It’s funny, but every time one mentions ‘Article 24’ publicly – meaning (using the correct Roman numerals) Article XXIV of the General Agreement on Tariffs and Trade (GATT) which predates the World Trade Organisation (WTO) – you receive a barrage of hysterical abuse from Remainers, often with long academic titles. They are clearly terrified we’re on to something.
They say: ‘The EU would never agree to it!’, ‘The EU would not be minded to do a deal if we leave on bad terms!’, ‘You can’t do it in a no-deal situation’ and ‘We’d have to levy tariffs not just on EU goods but all good from around the world’. This last point was made on Radio 4’s Today programme discussion of Article 24 yesterday morning.
But these claims are wrong. We know they are wrong because collectively we have asked the EU: its Chief Negotiator Michel Barnier, its trade advisers and personnel, and people David has worked with for ten years on the International Trade Committee of the European Parliament doing trade deals. And together we’ve asked very senior people at the WTO and top trade lawyers too, such as the impartial Article 24 expert Lorand Bartels of Cambridge University.
Their conclusion: GATT Article 24 is not only doable, it is desirable. Here are a few facts relating to Article 24:
1) Let’s not confuse what ‘deal’ or ‘no deal’ we are talking about: we are not seeking to renegotiate the Withdrawal Agreement or attempt ratification of that deal by 31st October. Angela Merkel and other EU leaders have made it clear that ‘deal’ is not negotiable.
So this is not a deal based on the Withdrawal Agreement under EU law such as the Lisbon Treaty’s Article 50. Nor is it a trade deal conducted under the EU’s ‘Future Relationship’ or ‘Political Declaration’ provisions either with its binding legislation – it is a separate deal done under World Trade Organisation rules.
2) The World Trade Organisation makes trade rules, not the EU. There’s a clue in the title. The EU quite correctly works within the global rules system on trade via the WTO. Most EU free trade agreements incorporate WTO level agreements like GATS – the General Agreement on Trade in Services.
3) GATT was the predecessor to the WTO and Article XXIV/24 is contained within these global GATT rules which all individual WTO members – that includes the UK as an individual full WTO member, every EU member state as individual WTO members and the EU as an entity – agree to implement.
4) The whole point of the WTO is to promote free trade around the world. The WTO does not like tariffs (taxes on goods entering), quotas (a certain quantity of goods entering at a certain tariff) or barriers to trade (e.g. excessive regulation advantaging home producers or in services). So the WTO will not like it if the UK and EU return to imposing £13bn tariffs on EU goods and £5bn on British goods into the EU. It goes against the grain.
5) GATT Article 24 is there to allow two countries or blocs to move towards a free trade area or a customs union. It basically allows the two countries to level lower tariffs and quotas than what is called ‘Most Favoured Nation Rules’ (MFN). Ironically it is the very basis of the EU’s zero tariff Customs Union which took between 1957 and 1968 to actually enact.
By offering one country a better deal than other WTO members you are discriminating – you are offending the rule that everyone must be treated the same – so you must levy the same MFN tariffs to all. This is such an important rule it is actually Article 1 of GATT. But Article 24 is a specific exemption to this.
Free Trade Agreements (FTAs) are really a licensed form of discrimination where you are allowed to offer better terms to one country over all the others but only if you really free up trade – particularly getting rid of at least 90% of tariffs.
6) So given the WTO hates tariffs (it’s not happy with President Trump and others reimposing tariffs but that’s another story), then it is amenable to ways of avoiding tariffs without disadvantaging its other members.
So if the UK and EU go to the WTO jointly and say that we have agreed to move to a full and comprehensive Free Trade Agreement (what we term ‘SuperCanada’ – that is better than the EU-Canada FTA) – that keeps tariffs at zero with no real change to other members, the WTO is happy to allow us a period of time to keep tariffs and quotas at preferential rates. GATT 24 allows what are called ‘standstill’ arrangements – much remains the same and this is essentially a WTO form of a transition – but is not an interim arrangement as is often claimed.
We can keep tariffs at zero for as long as the two partners need to negotiate the full works: that comprehensive FTA. Legally this could be up to ten years, but most are two to three years to negotiate. That is GATT 24.
7) Yes, GATT 24 needs a temporary agreement between the EU and UK, but frankly it could be written on the back of an envelope. Lorand Bartels has helpfully written a one-page FTA properly that is sufficient to allow Article 24 to apply. This is a ‘basic deal’ or a ‘temporary FTA’. But it is entirely manageable and legally sound.
