Culture, Tourism, Europe and External Relations Committee

Meeting date: Thursday, March 15, 2018

Official Report 583KB pdf

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Withdrawal from the European Union (Negotiations)

Agenda item 2 is an evidence-taking session as part of our inquiry on article 50 negotiations and the United Kingdom’s future trade policy. I welcome today’s witnesses: Peter Ungphakorn, who is a former senior information officer at the World Trade Organization secretariat; Dr Gracia Marín Durán, who is a senior lecturer in international economic law at University College London’s faculty of laws; Dr Matias Margulis, who is a senior lecturer in political economy at the University of Stirling; and Liz Murray, who is the head of Scottish campaigns at Global Justice Now.

I remind members and witnesses that we have a lot of ground to cover and our time is short, so it would be helpful if questions and answers were as brief as possible.

I will approach the issue chronologically and look first at the proposed transition period. The Council of the European Union’s guidelines on transition propose that the UK will continue to participate in the customs union and the single market. Is the UK likely to get agreement from the EU and third countries to continue participating in the EU’s free-trade agreements with those third countries? My understanding, which is borne out by other committee evidence-taking sessions, is that some third countries might object to continuing their relationship with the UK, because the UK would no longer be a legal party to the treaty that it signed with the EU. What is your opinion on that concern?

I am not a lawyer, so I do not know entirely how the legal aspects of that situation would work, although I have read and heard people talk about other countries wanting to improve the conditions that they have under their free-trade agreements. In other words, they see Brexit as an opportunity to gain more from the UK. However, I do not necessarily see it in that way. It is about countries trying to preserve their trading rights in a new context, which is the UK’s separation from the EU. Provided that both sides understand that and are willing to negotiate in good faith, I would have thought that it would be possible to do that.

The real question is how quickly that can be done and whether it can be done in two years. That will depend on a number of things. A lot of work will be involved in taking over, rolling over or grandfathering—whatever you want to call it—the , and how quickly that is done will depend on the resources that are put into that and how stretched the UK and other countries are in the negotiations.

My question was not so much about the grandfathering of the free-trade agreements, which is an important area to explore, as about what happens in the transition period. My understanding is that, although the UK would be bound by EU free-trade agreements during the transition period, third countries would not necessarily be bound by them.

Yes. I would have thought that they would have to give their agreement to that.

I will provide the legal answer to that question. Politically, third countries might object, but legally that will depend on the individual agreement. In the most recent EU FTAs, such as the comprehensive economic and trade agreement with Canada, the territorial application of those agreements is to any territory where the EU treaties apply. In so far as the EU treaties will continue to apply to the UK during the transition period, legally speaking, FTAs will also apply, because the UK will continue to be a territory in which the EU treaties apply.

The agreement with Canada is one of the most important ones for the UK, given current trade flows, and such an agreement applies not only to the EU and its member states but to any other territory where the EU treaties apply. During the transition period, there will be no problems legally, because the FTAs will continue to apply. The question is whether, during the short transition period of two years or less, the UK will have the capacity to renegotiate these FTAs in practical terms or the legal capacity to do so.

Given what I have just said about the fact that the treaties will continue to apply, the UK will still be bound by the EU common commercial policy, which, as we know, is an EU exclusive competence. The Commission’s draft withdrawal agreement of February 2018 is rather ambiguous on whether, given that the common commercial policy is an exclusive competence of the European Union—only the EU has the power to negotiate agreements—the UK will have the capacity to negotiate agreements during the two-year period. The UK will definitely not have the capacity to conclude any agreements.

The question of whether the UK has the capacity to negotiate must be clarified further, because article 124 of the draft withdrawal agreement is ambiguous. It says that the UK cannot conclude any new international trade agreements during the transition period unless it is authorised to do so by the European Union, because that is an area of its exclusive competence. The question is whether that is physically possible within such a short time and whether it is legally possible—whether the UK will have the capacity to negotiate and conclude something in an area that will continue to be the exclusive competence of the European Union during the two-year period.

I have a point of information, convener. It is being reported in the press this morning that that agreement has been secured and will be part of the outcome of the discussions that will take place next week.

Are you referring to the draft withdrawal agreement?

The United Kingdom has secured permission to undertake negotiations in relation to new trade agreements during the transition period. That is what is being reported this morning.

That may be what is being reported, but the draft withdrawal agreement does not say that. That is why it is a point worth clarifying in the actual agreement. Article 124 of the draft withdrawal agreement says that the UK cannot be bound by any new agreement—that does not mean that it cannot negotiate such an agreement, but it means that it definitely cannot conclude such an agreement during the two-year period—unless it is empowered to do so by the European Union. It is an area of EU exclusive competence, which means that only the EU has the competence to negotiate and conclude international trade agreements. It is worth clarifying article 124 and what is in the agreement rather than what is reported.

However, that will be part of the negotiation and it is being reported that that is the outcome—in other words there has been progress on the properly agreed transitional arrangement.

That may be so, but the text that I have seen does not say that so clearly.

Not yet.

I want to ask about the tariff rate quotas. In October, the EU and the UK proposed that the future TRQs of the UK and of the EU, which would exclude the UK, should be calculated by apportioning the EU’s existing commitments. We know that several countries have written to the WTO expressing concern about that. Can you say a little bit about that and about how it is likely to be resolved, if at all?

