26
Examination of witnesses
Sam Lowe, Dr Mona Paulsen and Professor Holger Hestermeyer.
The Chair: Welcome to this witness session of the International Agreements Committee, where we are looking at trade in a turbulent world and the trade mechanisms that we can use to create economic growth in the UK. We are aware on this committee, as I am sure everyone is in this House, of how the world has changed over the last year or so, particularly with the issues over tariffs, issues surrounding the World Trade Organization and other concomitant issues. Also, there is the evolution of the UK economy from one heavily dependent on goods to one now heavily dependent upon services.
The questions we would like to ask our three witnesses revolve around what the UK Government can do to enhance our trade abilities around the world, given the changes we have seen in the international system and in how our economy has evolved, and clearly given the immediate challenges presented to us by the friction and volatility in terms of world trade that have been created by various other countries.
I have the privilege of introducing our three witnesses today. Sam Lowe is a partner from Flint Global who is joining us in person; Dr Mona Paulsen is assistant professor of law at the LSE Law School and is very kindly joining us in person as well; and online we have Professor Holger Hestermeyer, professor of international and EU law at the Diplomatic Academy of Vienna. Thank you all for joining us. This is a really important inquiry, and I personally could not be more grateful. I think I speak for the whole committee when I say that we are grateful to you for giving us this time today. We are really looking to get some answers to these questions.
Given the fact that I am here and talking, I may as well ask the first question. We have given you a list of questions that we are going to ask; that is really just to help you to think about the issues, but we would be delighted if you strayed off those and gave us answers that you thought were more useful. My colleagues will ask questions and supplementaries that expand from that. Given the mechanics of how three witnesses operate in a scenario such as this, we might not ask each one of you to comment on every question, but say if you would like to specifically comment. Professor Hestermeyer, as you are online, just put your hand up so I can see you if there is something you would particularly like to chime in on—otherwise, we could end up going over time.
Q14 My first question is a slightly broad one. Of the trade agreements that the UK has signed with third countries since we left the EU, which do you view as particularly effective or well utilised, and by which sectors? Since Brexit, what trade agreements that we have done have been most effective in terms of promoting our trade around the world? That could be a free trade agreement, or it could be something very sector-specific.
Dr Mona Paulsen: First of all, thank you for having me. I am grateful to be here. That question is a difficult one in terms of evaluating effectiveness. By what measure do we consider effectiveness, considering that after 2016 the world saw such extreme uncertainty and volatility? Ultimately, my answer may disappoint you, in that the greatest one that they have signed is actually in the continuation of the UK’s efforts at the multilateral trading level and participation at the World Trade Organization, and the United Kingdom’s efforts to continue to shape a position for itself as an equal partner with other WTO members, and to continue to contribute on all various facets at that level.
Of course, there have been particular bilateral negotiations. Perhaps the simplest, most straightforward answer would be also in the joining of the Trans-Pacific Partnership, which was a huge political signal for many other countries and significant trading partners. Also, establishing relations and being able to think about being first movers in various areas that came with that agreement was very significant.
Those are probably the two in terms of effectiveness. I would defer to Sam in understanding how businesses may have determined what we understand to be effective. All negotiations at the diplomatic level are significant, but of course you also have the significance of various, even smaller constellations of that, such as signing mutual recognition agreements or signing individual agreements with various states of the United States. They can be significant political signals in terms of what your goals are; if they are interim towards developing a plan for future agreements, they can be significant. Even an ongoing negotiation with a country that has not yet led to a formal agreement can nevertheless still be important.
The Chair: Professor Hestermeyer, could I just ask a little follow-on from that? We are seeing more and more of these smaller agreements, as Dr Paulsen has just commented on, such as these MoUs and sector-specific agreements. There is one currently very topical one, which is the UK-US pharmaceutical deal. We are told in this committee that they are not binding agreements, as a result of which we do not have the opportunity to scrutinise them formally under the parliamentary process.
First, could you comment on the validity and use of those specific agreements? If they are not important enough for us to scrutinise, are they relevant, or is that just a technical term? Should they now fall into the remit of a committee like this?
Professor Holger Hestermeyer: I will start by explaining how these non-binding agreements work in theory. In theory, we distinguish between binding treaties and non-binding agreements that do not create legal obligations. How are they distinguished? You will probably have seen that the Foreign Office in the UK has a long list of terms through which they distinguish agreements that create obligations and agreements that do not. This goes back to Anthony Aust. In the end it is not that which is decisive.
Rather, there are three tests for how to determine whether an agreement is binding. The first one is the intention of the parties; the second one is what is objectively in the text. Probably the leading way to analyse this is through the intention of the parties to create bindingness as reflected in the text. It is important that the title is not decisive. You read the content and you say, “Is this supposed to be binding?” If it is a non-binding MoU, it does not create legal obligations; if it is breached, there is no state responsibility. There is no dispute settlement mechanism to resolve any disputes, because there are no binding obligations. If it is binding, if there is a breach, that can have legal consequences and there is state responsibility.
The UK-US agreements are peculiar. I do not want to single out the UK here. The EU-US agreement is similar, and I would also advise you to look at the Japan-US MoU on investment. You read through these agreements and you think, “This sounds awfully binding”, except for one thing. There is usually a clause in there that says, “This is a non-binding agreement”.
We have very limited experience with how to deal with such things. It is not the first time this has happened. We have had similar occasions twice in the UK. You will remember that the UK-Rwanda asylum partnership arrangement was originally an MoU that contained a lot of what lawyers would think are legal safeguards, but it also explicitly said, “This is non-binding”. The other one was in the Brexit process. Some of the continuity agreements could not be brought into force quick enough, and some states would not agree to any alternative mechanism to bring them into force faster, so they were brought into force via an MoU. That happened, for example, with the UK-Kenya agreement.
These agreements are legally problematic because they risk creating confusion between what is binding and what is not. When you look particularly at the US agreements, Trump has basically ordered severe consequences if a country does not abide by them.[1] As you rightly pointed out, because they count as non-binding agreements, there is no treaty scrutiny. In countries that have a vote on agreements, there is no vote on these agreements. That can lead to the agreement being put together in a rather rough-and-tumble manner, which can hurt individual traders. The UK-US partnership, for example, contained bioethanol clauses that threatened that industry. The pharmaceutical partnership contains clauses on pricing in NICE that have a significant effect on the public health sector in the UK. I am not saying that it should never be signed, but it should be scrutinised much more thoroughly than it is.
Dr Mona Paulsen: May I complement Professor Hestermeyer’s comments as well? I am happy to answer specific questions about the United States’ various deals. I have looked at all of them, and we can speak about various important questions.
One immediate thought that came to mind is that not only is there a question of review by Congress but it is also unclear what the statutory basis for some of these United States arrangements are. We are perhaps going to find this out in future, but there was a significant shift where, for many countries, they negotiated it on the premise of the threat of tariffs, which were under a statute in the United States. Now the United States Supreme Court has said that the president may not impose tariffs. Therefore, we now need to understand what the statutory basis is.
