European Circuit Manchester WTO Speechnotes by Alastair Sutton

Bar European Circuit Conference in Manchester

Thursday 23 May 2019

WTO, the UK and Brexit

Notes for comments by Alastair Sutton (Brick Court Chambers)

The challenge for the UK in “re-joining” the WTO¹ seen in the broader context of the UK’s multilateral relations, as these have evolved over the last 46 years of EU membership

For 46 years, during the UK’s EU membership, “competence” in policy areas covered by the UN “family” of 15 specialized agencies and other organisations (e.g. the G20², the OECD, international environmental and energy organisations etc.) has shifted towards the EU.  Thus, whether the EU has exercised exclusive or mixed competence in these many and varied bodies, Member States (including the UK) have been bound by EU disciplines (aimed at, to the extent possible, “speaking with one voice”) in the activities of these organisations.

Some in the UK apparently believe that “at a stroke”, as it were, the UK can sever its current arrangements with and in multilateral organisations as an EU Member State and continue automatically and seamlessly on an independent basis.  This is not the case.

The level of acrimony now felt by most of the UK’s international partners (especially but not only in the EU) after 3 years of tendentious negotiations, certainly does not contribute to a congenial negotiating atmosphere, either bilaterally or multilaterally.  Just as the UK (for some at least) is pursuing its own national interest in withdrawing from the EU (no matter what the economic cost), so other States and international organisations will do exactly the same in their future bilateral and multilateral relations with the UK.   This is already clear in the tariff rate quota (TRQ) negotiations in the WTO in Geneva. These are however a “walk in the park” compared to the future trade negotiations with India, China and Brazil, not to mention the United States and the EU27 itself!

Disentangling 46 years of convergence as an EU Member State

The  practical, political and legal challenges involved in the change of status from “EU Member State” to independent State  – ranging from “mere” administrative issues, to formulating policy which is “British and not European”, to establishing effective working relations with other Members (including  not least the EU27), and Secretariats as an “independent” player and – last but not least – staffing this work in London, at the headquarters of the relevant organisations and in major partner countries (such as the United States) – have, it seems to me, been massively under-estimated.   

No cost-benefit analysis has apparently been carried out in order to know whether this Herculean task is worth (in substantive terms) the effort.  No work has apparently been done to demonstrate that an “independent” UK foreign policy (e.g. in energy, climate change or indeed trade³) will bring benefits to the national economy greater than those available through the largest and arguably the most powerful economic entity in the world.

The “high watermark” of this process of accretion of “competence” to the EU has been in trade policy under Article 207 TFEU and, externally, in the GATT and WTO.

Note the (increasingly close) link between the development of the EU acquis in sectoral areas and EU negotiation, adoption, implementation and enforcement of its (i.e. the EU’s) international obligations.  The practical implications for a “diverging” withdrawing MS such as the UK are unprecedented and therefore unpredictable – adding to the legal uncertainty (for the UK, the EU and the 164 WTO Members) which has characterized Brexit since the referendum in 2016.⁴

Note that in the practical world of international diplomacy the UK will no longer be bound by the CFSP and will no longer be under the “umbrella” of the European External Action Service (EEAS) and its Missions in third countries (including international organisations in New York, Vienna, Geneva and elsewhere.  This has serious implications for the staffing of UK foreign policy not only in London, but also in all major capitals around the world, including Geneva for WTO and UN business.

Bottom line

(Self-) exclusion from EU system of solidarity, consensus-based decision-making and the political weight of 27 sovereign States working together in a global system based on power politics.  Need to devise and defend an “independent” foreign policy (even if UK interests post-Brexit are not substantially different from pre-Brexit). “Making Britain great again” is not a credible new foreign policy and certainly not in the trade/economic area!

Against this background, achieving “independent” UK membership of the WTO is arguably not the most difficult task facing the UK.  It is however a pre-condition to the more challenging bilateral trade and economic partnership negotiations which the UK will face outside the EU.

The UK and the WTO  – past, present and future

WTO law is more complex than is generally realized (perhaps even by national legal practitioners).  The consolidated text of the legal texts resulting from the Uruguay Round of Multilateral Trade Negotiations published by the WTO covers 660 pages.⁵ A “guide to GATT law and practice” published by the (then) GATT Secretariat in 1994, contains commentary and a summary of relevant Panel decisions on all GATT articles and ran to more than a 1000 pages.  Practice under the WTO (including Panel and Appellate Body rulings) would add substantially to this volume of legal material. By way of assistance to those not familiar with the issues covered by the WTO agreements, I attach to the present text the table of contents to the volume of consolidated texts published by the WTO.

