 Good morning, and welcome to the 10th meeting of the Culture, Tourism, Europe and External Relations Committee in session 5. I would like to remind members and the public to turn off mobile phones, and any members who are using electronic devices to access papers during the meeting should ensure that they are switched to silent please. No apologies have been received for today's meeting. Our first item of business today is an evidence session on the implications of the EU referendum for Scotland, and the session will focus on future trading relationships. I would like to welcome to the meeting Professor Ian Woodin of the University of Strathclyde, Professor Stephen Wulconk of the Linden School of Economics, Dr Mattias Margulis of the University of Stirling and Dr Gracia Marin Duran of the University of Edinburgh. Welcome. Thank you for attending today. I would like to invite each of our witnesses to make some short opening remarks, or I would emphasise that we are quite restricted for time on a Thursday morning, so if you could keep your remarks as brief as possible, thank you very much. Who would like to start, Professor Woodin? I am delighted to have been invited to be a witness at this committee. I share with the other witnesses a wish that we are meeting under different circumstances. Contemplating Brexit is not something that I ever thought I would have to do in my career. For the last 30 years, I have been working on aspects of international trade, in particular preferential trading agreements, and to now be at a stage where we are having to disassemble a trading agreement that has been very successful for the UK and Scotland for decades is quite troubling. In terms of thinking about alternatives, I was given a steer that one aspect that was of interest to the committee was thinking about the possibility of a reversion to the world trade organisation and the relationships that we have there. What I would like to speak to in my opening remarks is about how I do not think that that is going to be a feasible alternative for us. The notion of the hardest form of Brexit will be quite troubling and very difficult for Scotland and for the United Kingdom. That said, the multilateral trading system, which was established as the general agreement on tourism trade and then evolved into the world trade organisation, has been enormously successful. It has been around since 1948 and has achieved a tremendous amount of success in terms of opening up markets for virtually all countries in the world. If we take an example, the United Kingdom, which has been a member since 1948 at the conclusion of the Second World War, the tariffs among the industrialised countries were in the order of 40 per cent, so 40 per cent tax on every good traded internationally. Through the multiple rounds of multilateral negotiations that have taken place under the WTO and its predecessor, the average tax now is in the order of four to five per cent, absolutely enormous reduction. The United Kingdom's most favoured nation tariff, its WTO tariff on non-agricultural goods, is 4.2 per cent, which is exactly the same as the European Union. If we were to have a very hard Brexit and abandon all of the special trading agreements that we have with other countries, particularly the European Union, I think that we would undoubtedly remain a member of the WTO. Some of my colleagues, the other witnesses, would be able to discuss the actual details of our reverting to individual membership rather than membership as part of the European Union. I do not think that continued membership has ever been in doubt, but I would like to argue that we cannot count on it as the agent of change that it has been for the last few decades. In a respect when the World Trade Organization was started up, it was a relatively small number of countries that were involved in negotiations, and they picked the low-hanging fruit. They cut the tariffs that were relatively easy, and in each successive round they made substantial cuts, but those rounds, which happened every five or six years, were concluded relatively quickly. Although the last round, which was in some respects the most challenging, the Uruguay round took longer and made some significant changes, particularly for developing countries and the coverage of goods. However, since the conclusion of the Uruguay round, we have had 15 years of negotiations under the most recent round, the Doha round, and I think that almost everybody except those in Geneva are prepared to say that the multilateral negotiations are completely stuck and there is going to be no resolution in the near future, so we cannot look as a country leaving Europe to the WTO as giving us future trade deals. What I would argue is that we have to consider deviations from the multilateral route, despite the fact that we are breaking out with the common market that we have with Europe. We are going to have to consider free trade agreements with other countries, in particular Europe, but also other important trading partners, but this is not going to be a quick fix. The SETA took five years, and the US Trade Agreement took almost 100 years to get sorted. After article 50, the two years of that, it is going to be a very long time to sort things out. Just as a matter of guidance, if I could suggest maybe about three or four minutes for introductory remarks. Thank you very much, Professor Wilcoog. Thanks very much. It's very pleasing to be here. I would agree with Professor Whitten on the WTO as a fairly poor alternative to preferential trade agreements for the reasons he specified. In other words, it's not really making any significant progress in addressing the barriers to trade that exist in the modern international