The Chair: The UK-US pharma deal is not in response to the tariff issue; it is to do with our own purchasing and investment plan from the Treasury in terms of how we buy our drugs.
Dr Mona Paulsen: In terms of the economic prosperity deal, which was the opening agreement to negotiate, the United Kingdom was the first out of the gate among the United States’ trading partners to enter into this. It is basically an agreement of what they intend to do. There are various aspects of that agreement that give us signalling as to how they were going to proceed. The opening section on tariffs established what the two parties were going to co-operate on, so there is that aspect of it.
As for giving you an opening understanding of the relevance of these non-binding agreements, yes, they can obviously escape democratic accountability, which is a significant issue. A part of this is understanding the distinction between how non-binding agreements have always been used. I do a lot of legal history, so we can talk about the relevance of the Atlantic Charter or the General Agreement on Tariffs and Trade, which was a provisional application of tariffs. All the way through, we have various constellations of these, with memoranda of understanding and side letters. They are a frequent and important part of the law-making process.
The distinction with the United States’ approach right now, to complement Holger’s assessment, is that it is not interested in building towards something. It uses the word “interim” frequently. The United States-India agreement used it—an interim agreement that it intends to progress. In the United Kingdom’s statement too, it is an intention to finalise an agreement, yet it is unclear if it ever wants to shift out of the non-binding emphasis that Holger just raised, or whether it is content to continue to keep it in this perpetual grey space.
It is significant because, of course, this is a question of whether they are willing to bind what they commit to do. We know from this Administration that, at least with respect to tariffs, they view it as an important source of leverage, so there is a question of whether they will bind themselves. This is why we have this question of whether there is going to be oversight or transparency with respect to this, if everything is an important part of that bargaining with the central Governments and executive powers, and moving all the way down—and then what that means in terms of regulatory understanding, and also of course with businesses.
The trade-off in thinking about this is that it also allows for Governments to think about future co-operation in a very dynamic way. Oftentimes, you see relevant soft law instruments being used by Governments because they have an intention of continuing a conversation and continuing co-ordination. That is pretty typical in terms of seeing informal arrangements being used. Again, it is that building block analogy. They are building towards something; they are not seeking to supplant the multilateral trading system.
The Chair: For example, would the UK-US deal on pharmaceuticals be scrutinised by Congress?
Dr Mona Paulsen: Right now, it is simply a deal. It is not actually a formal agreement.
The Chair: It does not automatically get fed into the progress of congressional scrutiny of treaties.
Dr Mona Paulsen: Right now, as I understand it, these are all still being treated as executive agreements. I do not have it in front of me in terms of what the statutory basis for it could be. It could be a solution in terms of Section 232 tariffs with respect to pharmaceuticals, which I believe it is. That is a statutory basis that allows the president to impose tariffs on the basis of security. Within that provision, there is of course the ability to make an agreement to resolve this question of security raised by that investigation. Then Section 232 of the 1962 Act would be the basis; it would not then be considered a formal agreement that would receive congressional oversight unless they saw a law for this.
I showed Sam an interesting discussion where most of the agreements have been executive agreements, except with respect to the US-Taiwan agreement, which was in legislation; it went through Congress. They installed in the Act specific requirements with respect to transparency, whereby Congress had to review any of the steps with respect to the United States-Taiwan relationship. I do not have it in front of me now; I was showing it to Sam. In signing that Act, President Biden said at the time that, to the extent that any of those requirements with respect to transparency to Congress may hinder his ability or his executive power to continue his foreign relations with Taiwan, he would view those provisions on transparency to Congress as non-binding.
The Chair: Thank you very much. We have had a good amount of coverage, so I shall go on to the next question. This is the running theme of the debate, but we will have the next question just to keep us rolling.
Q15 Baroness Verma: I apologise for being late. I apologise to our guests as well for missing out on the beginnings of your question. I think some of it has been covered, but I will just repeat it for the benefit of the speakers. The Government’s trade strategy suggests a move towards sectoral agreements and non-binding arrangements alongside comprehensive FTAs. What are the key differences between those relative strengths and weaknesses of an FTA between sectoral agreements and non-binding instruments?
Sam Lowe: I will draw on the first question as well, because it helps to answer this one. You asked what the most valuable agreements post Brexit were. Other than the trade agreement with the European Union, which on trade terms was the most valuable, in the first instance it was the UK’s replication of existing trade agreements, particularly the one with Japan. This is a very simplistic way of going about it, but you just rank economies, and Japan is near the top. Of the free trade agreements we needed to do, that was the most important.
The reason why the UK’s replication was so important was that there were some specific changes that had to be made to ensure that they were still useful for UK exporters, particularly around the rules of origin provisions to allow for the continued input of EU-originating components into the supply chains. If those tweaks were not made, those trade agreements would have stopped being useful for the automotive industry and for others. The fact that that was done was quite important. We have since had CPTPP and India. We do not know how useful those agreements will be yet. For CPTPP, we already had bilaterals with all of the component parts, minus Malaysia and Brunei, so it is more of a question of who joins in future and how transformative that will be. For India, it has not come online.
Since then, the agreement that probably has been most important has been a non-binding one with the United States, insofar as, on the material commercial impact, we were threatened with a 27.5% tariff on automotive vehicles. As a result of this non-binding agreement or non-agreement—you can call it what you want—100,000 vehicles exported from the UK to the US every year receive a 10% tariff instead. Alongside that, you also have the 25% tariff applied to steel and aluminium, rather than the 50% that is applied to everyone else. I would note that the 10%, which was previously the reciprocal tariff but has since been replaced by the Section 122 vehicle, is not actually in the EPD. It is actually not committed to; it has been honoured, though, in the context of how the UK has been treated elsewhere.
Since then, we have had the introduction of the pharmaceutical agreement, which is a precursor to tariffs. Those duties are not in place yet, but the UK receives 0% tariffs for three years in the first instance. I should note that the pharmaceutical Section 232 and the agreements that are linked to it are incredibly convoluted, insofar as you have product-specific exemptions. You have company-specific exemptions. You have two of those, which you have to look at alongside each other. You then have country-specific duty rates. The UK’s is actually 10%, which is reduced to zero for a period of time via these agreements.
If the question is, “How valuable is a non-agreement?”, in this instance it is quite valuable. There is a question about the sustainability and how binding it is, but I would note that even traditional free trade agreements are not necessarily that binding for the US Administration right now. Mona and I were discussing this beforehand. You might want to go into more detail on this. USMCA, which is the US’s agreement with Canada and Mexico, has not been honoured. It has been accounted for in the Trump trade deals, but you have seen tariffs rise on both Canada and Mexico following its introduction, which then gets to the question of whether there should be scrutiny of these deals from a legislative perspective. The democratic answer is yes, but if you are the Government, the answer is no, because you want to move quickly.
The Chair: An agreement that you break, as in the case of the Mexico-Canada trade deal, is not the same as an agreement that is ideally not to be broken. It is a bit bizarre to say that just because it has been broken by the US, in the sense of tariff volatility.
