BREXIT: A TRQ TUTORIAL

"Then there is the big issue of TRQs. There are 121 tariff-rate quotas for agricultural products in the EU schedule."

Craig Thorn

After Article 50 is triggered - if it is triggered - and the UK and the EU find themselves in the serious business of disentangling the legal elements of their trade both with one another and with third countries, one of the more difficult sets of issues they will face is that of tariff-rate quotas or TRQs. It is an issue that got a lot of attention at the GBD-Steptoe & Johnson event last month on "Brexit: The WTO Issues." Several speakers mentioned the challenges of TRQs in the Brexit context. Craig Thorn of DTB Associates provided the most detail. Pablo Bentes of Steptoe & Johnson raised important points, and from the floor Jean-Francois Boittin, a former French diplomat with a deep knowledge of trade policy, provocatively simplified the issue. 

We shall get to all of them, but first a word about tariff-rate quotas. Essentially, a TRQ is a system of two tariff rates separated by a quota. The first tariff, the lower one raises prices, as all tariffs do, but it doesn't stop trade. That is the "in quota" tariff, which applies to imports that enter up to the limit of the quota. Then the higher tariff kicks in, the out-of-quota tariff, which is often prohibitively high. For a slightly more formal explanation, there is the Wikipedia entry on Tariff-Rate Quotas. 

To pick up where we left off, here is some more of Craig Thorn's November 16 observations on Brexit, TRQs, and the WTO: 

"There are 121 tariff-rate quotas for agricultural products in the EU schedule. There are 10 TRQs just for beef. And within those TRQs, there are eight country specific quotas ... for major trading partners. These TRQs - beef TRQs, sugar TRQs, other TRQs - are enormously valuable to a number of exporting countries. And so that makes it very difficult to negotiate any changes." 

 
The first thing that needs to happen, Mr. Thorn said, is that the UK and the EU have to talk. In his words: 

"They have to agree - the UK and the EU 27 - on how to divide those quantities, and then they have to sell that deal to the other [WTO] members. You could follow a different course. But if either party, either the EU or the UK, tried to negotiate with the other members without having an agreement [among themselves], it would be, I think, a recipe for disaster."

Two Examples: Butter and Sheep Meat. Mr. Thorn explained: 

"The sheep meat quota is 283,000 tons, which is really big in comparison to the size of the market, mainly lamb. The butter quota is 75,000 metric tons. These two quotas are a legacy of the UK [joining the EU]. In 1973, the UK pushed hard for the EU to agree to these TRQs, and they are country specific. They actually belong to New Zealand. 

"For many years, the lion's share of imports under those quotas went to the UK. That was even true in 1995, just after the conclusion of the [Uruguay Round] WTO negotiations, when the TRQs were again consolidated in the EU schedule.

"But now only half of the sheep meat and between 10 percent and 25 percent of the butter goes to the UK. And the UK is now, in some years, a net exporter of sheep meats and a much smaller net importer of butter. So you can imagine how complicated it will be for the UK and the EU to agree on how to apportion [those TRQs]. 

 
"I am sure there will be some people in the EU, [for example,] who will say that it's not good enough just to do the arithmetic based on the last three or four years. [They will argue] that these TRQs were a legacy of the UK, and the UK should take them on - if not [in their entirety], then a disproportionate share. 

"And obviously, New Zealand will have a big interest in making sure that, however the TRQ is divided, it doesn't undermine the value of the concession [for New Zealand]." 

Cheese and a Question. Understandably, Mr. Thorn's focus was on the tariff-rate quotas operated by the EU for imports into the European Union. But the EU (and UK) are also exporters that face TRQs in foreign markets. The United States, for example, uses TRQs to limit imports in a number of product areas including dairy, a fact that was pointedly referenced in a question that was put to Mr. Thorn near the end of the November 16 event. 

