19 September 2018

Dr Emily Lydgate is a lecturer in Law at the University of Sussex and a fellow of the UK Trade Policy Observatory.

In its Chequers White Paper, the UK government has proposed that, in order to facilitate a frictionless border, it will operate a dual customs regime known as a Facilitated Customs Arrangement (‘FCA’). By replacing rules of origin checks at the EU-UK border with internal monitoring, the FCA requires firms to establish ‘robustly’ the destination of their products to ensure that correct duties have been applied, and then, if they wish, to seek rebates if they have been overcharged. Past UKTPO blogs have addressed logistical challenges and strategic downsides of this ‘Fantastically Complicated Alternative’ (see also Does the Chequers Agreement provide any steps to Brexit heaven?)

But would it be compatible with the rules of the World Trade Organization? The precise details of the FCA’s operation remain unclear. Barring a dispute, it’s not possible to settle the question definitively, but the FCA does prima facie pose a risk of WTO non-compliance. We presume that the UK government has undertaken some analysis of this, and that it covers (at least) the following issues.

GATT Article II(1)b states that parties shall be exempt from extra charges on goods beyond those agreed in its WTO MFN tariff schedules. The White Paper proposes that the UK will apply the EU’s ‘tariffs and trade policy’ for goods intended for consumption in the EU, and the UK’s for goods consumed domestically. If a good cannot demonstrate its destination, it will pay the higher of the two and may become eligible for a repayment from the UK Government later. The White Paper insists that this will mean there is no ‘routine requirement’ for rules of origin between the UK and EU, thus facilitating a frictionless border (Section 1.2.1-2, pp. 16-19).

The UK intends to bind its tariffs at EU rates. If, in the future, it lowers its rates, it will end up charging EU-bound goods, and those of indeterminate destination tariffs greater than those agreed in its MFN schedules. The UK government will need to argue that the FCA does not entail additional charges, but simply changes the way in which schedules are administered. Exporters could argue that UK authorities are levying additional tariffs where they are unclear of a good’s ultimate destination and that tracking costs involved in getting a rebate down to the UK level amount to a greater de facto MFN tariff than the bound rate.

Moreover, these complexities mean that a Free Trade Agreement (FTA) between the EU and the UK will be less valuable. Also, given that such tracking and claiming will be voluntary, it may well be the case that exporters simply don’t bother. Previous UKTPO research has demonstrated that ‘a substantial minority’ of UK firms are unsure how rules of origin work and thus don’t benefit from preferential trade agreements. By adding to the complexity and uncertainty, the FCA would certainly reduce the incentive for partners to sign FTAs with the UK.

The administrative burden may also lead to a challenge in the context of the non-discrimination principle of GATT Article III, which obligates parties to treat imported and domestic products in competition with each other evenly with respect to internal taxes and regulation.

The question is: do the tracking requirements imposed on imported products alter competitive conditions to benefit domestic producers who face no such requirements? Importantly, Article III doesn’t cover ‘ordinary customs duties’, ie tariffs, so a threshold issue is whether such requirements can be characterized as internal regulations. In China-Auto Parts the WTO Appellate Body has made it clear that it’s not necessary for a tariff to be collected at the border to be considered a tariff, as long as the obligation to pay is incurred at the border. (Appellate Body Report, 2008, para. 158).

In this case, the UK can argue that its tracking requirements simply serve to ensure that goods pay tariff obligations incurred at the border. But the UK will also be collecting EU tariffs before the goods have crossed the EU border. Furthermore, some goods will need to undergo monitoring even after they have paid tariffs.  It is uncertain whether the WTO dispute settlement bodies would characterize such obligations as rather unusual procedures for paying tariffs or as internal regulations that discriminate against imported goods.

Also, the FCA is intended to apply to UK ‘trade policy’ in general, presumably covering anti-dumping and countervailing duties; without such coverage, there could not be a frictionless border. EU countervailing and anti-dumping duties will almost inevitably differ from UK ones (in either direction), and to a much more significant extent than regular tariff differentials, so there will be greater incentives for firms to track and monitor.

GATT Art VI (2) and (3) specifies that countries cannot levy anti-dumping or countervailing duties in excess of those offsetting injury from dumped or subsidized imports. If the UK imposes an anti-dumping or countervailing duty on behalf of the EU that is not in operation domestically, and the producer can establish that the product did not enter the EU, the difference will be refunded. However, the FCA places an additional administrative burden on exporters, with an associated cost; exporters can argue that this constitutes an additional duty.

Finally, GATT Article X(3)a obligates Parties to ‘administer in a uniform, impartial and reasonable manner all its laws, regulations, decisions and rulings,’ primarily for customs purposes. The Trade Facilitation Agreement also calls for ‘common customs procedures and uniform documentation requirements’ in Article 7.

The FCA would require importers to the UK to declare the ultimate destination of their product. A subset of importers would need to seek rebates for incorrect charges, leading to a lack of uniformity, with some exporters facing more burdensome requirements. Article X(3) applies to the publication or administration of customs procedures, rather than substantive content of the rules themselves (Appellate Body Report, EC-Poultry, para. 115). The UK could argue that the charges are a feature of UK legislation rather than customs administration and thus Article X(3) does not apply.  Even if this argument were accepted, the FCA could fall foul of GATT Article X if it were not quickly, evenly and transparently administered.

While not a comprehensive analysis, this note gives a sense of the WTO challenge at stake for the UK government. Addressing these issues comprises an important part of convincing not just the EU, but also other UK trading partners and the UK Parliament, of the feasibility of the FCA.

 

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The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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