Sam Lowe: There is the legal answer to your question, which Holger and Mona can address, but from a commercial perspective, all that matters is whether the benefits derived from the agreement exist or not, and also how reliant you can be on that agreement to persist into the future. My point with the US at the moment is that, no matter the type of agreement, you can derive commercial benefits right now, and you cannot be sure that they will persist into the future.
The Chair: Professor Hestermeyer, would you like to answer the follow-up question about the different types of instruments, including sectoral agreements, non-binding instruments and FTAs? What do you think the future is for the UK?
Professor Holger Hestermeyer: There are many things to take into account. One is the difficulty of negotiating instruments. A fully fledged FTA takes a long time to negotiate, but it also has a transparency and WTO-compliant aspect to it that industry can usually rely on.
I have to second Sam’s point: the current US Administration are peculiar in that I am not entirely sure whether it makes a difference for them whether an agreement is a legally binding one or a non-legally binding one in terms of whether they will respect it. The traditional legal answer would be that a legally binding agreement is more secure and a non-legally binding one is less secure.
Sectoral agreements can be negotiated more quickly but, where sectoral agreements provide preferential conditions, they run into problems with WTO compliance. Under Article XXIV of the GATT, if we are speaking about a goods agreement, they have to liberalise substantially all trade to be WTO-compliant. If we are speaking about GATS, that is Article V of the GATS. There, the test is a sectoral one, and it has to cover almost all sectors. I would have to look up the wording; I will do that for the review of the document. [2] That is, for GATS in particular, a test that is quantitative and qualitative, and a footnote to the agreement makes that clear. Where sectoral agreements are standalone agreements that do not enter into a larger framework, meaning where the UK does not have a fully fledged services agreement with a country, a sectoral agreement alone would be in breach of WTO obligations.
A non-binding agreement, as such, cannot breach WTO obligations as the agreement as such has no obligations, but if it is implemented on a preferential basis and, again, it does not fulfil the requirements of GATS and GATT, that is also an issue.
WTO compliance is another consideration here. The quickness of the agreement can be an advantage, and you can make it WTO compliant, particularly in the goods sector, if you simply do not provide for preferential tariff treatment but instead you multilateralise the benefit. This is what happened in pharmaceuticals before the whole current debate, where some countries said, “We will liberalise pharmaceuticals trade”, in a so-called zero-for-zero deal, then just offered the conditions to everyone. It was similar in IT products, where that was also multilateralised. If it is preferential, we run into issues with the WTO. Preserving multilateralism for the time being should still be a consideration. The question is: can we separate the relationship with the US where no one is caring anymore about most favoured nation obligations? Can we separate that and have a separate trade relationship with the world where we still care about multilateral trade obligations?
Q16 Lord Hannay of Chiswick: Could you just enlighten me about the US-UK arrangements deal, or whatever one chooses to call it? How do you interpret President Trump’s most recent remarks that he could just take them away? Are we in a world in which we are dealing with someone who says, “Mine is mine, and yours is mine too”? If that is so, what recourse would a British Government have simply to take away some bits of the agreement they have given—let us say on ethanol, pharmaceuticals, steel or whatever it is?
Sam Lowe: The answer is yes. He could just take it away, and he will continue to use that threat. In the context of the pharmaceutical deal, that leverage is built into the arrangement, where there are conditions requiring the ongoing compliance of the UK, and also conditions on the companies that the US has made individual deals with to continue performing certain functions and selling at certain prices.
In a way, it is under constant review, and the duties could be removed at any time, which is why I say that there are questions about the persistence. We should also say that the UK could fall out with the US on anything and the deal could come under threat. We have seen this happen in the context of Spain with its initial reluctance to support the US’s actions with respect to Iran, where Trump threatened Spain-specific tariffs. Yes, he could pull them away at any point, and that obviously creates a lot of questions. In terms of the UK’s recourse, there are lots of questions at the moment that we might get on to around whether the UK has the right legal tools in terms of anti-coercion instruments and the like.
My actual assessment is that it is entirely a political question. Does the UK want to retaliate against the US? Does it believe it can do so in a way that would inflict more economic damage on the US than the UK would receive in return, and give it sufficient leverage to get to a satisfactory outcome? My view is that the political decision taken there is no. The UK does not want to react, so if the US were to reimpose the duties, I think you are right that the UK might reimpose duties on beef and bioethanol, but I suspect it would not go beyond that, unless the US action was particularly egregious. The only line we have seen so far has been the threat to invade Greenland, at which point the UK did suggest it might take action, but that seems to be the threshold.
Baroness Verma: You have answered what I was going to ask, but it would make people very nervous, therefore, to take anything at face value when you are dealing with the current climate. We need to be looking at what would be in our toolkit to be able to protect us. What are your thoughts on that?
Dr Mona Paulsen: I want to come back to this question about it simply being a political answer, and also to reflect on some of these questions. To your point about where we are at, more broadly, even beyond this question of how we understand whether an agreement can be reviewed by this committee or not, what we are dealing with is a shift heavily influenced by one economy—but, because of its vastness, it is very significant. We are looking at interdependence as weaknesses and a potential weapon. This significantly changes the way that we have established trade relationships for a very long time. Some of this is directly in response to the relationship between the United States and China but, more broadly, we are seeing this even with former allies. For example, PM Carney is speaking about again understanding ties with the United States as a weakness, even though Canadian and United States automotive supply chains, for example, are heavily interdependent already, and untangling them is very difficult.
The other question is about whether we are focusing on building trade relationships in a purely reactionary way, where we are dealing with highly advanced questions of technology that will govern all our major economies, where we are acting too quickly before taking the time to think carefully about where we want our trade relationships to be supportive in the long term. The problem with a reactionary policy that is heavily dependent on whether a certain leader likes us is that we are not starting from a question of foresight and beginning to think about evidence-based regulation or deriving, for example, the importance of soft law arrangements through expert evidence that can be calibrated and evolve.
In terms of understanding how these deals work, they nevertheless can have significant implications for how we negotiate with third countries. In the UK economic deal or arrangement that we have, we do not yet fully know where this agreement is going to go. The UK negotiators have not completed it yet. We see a pattern with other Governments, such as Cambodia, Malaysia, Thailand and even with the EU. They are all different. This is not a model as we would have seen earlier, whereby the United States would come with a model agreement and say, “Do you have your own model? Fine, but in the particular areas of this agreement, we want to make sure this is our language”. That was always the United States’ approach in negotiating trade agreements in the past. Now, you have very different constellations where, as academics, we have to draw elaborate charts to say what agreement has this and what agreement has that. They are not consistent, but there is one thread that is: a shared understanding of US economic security, and a pursuit of their understanding of their interests with respect to national security. At present, all aspects of the United States economy are a matter of national security. That is the one common thread.
Within this, we do not fully understand what that will tie to, but in terms of just focusing on how to deal with coercion, this is largely an asymmetrical negotiation, so there is no battling to this. This is now where I want to come back and complement what Sam has said, because you need to know where your pain threshold lies and how far you would go. In early theory, we would say that you are only going to retaliate up to a certain point, but you know internally because your economists are telling you where your pain threshold is. We have seen from this Administration that they have no problem going to 100% and even beyond.
