of what is actually a non-problem, of one of such small significance that it deserves only limited attention.

Keen readers of Flexcit - which excludes the entire corpus of the legacy media – will already have seen the entry in the Agriculture chapter, which illustrates precisely why the issue is of so little importance in the grander scheme of things.

In theory, problems arise if, after Brexit, the UK will be required to conform to the technical requirements relating its WTO membership. If by then it has not normalised its commitment and obligations, it could be in breach of those technical requirements.

However, the WTO is not the EU and different rules apply. Unlike the EU where a member state can be taken to the ECJ merely for infringement (or violation) of the rules, this is not the case with the WTO. Non-conformity with WTO rules, per se, is not an actionable event. Action is triggered only when there is perceived (or alleged) harm. The legal mode of the WTO's Dispute Settlement Understanding (DSU) is seen as a corrective which must be aimed at seeking to repair harm done rather then imposing conformity for the sake of it.

Thus, a peculiarity of the system is that for action to be taken against a member for violation of the rules, there must be demonstrated a prima facie case of "nullification or impairment". From this follows a presumption that a breach of the rules must have an adverse impact on another WTO member.

Ungphakorn himself argues that the UK can seek a resolution by not creating any new commitments but by working within the EU's apportionment – thereby maintaining the status quo. If, by the time we leave the EU, arrangements have not been formally settled, the UK might be technically in breach of WTO rules, but as longs as it is careful to maintain the status quo ante,  no party could claim "nullification or impairment". No action could be taken.

Then, even if there was a theoretical possibility of action being initiated, some consider that there would be a reluctance to invoke the dispute settlement mechanism. Resort to this mechanism is the exception rather than the rule.

Nevertheless, there is an issue arising from the 1995 Agreement on Agriculture, where payments of different types of agricultural subsidies are subject to agreed restrictions. For developed countries (which include the UK) certain types of subsidy, such as domestic production subsidies and export payments, are prohibited unless commitments have been made to reduce those subsidies, set out in formal "schedules of concessions and commitments".

Because schedules for EU member states have been agreed en bloc, in respect of all 28 members, this means that the UK, on withdrawal, could not automatically take with it any rights to EU agricultural subsidies and quotas. Theoretically, if the UK wished to pay subsidies, then the UK and the EU must present new proposals to all WTO members, the sum of which cannot exceed what they have already committed.

However, despite the current fuss, this is far less problematic than might at first appear. Restrictions apply only to trade-distorting subsidies, in what is called the "amber box". So-called "green box" and "blue box" subsidies are exempt. 

The "blue box" subsidies cover payments directly linked to acreage or animal numbers, but under schemes which also limit production by imposing production quotas or requiring farmers to set aside part of their land. "Green box" subsidies must not distort trade, or at most cause minimal distortion. They include environmental protection and regional development programmes.

Specifically, such subsidies have to be government-funded (not by charging consumers higher prices) and must not involve price support. Rather than directed at particular products, they tend to include direct income supports for farmers "decoupled" from current production levels or prices. These subsidies are allowed without limits.

Fortunately for the UK, of the subsidies paid under the current Multiannual Financial Framework (MFF) under the 2010 CAP reforms, 94 percent would accord with "green box" and other exempt categories. They could, therefore, continue to be paid by an independent UK without breaching WTO provisions.

Furthermore, although such a big deal is being made of the need to conclude a new agreement, the provisions for "rectifications and modifications" are actually relatively straightforward.

As the EU has only used €8.76 billion of the €72.2 billion ceiling agreed with the WTO in 2009/2010, a fraction of the allowable limit, re-apportioning subsidy concessions would be relatively uncomplicated. Even if there was no agreement in time, as long as there was overall parity in subsidies paid in the "amber box", any technical breaches in WTO would be unlikely to trigger a complaint procedure.

As to tariffs, establishing new schedules is by no means as problematical as it might seem. Members are allowed to modify or withdraw concessions from their schedule through negotiation and agreement with other Members. Article XXVIII of the GATT 1994 entitled "Modification of Schedules" is the main provision dealing with this. To date, at least 42 GATT Contracting Parties initiated roughly 300 renegotiations between 1951 and 1994. 

According to the WTO, there have been 39 requests to enter into renegotiations under GATT Article XXVIII since the establishment of the WTO in 1995. Five of those have been withdrawn, 14 have been concluded and formally certified, and eight have been concluded, but have not been certified for various reasons. The remaining 12 are in principle still on-going.

In other words, while there do indeed need to be negotiations, they are no big deal and there is no great problem if they are not concluded in time. The worry beads may be out for the media and the Charles Grants of this world, but on this, life is not as complicated as they want to make out. It is complicated, but not that complicated.

For once, I'm trading places.