Thank you for the invitation to speak to the committee today.

As you know, several WTO members, including the US and Canada, raised concerns about the method that the EU and the UK are proposing to split up the tariff rate quotas. We can take three points from that: first, they are unhappy with the current method, which is a technical matter; secondly, and as a larger point, they are concerned about losing what they view as the full value of the TRQs; and, thirdly, that the proposal could not be achieved through technical rectification and would have to be approved by all WTO members. It is a clear signal by the WTO members that there is a line in the sand, that a technical option is no longer on the table and that the matter will be referred for members’ approval.

That introduces several issues that need to be taken into account, such as what the new method will be and how WTO members will be consulted along the way, given that they want input into the process. There is also the broader question of whether splitting up the TRQs will be sufficient or whether the UK, the EU or both will have to offer something in addition in order to gain WTO member agreement. The matter has turned out to be a lot more complicated than was originally assumed.

09:15  

It has been quite a long time since Gracia Marín Durán and Matias Margulis were last here. It must be well over a year since you gave evidence to the committee. At that time, we talked about the UK’s letter to the car industry, which suggested that the industry would be okay as a result of future trade deals. More recently, in her Mansion house speech, the Prime Minister talked about what has been described as a pick-and-mix approach to regulations for different sectors—the Government will adopt some regulations and not others. Will you share your views on that particular speech and the idea that recognition and mutual recognition can be approached in a pick-and-mix way?

There is a bit of a misunderstanding around the way in which mutual recognition is framed in the debate. The fact that the UK will not engage in mutual recognition does not mean that it will not have to comply with EU regulations—it will have to comply with regulations anyway, because there is no way of exporting to the European Union free from European regulation. That paradigm does not exist. If the UK wants to export agricultural products or cars to the European Union, it must comply with the relevant product standards. Mutual recognition simply means that a country’s regulation will automatically be considered compatible with the regulations of the EU.

Legally speaking, it is feasible for the UK to pick and choose whether to have an understanding of mutual recognition in certain sectors as opposed to others, but I am not sure whether that makes sense, given that not having mutual recognition does not mean that the UK will not have to comply with EU regulation. The UK will always have to comply with EU regulation, because any country that exports to the EU has to comply with whatever regulations are in place for the product or services concerned. Mutual recognition just means that such processes are made easier, because the UK’s own regulations will be automatically recognised as being compatible with the EU’s, just as they are currently within the internal market. Although it is possible to pick and choose, I am not sure whether that makes sense, because mutual recognition simply facilitates the process of having to comply in any event.

Thank you very much.

I want to ask some questions about establishing the UK’s position at the WTO, given that that position will need to be renegotiated. We are interested in what you think might be the particular areas in which WTO members might push for concessions from the UK. Questions have been raised around common agricultural policy payments and their future under renegotiated terms. Where might the pressure points be in those discussions?

For technical reasons, tariff rate quotas are the biggest problem. As I said, it is a question not necessarily of countries seeking concessions, but, as Matias Margulis just said, of countries trying to protect what they consider to be the value of access. At the moment, under TRQs, a country has a quota of, say, 100,000 tonnes of a product and it can export that anywhere in the EU. If the UK was split from the other 27 EU countries, the fluidity and freedom of exporting to any part of the bloc—of being able to choose whether to export to Germany one year and to the UK the next year—would be lost. That is WTO members’ objection to the proposal of tariff rate quotas. They are concerned about preserving what they consider to be the commercial value of access to those quotas.

A technical issue that nobody had thought about has also come up. Conceptually, it is simple: a country has a quota of 100,000 tonnes of something, of which 30 per cent goes to the UK and 70 per cent goes to the EU. That is the common approach of the UK and the EU. However, it turns out that there is no reliable data for that because, although the tariff quotas are defined at a very detailed level in relation to the products, the consumption data, which is how we know how much of the product has ended up in the UK or the EU, is much broader. There is a problem with taking a figure from a broad category, such as beef, and saying that, for a particular type of beef, such as high-quality beef, the ratio should remain 30:70.

Delegates told me that the UK and the EU had suggested to countries such as New Zealand and Australia that, if their industry had better figures than theirs, they would like to hear them. However, it has taken months for the UK and the EU to come up with such figures.

Regarding the CAP subsidies—we are talking only about trade-distorting subsidies that are directly related to prices and production—the whole of the EU uses only about 8 per cent of its entitlement. As the trade-distorting subsidy is small compared to the entitlement, there is a lot of room for manoeuvre. I do not see that dividing up how much of that should be the UK’s and the EU’s entitlements would be much of a problem in the WTO, because more than 90 per cent of the entitlement is unused, leaving huge room for manoeuvre. If that were to become a problem, that would suggest there was a lot of ill will in the negotiations, which I hope people will avoid.

Services are the other area in which there will need to be decisions on how to deal with the UK’s commitments. That work should be fairly straightforward although, like many things that we say are straightforward, it will be fairly time consuming because there is a lot of detail. However, it ought to be fairly easy to extract the UK’s commitments from those of the EU.

There are also commitments in the WTO on Government procurement. Unlike in other areas of work in the WTO, to which the UK signed up as the UK as well as the EU, the Government procurement agreement was signed only by the EU. There will have to be a legal way of dealing with that in order that the UK can have its own commitment that is separate from that of the EU.