economy. If I can just spend a couple of minutes saying what those barriers are, they are tariffs, but as Professor Whitten says, tariffs on non-agricultural products are pretty low. If you take the trade-weighted tariff, average trade-weighted bound tariff of the EU, it's 2.9 per cent on manufactured goods, 22 per cent on agricultural products, a bit more. Tariffs are not the real issue. It's border measures, in other words, the cost of shipping goods across borders, especially with global supply chains, that's customs, that's rules of origin, that's checking that products comply with national safety rules. More importantly, it's non-tariff barriers and the divergence between regulations, legitimate regulation of health, environment, consumer, prudential regulations. These are the subject of international trade negotiations now, if you look at TTIP, CETA. These are not really adequately covered in the WTO, which is why you've seen the negotiation of all these big preferential trade agreements. What the WTO offers is non-discrimination, so it's national treatment, what's called national treatment, and MFN, meaning that countries are not allowed to discriminate against between suppliers or to discriminate between products that are exported. But in order to gain effective access to markets these days, you need something more than that, you need more than non-discrimination, you need more positive action in the form of regulatory cooperation, mutual recognition, some approximation of regulatory policies. This is where the single European market is the most advanced form of this approach. What the single market aims to do is to facilitate trade while allowing the pursuit of legitimate policy objectives in the field of environment, health, safety, labour standards, etc. If you move out of that, you're moving to something where UK and Scottish-based companies would be able to trade. The people who talk about Brexit say that you can always trade, but that's true. You can always trade, but you trade at a disadvantage compared to your main international competitors. Thank you very much. Dr Moguls. Thank you, convener. I just also want to echo support for the statements by my two colleagues, and I'm just going to highlight three key challenges at a very general level. The first challenge is that all the Brexit trade options on the table for the UK are likely to leave the UK economically worse off and result in lower standards of living for UK citizens in the short to medium term. A few countries have proposed policies to deintegrate their economies from the global economy in such a profound way and on purpose as entailed by Brexit. This presents policy makers with a dilemma of how to steer a situation that is supposed to unravel thick webs of economic interconnections and interdependence that have taken decades to build up. A second challenge is the complexity of the Brexit process with respect to the UK's renegotiation of its trade relationship with the EU, but also with the rest of the world and how this will actually work in practice. And this matters not just to the UK's trading relationship in terms of its access to the EU, but it's very, very important how Brexit is managed with how it's going to trade with the rest of the world. Because what we're essentially talking about in the short to medium term is renegotiating the market access the UK currently enjoys, not additional free trade deals. And this is a process that would normally take years, if not decades, as my colleague was saying. And again, this is just to re-emphasise, this is just for the UK to achieve the current level of market access it currently enjoys. This is nothing in addition. A third and final challenge is a more practical one, and this is about the preparedness and the capacity of the UK government for the task ahead. As my colleague Dr Kristen Hopwell from the University of Edinburgh, and I have previously stated, policy makers are facing a herculean task. The UK has not negotiated its own trade deals since the 1970s, and trade negotiations, similar to all areas of work, require know-how and experience in order to be successful. And we know from research that countries with more trade negotiation expertise and experience secure better deals for their businesses and citizens than countries that have less negotiating capacity. This is the reason why the EU has been very successful at negotiating trade deals that serves its interest. The UK will be entering trade negotiations with the EU and other countries that have far more capacity and experience and will thus be at a disadvantage. Thank you. Thank you very much, Dr Maran Duran. Good morning. I'm equally very delighted to be here, and as the main international trade law expert on the panel, I will be mainly concentrated on any of the legal issues that may arise with regards to the UK position in the WTO post Brexit. This does not mean that I disagree. I very much align with the statement just made by my co-panelist that clearly trading on WTO terms for the UK would be worse off than trading within the silicon market or trading within any preferential trade agreement. Clearly, that's the very purpose of why we have regional trade agreements, is to have better terms of access than the ones we currently have under the WTO. And in this sense, surely the European Union, despite of its problem, has been the most successful attempt at regional economic integration we have seen in the WTO. But I don't want to deal that much with the trade policy options for the UK, but rather the legal questions. And on the legal side, I will start perhaps by clarifying what are the legal issues and what, in my view, are not the legal issues. The easiest part is what are not the