TWN Info Service on WTO and Trade Issues (Jul16/08)
14 July 2016
Third World Network

Europe: The "witches brew" of Brexit
Published in SUNS #8276 dated 5 July 2016

Geneva, 4 Jul (Chakravarthi Raghavan*) -- The outcome of the non-binding referendum on Brexit in the United Kingdom (UK) on 23 June, with a clear majority for the UK to exit the European Union, is creating a veritable "witches brew" - with the cauldron still on a fire that is being stoked and everyone adding their own "herbs" to the brew, and none the wiser whether it will be a potion to cure or kill.

There are various forces at play - of politics and the political economy of the UK, of Europe, of democracy spreading in varying hues, across much of the world, and spawning fragilities, national and international, in the wider world.

Analysing the forces at play, even in broad brush strokes, would need the genius of British Marxist historian Eric John Ernest Hobsbawm (June 1917-October 2012).

The Brexit outcome has evoked some violent reactions from Brussels, and an element of panic is also evident in other capitalist centres and in particular the US and its financial centres.

There is panic that the political economy of laissez faire economics and "globalisation" is collapsing; that the "market fundamentalism" that Margaret Thatcher unleashed in the UK in 1979, and picked up and pushed by Ronald Reagan, as US President from 1981, and enforced on the rest of the world, in particular the developing world, by the IMF and World Bank, the US "free trade economists", theologians rather than theorists with facts backing their theories, and step by step by the GATT and then the WTO, and the EU and its Executive Commission inside Europe, and through its web of FTAs with the African, Caribbean and Pacific economies, and others including FTAs under negotiation.

See for example: (http://www.nytimes.com/2016/06/29/business/economy/the-anger-wave-that-may-just-wipe-out-laissez-faire-economics.html?smid=tw-share&_r=0)

However, this neo-liberal economics, pushed by these economic "gurus", soon proved to be global neo-mercantilism, and trickle-up economics, creating and accentuating vast inequalities within nations and amongst nations, enriching the top minuscular one percent globally, with the vast masses and middle classes too finding living standards falling, and the underclass impoverished and marginalised. All of this is on the one hand being driven by financial globalisation, with finance no longer merely "oiling the wheels of industrial capitalism", but replacing it. It was and is an upside down pyramid structure, inherently unstable.

The UK electorate's reaction is against this elitist neo-liberalism, "globalisation" and trickle-up economics and this resulted in the "enough is enough" vote for "leave" in the referendum. And this has sparked the panicky reactions in the centres of financial capital or the elites running and benefiting from this "globalisation" - in Brussels, government leaders within the EU or Wall Street and the like. No one should be under the illusion that they will all just roll over.

Unlike Marxian dialectics of accentuated class conflicts, alienation and predictions of revolutionary upsurges of the working classes, the alienation is also throwing up fascist tendencies ala Marine Le Pen in France, though there appears lessening support for a French exit.

In opening the Scottish Parliament, with powers devolved by the UK 17 years ago, Queen Elizabeth (who has seen 12 Prime Ministers in the UK during her reign so far), spoke some words of wisdom: "We all live in an increasingly complex and demanding world, where events and developments can and do take place at remarkable speed and retaining the ability to stay calm and collected can at times be hard ... one hallmark of leadership in such a fast moving world is allowing sufficient room for quiet thinking and contemplation, which can enable deeper, cooler consideration of how challenges and opportunities can be best addressed."

Such leadership capable of "quiet thinking and contemplation" is perhaps a missing element.

Brexit has raised questions whether the three-century-old United Kingdom can or will survive in its current shape (UK of England, Scotland, Northern Ireland and Wales), will it continue in the EU (despite the referendum as elite financial media and columnists are still preaching) or in fact will exit by invoking Art. 50 of the European Union Treaty. And if separation does take place, the future relationships of the UK and EU; of an Europe and EU, with Germany as the dominant, almost hegemonic power - a hegemony that it failed to achieve in the last century in two wars but is now evident, whether sought or not, an Europe partially knit together in a web of integrated and evolving trade and other economic links, and by preferential accords with several nations in the world outside, an effort almost to replicate colonial-era economy.

In this context, also coming to the fore are issues of democratic governance in the EU or what civil society often complains, of the EU's "democratic deficit"; and similar deficits in the world beyond the EU, including the centre countries spear-heading the democracy drive, and at the United Nations and the international organisations linked in one form or another with the UN, and the so-called rules-based World Trade Organisation.

Within the EU, member states with duly elected parliaments and governments accountable to their parliaments have ceded to the Union by treaty some powers, and created institutions of governance: a Council of Europe (of heads of government or states of members); an executive in the shape of an European Commission, with a President and Commissioners from each Member, and under them a sprawling bureaucracy, to initiate and after approval put in place, EU-wide policies and regulations in some areas, and in others where national parliaments have to act; an European Parliament with Members elected by direct vote, and powers to approve or veto initiatives or proposals of the Commission before the Council for adoption.