You talked about 8 per cent of the entitlement being used and flexibility around the remaining 90-plus per cent. My knowledge is probably lacking here, so will you explain why the amount of remaining entitlement is so large? Why is only such a small proportion of what is available being used?

I have a linked question on state aid. When there are discussions on leaving the EU, it is argued that our trade deals are too restrictive. In the Parliament, we have discussed the restrictions that state aid places on us, including on film studios and our industry base, where Government intervention could be positive, if it were allowed. The argument is always made that state aid rules prevent our making such interventions. Is there any room for manoeuvre? It is suggested that there would still be state aid restrictions under WTO membership. Would they be as restrictive as they are now or are they likely to be more flexible?

As I understand it, the European Union changed the support—what the WTO calls domestic support—that it was giving to agriculture from coupled payments, which are directly related to production and prices, to decoupled payments, which are fixed and not related to how much the farmer produces each year. The change was partly because of the budget and partly because the EU was anticipating an outcome in the WTO agriculture negotiations that would have reduced countries’ entitlements. That did not happen, but the EU went ahead and made the change anyway. That is the reason why the EU is using only about 8 per cent of its entitlement for domestic support.

I am not an expert on state aid, but as far as the WTO is concerned, the restrictions are mainly to do with whether the state aid has an impact on exports; if it is aid in general, the WTO would be silent on it.

I will clarify that. EU rules on state aid are far more restrictive than WTO rules for a simple reason: the basic rule in the EU is that there is a general prohibition on state aid unless it is authorised by the Commission. In the WTO, you are not generally prohibited from providing state aid—or subsidies, as the WTO calls them—except in relation to those that affect exports or are contingent on exports. You do not have to be authorised to provide subsidies; you provide them, and if other members consider that there is a problem they can challenge you. The WTO system is more flexible because you do not have to seek a priori authorisation from any entity in WTO, there is a lack of a general prohibition but also in terms of monitoring or supervision of state aid.

To return to the original question and the types of concessions, we should keep in mind what Peter Ungphakorn said about it depending on what signals the UK puts out about its likely offer and what tariff level it is likely to set post-Brexit. Will it keep its tariffs the same as the EU’s or will it lower them slightly? What happens will change how other members perceive whether the value of their existing arrangements is being diminished. Other countries are looking at the situation in terms of diminishment of what exists on the table. That will be largely defined by the future UK-EU relationship, and because we do not yet know what that will look like, there is a lot of uncertainty.

On the agreement on Government procurement, members should recognise that many Scottish institutions are listed in the WTO subnational schedules as being subject to the agreement. It might be worth while for members and their staff to look at which specific Scottish institutions, such as Scottish Enterprise, are in the WTO Government procurement agreement, and to consider whether there are other institutions that you might want to add to any revised schedule for when the UK joins the agreement individually. There are issues to consider at a Scottish level.

Yesterday, the European Parliament passed an interesting resolution on the terms of a future UK-EU trade relationship, particularly in relation to tax. It says:

“The resolution makes clear that any future trade deal must be dependent on UK adherence to EU standards on taxation, including anti-money laundering legislation, exchange of information, anti-tax avoidance measures and must address the situation of its overseas territories.”

That is a combination of the UK having to continue to adhere to current rules as an EU member state and having to adhere to the rules following any changes to the status quo. It is relatively normal for the EU to make such demands when it is negotiating trade deals. What impact will that have on the negotiation of the future UK-EU relationship?

That is not my area of expertise, so I defer to colleagues.

As you say, the EU’s concern in the future trade relationship about a race to the bottom not only on taxation, but on social or environmental legislation, where it is to be expected that the third country would lower standards in order to obtain an unfair competitive advantage—that is, unfair from the EU’s perspective; whether it is unfair is open to discussion. That has been a concern with all the countries with which it has concluded a free-trade agreement and it will be a concern with the UK, too.

The EU will surely demand that the UK adheres to minimum standards not only on taxation, but on social and environmental matters, and not lower them in order to obtain a trade advantage or to attract foreign direct investment. The EU has already demanded that from other countries with which it has concluded free-trade agreements, such as Canada and Korea, even though it trades less with those countries than it does with the UK.

The UK remains one of the EU’s main trading partners, but the more economically independent the UK wants to be, the higher the EU demands will be in order to keep the playing field level in regulatory terms.

The UK’s overseas tax haven territories are unique and are a result of our particular history. Are there any comparable relationships between the EU and other third countries that have their own overseas territories with similar reputations as tax havens?

09:30  

I would not know.

Would it be realistic to assume that, in the event of the trade deal being negotiated, it would be dependent on the tax status of our current overseas territories changing quite significantly, to bring them in line? I understand that, at the moment, those territories have been able to continue operating in the way that they have because the UK is an EU member state, but they are not part of the EU. If the UK were a third country in an agreement with the EU, would those territories also have to be brought in line?

I do not think that we have a comparable situation, because all the overseas territories involved relate to the other member states. I cannot think of an example of a third country in a comparable situation with which the EU currently has a free trade agreement. The only comparable situation that I can think of relates to other member states, but obviously that does not help.