Then the question is, “What is our threshold that would make it logical for us to do this?” Without that, your recourse is to maintain diplomacy, not just with the United States but with everyone else. That is where we look at our other partners and what they are doing. We see various other aspects. The EU is formalising trade agreements with Mercosur and India, and it is about to announce Australia. You have the Canadian Prime Minister talking about a coalition of the willing; he is doing a lot of soft law diplomacy with his existing TPP partners. We are seeing various different routes, but we are not seeing the same sort of process at the multilateral level. We are seeing new processes with respect to trade negotiations for new areas.
Baroness Lawlor: The United Kingdom has traditionally been a global trading economy. As you know, services account for 80% of our economy. Professor Hestermeyer, which FTAs in your view provide the best framework for lowering tariffs and removing non-tariff barriers on trade in services, for promoting competitive free markets and for transparent, independent and effective resolution of disputes? How best can the UK champion new trade agreements for services, in view especially of the absence of any secure framework for services in the WTO?
Professor Holger Hestermeyer: It is a very difficult question, largely because services and goods in terms of how we treat them are quite different. The main tariff barrier for goods for a long time has been tariffs. That leads to us to having excellent statistics about goods travelling, and we know pretty well what they do. By the way, DBT has published statistics on tariff preference utilisation rates where you can see, for example, that the UK-Turkey agreement does really well in terms of preference utilisation, and the agreement with Canada in the space outside of Europe.
For services, tariffs are, by and large, unheard of. The main barrier is regulatory. That creates a problem, because if we want to simplify services trade, we have to find ways to reduce the tensions created by regulation. We are then quickly in the space where we give up our regulatory space to tolerate the regulations of others, and historically countries are not good at that. I am aware that Alan Beattie, in one of your sessions, said that only the EU and the trans-Tasman agreement did really well on services.
There are some specific agreements that do quite well because of concurrent interests. The UK-Switzerland agreement on financial services stands out in terms of what it does. Otherwise, the way to think about this is to ask what will make the life of traders easier. For example, mutual recognition of qualifications is essential for lawyers. If I want to work in South Korea, I have to find a way to offer legal services there, and that needs to be permitted. If I recall correctly, the UK-South Korea agreement does quite well in that regard, given that South Korea is a rather closed market for legal services from abroad.
For creative artists, travelling is utterly existential to be able to provide their services. The question then arises of whether we want to simplify travel arrangements. That would usually entail also allowing them to travel to the UK. You can see how there is a problem there in what we want to negotiate. There are a number of models. We could co-ordinate and speak about regulation; that is largely innocent. We sit together and alert our partner, before the regulation is made, that this might create a trade problem for them that they have not been aware of. It stretches all the way to dynamic alignment. I know that, when we speak about dynamic alignment, our first thought is the EU. I know there is also an inquiry by the European Union Committee on dynamic alignment—but note, for example, that we automatically dynamically align with some IMO regulations in the area of shipping, because they are highly technical, and we think that it is not worth parliamentary time, for example.
My suggestion is to be clear-eyed, open and transparent about the trade-offs and to say, “We think we have to reduce barriers. We know this comes with cost regarding our autonomy of regulation. We will safeguard our autonomy in some ways”. For example, we could provide parliamentary scrutiny to any new instruments included in the treaty. With these safeguards, we can live with these rules as they simplify trade. We do assessments of how much trade is simplified, and then we can take a clear decision on whether this is worth it in terms of autonomy of regulation.
Baroness Lawlor: What you say indicates that, with financial services and mutual recognition of standards, we trade on the basis of equivalent outcomes. Does the Swiss agreement go so far?
Professor Holger Hestermeyer: The Swiss agreement goes quite far in that regard,[3] but it is exceptional in that the situation of the two countries is quite equivalent. They are both also heavily influenced by EU regulation, which makes it easier to accept the different regulations. I am not sure similar outcomes can be reached with other partners. Mutual recognition is notoriously difficult to negotiate because the standard approach is that one country thinks its regulation is superior; the other country thinks its regulation is superior, and one wants to exclude all risks. Usually, you go instrument by instrument and you say, “These two very legally concise instruments do the same thing, and we recognise those two”. Even that is difficult to do.
Q17 Baroness Anelay of St Johns: So far, we have had a very clear explanation of the complexity of the sector-specific and non-binding agreements from the point of view of the legal problems and the issues around negotiating them, but the Government have been keen to move more towards that and away from FTAs. They say that there is value in that because of speed of negotiation and outcome.
Can I ask you to look at it from a different point of view—from the point of view of the people who actually matter, the businesses that are trying to engage in this? What would be your view of the value of moving towards non-binding sectoral approaches as against FTAs? Is it the political win for the Government that they are looking for, or is it really improving the economic outlook for business?
Sam Lowe: It links back to the previous question. For most services exporters, in both sectors, although regulated sectors are ostensibly where you could look into issues, the value of free trade agreements is near zero. If you look at the press releases for UK Government free trade agreements, you will find services firms on there. They are largely just companies trying to keep the UK Government happy, because materially there are very few benefits in there for them. There might be some benefits around intra-corporate transferees. There could be some benefits around some co-operation elements or the like, but materially their market access to those economies has not changed.
However, if you were even just to look at some unilateral instruments that the UK Government can deploy in the context of financial services, the temporary permissions regime post Brexit allowed EU-based financial services entities to continue to sell cross-border into the UK on what we would refer to as a mode 1 basis, so from the EU into the UK. That is a material benefit. That is not in a treaty. That is a unilateral action.
If you think about just the equivalence regime of the EU more broadly, clearing houses in the UK are still able to sell to customers based in the EU on the basis of an equivalence ruling. That is not in the TCA. If you think about data adequacy, whereby the UK allows for certain data to be stored and processed in third-country jurisdictions without standard contractual clauses, again, that is not in a treaty but it has a material benefit. In terms of your question around whether these new or non-FTA type instruments are useful, they can be; it depends on what they do.
However, in a way, we are being forced into this conversation in the trade space because of the US. Both Mona and Holger have suggested that you can treat the US as anomalous and then continue on a similar basis with everyone else. It is not that you do not do a sectoral digital agreement with Singapore, or you start to think about the agreement on climate change, trade and sustainability, or you think about the digital economy partnership agreement. You might still think about those things, but they are not necessarily as urgent and material as what you are doing with the US, which is damage limitation.
Dr Mona Paulsen: I very much agree and align with what Sam just said. Ultimately, my main message would be that, even though we are building up—we may build into sectoral arrangements and we may think about the value of unilateral action—that all requires us to have a sound foundation. The way that I would explain this to my students is to simply say that, if you were renovating your house and there were cracks in the foundation, or in my case pipes that had not been properly insulated, renovating a kitchen on top of those non-insulated pipes is useless because they will erode and the kitchen will flood, as mine did.
