Richard North, 14/08/2019  

I've been taking a back seat on the John Bolton controversy, where president Trump's national security adviser has said the UK is "first in line" for a trade deal with the US and, what is more, claimed deals could be done on a "sector-by-sector" basis, with an agreement on manufacturing made first.

According to Bolton, a bilateral agreement or "series of agreements" could be carved out "very quickly, very straight-forwardly". A trade deal for financial services and agriculture would not be the first to be agreed, he added, then declaring that "doing it in pieces" was not unprecedented.

Predictably, this reference to "doing it in pieces" has brought the pundits out in force, with the likes of BBC economics correspondent, Andrew Walker, telling us that "there is a problem with sector-by-sector trade agreements". They are not, he avers, "compatible with WTO rules", which say free trade agreements for goods should cover "substantially all the trade".

And while he concedes that there is no formal definition of that latter term, he will have us believe that a figure of 90 percent "has often been suggested". Thus does Walker maintain that, "It is unlikely a deal covering a few sectors would qualify. Other WTO members could start a dispute and would, on the face of it, have every chance of winning".

Needless to say though, in matters of trade and WTO rules, things are never quite as simple as the Janet & John pundits make out. For instance, two Sussex University academics at the UK Trade Policy Observatory, Emily Lydgate and Alan Winters, recently offered an analysis of what they thought the WTO might or might not permit in respect of a Free Trade Agreement (FTA) between the UK and the EU – a scenario that might reasonably be expected to have some application to a UK-US deal.

As one might expect, they concede the Janet & John point that, "WTO rules prohibit Free Trade Areas (FTAs) that provide tariff-free access or services liberalization in only one or a few sectors". In this sense, they say, "a narrow, sectoral approach to concluding an FTA between the EU and the UK would contravene WTO law".

However, in grown-up dealings there is always a "however". Assuming the EU and the UK were able to agree a substantially broad tariff-free FTA, our Sussex academics write, WTO rules would not prevent them from moving further to maintain the bulk of the benefits of the Customs Union and the Single Market in a few key sectors. In the abstract to their 29-page paper, they go on to say:
They could establish customs union-like conditions by coordinating external tariffs in some sectors and agreeing on relaxed Rules of Origin (RoO) administered lightly and Single Market-like access could be approximated through sectoral Mutual Recognition Agreements. Such an approach would enable continued deep integration, whose desirability has been signalled on both sides. It would fall short of current market access levels even in the selected sectors, and, in the case of tariff coordination, re-create some of the limits to an independent trade policy that Brexit aimed to remove. If the trade-off were deemed desirable, however, the approach could be reconciled with WTO rules including the 'Most Favoured Nation' requirement that equal treatment be awarded to all WTO Member States.
Without putting too fine a point on it, therefore, it would be more correct to say that, as a general rule sectoral agreements between developed countries are not permitted. But there are circumstances where parties can pursue such agreements. And even where the precursor might be the agreement of a "substantially broad tariff-free FTA", any tariff reductions required can be phased in over a number of years.

Despite this, in the popular media (even the supposedly "quality" end), Janet & John prevails. Thus we have Jeremy Warner in the Telegraph - who seems to have assumed the role of the paper's licensed Cassandra – writing that, "Post-Brexit trade policies are in danger of becoming an incoherent desperate mess".

He concedes that Mr Bolton "presumably knows his stuff when it comes to national security" but, says Warner, "he plainly has very little idea about trade". Sadly, though, in seeking as explanation as to why his "sector by sector" suggestion "falls at the first hurdle" under WTO rules, our licensed Cassandra relies on Lorand Bartels, lecturer in international trade at Cambridge University. He sternly instructs us that "you cannot normally discriminate between trading partners".

Thus we are enjoined, in relentlessly Janet & John terms:
Offer a special favour to one nation, and you have to offer it to all other WTO members. This so-called "Most Favoured Nation" principle is there to ensure that trade remains as open and free as possible.

There are, however, exceptions, one of which is a bilateral free trade agreement. But here’s the problem. The rules stipulate that such FTAs must cover substantially all trade between the two nations, usually defined as about 90 percent of it. If partial arrangements were allowed, it would open the door to precisely the sort of discrimination the rules are meant to outlaw. On the face of it, then, Mr Bolton's suggestion is a non-starter.
Lorand Bartels, of course, is the man who told us that, "the customs union is essentially what you do in order to get rid of customs border posts", despite the EEC's customs union (CU) having been completed in 1968 yet internal Community borders not being finally abolished until 1992.

Challenged on this, Bartels turned out to be a somewhat sensitive soul, eventually telling me that, "When I said the point of a CU is to get rid of border checks I meant CUs are necessary, not sufficient for this. You misunderstood".

Thus this "leading academic" was incapable of error. When he wrote: "The customs union is essentially what you do in order to get rid of customs border posts", we should have known that he actually meant: in order to get rid of them, it is necessary to have a customs union, but not sufficient.

And then there is the reality of the Single Market which, if it was extended to all products and services, could also allow the elimination of customs border posts without the need for a customs union. Things such as rules of origin could be dealt with administratively, without border inspections.

I suppose his reappearance as Warner's guru proves that you can never keep a bad man down. But what he and most – if not all - the other pundits seem to have missed is an EU press release in April of this year announcing that the European Commission had been authorised to open negotiations with the United States on two agreements.

The first was a trade agreement limited to the elimination of tariffs for industrial goods only, excluding agricultural products, while the second was an agreement on conformity assessment. This would remove non-tariff barriers, by making it easier for companies to prove their products meet technical requirements both in the EU and the US "while maintaining a high level of protection in the EU".

As I pointed out in my own piece, reporting this development, this new initiative had followed on from the failure of TTIP, while discussions on the elimination of tariffs was being confined to industrial goods – excluding automobiles - thus avoiding the contentious agricultural chapter which brought the Doha Round to a premature halt.

This is in addition to the joint ventures between the EU and the US on International Regulatory Cooperation (IRC), all pointing to the development of extensive trade cooperation between the parties – highly discriminatory yet short of a Free Trade Agreement which would conform with the WTO's definition.

One might also note that Turkey has agreed a Customs Union (a type of FTA within WTO law) with the EU which excludes both agriculture and services, thus embodying exactly the same exclusions to which Bolton was referring in respect of a UK-US deal.

Whether one can be optimistic or pessimistic about the outcome of post-Brexit trade negotiations between the UK and the US, the problems the parties will encounter do not seem to be entirely (or at all) in the area that the self-appointed pundits would have us believe.

Perhaps the more serious obstacle is the question of whether Congress will ratify any deal agreed by the Trump administration, especially in the context of reservations expressed in the US legislature about the impact of the Irish backstop.

But then, the bigger problem yet is the absence of a trade deal between the EU and the UK, where our exports are currently more than twice the level of US trade, 40 percent of which are services. The US, for all its apparent willingness to do a deal with the UK, may be a dangerous distraction.

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