The UK was a founder member of the GATT in 1947. The UK has never ceased to be a Member, although since joining the EU in 1973, the UK has been subject to the EU’s common commercial policy, under which the EU exercises exclusive competence –  at least for trade in goods and other areas where, through EU legislation, the EU has “occupied the field”. Thus, for 46 years, the EU (Commission) has:

1. Managed the common commercial policy in relations with third countries and in international organisations, notably the GATT/WTO;
2. Proposed “mandates” for trade negotiations with third countries, as well as for the successive “rounds” or trade liberalization negotiations in the GATT  (Kennedy, Tokyo, Uruguay and Doha Rounds);
3. Initiated and taken trade defence measures (e.g. anti-dumping, anti-subsidy and safeguard actions) against imports from third countries;
4. Represented the EU in dispute settlement before Panels and the Appellate Body under the WTO Dispute Settlement Understanding (DSU).

The practical impact of the EU’s exclusive competence in commercial or trade policy has been that the UK (and other MS) no longer have the staff and “hands on” expertise in many/most areas of trade policy (especially the more technical or legal areas such as anti-dumping or anti-subsidy actions).

The GATT was/is based on the principle of non-discrimination as between Members (through the most-favoured nation (MFN) principle) and between Members and the “home” or importing State (through the principle of national treatment).  Discrimination is allowed between Members of customs unions (CUs) or free-trade areas (FTAs) based on the theory that such arrangements are broadly in the interest of trade liberalization more generally. Until 1995, the GATT covered exclusively trade in manufactured and agricultural goods.

The EEC (1957) and EFTA (1960) were early examples of such preferential arrangements.  Today, more than 200 such arrangements have been reported to the EU. Note however, that a large proportion of world trade is still based on the non-discrimination principles   (e.g. EU-US).

The Uruguay Round (1994) as a landmark or watershed in the regulation of international trade

Post-War trade policy falls into two parts: 1947-1994 under the GATT and 1995 –  present day under the WTO. Especially over the last 20-30 years however, “trade policy” in the narrow sense must be seen (legally and practically) as part of external policy in areas such as health, environment, energy, etc.   In the EU, the removal of internal frontiers in 1993, led to the development of external EU policies in areas distinct from, but related to, trade. These developments complicate the task for the UK in disentangling itself from the EU legal order and achieving recognition as an independent “player” in the international system.

The practical effect of the creation of a Single Market without internal frontiers on 1 January 1993.

At least since 1993 and possibly before that, “classical” trade policy (i.e. tariffs and non-tariff barriers, commercial defence etc.) is only a part of the external economic policy of the EU.  The abolition of internal frontiers and the establishment of a common external frontier has meant that, in varying degrees, the EU’s external policy now covers all areas where it has acquired internal competence (e.g. civil aviation, maritime safety, certain aspects of taxation, health, consumer protection, environmental protection and climate change, energy, social policy, intellectual property, transport, etc.).

Clearly, many of these areas are inter-related and must be addressed in a coherent, comprehensive or “joined up” way.  This undoubtedly complicates the task of “disentangling” the UK from the EU’s external policy, seen as whole, including “classical” trade relations under the WTO.  It also increases the challenge for the UK in establishing and implementing a comprehensive and coherent foreign policy, including the “trade” dimension.

What is the WTO?

The WTO is a unique entity in public international law. The WTO agreements in 1994 not only added significant new substantive rules  (e.g. in services, investments and IP) but crucially and without precedent in international law, a system of compulsory dispute settlement, with short deadlines and binding enforcement procedures.  Until recently, this system has worked well.

The following are some key elements to note in the context of the UK’s renewed “independent” membership of the WTO:

1. Unlike the EU (with its unique legal order containing the principles of direct effect, supremacy and remedies), the WTO is based on public international law and the sovereign equality of all 163 WTO Members;
2. The WTO is not an “organization” like the EU and is not equipped with “autonomous” institutions like the Commission, Parliament and Council⁶; it is administered by a small (625) multinational Secretariat and by the Members themselves meeting in the Council and sectoral committees;
3. Unlike the GATT and its related agreements (e.g. on anti-dumping or on technical barriers to trade), the WTO is a single legal text , comprising not only the original GATT, but also new agreements on trade in services (GATS), trade-related investment measures (TRIMs), trade-related intellectual property measures (TRIPs), as well as sectoral agreements  and, crucially, the Dispute Settlement Understanding (DSU);
4. Decision-making is by consensus (or unanimity), although in dispute settlement, neither of the parties may block the adoption of decisions by Panels or the Appellate Body;
5. Although the WTO (like the GATT before it) is a rule-based organisation, WTO law set out in the GATT and sectoral agreements,  is – in contrast to the rules in the EU treaties – verbose and (relatively) imprecise;
6. Historically, the GATT tended to be dominated by the United States and the (enlarging) EU; the accession of China and Russia (in particular) has irrevocably changed the nature of the WTO;
7. Nonetheless, the WTO based in Geneva still resembles a “club” of specialists in international trade (where economists play as large a role as lawyers) from the 164 Members, represented by their Ambassadors⁷, who (because of the specialized nature of international trade law) tend to play a disproportionately important role in WTO decision-making compared with politicians “at home” in capitals;
8. The Doha Development Round was launched in 2001 and has “failed” in the sense that it has never led to a new agreement (like the Uruguay Round); as a result, the WTO today is stymied (or even under threat) notably by the attitude of Trump and his administration, but also because of the politization of international trade⁸;
9. The transparency of the WTO as a “purely” inter-governmental organization is less than that of the EU or national administrations; likewise, private sector interests are best represented in the WTO through national governments, rather than directly in Geneva.

The challenge for the UK in “re-joining”⁹ the WTO as an independent Member

As indicated above, the UK was a founder Member (or Contracting Party) of the GATT in 1947 and is already a signatory to the Marrakesh Agreement, establishing the WTO. However, establishing its “independent” status presents challenges.

Inter alia:

1. The UK must devise, negotiate, implement and enforce its own trade policy, multilaterally and bilaterally (e.g. in FTAs under GATT Article XXIV), including with the EU, the United States, China, India etc.  In what respects, for example, does UK policy as regards access to third country markets differ from that of the EU; in what respects will UK commercial defence policies  differ from those of the EU?;
2. What will the UK’s trade and economic policy be towards the EU?  This is crucial because the UK’s trade in goods and services with the EU27 is the largest in the world and will affect the policies of other WTO Members both to the EU27 and the UK;
3. The UK must staff its “independent” trade policy both in London (which will lead on bilateral negotiations with the EU, United States, China, India and other potential bilateral partners), in Geneva in all WTO Committees (TBTs, SPS etc.) and in other important capitals such as Washington, Tokyo, Beijing etc.
4. The UK must participate in the Dispute Settlement Understanding (DSU), as plaintiff, defendant or intervenor (in Panels and the Appellate Body)
5. Staff and implement its own trade defence system (anti-dumping, anti-subsidy and safeguards) through the Trade Remedies Authority in Reading;
6. The UK must find its own partners and allies amongst the 163 WTO Members, notably in Geneva –  arguably an easier task for a smaller “new” Member than for the 5^th or 6^th biggest economy in the world;
7. Because of the political stalemate in the UK, active preparations for the UK’s future role in the WTO are “on hold” for the time being, as of course are discussions with the EU27 in Brussels.

In the short term, the UK must:

1. Settle and gain acceptance for its schedules of concessions, both on goods and services;
2. Adopt the Government Procurement Agreement (GPA).

On trade in goods, the key issue is the division of tariff rate quotas (TRQs)¹⁰, where the EU and the UK submitted a proposal¹¹ for the division of these quotas (e.g. on meat and dairy products) between the EU27 and the UK.  More than 20 WTO Members (including the US, Brazil, India, China, Mexico and Russia) have complained that the EU27/UK proposal is incompatible with WTO principles and unacceptable.  Some have said that current volumes of trade could be cut by more than 50%, representing more than 100 million euros in trade.

Although legally, these negotiations between the EU27/UK and other WTO Members are conducted on the basis of GATT Article XXVIII (which broadly provides for the maintenance of balance, including compensation when one Member’s commitments are altered) –  this provision has never been used before when a Member (e.g. the EU) has been reduced in size!  Normally, at least in the case of the EU, Article XXVIII has been used when the EU has been enlarged (latterly with Croatia’s accession in 2013).  So this is “uncharted territory” for the EU27, the UK and the WTO.

On trade in services, the UK propose to “roll over” the current schedule of concessions as notified to the WTO by the EU.

On government procurement, agreement appears to have been reached on UK “independent” accession, following an intervention from President Trump, over-ruling some officials in USTR.

Many WTO Members have stressed that clarity on the terms of the future EU27-UK relationship is a pre-condition to settling their own terms of trade with the UK.