Ultimately, you need to ensure that you have general international law that sets that foundation and allows us to have a multilateral system. Of course, there are various aspects of that that are required. For example, we still rely on the multilateral system for trade remedies, which is one of the ways that we can deal more directly, through domestic investigation, with some of the issues that we may have with various partners. Producers will come to us and say, “We are concerned about subsidies or dumping”. You need that multilateral system.
To that extent, these deals, whatever the constellation of them may be, both in or outside of the World Trade Organization or the various other important international standard-setting institutions that we have, require that commitment of seeing multilateralism as an organising principle. It all works if we all buy into that, but you need that system to have its oversight. It needs to have a working, effective and impartial judiciary; it needs to have a legislature that will continue to think about future directions and policies in a long-term way. There is no executive body in that system. What do you do when the various players want to erode that?
This is a big part of how we think about UK trade strategy because, if that system goes away, what we are looking at are blocs, where it is fine that we begin negotiating bilateral trade agreements and various other informal soft laws, but when they conflict with one another, that will be a problem. At this point, we genuinely do not know what will happen because they are all happening so fast. We do not know what will happen if there is a commitment from some bloc to adhere to Chinese standards versus one that will say, “We will accept US approaches”. If the regulators are not able to communicate with one another, that will significantly do damage to our efforts to create global businesses and have global travel and connection. That is a significant problem.
Lord Anderson of Swansea: We are in danger of circling a little around the same areas, but later the committee will be examining a trilateral memorandum of understanding between Indonesia, the Netherlands and the UK. There is a very blunt paragraph 12, which says that the effect of the memorandum of understanding serves only as a record of the participants’ intention, does not constitute or create and is not intended to create any rights or obligations, and will not be deemed to constitute or create any legally binding or enforceable obligations. We understand that our Government are using these non-binding instruments more and more. Doing so happens to suit Governments. It makes parliamentary scrutiny more difficult. Where, in your judgment, should the dividing line be between these NBIs and the FTAs and other formal agreements?
Professor Holger Hestermeyer: If I may, I would start with the reasons why we see them proliferating. We see them proliferating because of globalisation, first of all. There are so many inter-governmental contacts, and Governments like to come back with something in their hand. That is an innocent reason. These are often not very relevant or impactful agreements. Governments want to show success. We also see them concluded for other reasons. We see them concluded, for example, by entities that either are not legally allowed to sign treaties or have a hard time doing so. That is why all of the UK agreements with US states were MoUs. Some non-international organisations resort to MoUs because they do not have legal personality. Departments sign MoUs; they can be signed without the procedures for treaties because they do not create obligations.
This shows where the risk really lies. The risk lies in the reversal of that. The rule is they do not have any legal obligations, so we do not need any of the safeguards we have created for treaties. The risk is that Governments say, “Wonderful. We can do this very quickly, so we will do that, and we will put in this savings clause saying, ‘This is not intended to create any legal obligations’”.
There was an allusion by a rapporteur of the International Law Commission, in his first report on non-binding instruments, where he said that, in some extreme circumstances, we might have to ignore such language and just say, “What you have here is an international agreement. The fact that you say it does not create obligations is very peculiar, because in the very next paragraph it creates legal obligations, so as lawyers we have to ignore that statement”. I do not think this is where we will be going, but when we look at these MoUs, we should regard this as an exercise of asking, “Should this be a treaty? Are these provisions better understood as legal provisions?” In that case, they should be a treaty and not a MoU, and they should be scrutinised.
We see that now with MoUs affecting individual rights and the livelihood of traders. Yes, MoUs can be negotiated faster, but we also have to see that there is a reason why treaties take time. If you think of a trade agreement going through numerous tariff lines, one of the exercises the Government should do is speak to everyone affected and say, “We will lower the tariff from 5% to 3%. Can you live with that?”, rather than receiving a phone call at 2 am from the opposite side saying, “We now want zero tariffs on the following five products. Can you say yes?” You have to say yes that very minute or your partner threatens to simply destroy your economy. That is not a good way to negotiate a treaty. The fastness is sometimes necessary, but sometimes it is also a danger.
Lord Anderson of Swansea: Clearly, everyone would agree that, if a matter is routine, technical and administrative, it can properly be an NBI, accepting that it is convenient for Governments to do that. Obviously, of course, it depends on both partners to the agreement, as is the nature of the category. How would you, in fact, draw a proper line between the two?
Dr Mona Paulsen: There is no clear line. It is important to recognise that, at least from what we have seen, while one party may view it as strictly non-binding, what matters is how the other may perceive it. A recent example is with respect to the EU-US deal. It went through the Parliament and recommended changes. One, which is a very viable recommendation for you in thinking about this, is to put in a sunset clause where after a few years you are subject to re-review. Of course, this can happen in a trade agreement. It is in the United States-Canada-Mexico agreement; they are going to head to a review of that agreement again this summer. It is one of the recommendations that the European Parliament asked to have in the Turnberry agreement as well.
There is no clear line for determining when there should be an agreement, but we can put safeguards in to be able to assure that, should that deal evolve in a way that there is concern about its long-term impact, it can be re-reviewed. I agree completely with Holger’s sentiments in terms of understanding how to analyse these questions when there is a statement of, “It is non-binding”, and nevertheless there are potentially legal consequences. It is about considering these interim steps where you can begin to try to have safeguards. That is an important one.
The other one is also to try to maintain, as much as you can, efforts for mutual recognition rather than simply accepting that of the other party. Of course, this is about whether the two parties are coming together at the same level or whether there is an asymmetry. Note by the witness: I referred to the European Parliament’s proposal, among others, to include a “sunset clause” in the regulation implementing the EU tariff commitments under the 2025 EU-US framework agreement.[i]
Sam Lowe: On the EU one, it is not being introduced through the European Parliament as an international treaty; it is being introduced as a change to domestic regulation, which is an entirely different approach. If you think about this conceptually, it is not even being viewed that way.
Dr Mona Paulsen: Yes. Forgive me—I did not want to imply that it was, so thank you for correcting that.
Sam Lowe: In terms of scrutiny in the UK, there is still the open question of how much scrutiny the free trade agreements receive. They get looked at, but in terms of the authority of this House and Parliament to make changes and intervene, I would say that is quite minor. The gap between NBIs and potentially FTAs is not even that great in this instance, I would suggest.
The Chair: It is a very interesting point. It is not actually a very good point—it is a bad point well made, as it were. Just because we do not have any scrutiny over the FTAs in very significant senses does not mean to say that that is a good situation to be in, but it is a very interesting way of pointing that out. What we really want is full scrutiny of FTAs and then an element of scrutiny over the other types of agreement. It is very clear that we should have that.
Q18 Lord Hannay of Chiswick: I would like to ask all three of you to express views on the extent to which this use of non-binding trade arrangements containing tariff commitments challenges core WTO principles such as the most favoured nation treatment, and also the “substantially all trade coverage for free trade agreements”, or what used to be called Article XXIV.6 of the GATT. The British Government say that all the free trade area agreements agreed to are totally consistent with that. Do you agree?
