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Post-Brexit tariff rate quotas – what is the cause for the despondency?

Post-Brexit tariff rate quotas – what is the cause for the despondency?

27 Oct 2017

Willemien Viljoen, tralac Researcher, comments on the EU and UK’s post-Brexit proposal to modify existing tariff rate quotas based on historical trade data and the implications for agricultural market access under the SADC-EU EPA

A proposal to apportion existing European Union (EU) tariff-rate quotas (TRQs) between the United Kingdom (UK) and the remaining 27 countries of the EU post-Brexit has numerous exporting countries hot under the collar. It even seems that trade experts and negotiators disagree on whether the division of the existing TRQs, based on historical trade data, will lead to a fair outcome for those who benefit from these quantitative market access concessions. The main contention concerns the modification of market access concessions which will lead to the loss of flexibility for exporting countries to direct their products to the markets of their choosing. Such separation of TRQs will mean that exporters would not be able to switch between the UK and EU markets if the prices are better or the demand higher. Exporting countries are arguing that such division would make them worse off than they currently are.

In correspondence to the World Trade Organization (WTO), dated 11 October 2017 the representatives of the EU and UK stated ‘the EU and UK intend to maintain the existing levels of market access available to other WTO Members. To this end, we intend that the future EU’s and the UK’s quantitative commitments in the form of tariff-rate quotas be obtained through an apportionment of the EU’s existing commitments, based on trade flows under each tariff-rate quota.’ Even before the correspondence to the WTO was published seven countries (Argentina, Brazil, Canada, New Zealand, Thailand, United States and Uruguay) expressed their discontent with the proposed division of the TRQs. ‘We would like to record that such an outcome would not be consistent with the principle of leaving other World Trade Organization Members no worse off, nor fully honour the existing TRQ access commitments. Thus, we cannot accept such an agreement. The modification of these TRQ access arrangements cannot credibly be achieved through a technical rectification. None of these arrangements should be modified without our agreement. A bilateral understanding between the United Kingdom and the remaining 27 Member States would not be sufficient in this regard, nor would a technical rectification be acceptable.’

The legal basis of their argument is found in Articles XIII and XXVIII of the General Agreement on Tariffs and Trade and the 1980 decision on the Procedures for Modification and Rectification of Schedules of Tariff Concessions.

  • Article XIII deals with the non-discriminatory administration of quantitative restrictions. According to Article XIII (2) (d) ‘In cases in which a quota is allocated among supplying countries the contracting party applying the restrictions may seek agreement with respect to the allocation of shares in the quota with all other contracting parties having a substantial interest in supplying the product concerned. No conditions or formalities shall be imposed which would prevent any contracting party from utilizing fully the share of any such total quantity or value which has been allotted to it.’

  • Article XXVIII sets out the following principles for the modification of schedules of tariff concessions: (a) any suggested modifications must be negotiated and agreed upon by the contracting parties, i.e. the country making the modification and the parties the concessions was originally negotiated with; (b) negotiations also need to take place between the country making the modification and parties which have a ‘principal supplying interest’; (c) parties deemed to have a substantial interest in the concessions and the modification thereof must be consulted prior to changes; (d) the negotiations can include compensation; (e) what is agreed upon should not be less favourable to trade than what was provided for prior to negotiations; and (f) if no settlement can be reached among the contracting parties the country is free to make the necessary modifications, if the parties deem that the settlement failed due to an unreasonable offer for adequate compensation the parties affected by the modification can retaliate by modifying equivalent concessions previously negotiated.

  • These formal rectifications can come into effect once certified by the Director-General if no objection is raised by other WTO member countries within three months of the changes. However, these changes cannot change the scope of concessions, they can only be of a purely formal character. If objections are raised parties are back to Article XXVIII of the GATT and the renegotiation of concessions.

Whether the opposing countries will choose the path of a WTO dispute will depend on what happens next. The methodology and data to be used for the calculations are vital. Which data will be used? Are we talking point of entry data or place of consumption data? More often than not the point of entry into the EU is not the final place of consumption and goods can freely transit throughout the EU. However, post Brexit the free movement of goods between the UK and the rest of the EU may not be possible. This will have logistical cost implications for exporters. Furthermore, what is the time period for the data to be used? Speculation in the media is that historical trade averages for the last three years will determine the quota allocation shares. However, this is a very short timeframe given the period some of these quotas have been in effect. The impact of seasonality, recent climatic conditions and economic and market changes on trade patterns over the last three years can give a scewed division of the TRQs. Historical data also does not take into account the potential economic implications of Brexit on future trade patterns and demand conditions. If we consider average trade data, how will the average be calculated? What will happen with the portion of unfilled TRQs? Thus far there has been no clarification as to the legal basis for the changes (technical rectification or modification), the methodology that will be used for the TRQ re-allocation, the data that will be used for any determination and the level of participation that will be sought from other WTO member states.

The issue of apportionment of TRQs is also of vital importance for South African agriculture, foodstuff and beverage exporters. Under the SADC-EU Economic Partnership Agreement (EPA) numerous products from South Africa have preferential TRQ market access into the EU market. Although some of the TRQs are the same as previously available under the Trade, Development and Cooperation Agreement (TDCA) (e.g. strawberries), the EPA also expanded the in-quota volume of some quotas previously available (including frozen orange juice and wine) and introduced new TRQs for products like skimmed milk powder and sugar. These expanded and new TRQs have only been in existence since November 2016 and uptake has been slow, trade data also shows that historic exports of these products to the EU have been limited. With the lack of historic exports of the products, that are covered by the EPA TRQs, from South Africa to the EU, an important question is what will happen post Brexit to the expanded and new TRQs?

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Sources:

Procedures for Modification and Rectification of Schedules of Tariff Concessions. https://www.wto.org/gatt_docs/English/SULPDF/90970413.pdf

Permanent Representatives of the United Kingdom and the European Union to the WTO. https://www.tralac.org/images/Discussions/eu-and-uk-letter-to-the-wto-11-october-2017.pdf

Permanent Representatives of Argentina, Brazil, Canada, New Zealand, Thailand, United States and Uruguay to the WTO. https://www.tralac.org/images/Discussions/letter-to-the-eu-and-uk-by-seven-exporting-countries-26-september-2017.pdf

Revell, B.J. 2017. Brexit and Tariff Rate Quotas on EU Imports: A Complex Problem. EuroChoices, 16:10-17http://onlinelibrary.wiley.com/doi/10.1111/1746-692X.12157/full

Ungphakorn, P. 2017. UK, EU, WTO, Brexit primer — 2. Tariff quotas. Trade Beta Blog. https://tradebetablog.wordpress.com/2017/10/07/primer-2-tariff-quotas/