Post-Brexit scenarios

In the event of a “no deal” exit by the UK from the EU (perhaps as soon as 31 October 2019), the challenges listed above will be immediate and beyond the capacity of the UK government, administration and diplomatic service to manage effectively.   It will/would be a “damage limitation” exercise.

The “running in” period would be more gradual and therefore less traumatic if the Withdrawal Agreement (WA) is ratified and implemented.  The WA does however provide that, for the transitional period (currently due to expire at the end of 2020)¹², the UK would remain bound by the entirety of the EU acquis, including trade policy, and

1. Would not be represented in any of the EU institutions (e.g. the Trade Policy Group or the Council of Ministers) and
2. Would not be able to implement any new trade agreements negotiated during the TP.¹³

Meanwhile (and entirely contrary to the predictions by Trade Minister Liam Fox and others that FTAs would be concluded easily and quickly), the UK is working with third countries to “roll over” existing EU agreements to which the UK is a party.  Many third countries are unwilling to do this in the absence of clarity in future EU27-UK terms of trade. This exacerbates the legal uncertainty created by the Brexit process as a whole.

More generally, for many third countries with traditionally strong trading links with the UK and the EU, there are concerns that:

1. Without the UK’s generally liberal approach in the EU (as expressed notably in the Trade Policy Group (TPG)¹⁴ and the Council of Trade Ministers) the EU may become more protectionist in trade policy;
2. The UK as a “third country” may seek to acquire a disproportionate share of EU imports under TRQs
3. That without the protection currently offered by the EU (under the common agriculture and fisheries policies, as well as the regional and structural funds), UK producers –  especially farmers – may seek protectionist measures by the UK;
4. Legal uncertainty may last for many years given the legal and political difficulties as the UK seeks to negotiate a new bilateral agreement with the EU27 and where trade negotiations may drag on for many years with the principal other UK trading partners;
5. Market access in the UK both for agricultural and manufactured goods may become difficult as the UK diverges from EU standards, either towards its own (new) standards or towards the United States (e.g. in food products and financial services);
6. The process of “disentangling” the UK from the EU’s (many) existing bilateral agreements (e.g. with Japan, Canada, Korea, Singapore – all important trading partners of the UK) may be legally and practically more difficult than initially envisaged, even if the UK “only” seeks the “rolling over” of these agreements, at least for an initial period.

Alastair Sutton, Brussels, 22 May 2019

Footnotes

1. ICAO, IMCO, IEA, FAO, OECD
2. The G20, G7 and G5 are not “organisations” in the strict sense, lacking infrastructure, secretariats etc.
3. Much has been asserted polemically; little attempt has been made to quantify benefits in the different sectors involved.
4. Note that although the Withdrawal Act 2018 effectively “freezes” the EU acquis on “exit day” and makes it a part of UK law, there is nothing to prevent the UK – by primary or secondary law –  diverging from the acquis from “exit day” onwards.
5. Not quite as long as the draft Withdrawal Agreement between the EU and the UK!
6. Although in some ways the WTO Panels and Appellate Body are similar to the European Courts in terms of their judicial and quasi-judicial independence.
7. Note that the personal qualities of Ambassadors are as, if not more, important than the size of the countries they represent.
8. For example, for many years, the GATT (and the WTO) was perceived as a “rich mans’ club”, with developing country interests being better represented in UNCTAD. More recently, the WTO has been attacked as neglecting environmental or workers’ interests.
9. As indicated throughout these notes, the UK is of course not “re-joining” the WTO in the sense that the UK has been a Contracting Party to GATT since 1947 and a signatory of the WTO Agreements since 1994.
10. These are the maximum volume of goods (mainly agricultural) which can be imported into the EU at a reduced or zero tariff.  Quantities imported above these quota limits must pay the full tariff (including import levies where applicable). The EU27/UK proposal involved splitting the quotas based on the UK’s share of imports over the last three years.  Some WTO Members allege this would reduce their share of trade. Note that there are some  196 EU TRQs, covering 400 tariff lines and representing 28 billion euros of trade.
11. Perceived by some WTO partners as a fait accompli.
12. There seems to be common accord however that this date is utterly unrealistic, in the sense that the conclusion of the future EU27-UK agreement by that date is impossible.  It remains to be seen how long a TP would be a) requested by the UK and b) agreed by the EU.
13. See WA Articles 126 et seq.
14. Formerly the Article 113 Committee, which works with the Commission both on the bilateral and multilateral negotiations, but also on the day-to-day management of EU trade policy, including the imposition of measures of protection such as anti-dumping or anti-subsidy duties and safeguard or retaliation measures.