Tricks of the trade

A glossary of useful trade terms

Confuse your customs unions with your comprehensive trade agreements? Wouldn’t recognise an MRA if you were sitting on one? Not that bothered by NTBs?

There are a lot of trade terms swirling around the media at the moment, as attention turns to the future framework of the UK’s relationship with the European Union. The concepts are new to most of us, and their acronyms are headache-inducing.

But these terms are vital to understanding the complex choices facing Britain over the next fifteen months and beyond, and in the meantime to navigate the murky claims made by hard Brexiters.

[The definitions below are arranged alphabetically and all terms defined within this article are highlighted in italics the first time they appear in each definition.]

Anti-dumping duties: If a company exports a product at a price lower than it normally charges on its own home market (especially if it is at a price lower than it costs to produce), it is said to be “dumping” the product. The WTO agreement allows governments to act against dumping where there is genuine injury to the competing domestic industry. If an investigation proves this is the case, then the affected country can apply duties or restrict imports to counteract the undervaluing of the product.

The EU took such measures against China when it dumped steel on the European market, though the UK Conservative government resisted this. There are therefore concerns that the UK will not adopt the same rules as the EU to fight against unfair competition, and so weaken standards for workers and consumers in the UK and abroad. The other way around, the US currently restricts the import of UK steel into its markets, and if the UK leaves the single market it is not inconceivable that the EU will consider doing the same.

Anti-subsidy duties: Subsidies consist of financial assistance from a government to a company or group of companies. The WTO rules governing them are complex, but if the subsidies are deemed to harm the domestic market of another country, the disadvantaged country can ban certain subsidised imports and place countervailing duties on others. The UK is subject to WTO state aid rules whether or not it remains in the European single market.

CETA: Mostly known by its acronym, the Comprehensive Economic and Trade Agreement is a free trade agreement between the EU and Canada. It removes around 99% of tariffs on goods but provides little liberalisation of services. The deal took seven years to negotiate and is fifteen times the length of Labour’s 2017 general election manifesto.

Countervailing duties (CVD): Import duties imposed by a country under WTO rules to counteract the negative effects of subsidies by another country.

Customs Union: A customs union is an association of countries who have agreed to eliminate customs duties among themselves and apply a common external tariff to goods imported from outside. Customs unions help to facilitate trade and supply chains between participating members, reducing the need for complex rules of origin procedures. The EU currently only has three customs unions with third countries: Turkey, Andorra and San Marino. Monaco is part of the EU customs union.

The UK cannot be outside a customs union with the EU without creating a hard border between Ireland and Northern Ireland, because both sides would have to enforce rules of origin checks to ensure third countries’ goods were not entering through the backdoor. For example, if there were no border checks, post-Brexit an Australian cheesemaker, could export their cheese into Belfast under the terms of the UK’s new tariff arrangements, and avoid paying the EU’s common external tariff by crossing into the Republic of Ireland with no worry of being checked by customs officials.

European Economic Area (EEA): The European Economic Area enables Iceland, Liechtenstein and Norway to be virtual members of the EU Internal Market. They must apply the same basic rules but have limited influence when the rules are changed or new ones adopted, as they are not directly represented in the EU institutions. The EEA arrangement also allows for cooperation in research (such as Horizon 2020) and on the environment (such as the Emissions Trading System). But it does not include membership of the EU customs union. EEA members must therefore strike up separate trade agreements with countries outside the EU.

European Free Trade Association (EFTA): The European Free Trade Association is an intergovernmental organisation of Iceland, Liechtenstein, Norway (the EEA members) and Switzerland (which has its own series of bilateral deals with the EU).

Free Trade Agreement (FTA): These remove or reduce customs tariffs and other barriers to bilateral trade in goods. The EU currently has major FTAs signed with South Korea, Canada, and most recently, Japan. They are the fruit of complex negotiations, usually taking many years. They also provide little access for services, which is an important factor considering that services make up around 80% of the UK’s economic activity.