So to our Remainer friends – yes, you need a deal, but one or two pages of FTA is much easier than the 585-page Withdrawal Agreement to agree.
8) So why would the EU agree?
Well, the UK is the fifth largest economy in the world and the EU’s largest single market – bigger than the USA, China and India. The EU has a £96 billion goods deficit with us (we have a £13bn services surplus). Over a million German jobs alone rely on British consumers buying German goods like BMWs. Without a basic GATT 24 deal, the EU would have £13bn tariffs slapped on its goods – 10% on VWs; 12% on wine, 40% on cheese. They would suffer far more than the UK simply because they sell more to us than we do to them. The EU – particularly Germany, which accounts for nearly a quarter of all EU trade to the UK – does not like the idea of this. Better for everyone surely to keep on an even keel?
There is also the question of money. The UK may well be prepared to pay a fair contribution, if not anywhere near the £39 billion associated with the Withdrawal Agreement, but this would be contingent on such a basic deal. It is also much easier to deliver by the end of October.
In the absence of EU agreement to GATT 24, the UK can unilaterally and universally change its import tariffs, and be open to cutting all tariff rate quotas – but obviously the UK would not be able to control EU import tariff rates.
9) What about services and standards?
Services will be a part of the future trade deal but will be along the lines of ‘Mutual Recognition’ of standards or ‘enhanced equivalence’, not on a harmonisation or rule-taking basis.
10) What about all the the other non-trade elements, such as aviation flying rights?
GATT 24 is not the only basic deal needing to be done if there is no Withdrawal Agreement. It will need an accompanying flotilla of what we call ‘mini deals’.
But – good news – the EU has already quietly agreed most of these through emergency legislation. As an MEP, David has voted on 17 main pieces of legislation to keep trucks rolling, planes flying, trains running, goods flowing, fishing boats sailing, visa costs eliminated, energy efficiency maintained, social security cooperation, the Northern Ireland Peace programme running, Erasmus+ for students allowed, and other affairs. The UK just needs to reciprocate.
The reality is that much of the non-controversial elements of the Withdrawal Agreement can be agreed as separate ‘mini deals’ in exactly the same way – for example, the elements on citizens’ rights – but can be done outside the provisions of the European Court of Justice. This is the case with other EU free trade deals including Canada and Switzerland.
11) What about the Northern Ireland border and Good Friday Agreement?
Iain served as a soldier in Northern Ireland and well knows its challenges, whilst David worked on the Peace Process 20 years ago as a Government Special Adviser. There is no mention of the border in the Good Friday Agreement for a start (rather a sensitive subject!).
With Ireland only checking 1% of goods imported now and with existing trusted trader and other current mechanisms available, such as checks in factories and warehouses, even the EU admits alternative arrangements can be done with the border remaining free. No one wants a hard border. But the detail of this can await the negotiation of the bigger free trade agreement – and is part of that.
What GATT Article 24 represents is a Clean Managed Brexit – and what’s more it is deliverable by 31st October.
The post The facts about GATT Article 24 – and how it can deliver a Clean Managed Brexit by 31st October appeared first on BrexitCentral.
In the recent Commons indicative votes on alternative Brexit options, the idea of remaining in the EU’s Customs Union emerged as the most popular future relationship with the EU even though, like every other option, it failed to get a majority. This is of course because it is Labour’s preferred option although Labour, fantastically, supports the idea only if the EU gives the UK a say in determining future EU trade policy (which it won’t).
Labour supporters of the Customs Union rarely say anything much in detail about why they support this option beyond a vague intention to preserve jobs, though what these jobs might be is rarely made clear. In fact, there is little evidence that a customs union would be a good idea for the UK.
The main arguments for a customs union are that it will guarantee tariff- and quota-free access for UK exports to EU markets and that it will avoid UK firms having to bear customs and ‘rules of origin’ costs that they would face in a free trade agreement (the latter involve the costs of ensuring product has enough ‘local’ content to qualify for zero tariffs). On top of this, it is claimed that a customs union solves the problem of the Irish border.
In our view, the purely economic arguments in favour of UK customs union membership with the EU are weak:
- There is not much evidence that a customs union would be more beneficial for UK-EU trade than a standard free trade agreement (FTA). A large-scale academic study from 2006 finds no evidence that customs unions outperform FTAs, while a more recent study even suggests the EU customs union has a smaller trade creating effect than FTAs such as NAFTA (which covers North America).