Furthermore, to what extent does the British decision to join the interim disputes procedure along with 50 or so other countries reimport legal obligations into agreements that do not have legal obligations themselves? Presumably, if both parties are parties to the interim dispute procedure, they can go into the interim dispute procedure process if they think that they have been tricked or deprived of benefits that were in the understanding that they originally negotiated? To what extent is it a back door for importing legal obligations?
The Chair: I can see that Professor Hestermeyer is eagerly waiting to answer that question. Maybe you could cover the first or second part of that, or both.
Professor Holger Hestermeyer: On the first part, the way to think about this is in an order of analysis. Every WTO member has to treat all WTO members alike under the most favoured nation obligation. There is an exception to that if you sign a free trade agreement. If the free trade agreement then fulfils the requirements in Article XXIV of the GATT for goods and Article V of the GATS for services, the breach of the MFN principle that lies in treating your partner preferentially is justified.
If your non-binding sectoral agreement does not provide for preferential treatment, there is no breach of Article I of the GATT or of the most favoured nation principle in the GATS, and you do not need a justification. That means that if, for example, you negotiate with the US and you say, “Okay, we will lower tariffs for you”, then you offer these lower tariffs to all WTO members, there is no breach of the MFN principle. If, however, as the US seems to want, you offer the US preferential conditions, you need to justify that, then your agreement needs to fulfil the requirements of GATT and GATS. That is the famous “substantially all trade” requirement, and that requirement is not fulfilled. Both the UK and the EU tried to justify that by saying that it is an interim agreement, but nobody believes the US will actually sign a fully-fledged trade agreement, because that is not the direction in which the US is travelling. I regard this as a rather serious danger for the MFN principle and a risk to the WTO that I hope can be limited to trade with the US.
I do not see a problem with the MPIA; in fact, I regard that as a net positive because the MPIA simply replaces the defunct appellate body that is necessary in the system to make dispute settlement ultimately binding between the partners. The two parties that have agreed to the MPIA agree that if a panel decision is not to one party’s liking, they can appeal that panel decision. The panel decision goes away; instead, you now have an arbitration process that is modelled on the appellate body. It does precisely the same thing that the appellate body did in the past. This is about enforcement of WTO rules and obligations. I do not see this as an entry point for legalising obligations that have not been there before.
Dr Mona Paulsen: To contribute to what Holger very lucidly explained, I would say that Governments, including the United Kingdom Government, are seeking to have more agile—that is their word—approaches to how we set conditions to our requirements with respect to the most favoured nation principle.
One of the great gains of MFN within the multilateral trading system and this liberalisation is that you may create free riding, but the counter to that is that you do not deal with concession erosion. The interesting thing that we have seen from the United States recently is an exercise of what it looks like when you do not use MFN. Every single partner had to go and negotiate separately. Of course, they all had varying agreements. You did not know whether what you committed to with one partner would be eroded with the next one.
The only thing I would add is that the United States has been very clear that its justification for violations of MFN—as soon as it raised their tariff rates, it was in violation of their binding commitments under Article II—was that it viewed these matters as largely under their own statutory authority, pertaining usually to a national emergency, which they equate to national security. Sam alluded to Section 122. That is now an even broader assessment of assertion of the international balance of payments problems. That is only a six-month process.
Several of these deals are not focused that much on the services trade. They are very concerned about what they choose to justify on the basis of security. Of course, with this, they argue that there is no transparency or obligation to explain or articulate to their other partners under the WTO what the security concern is, which then means the exception has become the rule.
Ultimately, this is a big part of the discussion about most favoured nation as a central organising principle. The United States could have gone to the other members. There is a process to renegotiate tariff rates. They could have done that. They could have done it for all of the various Governments. They could have gone broadly. They could have just negotiated, but the rules would have required them to negotiate with their principal suppliers, which would have meant China, because renegotiations largely take place on an MFN basis and they wanted to avoid that. How do you do it? You have to go outside of the system and bilaterally negotiate.
This is one of the key questions when we think about the responsibilities of MFN. You are also weakening with it the obligations with respect to reciprocity and transparency. This takes me back to my initial point. Normally, we would say that the best thing you could do is to liberalise yourself, because this gives a huge advantage to your producers. Instead, we are saying, “How can we insulate ourselves and protect ourselves? What are we willing to give you?” Even the notion of concession is, “What is the least I can give in order for you to give me the most?” This sort of bartering situation is quite different. It goes to the fundamental idea of what most favoured nation is.
Sam Lowe: On MFN, there is another version of this. This is not necessarily my view, but you can make the argument that MFN is breached all the time by everyone in loads of different areas. What we are seeing from the US is a really egregious example of this. Holger has mentioned the legal ways with FTAs and trade defence. You have national security exemptions. You have claiming things are interim agreements. You have had other ways that people have done it. They have created new HS codes specifically for products that only exist in one territory. The EU did this in respect of lobsters that you can only buy in North America. It liberalised it on an MFN basis, but it only applied to the US. You see it in services all the time. The UK has not received an equivalence ruling on financial services despite having all the necessary conditions to do so, but that ruling has been granted by the EU in respect of Switzerland in some instances. You can have different measures in other jurisdictions.
It is breached all the time and people just live with it. The US has acted very forcefully, deliberately and in a way that is all-encompassing. There are degrees within this.
Dr Mona Paulsen: I agree. MFN is highly agile already. There is a lot of flexibility to working with MFN. The question is whether you believe in the foundations itself. That is a slightly different question. Do you only want to operate outside it? It does not just matter for the UK-US relationship. It matters for the UK’s relationship as an open economy with all the other countries that are trying to navigate this as well. It is those relationships that significantly matter and are impacted as well.
Lord Hannay of Chiswick: You have not mentioned the revival by the US Administration of Article 301.
Dr Mona Paulsen: Yes, this is with respect to discrimination on US commerce.
Lord Hannay of Chiswick: Everyone had assumed that that was overridden by the dispute settlement procedure agreed in 1995. By killing off the dispute settlement procedure, they have revived a unilateral process for damaging their trade partners.
Dr Mona Paulsen: With respect to this, the United States has had longstanding concerns with respect to the way that the appellate body mechanism was operating. That was not just with respect to that particular issue but issues with respect to safeguarding investigations, anti-dumping investigations and the way that they tried to narrow down and focus on how China subsidises its exports. There were various aspects to it.
Would I say that it freed the United States to do this forceful breaking of MFN, as we heard from Sam? It did not need to get rid of the appellate body beforehand to do that. We have seen the United States take a long interest in having unilateral statutory tools. This was simply a part of that arsenal. That is how I would describe it. It was an important part of it, but, even now, if a Government did not like a report, the way the system works is that there is supposed to be a mutually beneficial solution. It is often a compromise between the two Governments. The system is not a ruling that says, “This is illegal. You must take it back”. It is often a calibration, where the Governments try to reharmonise their benefits.