The Council, meeting at Summit level periodically or at special meetings, adopts decisions; Council decisions need unanimity on some matters, and qualified majorities on others. Under the Council, are meetings on specified subjects of ministers with competence of members, and a permanent committee, the "123 committee" as it is called, of ambassadors/representatives of member governments at the seat at Brussels, or in centres like Geneva (where the EU Commission negotiates on behalf of Members at the WTO), or before international organizations in New York, Geneva, Vienna or elsewhere, with the member-nation holding the six-monthly rotating Presidency of the Union as the spokesperson of the EU.

At the Council of Ministers, the Presidents and Prime Ministers negotiate and do some hard bargaining on individual issues, often well into the night, and take decisions. Back home, where some particular interests or the public, get upset or dissatisfied, the member governments do not own responsibility (since those heading their governments had collectively taken the decision), but take shelter behind the country having to abide by decisions of an external authority, the EU.

All this is so complex that it is confusing even for experts dealing with the EU. But the functioning of various EU organs and institutions, purportedly on a democratic basis, are so non-transparent and opaque, that it is little understood by the EU public, or even in many parts of the media or their Parliaments. It adds to the feelings amongst the public, reflected in the Brexit vote, of non-accountability and rule by some external colonial-type authority, depriving a nation of its sovereign rights of democratic decision-making and governance.

In sum, it is a mess, needing careful handling and explaining at every level, and "cool heads and calm thinking" that Queen Elizabeth called for, but in so short a supply everywhere.

These complexities get added on at decision-making levels at international organizations too, including at the World Trade Organization (WTO), whose administrative head, the Director-General, and the secretariat, have even less powers than their counterparts at the UN and other International Organizations; for example, they cannot initiate or make any proposals on their own, but can only carry out tasks they are asked to do by the WTO legislative bodies.

Nevertheless, the WTO secretariat and its various wings, act on their own, promoting from behind initiatives and interests of the dominant members, and pronounce themselves. So much so that in a treaty organization like the WTO, with such detailed rules and instruments to carry out assigned tasks, including by such bodies like the Appellate Body (AB), with functions, remit and jurisdictions laid out in the treaty, no functionary bodies or officials discharging functions laid out in the treaty can claim inherent powers, and right or ability to do what they have not been expressly forbidden to do (as the AB claimed in one ruling, when it accepted a brief from an NGO, when even WTO members that are "not parties or third parties" to the dispute, cannot file a brief!)

This claim of ability to do what is not prohibited is a proposition unacceptable in any system of law or public international law codified in the Vienna Convention on Law of Treaties (VCLT).

In the Brexit context, before the actual vote by UK citizens in the UK, something exclusively within domestic jurisdiction (with the connivance of Cameron's Tory government) was made into one with any non-British person giving advise.

Undoubtedly, given the wider effects of a UK-EU rupture on other nations and the global economy, various foreign governments (including President Obama) went to the UK to publicly voice their advice, while some (like President Xi of China) did so from their capitals.

Several international organizations, including the IMF, joined the debate to warn UK voters of serious adverse consequences to them; and so did the WTO DG in some ill-advised remarks, interpreting provisions of the WTO and its agreements, in London on 7 June. These remarks related to the UK's complex web of trade relations - at the WTO, with the EU, and the EU's various preferential trade relationships in EU FTAs with non-EU countries (see SUNS #8271 dated 28 June 2016, "Brexit overshadows BIS outlook, world central bankers meet.")

Even normally, the public of any nation would not like outsiders to intervene and inject themselves into a sensitive and politically charged domestic issue. It is more so in the case of the insular UK - where the purported lack of control of the UK citizens over their destiny, and the alleged external elements running the country was a major issue in the referendum.

After the vote, some wisdom has dawned on some external actors and institutions, e. g. the IMF head Christine Lagarde intervened after the vote, merely to ask the UK and EU political leaders to discuss and reach arrangements without delay to end uncertainties - she did not venture any view on the nature of detailed accords that should ensue.

Within the UK, the political process is in shambles. Within the EU (minus UK), the German Chancellor in public is playing a statesman-like role, and speaking in terms of keeping the EU together, and not showing undue haste or encouraging extreme hostility to the UK. Others, in particular EU Commission officials, are talking tough - and loosely - of a messy divorce, and threats about UK and its trade relations with the EU being in limbo and at the end of a long queue of nations seeking trade accords with the EU and/or FTAs etc.