- Rules of origin costs are often hugely overstated. Claims that rules of origin costs for UK businesses in case of a UK-EU FTA could be as high as 7-8% of trade values are far too high. A careful study by the WTO suggests such costs are less than 1% of trade values, and often negligible.
- Costs of customs processing are also massively exaggerated. Claims by HMRC last year that customs costs could total 1% of UK GDP or 6% of trade values are anything from five to twenty times too high; they are based on dubious calculations and are totally at odds with on-the-ground industry experience.
- A ‘new’ UK-EU customs union would not even remove customs-related costs. Formal customs checks within the EU customs union only ended in the early 1990s due to the Single Market Programme, and still exist in Turkey’s customs union with the EU. Moreover, the documentary requirements associated with trading in a customs union can actually be greater than for trading on WTO rules!
- The UK’s foreign trade structure is not suited to a customs union. Customs union arrangements have some logic where one economy does a very large share of its trade with another. But the EU now represents only around 45% of UK goods exports and this share has been dropping rapidly. Twenty years from now it is likely that the EU will take only around a third of UK goods exports.
- The UK would remain locked into the EU’s highly protectionist agricultural trade system. High EU tariffs on agricultural products represent a heavy ‘tax’ on UK consumers. UK consumers are denied the choice of cheap food from outside the EU and pushed towards consuming expensive products from within it. This cost is high at 0.5-1% of GDP.
Moreover, the strategic/political arguments in favour of a customs union are even less compelling:
- Entering a customs union would make meaningful trade deals with other economies impossible. There could be deals on trade facilitation or deals on services but their scope would be very limited. Why would India or the US be interested in a deal on services (potentially benefitting the UK) when the UK had nothing to offer on the goods side?
- The EU would be able to ‘sell’ access to UK markets with no reciprocal benefits for the UK. Britain would be in the same boat as Turkey: when the EU does trade deals with third parties, these countries gain tariff-free access to Turkish markets but Turkish exporters do not gain automatic reciprocal access to these third countries.
- Britain would have no voice at future WTO discussions about global tariffs. It would simply have to accept whatever the EU agreed.
- The EU would be able to damage UK business using anti-dumping actions. Under a new UK-EU customs union the EU would be in charge of the UK’s ‘trade defence’ measures such as ‘anti-dumping’ actions. The EU could force the UK to impose steep tariffs on goods from third countries, hurting UK businesses and consumers. Worse still, the EU might insist on being able to impose anti-dumping duties on the UK as well – as is the case with Turkey.
- A customs union would not simply cover tariffs and quotas. The EU would also require the UK to follow EU rules in a broad swathe of policy areas including competition policy, environmental policy and social and labour standards – without any say. This would not only be a huge loss of UK sovereignty but also dramatically narrow the UK government’s freedom of action in key economic policy areas.
- A customs union does not solve the Irish border ‘problem’. Customs checks only represent a small element of potential border checks at EU borders today. A bigger issue is product conformity and other single market rules. This is another reason why any customs union would require either effective UK single market membership or border checks between Britain and Northern Ireland and/or Britain and the rest of the EU.
In summary, a customs union arrangement whereby the UK contracted out huge areas of trade and economic policy-making to the EU would be totally unsuitable for an economy like Britain’s.
Customs union arrangements may work well for small economies that do an overwhelming share of their trade with a large neighbour. But the UK is the world’s fifth largest economy, with a diverse pattern of foreign trade and with business and consumer interests that will often diverge from those of the EU.
It is no accident that Canada and Mexico are not interested in joining a customs union with the US, despite their strong trade orientation towards the US. They know that the loss of economic independence involved would be far too great to justify a modest reduction in border frictions. The calculation should be the same for the UK.
Supporters of a customs union have suggested the UK could somehow retain some influence over decision making in such a new UK-EU arrangement. But this looks like a fantasy. It would be legally and politically difficult for the EU to grant any significant decision-making power to the UK. The best the UK could hope for would be some kind of observer status. But the arrangement would remain a thoroughly one-sided one where the UK would have no power either to veto potentially damaging agreements or to push for deals that benefited it.
Entering a new customs union with the EU would be a backward-looking step for the UK, with a massive loss of policy independence and flexibility while leaving businesses and consumers at risk of having damaging decisions imposed on them with no say in how those decisions were taken. It would also give the UK minimal additional policy freedom in the trade and economic policy area. Overall, it is hard to imagine a more sub-optimal policy.