I would like ask about timescales and the capacity for negotiations. You have talked about the two-year transition period and the concluding deals that will come after that, and during that period the UK will have to negotiate a continued relationship with the EU—never mind negotiating trade agreements with the rest of the world. Does the UK Government have the capacity for all that? How long would it take? I presume that for big countries such as the US, it could potentially take several years.

It has taken years for the European Union to negotiate all the agreements, and the EU is an entity that has a built-in capacity for such negotiation. Commercial policy became an exclusive competence of the EU in the 1970s, which means that the EU has about 40 years’ experience in negotiating trade agreements on behalf of an ever-growing trading block, which gives it an awful lot of bargaining power vis-à-vis third countries.

I have doubts about whether the UK can achieve all that within two years, because, as we have been saying, every other negotiation depends on what is negotiated with the EU. What all the other third countries will expect or want to change in their bilateral free trade agreements will very much depend on what the UK and EU negotiate. The terms of trade between the UK and the EU will affect the terms of trade between everyone else. That is assuming that the UK leaves the customs union. If the UK stays in the customs union then there is no problem and things will stay as they are. However, it appears that that is no longer an option.

Assuming that the UK leaves the customs union, what it negotiates with the EU will affect everyone else. That applies to both the bilateral free trade agreements and the negotiations in the WTO over the tariff rate quotas, because as Matias Margulis was saying, it is no longer a technical change, but requires the involvement of the other WTO members. It has been recognised by the UK and the EU in their joint letter that the tariff rate quotas will require negotiations in the WTO or at least what they call “active engagement”.

Aside from the point about how such quotas are distributed between the UK and the EU, the tariff quotas currently work in such a way that they do not include exports from the EU to the UK and vice versa—that is intra-EU trade of agricultural products. Exports from the EU to the UK and from the UK to the EU are currently excluded from the tariff rate quotas, which apply only to third countries such as those that have raised the objections in the WTO. What will happen post-Brexit? Imagine that we agree a formula on how to divide the quotas—let us say 50:50, to make things easier. Will the EU also have access to the UK’s 50 per cent share, given that under that arrangement the EU would now be a third country in the WTO? Will the UK have access to the EU share? That is the problem.

The time is limited and the capacity is limited, too, because for the past 40 years, the EU has been doing all that on behalf of not only the UK, but every other member state. In addition there is the fact that every other negotiation depends on what the UK and the EU agree first. It is challenging.

The capacity issue cuts two ways. First, there is the issue of bargaining capacity and the extent to which the UK can develop capacity to bargain, revise current agreements and negotiate new ones. Secondly, there is the issue of the implementation burden that comes with taking on a lot of the current practices and regulatory work that the European Commission does. The amount of resources that need to be pumped in, just to have a baseline capacity, are quite substantial.

It is probably not very realistic to imagine that the UK can pursue a highly ambitious agenda in the short term, simply because of the learning curve and the fact that you have to get people in who have to learn to do the job, which cannot be done in two years. As Peter Ungphakorn was saying, it takes three or four months to get some figures on tariff rate quotas. That gives you a sense of the scale of the speeds at work, so two years seems pretty optimistic.

It is now less than two years: from March 2019 to 31 December 2020 is not even two years.

I agree. My experience of watching negotiations is that something unexpected always comes up to delay things.

The UK expertise in negotiating may be limited to UK citizens who work for the European Commission—they are the ones who have experience negotiating through their work for the European Commission. Will they be obliged to continue to work for the EU during the transition period, or will the UK Government be able to call them back to work as part of the UK negotiating team? If not, I cannot see how the UK will be able to have a negotiating team.

In the withdrawal agreement, there is something about that and what will be the status of current UK officials of the EU or the European institutions. I have not read that in detail, but there is an attempt to regulate that in the withdrawal agreement.

One should not forget that some of those UK nationals have applied for nationality of other member states and have obtained it. I used to be an EU trade negotiator, and some of my former colleagues have applied for Belgian nationality and so on. That is not very difficult. It is pretty much an individual’s choice whether they want to come back to the UK. If they do not want to come back, it is not really possible to force them because during the transition period they can still apply for Belgian or Luxembourg nationality, given that if they have been working for the EU institutions they have been resident in those countries for many years already. They can say, “Well I am Belgian now and I will stay here”. It would be difficult to force those officials to come back.

I agree that much of the EU capacity is made up of great trade negotiators and lawyers from the UK, who are currently negotiating for the EU and defending the EU in the WTO.

Last week, in the Public Accounts Committee of the House of Commons, the permanent secretary at the Department for International Trade, Antonia Romeo, and her number two, Crawford Falconer, were asked that question about capacity. They gave fairly detailed answers. It is interesting to hear what Crawford Falconer said about what is needed for negotiations. I suggest that that is worth looking at. The bottom line was that they felt that they had enough people, that they were training them well enough and that Crawford Falconer’s experience would help with that.

They would say that.

I am sorry to go on about tariff rate quotas, but it is an interesting subject, because it will affect agriculture around the world. Could the UK benefit from some of the third-country trade deals with the EU that are currently in discussion or that have already been completed? Is it not just a political point or a protectionism point from each side?

There are two points here. We can either replicate or replace those trade deals that, through the EU, we currently have with third countries or, we could just do what Norway has done and take agriculture out of trade negotiations and then separately negotiate free-trade agreements outwith Europe?