Many on the EU side, though, are forgetting that the UK is still a major economy - even if it be correct that after the vote, its position has slipped, pushing the UK to fifth from fourth place. And if relations of the UK with the EU will be in limbo, so will it be, reciprocally, for EU members with the UK; and some of the EU's FTA partners, who might have agreed to an FTA on assumptions of the UK as part of the single market, may have second thoughts.

For example, there have been for some time now off-and-on negotiations for an FTA between the EU and India (stuck apparently on issues of investment, TRIPS). More recently, there has been talk of accelerating the talks and concluding the FTA.

After the Brexit vote, Indian officials in Delhi have been quoted as saying that they might have to revise their market access offers, initially based on assumptions of meeting UK requests in terms of its EU membership, but that if the UK exits the EU, they no longer would need to provide the same access to the EU minus the UK.

There have been negative fall-outs too; Switzerland (unlike Norway) has been having a series of bilateral arrangements with the EU in specific areas of the single market. These talks have stalled for the last two years over the issue of free movement of EU nationals to Switzerland and for work - the major sticking point now in any post-Brexit EU-UK trade arrangements.

Two years ago, the Swiss voted, in a binding referendum, adopted by a thin margin, 50.3% in favour, of a constitutional amendment for restricting foreigners moving to Switzerland and working. The Confederation has to give effect to the referendum by enacting laws within a February 2017 deadline, and have been negotiating with Brussels (and getting desperate).

They have now been told that there could be no access to the EU single market, if there is no free movement of EU citizens, if the Confederation goes ahead with plans to restrict such movement.

And Switzerland is far more dependent on the EU than the other way round. The Swiss export 56% of their goods to the EU. While some extreme right-wing parties are talking of going it alone, other Swiss parties are asking the Bern government to re-run the referendum to annul the previous one.

In the Swiss system, such binding referenda on specific issues can be at the instance of the Confederation government or by popular initiative. An impasse on the immigration issue threatens hundreds of other EU-Swiss bilateral agreements, as well as the imposition of tariffs. Further talks were due a week ago, but were postponed by the EU Commission claiming they were too distracted by Brexit.

The president of the EU Parliament, Martin Schulz, has said the talks will not get easier, because "free movement of people now plays a bigger role, in light of the imminent Brexit negotiations".

The Swiss President, Johann Schneider-Ammann, has been quoted in Swiss media as saying that his efforts to press the EU for talks to reach accords has met with the response of the EU commission president, Jean-Claude Juncker: "If there is Brexit there would be no more time to deal with Switzerland."

The EU has previously shown its negotiating muscle by freezing research grants for Swiss universities worth hundreds of millions of euros and suspending the involvement of the Swiss in the Erasmus student exchange programme. The EU acted after the Swiss refused to sign a free labour market access deal signed by the EU in Croatia. Swiss authorities, students and research scholars are worried about future access, and scientific research contracts of Swiss institutions with the EU.

As for the UK and the WTO, contrary to the huge uncertainties, or of impression to that effect, that like new applicants for accession to the WTO, a whole lot of complex arrangements, including tariff schedules have to be re-negotiated, the UK talks at the WTO are less complex than that of the UK with the EU and vice versa.

With some goodwill, and flexibility that the WTO and GATT have shown in the past, it is more easily solvable, and in mutual interest.

If and when the UK becomes separate from the EU, after it invokes Art. 50 of the EU treaty and sets in motion talks between the UK and the EU (minus UK), the Art. 50 prescribes negotiations on separation arrangements and at conclusion for an agreement. This is to define and set out detailed provisions of EU-UK accords on various issues and questions, including a possible future trade relationship.

With or without any agreement, at the end of the two years from date of the UK notification under Art. 50, the UK will continue as a founding Member of the WTO.

For, the UK was a founding contracting party of the GATT 1947 and, after it joined the European Communities (EC), as part of the EC common market. The UK as such signed the Marrakesh Treaty for a WTO in 1994, and as of that point with its tariff schedules in GATT 1947 (as UK, and then as EC, with a common external MFN tariff schedule). Those schedules were withdrawn, and substituted by the common MFN external tariff schedule of the EC, as of 1 August 1994, by notification of the European Communities to the Director-General of GATT 1947
(L/4067 of 4 August 1994).

As a result on entry into force of the WTO on 1 January 1995, by virtue of Art XI: 1 of the WTO Treaty, the UK became a founding WTO member, and the UK's (EC's MFN external common) tariff schedules of GATT 1947 became the UK's GATT 1994 schedule.

At the moment, UK political leaders, and EU leaders, the EU Commission President and Commissioners, and the President of the EU Parliament, are all engaged or indulging in some public discussions and negotiating postures, creating some uncertainty among their own enterprises, investors and public, but also to others outside.

