Most Favoured Nation: The Windsor Framework
Tariff-rate quotas, difficult due diligence, GOLD, illegal repatriation and football
Welcome to the 85th edition of Most Favoured Nation. This week’s edition is free for all to read. If you want top-quality trade content in your inbox every week, please consider becoming a paid subscriber.
The vibes are good. The EU and UK have finally agreed on concrete measures to improve the Northern Ireland Protocol: the so-called ‘Windsor Framework’ (WF).
My general view on the WF is that while it is understandably being oversold, it does offer some tangible benefits over and above the existing arrangements. For example - and assuming all of the preconditions are met [basically in many instances the EU has committed to introduce a load of flexibility so long as the UK does stuff like building border control posts and introduce labelling] – the green lane offers an opportunity for trusted traders to reduce the amount of customs beuaracracy they are subject to, parcels (B to C) and sausages can permanently move from Great Britain to Northern Ireland, and the number of checks carried out on products of animal origin entering Northern Ireland from Great Britain will be reduced.
Obviously, if you wanted to tear the whole thing up and start a massive trade war with the EU, you’re probably disappointed. But if you’re a fan of not having a trade war, incremental progress and compromise [me], you’re probably happy.
This new period of EU-UK friendship (fingers crossed it lasts longer than a few weeks) also unlocks some new possibilities. Horizon 2020 is back on the table, as is the memorandum of understanding on financial services.
More urgently, the WF also means the EU and UK can now talk about the TCA’s electric vehicle rules of origin, and the fact that if the deadline for making these rules more difficult at the end of this year isn’t extended, then electric vehicles will stop trading tariff-free. Which is bad.
Anyway, I’ll probably come back to various WF issues over the coming weeks, but I thought it would be useful to discuss an issue that has not received so much attention in the press: tariff-rate quotas.
Before getting into this, a recap:
Goods entering Northern Ireland from the rest of the world are subject to the EU tariff rate unless they are deemed ‘not at risk’ of onward movement into the EU, where the UK rate may apply. Imports are considered ‘at risk’ if the applied UK tariff is lower than the applied EU tariff, and the difference is equal to or greater than three percentage points. So, for example, if a Northern Irish firm imported LED lamps, where the UK tariff is 0%, and the EU tariff is 3.7%, the goods would be considered ‘at risk’, and the higher EU tariff would apply.
If the imported goods are not automatically deemed ‘at risk’ due to the tariff differential, importers authorised under the UK Trader Scheme can apply the UK tariff. But only subject to specific requirements for further processing and on the basis that the imports are not subject to EU trade remedies. And as with imports from Great Britain, the UK can choose to waive any tariffs due for traders so long as it does not breach state aid limits.
At the time of writing, there is a further complication concerning TRQs. The EU’s 2020 tariff rate quota regulation prevents EU TRQs from applying in Northern Ireland. This creates problems in instances where the UK applies a TRQ, either unilaterally or in the context of a free trade agreement. In such instances, the applied UK tariff, under the TRQ might be the same or similar to the EU’s, if the EU TRQ was accounted for. But due to EU TRQs not applying in Northern Ireland, the out‐of‐quota tariff must be accounted for instead, which will invariably have a tariff differential vis‐à‐vis the UK tariff well above three percentage points. For example, New Zealand sheep meat is subject to an EU and UK WTO TRQ, allowing for 114,184 tonnes and 114,205 tonnes respectively of New Zealand sheep meat to enter tariff‐free (usually underfilled for both). Despite tariff‐free trade technically being on offer in the EU and UK, Northern Ireland importers cannot benefit.
So yeah, the WF doesn’t solve this issue. Yet. It does however set in motion a process to permanently resolve a similar but slightly different issue relating to safeguard duties (and related tariff-rate quotas), applied to steel moved from Great Britain to Northern Ireland (previously discussed in MFN here).
But the reason this is interesting to me is that I don’t expect the DUP to make a huge fuss about tariff-rate quotas. Why? Well, because the status quo — which sees Norther Irish farmers able to export under the preferential terms of UK free trade agreements but not subject to direct competition from, say, Australian and New Zealand farmers – is pretty good from a political economy point of view. [Ed: this newsletter likes trade and knows that imports are in fact good but let’s not kid ourselves that this view is shared by all.]
My expectation is that this is an issue that could be resolved — I even have ideas on how to do it! – but I’m less sure there will be lots of pressure to actually do so.
Due diligence is difficult
Due dilligence is all the rage. This year, the EU will be progressing its new rules on mandotary supply chain due diligence, as well as new forced labour restrictions. These efforts were, in part, a subject of discussion at a panel I chaired at the inaugural UK Trade Trade Policy Forum, hosted by the Centre for Inclsuive Trade Policy and Chatham House.
This discussion reminded me of a time I attempted to do some due dilligence. While working in the charity sector, the organisation I worked for was considering providing fianncial support for a legal case being brought by one our partner organisation in Uganda. Our partner was working with communities who claimed that their land had been unfairly taken from them and converted into palm oil plantations.
Without going into too much detail, the Ugandan land-rights system is (or at least was, it could have changed since!) quite complicated, in that it was two-tier: when selling, a primary owner has an obligation to offer first refusal to any people who have been physically living on the land.
Anyhow, actually finding out what exactly had happened was really difficult. When visiting one island (lots of the palm oil is grown on islands in Lake Victoria), we were escorted by police from the moment we landed, and introduced to lots of community members who told us everything was absolutely fine. On the way out, I asked one of the people if everything really was fine and they said “No, but we can’t say anything because the people who you are with are the ones who stole our land and then sold it”.
So yeah, due dilligence is hard.
Trade often has conditions attached. For example, the EU’s enhanced developing country preference scheme (GSP+), the EU conditions unilateral preferetial market access (tariff removal) on these countries signing up to a number of international environmental, human rights and governance conventions.
In a slightly sinister turn, there has been quite a lot of discussion in the EU recently about conditioning some of this market access on developing countries agreeng to accept the return and readdmision of migrants booted out of the EU.
Well this is apparently illegal. Opinion here:
One of the slightly mysterious post-Brexit condundrums has been the question of why UK goods exports bounced back so well, given you would expect a decent sized drag due to the significant trade barriers being put up with the EU.
The Resolution Foundation’s Emily Fry seems to have the answer: gold [and other precious metals].
The Australian Strategic Policy Institute has published a useful new paper documenting the uplift in Chinese economic coercion.
Cool chart here:
Chinese use of economic coercion against foreign states, 2010-2022
Argentina may have won the world cup, but it is still on the Premier League naughty step.
Nowhere to hide
The EU Commission’s efforts to penalise Chinese subsisides granted to companies outside of China has been given the green-light by the EU General Court.
As ever, do let me know if you have any questions or comments.