In purely legal terms, the UK cannot remove the tariff rate quotas that it is currently committed to providing in the WTO. The UK is bound to that in the EU schedule. The question is what share the UK will take from the EU. I agree with Matias Margulis that that is no longer something that the UK and the EU can agree bilaterally, because it is not just a technical change but a change that affects other countries, so the UK and the EU will have to engage in negotiations with at least those countries that currently benefit from the tariff rate quotas. The ones that the UK is committed to in the WTO cannot be taken out completely.

Free-trade agreement concessions can be withdrawn completely, because those are subject to negotiations. You could argue that closing your market makes sense to you but, were you to do so, third countries would also close their markets to UK exports, whether in agriculture or other sectors. Whether that would make sense overall is not an assessment that I can make.

Trade negotiations work both ways. If you were to take away something from third countries, they would want to rebalance concessions somewhere else. If you are exporting a lot of agricultural products to them, the rebalancing might be in the agriculture sector, but it might be in another sector.

The balance of concessions in free-trade agreements will be reopened to negotiation. If you put in more or take out something, that allows the third country to do exactly the same. The more that you demand, the more that they will demand, and vice versa.

I will elaborate on what Gracia Marín Durán has said. We have to distinguish between two activities. One activity is preserving the legal status quo, as is happening with the schedule of commitments in the WTO, including the TRQs. It has emerged that the concept of status quo is a little bit more complicated than it sounded, because it is not necessarily just a question of splitting up existing quantities, as we also have the notion of the value of market access and the commercial value. However, that should be a comparatively simple exercise, at least in the sense that it need not become too political.

The other activity relates to changing the status quo, should you want to do so. Gracia Marín Durán said that you cannot take tariff rate quotas out of the WTO. That is true in the sense that you cannot remove the quota that gives a low tariff, because that is a commitment. However, you can take tariff quotas out of the WTO by saying that the low tariff would apply across the board, without limits. That can be done through commitments in the WTO or unilaterally. Even if you had a tariff quota of 100,000 tonnes duty free, you could unilaterally expand that without violating WTO commitments, because you are being less protectionist than you were and, in the WTO, you can always be less protectionist than the commitment that you have made in the WTO.

There are other questions. Rachael Hamilton mentioned Norway. It may have taken agriculture out of the relationship with the EU in some respects, but the Organisation for Economic Co-operation and Development figures show that Norway and Switzerland are the two most protectionist countries in the world on agriculture. Is that a good model to follow?

How much power will the UK have to negotiate trade agreements outside the EU?

Do you mean after the transition period?

Yes.

It will have full power and full autonomy.

You described the balance in the negotiation process. As a negotiator outside the bloc, how much power will the UK have in trying to get a good deal from the different countries?

In my view—I might be wrong—it will have less power than it does now. Let us look at the concessions in the free-trade agreements and imagine that we do not want to leave them as they are, but instead want to reopen everything for renegotiation. From a third-country perspective, those concessions were not negotiated with the UK market; they were negotiated with a market in which any exports to the UK—that is, goods crossing its border—meant automatic access to a market of 27 additional countries. That value will be lost, because it will just be the UK market.

The value of any concessions in free trade agreements has changed tremendously from a third-country perspective because, if I am exporting my bananas from Ecuador to the UK, I can no longer automatically access the whole of the EU market. You can expect third countries to demand and to review the concessions accordingly, because they were made to the UK under the assumption that anything exported to the UK has automatic access to the European Union. If the UK leaves the customs union—as it seems that it will—that automatic access is lost.

09:45  

A few moments ago, Peter Ungphakorn said that, in terms of the wider political context, some things will happen that will lead to change. How important is the wider geopolitical situation to the UK’s trade negotiations and trading operations post-Brexit?

How long have you got? The most difficult example to look at is a possible UK-US free-trade agreement. Can anyone tell what US trade policy is and what it would negotiate with the UK? It is very complicated; we just do not know what it is.

Gracia Marín Durán spoke about the power of the UK to negotiate with others. The matter is complicated, but I agree with those who have said that the UK’s power to negotiate with other countries as a member of the EU is greater than its power to do so on its own. For example, India wants to export to 28 countries, so it will give priority to negotiating with those 28 countries—or 27, post-Brexit—rather than one, unless it has a product that it is particularly interested in selling to the UK market. That is a generalisation, and there will be differences in product areas and in countries and so on.

Matias Margulis may have an opinion on this, but I would have thought that Canada would be more interested in getting a good deal with the EU through CETA rather than in getting a Canada-UK deal.

I agree with all the previous comments. The UK has put itself in a pickle in that it has publicly said that it wants to negotiate many agreements as quickly as possible. Very few countries do that; they know that they must sequence and spread out the agreements over time, because they can handle only so many at the same time. The fact that the UK has said that it is willing to take deals as quickly as possible has put it in a situation in which it will have less bargaining leverage, because the political imperative is much greater at the UK end to negotiate agreements than it is for the other countries.

On the broader geopolitical issues, in addition to the unknown US trade policy, there are questions about the future of the WTO and, now that it seems to be back on, the trans-Pacific partnership. There is a lot of movement. Some would suggest that free-trade integration is picking up again, but in other areas things are being put into reverse. The global trading and geopolitical environments are very unstable, and the UK is partly contributing to that instability.