legal issues. There's been a lot of talking and it's almost becoming a conventional wisdom by now in the press and elsewhere that once the UK leaves the EU, it will have to resume or renegotiate its membership in the WTO. I will maintain this is not correct. The UK is what was an original member of the WTO is currently a member of the WTO and will remain a member of the WTO independently of its EU membership in legal terms, unless the UK is also planning to withdraw from the WTO, something I'm not aware about. And there is also a procedure to do that in the WTO agreement, Article 15, which is much easier, more simple than Article 50. But as far as I know, they have not communicated their intention to withdraw from the WTO. So this means the UK remains a member of the WTO and already has WTO rights and obligations. It is not like a new entry or a new exceeding country. It already has rights and obligations. And for the most part, for the big chunk, let's say, the most substantial part of the WTO load, the obligations that are of general application to all members, as my co-panelists were saying, non-discrimination rules on technical regulations, rules on sanitary and phytosanitary measures, TREPS agreement, trade-related intellectual property rights, the dispute settlement understanding, all these obligations, rights and obligations that are of general applications to all members in the WTO will continue to apply to the UK after Brexit unless they decide to leave. With three qualifications, which is where the legal issues are and where, if you were like me, to do so I can elaborate further during our discussion. There are three qualifications to that statement. The first pertains to those rights and obligations with the EU has, excuse me, that the UK has jointly committed to with the European Union. In other words, they are not general rights and obligations applicable to all members, but those that we call member-specific commitments. And those in the case of the UK, they have been agreed jointly with the European Union and the other 27 member states in the so-called shadows of concession. So that is a legal question as to what happens with that. Those the UK need to renegotiate a new schedule of concessions for goods and services or can it just simply adopt the one of the EU at its own. So that's the first legal question. The second legal question is an exception to what I've just said and is the plurilateral agreement on government procurement and the fact that to the revised version that we have from 2014, only the EU has exceeded. Only the EU is a party, not the EU and the member states, unlike for all the other WTO agreements. So obviously, by leaving the EU, this means that the UK will no longer be bound by that agreement, unlike the others. That does not mean that the UK cannot become a party to that agreement, but there is a legal issue there. And a third one, and perhaps a clarification which is not that much of a legal nature but that I think needs to be made, even though I have said that for the most part, the UK will retain the very same rights and obligations on the WTO that it currently has. What will clearly change in practice once it leaves the EU, and again, like my co-caf finalist, I'm very sad about this, but I'm taking this as a fact. I'm not going to comment on that option. Once it leaves the EU, what will change in practice will be that the exercise of those rights and ensuring performance for those obligations will not be done by the EU on behalf of the UK, as it has currently been the case. We hardly see the EU member states in the WTO. It is the EU that exercises those rights and that assumed responsibility for the performance of obligations, notably in the WTO dispute settlement. So there, of course, we will have practical challenges, not legal challenges, but practical challenges on how the UK is now going to take up upon the role that has those far been performed mainly by the EU of exercising its rights and obligations on the WTO law, including by participating in the WTO dispute settlement system. But these are more practical challenges rather than legal challenges or at least challenges from a WTO perspective. I can elaborate on those points, if you are interested, during the discussion. Okay, thank you very much. I very much hope that we don't have to try to get our heads round on article 15, as well as on article 50. You raised a frightening prospect there. Can I open my actually thanking you for your contributions so far, but perhaps drilling down to a very specific and contemporary issue to get your expert opinion on that. That is the letter that the UK Government has written to Nissan to secure the future of car manufacturing in Sutherland. Is it a reasonable assumption that there must have been guaranteed some access to the single market and the customs union to be able to make that guaranteed in a sand that car manufacturing could continue? I just wondered what your opinion was on that. The Nissan deal has been in the news quite a bit. At this point, obviously the details of that deal are not yet known, but it has been suggested that part of the proposed package would be zero tariff access for UK automobile exports into the EU. Currently, under WTO law, such an arrangement is only possible under a comprehensive regional trade agreement, basically under the single market. It is very unlikely that a sectoral one-off deal for automobiles would be WTO compliant. Does anyone else want to comment on that? Professor Whitty? There is a precedent for a common country of Matias, myself. A candidate in the United States did have a free trade agreement on automobiles, cars and trucks, which was deemed to be compliant with WTO rules. That is