Asymmetry in the UK’s post-Brexit Trade

After last week’s publication of the UK-EU Withdrawal Agreement, there has been a frenzy of activity in political circles, as Cabinet, Government and Parliament jostle for position with new information and that new deal.

One of the claims made in the rumour mill, inferred the UK will not be able to trade freely through the existing 88, 3rd country treaties the EU has during the transition.

There was some confusion from commentators and campaigners alike. Not to mentioned the usual confusion from MPs in matters of analytical competence. With many assuming that we had that freedom because of the deal. “We have CU+SM!” or “BRINO”. Unfortunately not!

But how can this be?

Withdrawal Agreement is NOT EU membership

I can’t stress that enough. Seems weird to constantly have to repeat it. But it’s obviously necessary and admittedly, I should be used to this by now.

The Withdrawal Agreement makes reference to dozens of other documents. So while it is 585 pages long, it’s “true” length is much longer, given all the cross referencing that must occur.

Hence, to understand its full effect, requires us to cross reference a number of EU regulation documents and also references within the WTO.

The first place is here.

Cross referencing that, needs two documents.

This is relevant because of the limitations of onward sale of goods. That’s EU 952/2013. Where the Common Customs Tarrif regimes can only be applied in the event of an EU limitation in the location where the goods can be resold (ie inside the Customs Union). This is partly to ensure the integrity of the Customs Union, by ensuring nobody overrides WTO rules of origin and procedurally, also ensures correct markings are placed on consignments to ensure that there isn’t a bypass of any intermediate tariff regime (aka a tax dodge).

Transitional Spaces

Take for example, a Canadian raw material. Wheat. It is imported into Britain for use in manufacturing UK produce like Warburton’s bread. As of 2016, it has been brought into the UK via CETA and by the above EU rules to be turned into something else (bread). In the event it isn’t, the UK of the future is obligated to charge a tarrif on that good, under WTO GATT (General Agreement on Tariffs and Trade) and in accordance with the tariff schedules the UK has (or rather, currently has not. Given the formal objections filed last month). In the event a trade deal is done by the UK with any third party, the UK is obliged by the Withdrawal Agreement, not to charge less of a tariff than the EU does. Although of course, can charge more and will have to, in the event of the WTO not being resolved in good order, which it will not (a problem of Trump’s making).

However, in the event the UK does charge more, it cannot charge a tariff, nor set a quota, specifically for Canada, which exceeds what it charges the EU for it, nor any other country the UK signs a trade agreement with. That’s the Most Favoured Nation (MFN) rule at work.

This has a few major ramifications for the UK during the transition period, when the Withdrawal Agreement has effect.

The UK cannot negotiate a third country trade agreement and apply a lower tariff than the EU applies. The UK can negotiate an agreement and apply the same, or a higher tariffs.

During the transition, the UK could also negotiate trade deals with an asymmetric introduction period to cover the transition, while the Withdrawal Agreement is in force. To positively affect the UK side only after the transition has ended. A bit pointless of course if we want to buy cheap and for that period, the trade partner gains much more than the UK does. These asymmetric deals do exist and have been done. With the asymmetry sometimes running for 10 years.

In addition, any goods bound for the EU, via the UK, cannot be subject to a lower quota or higher tariff regime, than that which would have applied in the event it went directly there.

The relevant aspect of GATT is this guy. It makes it clear that the scope of this legislation applies between the UK and EU only. NOT 3rd countries the EU has trade agreements with. Which, in combination with the points above, in the Withdrawal Agreement, mean the UK is stuck between two bounds.

• It can’t charge zero tariffs nor set inappropriate quota, if the EU charge some.
• It can’t charge more to one country and not others, as they’d be breaking WTO MFN.

Following up on our wheat example. The UK loses free trade with Canada through CETA. It must charge Canadian companies who supply Canadian wheat. Let’s say the UK charges 20% on all wheat tariffs across the world. So the $1,000 per tonne commodity becomes $1,200. Hence, the UK MUST charge everyone $1,200.

Any wheat coming in to the UK, from the EU, can use a Free Trade Agreement, but rules of origin, as implemented by the following (EU regulation 2015/2446 — OJEU) pack the Canadian wheat with Canadian origin markings and thus, the UK must utilise its tariff schedule with Canada. As similarly required by the GATT.

As a result, the EU doesn’t (or can choose not to) charge tariffs on them as they would be for onward transit.

What’s the Problem?

The problems come at the UK customs border. The UK doesn’t have preferential access to the Comprehensive and Economic Trade Agreement (CETA) between Canada and the EU. The net result is the UK must charge its import tariff to the same degree it charges other, non-EU parties. Since the UK and Canada do not have a direct trade agreement between them. If we did, then the UK could charge that tariff (including nothing) instead.

The EU now has Free Trade Agreements, now, with about 83 other countries. Countries that do not have trade agreements with each other just by virtue of their agreements with the EU.

FTA’s with Canada and Japan say, are:

• Canada-EU
• Japan-EU

That doesn’t cover Japan-Canada. As seen in this snippet from Canada’s customs schedule. Note that Ireland uses the CEUT abbreviation for CETA and Japan does not. Even though there is an economic partnership between Canada and Japan.

It up to 3rd countries to deal independently of the EU, but with a focus that they don’t undercut the EU relationships they have and also requires WTO MFN to be considered.

When the UK leaves, we leave the EU of course, but even in the event we stay in the Customs Union, that only deals with the EU as one block as Japan and Canada see it and we only have a direct relationship with the EU as a Customs Union & Single Market. Not the 3rd countries the EU has trading relationships with.

Hence why we’ve been seeing headlines of assymetric trading relationships. They can trade into the UK market, via the EU (specifically, sell to EU and EU sell into the UK market, as rules of origin allow that way round) but UK selling into the EU, incurs a tarrif where the destination is onward to 3rd countries, as the WTO rules of origin of Japan and/or Canada require them to charge a tariff on ours (or each other’s).

That’s the subtly of the 3rd country inside SM+CU. It isn’t EU membership.

The short summary is we don’t automatically have direct relationships with the EU’s 3rd countries just by virtue of our relationship with the EU. Contrast that with EFTA, who created a seperate trade body with their members before the EU, then the negotiations with the EU brought them in. EFTA parties trade independently of the EU anyway, but that’s because they’re within EFTA independently of the EU. It’s an overlap of two, regional trade agreements. Not the regular bilateral trade agreements between Canada and the EU (remembering that the EU is regarded as a seperate, single market at the WTO), or even the to-be UK-EU relationship.