AGRICULTURE TRADE IMPLICATIONS OF THE EXIT OF MEMBERS FROM CUSTOMS UNION

Aggregate Measure of Support and Tariff Rate Quotas under the Agreement on Agriculture

Clinic: Centre for Trade and Investment Law (CTIL), Gujarat National Law University, Fall 2021

Summary of a Confidential Project

As Brexit has shown us, lot of legal issues arise when a country leaves a Customs Union (CU). Among others, these include the process of redefining the country’s relationship with the World Trade Organization (WTO). Under the WTO arrangement, a CU submits a combined Schedule of Concessions for its Members. Therefore, after leaving a CU, the country will need to separate its schedule from that of the CU. Inter alia, it raises issues related to the Agreement on Agriculture (AoA). The common schedule submitted under the General Agreement on Tariffs and Trade, 1994 (GATT 1994) will have to be apportioned between the exiting country and the CU. This report seeks to analyse the agricultural trade implications of a country leaving its CU. It focuses on two aspects – (1) Bound Total Aggregate Measure of Support (AMS) and (2) TRQs, along with the issue of currency conversion.

Concerning the rights and obligations which arises when a country leaves a CU, the modification of its Schedule is guided by the exiting country’s trade policy. In this context, references can be drawn from the United Kingdom’s exit from the European Union.

First, with respect to the apportionment of the Bound Total AMS commitments, a country has three options viz. (i) having an empty schedule, (ii) applying de minimis level of AMS, and (iii) dividing the Bound total AMS of the Customs Union on pro-rata basis. The report considered a case where the country decides to reapportion the AMS from CU’s schedule. In that situation, the allocation key and appropriate amount against which the AMS is calculated would have to be determined. The allocation key can be based on: (1) the countries’ contribution to base schedules, (2) their receipts from common agricultural policy, and (3) their respective values of output in agriculture. The CU and the exiting member can determine the appropriate amount depending on the current permitted level of domestic support in the CU or identifying the country’s original share. Third-country challenges, in this case, are unlikely if the AMS commitment was calculated in accordance with Annex 3 of the AoA. The reapportionment of the Schedule would have to be consistent with the Procedures for Modification and Rectification of Schedules, 1980 which provides that a Schedule can only be certified if no Member State of the WTO objects to the draft Schedule. This puts the reapportioning country at the risk of its method of apportionment being objected to, and thus its Schedule remains uncertified. However, according to state practice, the challenges faced by a country for the reapportionment of its Schedule are not legally significant enough to affect the implementation of its reapportioned Schedule.

In this regard, a major issue concerns the appropriate currency to be used for the apportionment of an exiting country's AMS. The Schedule under the GATT 1994 can be specified using any currency. Therefore, the exiting country has a choice to either apportion its Schedule in its national currency or the currency used by the CU. State practice suggests that an exiting country would prefer apportioning its AMS in its national currency. In such a case, the use of the national currency by the exiting country would necessitate specifying a conversion rate between the national currency and the other currency. According to state practice, there are two methods of choosing a base period for calculating the conversion rate – first, choosing the base period as 1986-1988, which is the base period chosen by most Members to calculate the relative value of their national currencies; and second, choosing a recent period before the exit of the country from the CU. While both choices have drawbacks, the report suggests that the second alternative should still be preferred since it avoids a situation where the apportionment of the exiting member’s AMS is based on an outdated conversion rate.

Second, another major issue is related to the apportionment of the TRQ. Once the quota is filled, a higher tariff is then imposed on the additional imports. The report considers why there is a requirement of the apportionment of TRQs, and the two resulting possibilities. First, in the unlikely event of the exiting state wanting to liberalize their agricultural imports, allowing imports without limits at the tariff rate currently limited to the quota, no apportionment would be needed. Second, negotiations with interested Members under Article XXVIII of GATT 1994 to modify or withdraw its certified schedule. Both the CU and the exiting country may want to accept as few TRQs as possible. The CU would not want to retain the same TRQs after losing the exiting state’s market share. The withdrawing state would not want to get a high share of TRQs since high TRQs could overwhelm its domestic agricultural market.

In this regard, it is crucial to assess the methods of administration of TRQs post apportionment and consequent advantages and disadvantages. For instance, the EU and UK’s method of apportionment of tariff schedules post-Brexit was done as per their market shares. In a circumstance where an exiting country employs this method of apportionment, the same would be done based on the market share of the exiting country and the CU for specific products in a manner where the total TRQs would be divided as per the ratio of market share of every product.