something of an exception, and I would doubt whether it would be supported nowadays. The issue that comes is that, if a special deal appears to have been struck within the automotive sector, it will spill out to other manufacturers but beyond that industry. Frankly, I do not think that it will be sustainable. It suggests that the UK is going to remain within the customs union, and that they have told us and that they are going to remain within the customs union. Would you agree with that? I find it difficult to see how the UK can stay in a customs union. The customs union is so tied up with membership of the European Union. It is feasible, but it would mean that the UK would have no independent trade policy, in effect, because it would follow simply the common external tariff of the EU. It would reduce the border costs, but I cannot see politically how that would be accepted by the EU. I cannot see politically, within the UK, it does not seem to square with the argument for leaving the EU in trade policy anyway, is to get an independent trade policy, but you would have no independent trade policy. As part of a soft Brexit, it might be possible, but then you are not really changing the status quo very much if you stay part of the customs union. You solve various problems, so there will be no border controls. You might have to prove all the origin, but you would cut back on a lot of the trade costs associated with leaving the customs union, but you would more or less be just following EU policy without having a significant say in it. If that is not feasible, I would support it. It is feasible, but it does not seem to be very politically viable. My take on the Nissan thing is that it is a commitment to negotiate, but it depends on the person you are negotiating with. In other words, it is the other 27 member states. This is an aspect where Nissan has been guaranteed market access. This is not something that is in the gift of the UK Government, but it is in the gift of Europe after article 50 has been triggered at the end of the negotiations. It is very difficult to imagine how this can actually be an incredible offer, unless, behind it, there is some offsetting subsidy that would compensate for any tariffs that were left in place at the end of the negotiations. That would amount to millions and millions of pounds, I would imagine. Very much so. Yes, and other sectors will be looking for... I think that they will be lining up. Potentially it was a very opportunistic thing to do because of the fears of losing Nissan, but in the long run it could actually be extremely expensive for the UK Government. Last week, when the Secretary of State for Scotland was before the committee, he said that the UK was negotiating a bespoke deal, seems to be the word of the moment, a bespoke deal, with no tariffs and no barriers. Do you think that that is feasible? I will start, if I can. I have always thought that the most viable option is a free trade agreement, so it would be a comprehensive free trade agreement. That is probably what is meant by a bespoke deal. You can negotiate tariff free access. As we suggested, tariffs are not that high, that is not the main problem. You can maybe negotiate some sort of mutual recognition agreement that would deal with some of the non-tariff barriers. If you look at the existing preferential agreements that are negotiated now around the world, you can see what sort of a shape, a bespoke agreement would be, but it would be a form of comprehensive free trade agreement. I am going to hand over now to Lewis McDonald in the name of Harper. Thank you very much and very interesting submissions. I am interested to explore perhaps first of all in a quick response to Professor Stephen Wilcox's comments. Membership of the customs union need not be the same as membership of the single market. Membership of the single market would clearly involve no independent decision making in a whole range of policy areas. Membership of the customs union or a customs union with the customs union, which is an existing precedent, would not necessarily involve that, would it? It would remove trade flexibility, certainly, but it would not, for example, prevent the UK Government having a different position on freedom of movement from the European single market. That is true. The UK would not have a separate tariff policy, but my argument would be that tariffs are not the main problem. Access to the rest of the European market is about differences in regulation. If you do not have—at the moment, the single market is—I would characterise it—it is not really just the four freedoms. It is full regulatory mutual recognition, meaning that what is produced here can be shipped throughout the—sold throughout the EU without any further checks or without having to prove compliance with EU regulations. That is far more important than tariffs. Tariffs are going to be negotiated away anyway, probably through preferential trade agreements. The UK, it is true, could keep the customs union and it would save some of the border costs and would solve maybe the problem in Northern Ireland, but it would not really provide equivalent market access to what is being negotiated in some other agreements. But it would meet what we think—would meet what you speculated in relation to Nisan? No. No, okay. Because you can—well, you can negotiate tariff free access in any free trade agreement. What Nisan needs is also type approval. It means that if a Nisan car produced here can be simply sold in the rest of Europe. If you do not have that, the potential cost, tariff equivalent costs are anything up to 20 per cent or more. The wider question I was interested to explore was— I thought so too, but perhaps not. I just