It is important to remember that the UK has introduced instability into the global market through Brexit. That will have unforeseen consequences down the road, but it might change how other countries view the relationship with the UK and the speed at which they might want to enter into an agreement with it.

Sometimes, because of the use of expressions such as “grandfathering” and “rolling over”, the feeling is being created that the UK must retain all the 40 or 50 free-trade agreements that the EU has with third countries, but it does not have to. After the transition period, the UK can come out of those agreements and trade with those countries on WTO terms. You will tell me that WTO terms are worse than those in a free-trade agreement and free-trade agreements are concluded precisely to do better than the WTO. That is correct but, given all the capacity challenges that we are discussing, is it really wise to try to renegotiate 50 free-trade agreements in less than two years?

I am not an economist, but your trade flows with the rest of the world are shown in the Scottish Parliament information centre briefing on the issue. Does it really make sense for you to quickly renegotiate the agreement with Canada when Scotland’s trade flows to Canada are less than 1.6 per cent of its total exports? You could quickly renegotiate that deal in two years and get a bad deal for 1 per cent or so of your exports. That needs to be thought about.

There is no obligation on the UK to retain those 50 free-trade agreements after the transition period. During the transition period, they will be retained. Given the limited time and capacity issue, the UK should take that time to rethink which of those free-trade agreements are worth retaining. In situations where 1 per cent or less of your trade is with a third country, you could be better off trading in the WTO for the time being and then, when you have more time and capacity, engaging in free-trade agreement negotiations. That is just a suggestion. There is no obligation to roll over.

Does Liz Murray have any comments?

I do not have anything on the technical side, but I will mention the Trade Bill, which will have to go through a process of legislative consent here. Speaking on behalf of Global Justice Now and as part of the trade justice Scotland coalition, we are suggesting that the Trade Bill needs to be amended to include some level of parliamentary scrutiny.

The UK Government believes that those third-party deals will be cut and pasted, so there is no need to include provisions for allowing parliamentary scrutiny of them in the bill. From listening to the evidence that was given to the House of Commons Public Bill Committee on the Trade Bill and from what I have heard here, it sounds as though that is not a correct assumption. Certainly, at least some of those deals will be opened up for renegotiation. It is therefore very important that the Westminster Parliament and the Scottish Parliament have a say, because of the different potential impacts in the different parts of the UK, which I could say a little bit more about.

I think that Mairi Gougeon has a question on that.

That ties in perfectly with what I want to ask Liz Murray. I want to tease out some more from the trade justice Scotland coalition submission. I attended an event in Parliament a wee while ago at which we discussed some of the issues with the Trade Bill in particular. I want to get Liz Murray’s thoughts on some of the free-trade agreements that we are part of at the moment. Where do you think that the problems in those have been? Your submission says that there is “a clear democratic deficit”. How do we best go about trying to resolve that through the Trade Bill?

I am not able to give you details on specific trade deals that we are party to as part of the EU at the moment, because we have been looking at the new generation of bigger trade deals—the transatlantic trade and investment partnership is the classic example, and then CETA—and, through those, the encroachment into a public policy space that we have seen. The deals are moving away from tariffs and quotas—away from the customs barrier, if you like. We need to consider how the mechanisms in those trade deals could be used, such as the investor-state dispute settlement mechanism or even the investor court system. They could be used to sue Governments for loss of profit through public policy decision making, for example, which would have a chilling effect.

That is influencing our view that it is vital that parliamentarians have a say. They need to get it into the current Trade Bill so that if parliamentary scrutiny is needed for the transfer of those trade deals that the UK is part of as a member of the EU, it is there. It would also set a precedent for future trade deals. Because of what we saw with the transatlantic trade and investment partnership, we are particularly concerned about a possible future trade deal with the US.

There was another part to your question. I am sorry but I did not note it down.

That is fine. What do we need to see come out of future agreements? I would also like to tease out a bit more about what you said about the wider impact on other public policy areas as a result of some of the agreements that might not have been considered so much as part of the Trade Bill.

Do you mean where public policy has had to change?

Yes. I am asking about the wider impact of some of the agreements and where you have seen changes in other areas.

There are many examples around the world in which Governments have had to put their public policy measures on ice, if you like. In yesterday’s news, there was the example of Philip Morris having sued the Australian Government. Philip Morris did not win but the case took six or seven years or so, and it is estimated to have cost the Australian Government $50 million in legal costs, although that is not a certain figure. That case had a chilling effect on countries that were thinking about implementing a policy of plain packaging for cigarettes, particularly New Zealand, which held on and waited for an outcome.

There can be huge costs to Governments through that system and direct effects on the public policy space. An example that might be transferable to the interaction between a national and a subnational Government is the Lone Pine Resources case. Lone Pine is suing the Canadian Government for a decision by the Quebec Government to put in place a moratorium on fracking.

I will relate that case back to here, but I am talking about these things only to back up the evidence for why we think that parliamentary scrutiny is really important, and for why we think that the Scottish Parliament should have some say over future trade deals. Well over a year ago, a parliamentary question was asked about what would happen if the UK Government were to be sued under a trade deal for policy differences between the devolved Administrations and the UK. The answer was that the claim would be brought against the UK for a difference in policy under investor-state dispute settlement.