These uncertainties may or may not have an effect on actual negotiations when it is invoked and begins, and until it is concluded and terms are clear, to the rest of the world too. Crucial as they are, it is just one more in an uncertain and fragile world of international political and other instruments and organizations. And whatever pressure and influence the external world wants to exert, it needs to be done more discreetly, from behind-the-scenes, than the ham-handed interference in the UK pre-referendum vote campaign.

Even if, at the end of the two-year period after the UK invokes Art. 50, there is no agreement, it does not equate to or mean a vacuum. UK-EU relations in such a situation, including on effects of termination of a treaty arrangement between the two, will be decided according to applicable principles of international law (as would have been the situation for any member of the EU, including the UK, exercising its international rights and giving notice and withdrawing from the EU Treaty).

Before Art. 50 of the EU treaty, the post-treaty relationships were governed by ordinary principles of international law. The same will be true now, after a EU-UK separation without any agreement or arrangement at end of the two-year period.

Any negative effects on the UK - as laid out for example by the EU Trade Commissioner in an interview to the BBC - will have a mirror image effect on EU members vis-a-vis the UK. It may be viewed calmly by the Commissioner, but not Member-States.

The WTO DG's 7 June remarks in London seemed to suggest that the EU's MFN external tariff schedules, which was the UK's schedules as an EU member, could not be mechanically transposed post-separation as UK schedule.

In such a reading of WTO law, it would lead to the absurd legal situation of the UK as a WTO member enjoying all the rights set out earlier (rights flowing out of treaty provisions, and the schedules of commitments of other Members, including the EU), but the UK will have no obligations at the WTO. This appears to be a misreading.

Another and more credible reading, set out below, is supported by former Indian Ambassador to GATT, Ambassador B. K. Zutshi, who negotiated the final stages of the Uruguay Round and signed the Marrakesh Treaty at Marrakesh in 1994, as plenipotentiary of India, as well as US academic, Brett Williams of the American University, Washington DC. In posts at the IELP blog on Brexit, and comments by Williams and the writer, there is confirmation of the writer's view.

See: http://worldtradelaw.typepad.com/ielpblog/2016/06/whats-the-answer-to-the-variable-geometry-test-brittip.html, and earlier report in SUNS #8271.

In this view, post-separation, in terms of WTO relations, the UK will continue to remain a WTO member. As a WTO member, the UK will have all the rights and obligations spelt out in the provisions of the texts of the WTO and its annexed agreements, including under the DSU.

The UK will also have rights arising out of the commitments of other WTO members, including the EU members, as set out in their various schedules of commitments, under the GATT 1994, and other WTO agreements in the area of trade in goods, the commitments of Members, including the EU, set out in the GATS schedules. These commitments of other Members are automatically obligations of theirs to the UK, post-Brexit separation from the EU.

As mentioned earlier, the UK was a founding member of GATT 1947 (with a tariff schedule, and when it became part of the EC customs union, the common external tariff schedule of the EC was thus the UK schedule too), and became a founding member of the WTO and its GATT 1994, with a GATT tariff schedule, that of the common MFN external tariff schedule of the EC Customs Union notified by the EC to GATT secretariat on 4 August 1994 as effective from 1 August 1994.

The other common schedules filed by the EC, in terms of various WTO agreements in Annex 1A, also became UK schedules as a member of the Customs Union under GATT 1994 and Annex IA agreements, and of the EC GATS schedules, and the Financial Services Annex (FSA) schedule. If and when the UK separates from the EU, without a separation agreement, all these schedules will continue to be UK schedules of commitments, including for GATT 1994, vis-a-vis all WTO members, including the EU, and the GATS and its FSA schedules.

If the UK wants to reduce any tariff, at any HS tariff line, it may do so, like any other member as an applied MFN tariff and, after going through the needed procedural notification, even amend its tariff schedule downwards and bind it.

However, if the UK wants to vary its tariff schedule, for example post-separation, and increase it for any HS line, it would need to invoke relevant GATT Art. XXVIII, and undertake renegotiation, wherever it wants to raise the level of its bound MFN tariffs. Though such a procedure is not envisaged in respect of for example minimum imports in terms of the Agreement on Agriculture (AoA) or its commitments under AoA schedules, it might still have recourse by invoking Art. XXVIII of GATT 1994.

For its GATS schedule too, the UK will have to follow a similar procedure, in terms of the equivalent GATS Article XXI, and in some respects it is simpler.

The legality, and the balance of rights and obligations, if the issue arises in any future disputes, will be one to be judged, not by the WTO secretariat, but by the Dispute Settlement Understanding (DSU) processes - a dispute panel and, on points of law, by the Appellate Body.

The Brexit vote and its aftermath bristle with complications, but the leadership and decision-makers on either side, and international organizations and their leadership, would do well to exercise patience and goodwill, and help in resolution and not add to complications and confusion.

(* Chakravarthi Raghavan, Editor-Emeritus of the SUNS, contributed this comment.) +