Geographical Indications (GIs): A geographical indication is used to identify a product as coming from a particular country, region or locality where its quality, reputation or other characteristic is linked to its geographical origin. Think Cornish pasties, Wensleydale cheese or Scotch whisky. Acceptance and protection of your GIs are negotiated as part of trade agreements. Without the EU’s clout, the UK might struggle to secure the same recognition of its GI products if it tries to go it alone around the negotiating table with third countries. Watch out for those cheese pirates.

Global Value Chains (GVCs): Allow cross-border inputs to domestic production, as well as cross-border transfer of knowledge within a single company. To give an example; of the 30,000 parts in a typical car assembled in the UK, more than half come from outside the UK. The coolant might come from the Czech Republic, the front lighting might come from France, but the final product is assembled in the UK. Global value chains like this are increasingly important in modern economies and work best in areas of frictionless trade like customs unions. A recent paper estimates that GVCs will account for 25% of the total impact of Brexit.

Grandfathering: In the context of Brexit, grandfathering means rolling over, for the UK, more than 700 agreements that the EU has with third countries across the world. It will not be as straightforward as Brexiters once hoped. In the field of trade (some 67 free trade agreements), grandfathering is hindered by WTO rules of origin, tariff rate quotas and by the likelihood that other countries who might see the UK’s lesser clout outside the EU as an opportunity to get themselves a better deal. The prospect of having to renegotiate so many deals simultaneously and in a hurry does not augur well.

Most Favoured Nation (MFN): Most Favoured Nation status is the bread and butter of the international trade system. MFN status means that countries cannot normally discriminate between their trading partners. If one country grants another an advantage (such as a lower tariff for one of their products), the same advantage has to be applied to all other WTO members. Aside from trade with developing countries, there are only two main exceptions to this rule: if the participating countries are in a FTA or a customs union.

This means that if the UK leaves without a deal, but decides against creating new tariffs on goods coming from the Republic of Ireland to respect the Good Friday Agreement, it would have to do the same for all goods coming from the 164 WTO members. Not an appetising prospect for British farmers, whose costs are inevitably higher than those in poorer and developing countries.

Mutual Recognition Agreements (MRA): These establish a basis of trust between trading nations. MRAs facilitate better access to new markets by setting out the conditions under which one country will accept the testing/certification/conformity assessment carried out in another country, so that they can exchange goods without going through the whole assessment process twice.

For instance, a British company in the automotive industry can sell car parts to Australia because the EU and Australia have agreed to recognise the assessment procedures in place to make sure the components in question are safe. But these MRAs will have to be renegotiated bilaterally if the UK leaves the EU.

Non-tariff barriers (NTBs): Increasingly the most important aspect of modern trade relationships, non-tariff barriers refer to any obstacle to international trade that does not consist simply of custom tariffs. This broadly covers: regulation; rules of origin; quotas. Despite some Brexiters insisting on the contrary, it is not possible to have zero non-tariff barriers with the EU if we leave the single market. The single market is about agreeing common standards and rules precisely to avoid non-tariff barriers (and to secure a level playing field). As soon as regulations diverge, checks on the safety, hygiene, consumer guarantees and so on begin to be necessary.

Rules of origin (RoOs): Rules requiring that an exporter prove that the product they are selling is from, or has had a specified amount of value added in, the originating country.

For example, if a cheesemaker in Yorkshire wants to sell their cheese to a shop in the Netherlands in 2019, they’ll have to produce a certificate that shows enough value of its cheese was created in the UK. So, if they’re selling Wensleydale and cranberry, but had imported those cranberries from North America, they will have to prove that the cranberries don’t make up more than a certain percentage value of the final product.

Rules of origin certificates cost £48 each, a costly burden on small businesses. They also threaten to roll back the grandfathering clock.

Sanitary and phytosanitary measures (SPS): An important non-tariff barrier to bear in mind for any future UK-US trade deal, these measures consist of plant and animal health regulations. When Brexiters talks of watering down SPS measures, your chlorinated chicken alarm bells should be ringing. And if we have lower (or even divergent) standards, it will not just about what we may then find on the UK market, it’s that our products will no longer be accepted on the EU market — a particularly big problem for agriculture and Northern Ireland.