wanted to support that point that tariffs are really not the key issue. I mean, if you look at the 500 over 514 disputes we have had in the WTO since it was established in 1995, that is with the exception of agriculture, that is hardly any dispute on tariffs. All disputes are in the areas of regulatory measures, TBT, SPS, and so on. Those were non-tariff barriers to trade. That's mainly where WTO members are disputing in the WTO, not in the area of tariffs, with the exception, as I said, of agriculture. The wider question that perhaps particularly arises from Dr Marine Gillan's initial contribution was around membership of the WTO. There are clearly a whole range of options for the future UK relationship with the European Union from membership of the economic area, negotiation on the model of Switzerland, or simply negotiating a free trade agreement. All of these involve the UK being a member of the World Trade Organisation in its own right. Do they all involve the UK negotiating its own schedule of concessions in its own right, even if the UK remains within the single market through the European economic area? Thank you much for the question. That's one of the legal question that arises. What happens with these schedules of concessions that are currently jointly binding on the EU and the UK once the UK leaves the European Union? I would say you are right in pointing that this very much depends on what the UK trade relationship is going to be post Brexit. Clearly, if the UK is to remain part of the custom union, although I agree this is politically perhaps not very valuable, but there is a legal option that this is the case, then it could clearly keep the EU schedule of concessions because then it will mean that, such as Turkey, it has to adopt the common tariff that is stipulated at EU level. That being said, there are two other aspects in the schedule of concessions, so we are in that option that will nonetheless be tricky. That is the issue of tariff quotas, tariff rate quotas, currently applied by the EU, whether the UK will be keeping those two, as well as, which is bound in part three of the schedule, as well as the right that the EU currently have if we want to subsidise agricultural production up to a certain level, which is bound in part four of that schedule. That goes beyond the issue of the common external tariff in itself, which is what the custom union sets. It says that all the members are going to keep the same common external tariff. That deals with part one of the schedule. We all will keep the same tariffs, but it doesn't tell us much about part three and four of those schedules. What are we doing with the tariff rate quotas and subsidies to agriculture? Those issues, as well as the tariff, are also open to question if, instead of the custom union, the UK-EU relationship post-Brexit moves into other forms of regional integration, such as a free trade agreement, in which the independent parties will keep their right to set external tariffs. You don't have those armonies. Then that becomes an issue. In here, I have to say that we can only talk about legal options, because we do not have a procedure in WTO, and whoever claims the country I don't think is being accurate legally speaking. There is no procedure in the WTO as to how we deal with the current situation we have, meaning one member living a custom territory. We have a procedure in the WTO on how to deal with the custom territory, enlarging, and we have done that through the successive EU enlargements, as new members have acceded to the EU. What do you need to do vis-à-vis all the members? There is a procedure to do that in article 24. There is no procedure right now when one member of that custom territory decides to live. There is no procedure in the WTO on how we regulate that. The legal options are two. You could make the argument that that member is modifying his schedule of concessions. This will mean if the UK decides to adopt a completely new trade regime to the one that is currently bound at EU level, it will have to modify schedule of concessions, and that will clearly require a renegotiation with all WTO members having a substantial interest in that new trade regime, clearly. The second option is if the UK does not want to substantially modify or amend the current trade regime that is bound at EU level, it simply wants to continue to apply it as UK. If that is the policy option that the UK government decides to go for, there may be, although, as I said, there is not a clear procedure, but the UK government could make the argument that this is not a modification of the schedule that requires renegotiation with all other members, but simply a rectification of the schedule, which is what you hear some officials from the UK government already trying to make that argument, and a rectification from a schedule, which means that there is only a formal change. In practice, you are applying the same concessions. It's just not the EU anymore applying them, but the UK independently, but the concessions remain the same. Does not involve you renegotiating with the members? It only involves you notifying it as a rectification to the WTO and hoping that no member objects. If a member objects, they could always take you to the WTO dispute settlement system. But that will be an easier, sort of more simple and faster procedure than the whole process of having to adopt an entirely new trade regime with new tariffs and so on and having to modify the schedule of concession through negotiations with other members involving compensatory adjustment. So the UK will need to compensate the other members for any change that it wants to make to the current EU-bound regime. I hope this answers your question. It