The post A dozen reasons why a UK-EU Customs Union remains a terrible idea appeared first on BrexitCentral.
In the aftermath of Parliament’s rejection of the draft Withdrawal Agreement, there is a way forward for the Government which allows a smooth transition into a No Deal scenario after 29th March, if found necessary, and then allows the UK to negotiate its desired comprehensive Free Trade Agreement with the EU without having to impose tariffs or quotas in the interim. There is a mechanism to ‘manage’ a No Deal scenario; one that works within existing WTO rules, and that is not widely known about.
This is essentially an alternate transition or interim period, but within WTO rules without having to levy tariffs or (arguably) pay membership fees to the EU, but requiring some customs forms levied on the 7% of UK businesses (400,000 out of 5.7 million UK private registered businesses) that actually trade with the EU. This is the deal with the EU used by China, the USA, India, Australia and New Zealand for example.
These recommendations are based on my nearly ten years of experience as a member of the European Parliament’s International Trade Committee, working on EU trade deals such as those with Canada, New Zealand, India, South Korea, Japan and Columbia/Peru, and drawing on high level discussions I have had with senior trade representatives for the EU and the World Trade Organisation (WTO).
In the event of No Deal, there is a strong case to maintain preferential tariff and quota rates at zero between the UK and the EU for a limited period – thought to be around two years. There are a number of arguments for exemptions to what are termed ‘Most Favoured Nation’ (MFN) rules, which require the same treatment in terms of tariff rates and treatment between WTO members to avoid discrimination. They are:
1) It is to the advantage of fellow WTO members to minimise disruption between our two large markets, which would reduce knock-on impacts to their imports/exports to the UK or EU markets. WTO members have to show financial harm to justify objections to practices (or tariff schedules). Civitas calculate that £13 billion of tariffs would have to be levied on EU goods entering the UK and £5 billion on UK goods entering the EU Single Market if standard tariffs are levied under No Deal. This is one justification for keeping preferential rates of tariffs for a period whilst a full trade deal is finalised.
2) There are exemptions under National Security grounds such as over the issue of Northern Ireland, which the IEA have argued as a case for an exemption, but this is less appealing given its association with US and Russian cases for exemptions, such as over US tariffs on Chinese steel.
3) Exemptions to ‘Most Favoured Nation’ (MFN) rules under Article 24 of the General Agreement on Tariffs and Trade (GATT) 1947. This appears to be the most substantive argument. WTO rules state that preferential benefits, such as tariffs and quotas for goods which are more favourable than MFN treatment, may only be extended to another country if it is part of a customs union or a free trade area. The ultimate legal authority to grant such preferences is Article 24 of GATT , incorporated into the WTO regime when that body commenced operations in 1995.
Article 24 is helpfully the ultimate basis in international law for the existence of the EU itself as a preferential trading bloc, which grants preferential treatment to its members within the Customs Union.
If the UK accepts Donald Tusk’s offer of a free trade agreement along the lines of CETA+++ or what I propose as ‘SuperCanada’, then the UK and EU will be in the process of moving towards creating a free trade area – Tusk has offered a tariff and quota free deal plus services (whilst leaving the EU Customs Union) – so qualifies under this criterion.
There are two under-appreciated aspects of Article 24 which have direct relevance to our situation, and which provide reassurance.
Firstly, Article 24, para 3 states:
The provisions of this Agreement [i.e. the requirement to extend MFN treatment equally to all] shall not be construed to prevent:
(a) Advantages accorded by any contracting party to adjacent countries in order to facilitate frontier traffic
- This has direct relevance to the position of Northern Ireland, and our adjacent country of Ireland. Some commentators have claimed that a sensitive and appropriate management of trade which respects and upholds both the letter and the spirit of, for example, the Good Friday Agreement would be in some form an unauthorised infringement of MFN treatment. That claim is clearly untrue.
- There is also no obligation under WTO rules to erect a so-called “hard border” on 29th March. Government may continue discussions with our counterparts in Dublin to arrive at adequate and effective technological measures for the management of trade with minimal friction. You will have noticed the encouraging signs that the Irish Government already appreciates this fact. (See, for example, “Ireland has no plans for hard border after Brexit, says Varadkar”, from The Guardian of 21st December 2018)
- We can expect that there will be considerable international sympathy for measures which support the situation in Northern Ireland, and hence a reluctance on the part of third countries to lodge objections. Although given the sensitivities this should not be stressed too heavily, such an exemption falls into ‘National Security’ related actions.