If the UK Government fought the claim and lost it under an ISDS for something that relates to an act of a devolved Administration, the memorandum of understanding between the UK and the devolved Administrations would apply. That provides that the devolved Administration would be responsible for the payment of the legal costs and awards that were made by the tribunal to the extent that they arose from the failure of the devolved Administration to implement or enforce an obligation. We said in our evidence that Scotland is inextricably linked to those trade deals, so they could impact on policy in Scotland and the ability of the Scottish Parliament to take its own decisions in the interests of public health in Scotland, the environment in Scotland, and so on. There could also be financial consequences if the UK Government were to be sued under a trade agreement for differences for something that the Scottish Parliament had enacted.

At the moment, the Trade Bill has no provision for parliamentary scrutiny by MPs or the devolved Administrations. An amendment has been tabled to try to rectify that. We think it is important and that is why we suggested that the Scottish Parliament should withhold its consent until or unless the bill is amended to allow more parliamentary scrutiny.

Matias—you have experience with negotiating in Canada, where the regional Governments were very involved. Do you want to pick up on any of the points that Liz Murray made in the Canadian context?

10:00  

Over the past 20 years, as trade agreements have moved beyond the border, as Liz Murray was saying, they are no longer about tariffs—they are largely about national regulation, because the general push has been to have global convergence. That is the broader effect of trade agreements.

In the Canadian context, as it became clearer that trade agreements were having an impact on the areas of health, energy, environment, labour, policy and so on—on many areas that were, in the Canadian context, provincial areas of jurisdiction—there was a process of increasing participation over time of the provinces in the development of trade policy. The CETA case was quite exceptional in the sense that provincial Governments were part of the negotiating teams and, to a certain extent, the negotiations. They were not there for the final deals but they were part of the process along the way, largely because the provincial Governments had the expertise in particular areas.

In the Canadian context, there has always been a strong and thorough provincial consultation process to ensure that the provinces have real-time input as things are happening in the negotiations. It has worked quite well in the Canadian context to have a pan-Canadian approach but also political buy-in at all levels for any deal. That has been viewed as important.

I should note that in the Canadian context, it is very ad hoc—it is not formalised through any proper institutional mechanism. However, it is a practice that has been adopted and depending on the trade deal or the Government in power, that relationship can become stronger and more inclusive or, at other times, less so. There may be some lessons there for the devolved Governments about the mechanisms that could be put in place to ensure that information flows both ways as opposed to just being told something after the fact.

I believe that the UK is quite unusual in that, in the ratification process with CETA as a member state, there is very little input at all from MPs. We do not feel as though we are asking for anything radical, in that there are many examples of other countries, including Denmark, Belgium, Germany, and even the US, having much greater interaction and much more say for different levels of government.

I will just quickly clarify something in relation to what Liz Murray said. I do not want to take away from her argument—I agree with her about scrutiny and about the investor-state dispute settlement. However, although the dampening effect of the challenge on plain packaging may be the case in smaller countries, in New Zealand’s case, as I understand it, New Zealand was waiting for an outcome in the WTO dispute settlement, which is not an investor-state dispute settlement—it is Government to Government.

Thank you for that clarification. Ross Greer is next.

Much of what I was going to ask about has already been covered. I have just one small additional point. Public procurement is an area that has increasingly become part of trade negotiations. It is also one of the remaining significant areas of disagreement between the Scottish Government and the UK Government in relation to the withdrawal bill and the issues of devolved powers and re-reservation and so on.

Does anyone have an example of what objective is sought when public procurement is brought into trade negotiations? Have there been any examples in which trade deals have been negotiated that have resulted in a significant shift in how public procurement operates?

It is not my specific area of expertise but if you look at the WTO Government procurement agreement, in the renewed version of 2012, there is a really good example. You can see the specific sectors that countries have opened up. You can look at it EU member by EU member, including the UK. If you look at the schedule, you can see which bodies in each EU country have been listed as being open to Government procurement bidding from members of the agreement.

What is important about the WTO Government procurement agreement is that Governments assess a threshold for the size of contract at which it becomes open to members and then they list specific sectors in quite a lot of detail. The general thrust is to open up Government procurement to international competition. If you look more specifically at the EU schedules, you will get a better sense of the profile of, for example, English, Welsh, and Scottish bodies that are currently part of the agreement. That does not fully answer your question but I think that it is probably relevant.

Absolutely. That was useful. Liz Murray might know whether I am right in saying that one of the specific concerns about TTIP was about the opening up internationally of tendering processes for health services in the UK.

Yes—and other public services, such as universities and tertiary education, and potentially water services.

But it is also possible to negotiate a carve-out for those.

Yes. That is what the EU usually does. Again, this is not my area of expertise, but the EU usually excludes what it defines as public services from its free-trade agreements. That was another division with the United States during the negotiations.

It depends on whether there is a positive or a negative listing. A negative listing seems to us to be, if you like, a less secure way of doing it, particularly if things change in the future, because you are locked into that. There are important distinctions and things that concern us there.

The EU, as a large and powerful trading bloc, is able to negotiate such opt-outs. Will the UK be able to do that if it is in negotiations with the US, for example? Will we have the clout to negotiate the levels of exclusions that we would perhaps want to see?

It would have a price.

It would be a trade-off.

Yes.