does. That's very helpful. Okay. Emma Harper. Actually, I don't know the size of it. Oh, sorry. Oh, sorry. Dr Margulis. I just wanted to add something just to clarify. The moment the UK leaves the single market, it does have to adopt the schedules. And as my colleague was stating, this is a negotiation not just with the EU, but with the rest of the WTO. Now, I think it's really important to emphasise that those specific concessions, particular agriculture subsidies, are the most contentious issue at the WTO. That is the issue that has led to the stalemate in negotiations at the WTO. So this is not some sort of minor issue that the UK just sort of hope it could do under the radar. This is the number one issue. So the UK would require a lot of political goodwill from other members to entertain the idea of negotiating a favourable share of the EU's concessions, assuming the EU is willing to give that because you can't make that assumption that the EU is actually willing to give the UK part of its concessions that it has under the WTO. So I think it's really important to remember this is going to be extremely politically contentious and much more so than the EU negotiations themselves. So I think that's a much more difficult task than the actual EU negotiations. I take it what you're saying. It only takes one member of the WTO to object, which could hold the thing up for a long time. Do you think that it's more likely that they'll give the EU concessions than the UK concessions are more likely to object to the UK? The EU doesn't require any concessions. The UK can continue as is. The EU does not have to give concessions. The EU can continue as is. It's up to the EU to decide whether it first wants to give the UK any part of its concessions that it currently enjoys. So, for example, levels of agricultural subsidies, that's up to the EU to give to the UK how much of its current commitment on agricultural subsidies it's willing to give the UK to provide. And then the rest of the membership has to agree that they are willing to accept that. And they are very likely to ask for some sort of compensation or additional demands, because the UK is essentially putting itself out there and is open to these kinds of demands. It cannot say no. If countries say, you must give us something in order to keep this part of the EU concessions, the UK will be obligated to do so if it wants to keep part of the EU concessions. Emma. I guess it's quite complicated all of this, but you talk about tariffs or tariffs don't matter except for agriculture. But Scotland's food and drink industry was £14.2 billion this year and hopefully going to expand, but much of our industry is in food and drink as agriculture and in the south-west of Scotland particularly it's dairy. And in our papers it says that there would be tariffs of about 42 per cent on dairy products and 12 per cent on agricultural products. So, help me understand a bit better about agriculture and tariffs because you're talking about tariffs except for agriculture. I think I introduced a topic. Yes, tariffs, I was talking in general terms about the trends in trade and the relative importance. Yes, tariffs in agriculture tend to be higher. So, the figure I quoted in the paper I think you may be looking at is the common external tariff, the EU's common external tariff on agricultural products. So, that's potentially the tariff that agricultural exporters would face in exporting to the EU. So, that would be significant in certain sectors, but you have to look at individual sectors in order to really be able to assess the general impact. You're quite right. Just give a little bit of historical context. Agriculture was part of the initial multilateral negotiations when the WTO was first founded in 1948, but they were set aside. They were too contentious and so for many of the negotiating rounds it didn't happen and so these grand reductions on average of 30 per cent at the end of each of the rounds generally took place in terms of manufacturers and agriculture was only brought back into the WTO system formally with the successful conclusion of the Uruguay round. Of course, we've not had a subsequent round of negotiations since then. Historically, they've not had the opportunity to be brought down, but in addition they're so tied to nation's culture and their environment that they remain a very contentious area for negotiation. You're right to stress that the tariffs in agriculture are higher, but also non-tariff barriers in agriculture are equally important, what are called sanitary and phytosanitary measures. In other words, food safety regulation of food products is arguably more important than the tariffs even in terms of access. Now at the moment the UK complies with all the European standards and so it's a question it's not there isn't a barrier now but if there is a divergence from the existing European standards then there will be a progressive or could be a progressive increase in the cost of complying with the different SPS standards. Yes, I agree with everything that has been said with the tariff, but that's what has been said so far concerns mainly the UK having to trade on MFN basis with the EU out of the single market. But there is also the issue of accessing tariff rate quotas that other members currently have for the EU. That's also another challenge for the UK. For instance, the US has a quota with a preferential tariff for accessing the US market on EU cheese. That is obviously something that I think, this is subject to EU-UK negotiations, but that is something that the UK is likely to lose. In other words, all the concessions that have been done by other members with regards to tariff rate quotas on agricultural products such as