Secondly, Article 24 not only authorises member states to operate lower/zero tariff free trade agreements, it also permits them to offer lower/zero tariffs pre-emptively during the course of negotiations. The relevant provision, Article 24 para 5, is worth quoting at length, with emphasis added to the critical wording:
Accordingly, the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of… a free-trade area or the adoption of an interim agreement necessary for the formation of… a free-trade area; Provided that:…
(b) with respect to a free-trade area, or an interim agreement leading to the formation of a free-trade area, the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free–trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area, or interim agreement as the case may be; and
(c) any interim agreement referred to in subparagraph… (b) shall include a plan and schedule for the formation of such… a free-trade area within a reasonable length of time.
(A WTO declaration, the Understanding on the Interpretation of Article 24, 1994, clarifies that the ‘reasonable period of time’ in para 5(c) will generally taken to be no more than 10 years.) I estimate based on EU trade deals to date, that a UK-EU comprehensive Free Trade Agreement could take around two years, especially given the unique reality that the UK is starting from a convergent position with the EU, with zero tariffs and quotas and with our laws and standards currently harmonised.
- If, before 29 March, the UK has reached an ‘interim agreement’ with the EU to pursue negotiations towards a comprehensive free trade deal, both sides would be permitted under WTO rules to continue with the present zero tariff/zero quota trading arrangements. There would be no disruption to the man or woman on the high street. No Deal would mean No Change, as the cost of goods would not go up.
- In the present situation the ‘interim agreement’ would not have to be an extensive document running to hundreds of pages. The schedule of items covered by the negotiations would be all goods, as already envisaged in our discussions with the EU. The plan which the document sets out would have to amount to little more than a timetable for regular meetings and an ultimate deadline, some years hence, by which point negotiations will have to be concluded.
- An ‘interim agreement’, then, need be little more than an agreement to continue talks – while also continuing zero-tariff and zero-quota trade on both sides – plus a deadline no later than 29th March 2029. I accept that the EU has so far declined to agree any deadlines (other than 29th March) but since the absence of a final cut-off point has been a major contributing reason for Parliament’s rejection of the Draft Withdrawal Agreement, perhaps the EU will now reassess that stance.
- Whilst legal challenges at WTO level might be expected from an unhelpful member, the reality is that any such challenge is unlikely to get to the WTO ‘court’ – its appellate body – for at least two years and possibly longer, and only if that body finds the UK non-compliant would any compensating actions be authorised such as tariffs. This is within WTO rules, and if any challenges arise a fully compliant Free Trade Agreement should already be in place by the time any appellate body were to meet. The EU is now under extreme pressure from EU27 industry and commerce who enjoy a £96 billion surplus with the UK.
- You will recall that the draft Political Declaration indicates the EU want to reach a comprehensive Free Trade Agreement with the UK on the basis of zero tariffs and quotas (see paras 17, page 5, and para 23, page 6) and extending to services (para 29, page 7). Those provisions are fully in line with numerous public statements made since the 2016 referendum by Donald Tusk, President of the European Council, and Michel Barnier, European Chief Negotiator – offering a CETA+++, or what I term a ‘SuperCanada’ trade deal, on 7th March 2018, 30th August and 6th October 2018.
It is significant that Heiko Maas, Foreign Minister of Germany, has already indicated a willingness to continue talks (see “Germany says EU ready to talk if UK rejects Brexit deal” on Reuters, 15th January).
This approach would continue the pre-29th March status quo in trading arrangements and patterns without interruption, justified by an explicit provision of the WTO regime. The possible grounds on which any third country could lodge an objection to this are extremely slight (unlike for schedule changes).
An ‘interim agreement’ would therefore be an important component of a ‘Managed No Deal’ outcome from 29th March. It permits trade between us and the EU to continue without tariffs or quotas under No Deal while creating a space for negotiations to be reset and recommenced on the basis of reaching a SuperCanada or CETA+++ trade treaty.
I urge the Government to now adopt this course of action, as it will mitigate the main impacts of a ‘No Deal’ Brexit and eliminate the task of having to assess and charge tariff rates on 19,753 MFN tariffs under the EU Customs Union, thereby substantially reducing friction at borders.
The post A ‘Managed No Deal’ WTO option using Article 24 of GATT can avoid raising tariffs or quotas appeared first on BrexitCentral.
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