The United States has simply said, “We will choose when we negotiate. We will choose when to have that discussion. It will not be on anyone else’s timeline. It will be one that serves us”. To the extent that they found that system to always be the case, if you just simply could not buy into that, you had options to retaliate temporarily. Outside of the system, technically, no Government are supposed to seek redress without going through the WTO system first, which is why the MPIA was so important. It is not the only way: Governments could agree not to appeal, or they could develop their own bilateral arbitration agreement. There were always ways. The way that the MPIA works is that it creates a holistic and more tangible system. The extent to which it is ultimately up to the Governments to say, “How can we rebalance this problem?”, to come back to Sam’s point, is often a political question.
The Chair: We have developed some very interesting themes here. We have two last questions. I am aware of our time constraints.
Q19 Baroness Blower: We have entertained some discussion about sectoral agreements supporting services trade, such as digital trade agreements or mutual recognition agreements, and how they usually require some regulatory co-operation. How should the UK weigh the commercial benefits of such agreements against concerns about regulatory autonomy, which is clearly often a significant matter, the public policy space and accountability to Parliament?
Sam Lowe: Starting on digital agreements, the interesting thing about them is that, from a UK perspective, most of these agreements do next to nothing in terms of actual day-one benefits for companies. They are largely commitments to continue applying rules in the same way as you are applying them already. For example, there will be a commitment not to force companies to onshore data processing unless there is a prudential concern in financial services, a national security concern or a public policy concern. They are commitments not to do things that you are not doing anyway.
In some of these agreements, there are provisions in relation to, for example, the forced transfer of source code to Governments, other sorts of access to data or forced localisation. It is possible that governmental preferences could change, in which case you may want to force companies to hand over source code as a condition of entering the UK or you may want to force them to store data locally on an ongoing basis, in which case you would then be in breach of your treaty obligations. There is then a question around whether you could argue your way around that. Given that the exemptions in most of these agreements are wide and vast, you could make the case that it is due to national security or public policy.
The issue that we have had is that, in the context of services and digital, from a commercial perspective, there has not been enough regulatory integration between the UK and other markets in order to derive new benefits and go beyond what exists now. I am not so worried about the regulatory space because I feel that we have not given up very much competence in most instances. There are some specific exemptions to this. If we were to pursue a more single market-style relationship with the EU on services, this question would have a slightly different flavour.
The Chair: You have developed a very important theme, Baroness Blower. Maybe Professor Hestermeyer would like to touch on this. We are coming to the end, so please be brief with your remarks.
Professor Holger Hestermeyer: I entirely agree with what Sam has said. The one thing I want to add is the importance of having a clear-eyed view of what is done. That includes building space for Parliament to discuss issues. If you take an agreement on alignment, for example, the way that it is currently envisaged would mean any provisions that would have to be put into force would be entered into an annexe to an agreement. That is also how the EU does it with Switzerland. It makes sense to scrutinise the amendments to the annexe before they enter into force because afterwards there is very little you could do.
I return to a theme very close to my heart. One way to navigate the situation, particularly if we are going in the direction that regulatory space will be diminished by treaties—for services, that is the only way that you can diminish barriers—is to improve scrutiny mechanisms and give Parliament more power to scrutinise treaties effectively and a parliamentary consent vote. I have been banging that drum for quite a while, so I apologise for banging it yet again.
The Chair: We are in agreement with that. Bang the drum with us. We should do some follow-up work on that. That would be very helpful. Lastly, Dr Paulsen, do you have any comments on this?
Dr Mona Paulsen: I agree with both. The only thing that I would add is that right now it is very important that, when we sign our trade agreements, if we are thinking about potential cases of discrimination, within the rules you would have built in a way to discuss whether that discrimination was owing to a legitimate regulatory purpose. This is what Holger was speaking to. You have a justification for what you do. Oftentimes in the agreements this is in the form of an exception, but you can also build it into the actual substantive requirements.
Here is a classic example where you can have these footnotes for greater certainty. Lawyers like to put in that there will be permission to regulate. It may not have a strictly binding impact, but it sends some sort of signal and it sets a requirement that later on you can have a discussion where you would be able to do it. If that is not clear, if it simply says, “Shall not discriminate using digital services taxes”, and there is nothing further with respect to that, it is unclear whether you could have discrimination for a legitimate regulatory purpose. It is very important to think about whether even non-binding instruments are accounting for that. That is the only thing I would add.
Q20 Lord Hannay of Chiswick: We have not heard from any of our three witnesses any ranking of the agreement to join the CPTPP. You have not ranked that alongside or against the others. You mentioned the Japan agreement being particularly useful. You did not mention the agreements with Australia, New Zealand and India, and possibly the GCC. Could you characterise CPTPP in terms of its value for Britain both in trade and services?
Sam Lowe: In terms of trade, it is difficult to ascribe a significant economic boost to CPTPP because the UK already had free trade agreements with all its major members except Malaysia and Brunei. Any economic boost there would be minor. The actual benefit of CPTPP over the bilateral arrangements involves me getting into a conversation around cumulative rules of origin. I am happy to do that, but it is perhaps something I should do at a different time.
There is then the political and signalling question around CPTPP. At the time of accession, it allowed the UK to demonstrate that, despite Brexit, it was still committed to rules-based trade. In the context of Donald Trump since, it has been good for the UK from a positioning perspective. There is also the question of future accession. This is where CPTPP becomes more interesting. It will grow over time. It is possible that countries join with which we do not have free trade agreements with, which are significant. For example, China has indicated that it wants to join. I do not think that will happen, but that would obviously be significant were it to happen. You also have within that conversation South Korea, which is less interesting because we already have the bilateral, and Thailand, which is possibly of interest. On a day-one basis, CPTPP is pretty small from an economic perspective, but there is a version of CPTPP in the future that is more significant.
Baroness Lawlor: The provision for services is more blue sky, is it not?
Sam Lowe: It has all the commitments that you would expect. This is the problem with CPTPP. Because foreign policy people got hold of it, they started talking about it in very grand terms, about it being the bastion of the rules-based system. It is just a free trade agreement. The services provisions within it look like most other free trade agreements that have been developed recently. You largely have commitments by the members of CPTPP to keep providing the levels of access that they already apply, for the most part.
There are some questions around Vietnam that are interesting on services. They are currently not necessarily obliging with some of their obligations. Were they to do so, that would potentially be a good thing. They are forcing lots of data localisation, which is ostensibly bad for our services providers. If they were to stop doing that, it would be good. It is a high-water mark. It is just a high-water mark in an area where the water mark is very low.
Baroness Lawlor: As far as I know, though, legal services have a fly-in, fly-out and have from the start. In some sectors, it is a much more liberal approach than the bigger deals we have, such as the TCA, which does not really touch services at all.
Sam Lowe: Holger will correct me if I am wrong, but what you largely see in the context of legal services are commitments to allow lawyers to practise international law in third-country jurisdictions rather than domestic law. This was included in the TCA as well. There is a whole story around Cyprus, which accidentally liberalised its market when it forgot to put in place an exemption. There are provisions such as that that can be helpful, but there are then questions as to whether anyone was really prevented from doing so in the first instance or what the barriers to doing so were.