I add that there are differences between, for example, the NHS up here in Scotland and the NHS down in England, but it would be the UK Government that did the negotiating for trade deals—and with no Scottish input. We are suggesting that there should be a Scottish Government representative on the negotiating team, but at the moment that is not being proposed.

Thank you.

I want to go back to an area that we should, perhaps, have covered earlier—the whole issue around rules of origin. I see some looks of exasperation. [Laughter.]

It is six minutes past 10!

Obviously, the UK will have to apply rules of origin if it wants to have preferential access to EU markets. Can you say anything about the challenges of gearing up for rules of origin after the transition period. Is it achievable?

Legally speaking, rules of origin are an awful area of trade law. I never teach it in my courses because it is highly technical and complex to understand.

From a legal perspective, quite a bit of effort will be required for the renegotiation. I will discuss what the problem is, always assuming that the UK leaves the customs union, because in the customs union there are no rules of origin: products come from the EU and it does not matter how they have been assembled or whether there are inputs from Spain, Italy and so on in products that are exported from the UK. The origin is the EU market. If the UK leaves the customs union, that will have to change, and they will be products that originate in the UK.

At the moment, we have full cumulation at regional level within the EU market so, as I said, it does not matter where the inputs come from, and the good is an EU good. Will the UK be able to maintain the full cumulation that we currently have in a free-trade agreement with the European Union? A free-trade agreement will need to have rules of origin. Will the UK be able to maintain that full cumulation such that it does not matter where inputs come from and the good will be one that originates in the UK, or will the EU require, as it requires from third countries in other FTAs, that a minimum percentage comes from the UK in order for it to be a UK good that can be exported to the EU on the terms that are agreed in the FTA? That is the legal challenge for the negotiations.

There is also a practical challenge. At present, to export to the EU, a company does not have to prove any origin. It can just export, saying, “This is an EU good.” Even if we assume that the requirements on rules of origin that are negotiated in the FTA can be met—whether there are criteria that need to be met or whether the EU will allow the UK to fully cumulate on a regional basis—companies will need to prove to the customs authorities of any of the 27 remaining EU member states that the criteria have been met.

It is time consuming not only to negotiate rules of origin, but to prove that the criteria in the rules of origin, whatever they are in the free-trade agreement, have been met. Obviously, that is a challenge vis-à-vis the current situation, because there are no rules of origin in the current situation.

The financial burden of taking that on is quite high for exporters. There is the process of training and teaching firms how to fill out the form—to put it nicely—and the cost of doing that. That is quite expensive for businesses, and will have knock-on effects on exporters’ competitiveness.

It is worth saying that there is another aspect. The push will come from business. I tried to look at Scottish industries to see where they might be interested in rules of origin. It is quite clear that, in the UK as a whole, the car industry has already started to push for diagonal cumulation—I will not go into that; it is explained in the documents. Is butter from Ireland used in shortbread? If it is, rules of origin for shortbread might become important if it is to be exported to Korea, for example.

As I said, the push will come from business, and the Government might find itself sandwiched between other countries that might have a view on what kind of rules of origin there should be in relation to their own domestic industry. They might say that they need them.

To carry on from the question about rules of origin, what about geographical indications, which the EU has? Scotland takes advantage of them. How will they change? Do you see a change coming?

I was going to add a brief comment about that. GIs are also a very complex area of WTO law. There are some general rules on geographical indications in the WTO and in the trade-related aspects of intellectual property rights agreement that will continue to apply to UK relations with third countries when the UK leaves the European Union.

The issue is that the EU has been quite aggressive—to put it nicely—in its policy on geographical indications in free-trade agreements. It has required third countries to go beyond the current commitments in the WTO, which are slightly more flexible for foodstuffs than they are for wine and spirits. Basically, the WTO rule is that countries have to recognise one another’s geographical indications, but there are a number of exceptions. In its FTA negotiations, the EU has tried to limit the capacity of countries to use those exceptions. Canada knows that well for Gorgonzola, Parmesan and other things. It considers that they are generic names, but the EU does not. That applies especially to cheeses and foodstuffs. I think that the UK can expect that the EU will try to do the same in a free-trade agreement and that it will ask the UK to continue to protect EU geographical indications, as it does now automatically.

What will be the UK’s ability to protect our own products in future trade agreements?

That should not be a challenge vis-à-vis the EU, because the EU is very much into protecting geographical indications. The challenge will be with third countries. The EU has had relative difficulties in convincing third countries to go beyond the TRIPS agreement in FTAs. For instance, Canada was not too happy about certain terms that it considered to be generic. With the US, it was the same for feta cheese and other geographical indications that the EU pushed for. That is particularly the case for foodstuffs; it applies less to wines and spirits, such as Scotch whisky, but it is really important for agricultural foodstuffs.

I do not think that that will be too much of an issue in the bilateral negotiations, as the EU will ask the UK to continue to do what it has done until now, and the UK will have its own geographical indications protected in the EU. The problem will be the extent to which the UK can persuade third countries. The EU has had difficulties in pushing its own agenda completely in that area.

I am afraid that we have to end the discussion there, as our next witness is due in one minute. I thank our panel of witnesses for coming to give evidence to us. We will have a brief suspension to change the panels.

10:14 Meeting suspended.  

10:18 On resuming—