Services: The phrase “services” can sound rather abstract, but its definition is fairly straightforward. The services industry is based on transactions in which no physical goods are exchanged between seller and buyer.

Services include: communications, engineering, software development, healthcare, banking, accountancy, transport, education. They account for around 80% of economic activity in the UK, which had a £14 billion trade surplus with the EU in services last year.

As a participant in the European single market, the UK benefits from free movement of services, including the much-vaunted banking passport. However, if the UK opts to leave the single market and forge a new FTA with the EU, it is highly unlikely to gain anywhere near this level of access.

Single Market: The European Single Market is the largest internal market in the world. It is a regulatory union that ensures common standards on consumer protection, workers’ rights, the environment and fair competition, meaning that products do not need to be checked at borders and can circulate without hindrance. This is particularly important for supply chains that criss-cross borders, such as in the manufacturing of automobiles and aircraft, or in agricultural products and processed foods.

The UK cannot leave the European Single Market without creating a hard border between Northern Ireland and the Republic of Ireland. Even with no tariffs, which is by no means a guarantee, there would need to be regulatory and safety checks (such as SPS) carried out on goods crossing the border to check they conform to EU standards.

But the UK government still claims it will be possible to leave the single market without introducing a hard border. They just haven’t told us how yet.

Tariff: A tariff is a tax imposed on goods imported into a country. There are no tariff barriers between EU member states.

Tariff Rate Quotas (TRQs): Tariff Rate Quotas allow a certain volume of particular products to be imported into the EU at a reduced tariff rate or even with zero-tariffs. As part of its preparation for leaving the European Union, the UK is hoping to agree with the rest of the EU and third-party trading partners how they should apportion existing quotas between them. It has not gone well so far.

However, third countries are entitled to say that the terms of their quota arrangements have changed if it is divvied up between the UK and the remaining EU, because there is less certainty over being able to sell the full amount when it is compartmentalised in that way. Other countries might want to reopen negotiations with both the EU and the UK in such circumstances, as we saw last year with lamb quotas from New Zealand.

Third Country: Any country that is not an EU member state. The UK will become a third country on March 29th 2019 and lose its representation in the European Parliament, the European Commission and the European Council unless it decides to extend Article 50 or set a later withdrawal date (and that the EU27 accept this new arrangement), or change its mind about Brexit.

World Trade Organization (WTO): The WTO is the mother ship of trade. It is the international organisation in charge of negotiating, administering and implementing the multilateral trade agreements that provide the foundations of the current global trade system. The WTO’s objective is freer trade, but it still maintains and allows some trade barriers. Its future has become increasingly uncertain after the election of Donald Trump in the US.

Not had enough acronyms yet? Here’s a bonus combo for getting this far.

EU FTA MFNs: Catchy they are not, but the Most Favoured Nation clauses in recent Free Trade Agreements between the EU and other third countries have the potential to be a major sticking point. These clauses, found in chapters on trade in services and investment, state that the trading partners cannot treat third countries more favourably than they treat one another. So if the EU were to liberalise trade in services in a new FTA with the UK, they would have to give the same beneficial treatment to Canada, South Korea, Singapore and so on without the EU getting anything in return. The EU has fixed reservations to these clauses – they do not apply in cases of the EEA model, the Swiss model or full sectoral alignment – but none of these reservations is compatible with the current ambitions set out by the UK government.

3 Comments

  1. Thanks for making my” discussions” with some hard brexeteers at my local a bit easier,I like to have my facts about the damage leaving the EU will do to the UK and others. Keep up the good work Richard,thanks v.much. JC.

  2. regarding the border and single market as opposed to a customs union, presumably it is up to the EU (and members) whether or not it insists on a border for regulatory checks as opposed to tariffs (which are WTO), they could leave it to trading standards for example. isn’t the key whether or not we are in a customs union?

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