Lord Stevenson of Balmacara: I just want to follow up that last exchange. It may seem a rather naive question, but why do we bother putting services alongside trade? Are they not two separate issues? Would it be advantageous for the UK to pick out the services elements of a lot of our deals and concentrate on the trade stuff, where we can do it? We could at least move where the benefit will be most to us by trying to work on things that will work for services.
Professor Holger Hestermeyer: To answer that question, there has been a traditional benefit in having these broad agreements and, in particular, multilateral agreements—CPTPP or, even better, the WTO—in terms of transparency. For your traders, the rules are easy to see. They are complex, but at least you can understand them. The more we move into a space where we say that we have a services agreement with A, a sectoral agreement with B, another tiny little agreement with C and a contradictory agreement with three partners, it becomes very difficult for lawyers. It becomes a profitable field for them, so that might be an upside, but for normal traders, it is not. They will see all these difficult rules.
To the extent that they contradict WTO rules, that creates a problem in the multilateral space. There are real problems in the multilateral system. Let us not kid ourselves about it. We mentioned the United States several times but, in fairness, China has been a problem for us long before. Its market does not fit neatly into WTO obligations. The weaponisation of trade that Mona has rightly mentioned several times becomes a black hole that swallows everything. Reform within the WTO is also blocked by India. For better or worse, India does not also like the idea that some countries can proceed without it in the WTO on what is called a plurilateral basis.
The system will change because of all of these difficulties. We should not resist that change entirely, but we should try to protect what we can, and that is a multilateral approach to the extent possible. In that regard, CPTPP is a core issue for me. The more the WTO is weakened, the more CPTPP stands out, particularly now as there is a debate about some form of co‑operation with the EU. Though, as Sam would say, there is currently nothing that anyone concretely would benefit from, that is a sign that partners are getting together and thinking, “We need to try to co-operate and engage in these limited agreements, where we have to, in a WTO-compliant manner so that we do not add to the stress the multilateral system is already under”.
We should be clear-eyed about this. As Sam and Mona have pointed out, most services agreement do not create a lot of benefit for traders. If we want to create a lot of benefit, that will be intrusive on our regulatory powers. There are safeguards that we can put in. Mona mentioned sunset clauses. Let us do that. Let us enter into these agreements in a clear-eyed manner, knowing that there are trade-offs.
I want to point out the role of the UK in that regard. The UK is not the largest trading nation in the world, but it has a strong Civil Service, a strong education system and committees such as these. The reports that come out of committees like yours are read elsewhere. That gives it a benefit and the power to punch far beyond its trading weight in the world trading system. Let us use that to try to help sustain a rules-based order.
The Chair: I am glad—it sounds like you have read our recent transcripts. That is a relatively elite club. Let us have a last few words from Dr Paulsen and Mr Lowe.
Dr Mona Paulsen: I very much align with both Holger and Sam on this. In terms of the question of whether we should just focus on services, we are now entering a new period where we are going to be thinking about electronic commerce and digital trade more carefully. In terms of understanding the boundaries between the trade in goods and products and the services that are attached or incremental to them, navigating that complexity is what we need to be thinking about.
In turn, there are other advanced technologies that will require us to think more carefully and define some of these issues around how we think about electronic commercial transactions. They are quite different. We used to think about CDs in a certain way. Do you charge the musician or the physical cheap plastic disc? My computer does not even have a CD player anymore. We are changing. Ultimately, even TPP is going to have to see fixes and modernisation. The interesting thing is, “Are we in the room where it happens?” I am sorry—that is a quote from “Hamilton”. Are we going to be able to be at that table? That is what makes TPP so significant. If they are the leaders of that modernisation, we want to be there with some of those significant trading partners.
At the World Trade Organization, several members—I say “several” because there is some discrepancy on how many there were; forgive me for that, because we do not know—supported the e-commerce agreement. That is a decision to develop an interim agreement, recognising that there is an expectation that it could become a plurilateral that is attached to the umbrella of the World Trade Organization. For now, it is a separate agreement, largely outside the World Trade Organization, that begins to establish those channels for those members to think carefully about e‑commerce together. They are not willing to be held up, as Holger explained, by the various members that wish to keep the system in a status quo. They want to continue to participate. What the outcomes of those agreements are and what future agreements may come from that broad-spectrum arrangement will be significant to focus on in future. This will be an impact both for trade in products and for trade in services.
To that extent, this comes back to the point that we should see these soft laws not as replacing trade agreements that would be under the scrutiny of this committee but as interim steps, norm building, building blocks and opening channels for subsequent legal agreements to be established. Those are the ones that we want to begin to see because, ultimately, you do not want the entire world to be soft and nebulous and all actual principal law to be strictly on a contractual basis where individual suppliers must duke it out for themselves.
This is where it becomes really important to watch some of the renegotiations of the TPP and other agreements that are being negotiated. Rules of origin is one issue that Sam and I have talked a lot about, because that is an easy example. The TPP talks about rules of control. They are not just interested in where a product comes from but who is making that product and where the company is domiciled or based. These questions raise important and challenging questions in terms of how we understand where our companies are establishing subsidiaries, where they are establishing routes, what tools, engineers and managers they have within their systems, and whether there will be some sort of extraterritorial requirement on how we allow our businesses to do business.
Baroness Lawlor: Sam, I do not agree with you about CPTPP only doing what others did already. For instance, with financial services or services generally, there is no requirement to be resident or to establish or maintain a representative office in the market to supply a service cross-border. That is a huge gain for the big and potentially growing area of service provision.
Sam Lowe: I would just recommend looking at the actual schedules of the individual parties.
Baroness Lawlor: There will be a conformity assessment, which will sort out the basis on which we sell our services.
Sam Lowe: The provision that you are referring to is in terms of the national treatment of conformity assessment bodies, which largely is related to goods. It is in respect of the ability for products certified to a UK standard by a body in, say, Malaysia to be accepted. We would recognise that that body in Malaysia could provide that certification, so long as it meets the same requirements as a body based here. That is a provision that is largely related to trade in goods.
Baroness Lawlor: The principle is to establish mutual standards and mutual recognition of equivalent standards.
Sam Lowe: In the context of conformity assessment, CPTPP introduces a new approach that was not present in the UK before, but I am just making the point that it largely refers to goods trade, not services trade.
The Chair: That is a very good point on which to end. Thank you very much indeed to the three of you for coming to join us. We have gone over time, which we never normally do. That shows how much of a fascinating discussion we were undertaking. Each of you have raised such relevant points in relation to our inquiry. I hope you do not mind if we follow up. I wanted to ask a very detailed question on PEM and rules of origin. Maybe we could ask Mr Lowe to come back and talk about that separately. Maybe we could have a private briefing session on that, just so we can do some work on that.
Please keep in touch with us as we develop this inquiry. We are keen to get people to give evidence. We are looking for more witnesses, so please make suggestions in terms of who else we should invite. We would be keen to hear that. In the meantime, Professor Hestermeyer, Mr Lowe and Dr Paulsen, thank you very much for your time. It has been a fascinating witness evidence session. Thank you very much.