The question came from Jean-Francois Boittin, a former French diplomat and trade negotiator, who took the position that, in fact, the situation isn't really complicated at all. Mr. Boittin said:

"The tariff-rate quota. I don't see that as a problem. If I take a New Zealander [approach]... -- that's because I'm a big All Blacks fan -- ... I will say, 'So, EU, the UK is not my problem. I have my quota of 200,000 [tons of] sheep meat. You, EU, take it, whether the UK is part of [the EU] or not.' 

 
"And conversely, if I take an EU approach, I tell the UK, 'Sorry guys. You don't have any part of the tariff-rate quota on cheese in the U.S., because you are not part of the EU." Not complicated at all. Am I wrong?"

We'll finish this portion of the TRQ discussion with this from Mr. Thorn's response. 

 
"You're absolutely right," he said to Mr. Boittin . "I mean, as far as other WTO members are concerned, "the level of commitment is what's on paper right now. I'm just assuming - it was an unstated assumption - I'm just assuming that that would not be acceptable to either the EU 27 or the UK, that both parties will want to modify their schedules to take into account the divorce."

Another Angle: Article XXVIII. When one WTO member changes its import policies to the detriment of another, the exporting country is not without recourse in the WTO, especially if it is a major supplier. Under GATT Article XXVIII ("Modification of Schedules"), the supplying country can renegotiate its relationship with the country that has made the change. 

Pablo Bentes, a panelist at last month's event and the Managing Director for International Trade and Investment at Steptoe & Johnson, zeroed in on the Article XXVIII angle of the TRQ question.

Considering EU and UK exports, there is the issue of how those two will divide up country-specific TRQs operated by other WTO members, such as the United States, and currently allocated to the EU. Who will get what share? And for those TRQs operated by the EU, there is the issue of who will take what percentage of imports from the supplying countries. To some extent, this entry has touched on each of those problems. 

 
"But the key question that has to be answered here," Mr. Bentes said, " is, does this trigger an Article XXVIII process? As a result of the modification of schedules, [does it oblige] the UK to sit down with everybody and renegotiate the principal supplying interests? 

He continued: 

"One commentator recently ... posited something quite provocative, and I don't have the answer to this. But, essentially, he was saying, why doesn't the UK simply schedule the duty part of the TRQ - forget about the quantitative restrictions- just the duty part, the "in quota" TRQ and say this is not a modification of a schedule but rather simply a change or rectification of a schedule, which wouldn't trigger the Article XXVIII process. Now, I don't have the answer to that. It is one very provocative thought. Personally, I am more inclined to see it as a modification.

"And in fact, it might be beneficial for the UK to have a framework for renegotiating these. Article XXVIII has specific procedures to do this. So, it might be in the UK interest to go through the process and have it structured in a nice way."

First, the experts quoted above have more than effectively flagged the importance of TRQs and the role they will play as the UK and the EU try to rewrite the rules - including those in the WTO - that govern their economic relationship, especially their trade. Like the rest of the Brexit process, the management of TRQs among the parties will evolve as an issue. As it does, we may have more to say, but we have nothing to add here. 

Second, Mr. Bentes's suggestion for having at least some part of the Brexit process occur "in a nice way" struck us as optimistic if not fanciful. Yet it is appealing, something to hope for. Unfortunately, the headlines of the day offer little evidence of things moving in that direction. Today's Wall Street Journal, for example, announces that the " U.K. Weighs Cost of Brexit Nuclear Option," which they define as "walking away from the EU without any deal." 

 
We found that story not so much alarming as inevitable. A clear willingness to walk away would give the UK its strongest possible bargaining position while at the same time exposing the country to the greatest economic risks. At some point, the logic of that was going to find its way into the public discussion of Brexit possibilities. Now it has. Whatever the merits of such a discussion, it is pretty far removed from things happening "in a nice way." 

Third and finally, we had promised this entry for last week. We'll resist the temptation to blame the delay on the snow here in Portland. (We're blaming everything on the snow these days.) Instead, we will simply apologize for missing that deadline and express our hope that you will stay with us as we follow Brexit and other trade issues through to the end of 2016 and on into the New Year.