the US for cheese that have been done vis-à-vis the EU. If the UK leaves the EU, that is no reason why the US needs to continue granting that preferential tariff to the UK. It's no longer a member in the EU legally speaking. The UK could of course renegotiate another preferential tariff rate quota with the US, but I think there are obviously the fact that even though it is a considerable economy and economically certainly it has a weight, it does not have the same weight than when it is the EU negotiating with the US. That is clear. For how much concessions the UK is going to have to give to other members in order to keep what was agreed with the EU or how far it is going to be able, I think we need to bear in mind that the market size, the WTO is what you can get in exchange for what you can offer. Obviously, when you are negotiating as a trading bloc of 28 countries, what you can offer, what you can put on the table is more than when you are only one. That's going to be obviously a practical challenge. As I said, it's a negotiation. It's not a legal problem, but it's going to be a practical challenge to negotiate as an individual country with an important market size but not equivalent to that of U28. Richard Lockhead and Rachel Hamilton indicating that they want to... Is it supplementary? No, it's your supplementary, Rachel. We have such high standards of food production here in the UK and I just wondered what made you so sceptical that we wouldn't keep those high standards of regulation up? In fact, it could be one of our unique selling points when we look to negotiate with other countries. The UK government has said that it will adopt all EU standards into UK legislation. At the moment, the standards are the same, the same high standards. One question in my mind is that there will still be a need for the UK to prove that in a way that hasn't had to prove it in the past perhaps. In other words, other importers in other EU member states may say, well, we need evidence now, more evidence that the UK is compliant. Yes, if the UK keeps the same standards, then fine, yes, but then there isn't anything, nothing changes. That's true, but you could see that there may be pressure if the UK... It's a question of managing divorce, really. It's a question of managing divergence. So over time, the EU may introduce new standards, different standards, maybe not significantly higher, but different standards. If the standards are different or the regulatory requirements are different, the UK will have to adapt to those and have to prove that it's adapting to those in order to ensure full access to the single market. Let's take an example of the famous chlorinated chicken example. At the moment, the EU rules say that you can't use chlorinated wash to clean chicken carcasses. A lot of scientists say this is not necessary. So if the UK agricultural regulators would say it's not necessary, it's an additional cost for our farmers, we don't need to do this, we won't do it. If that's the case, then UK chicken export wouldn't be able to get into the EU market. You take GM crops. Is there going to be a divergence? Will there be pressure to introduce more genetically modified crops in the UK? It may be more efficient. If that's done, then there will be difficulty exporting a wide range of products into the EU market. So it's a question of how you manage a divergence. It's clearly possible, but it requires a procedural agreement between the UK and the EU in order to deal with that. Additional points on agriculture, because it is an exceptional sector. One thing that we haven't discussed is actually tariff rate quotas related to imports. For example, much of the UK's sugar, which is using confectionary goods for example, enters through tariff rate quota arrangements with certain countries, particular African and Caribbean countries. Now, should the UK leave the single market, it will disrupt those particular import TRQs and supply chains. That could be quite disruptive in terms of existing supply chains for imports that go into the food and drink sector. I think that aspect needs to be further thought out. The second, because we haven't talked about agricultural subsidies, but I think in the Scotland context it's quite important because Scotland does receive about one-fifth of the UK's share of agricultural subsidies, which are part of the EU's commitment. For Scotland, the agricultural subsidies question, which provides a fairly high percentage of farmer income, is particularly important. I think that issue should not be understated in terms of the importance for the Scottish economy, but also how tricky that particular negotiation will be with the EU and the rest of the WTO membership. Can I go back to the point that Ms Harper made about dairy products? As you rightly said, the 42 per cent for dairy products is applied to favoured nation status, if you didn't have a free trade agreement. Given that we are told that Nissan has been assured that they will have full access, would dairy producers have to negotiate, would they be part of the deal that was negotiated between the UK and the EU? Otherwise, they would end up paying 42 per cent, because the world has a lot of dairy products at the moment. Do you think that that 42 per cent would be negotiated away as part of a deal? Gary is a special case. I think that it's difficult to say how likely it is or not. This is going to be part of a broader package of negotiations of the exit terms. It is difficult to say, but perhaps I haven't followed closely enough the political debate in this country, but as an outsider, I have somehow problems thinking that all you want to do is to maintain what you currently have in the EU, including the SPA standards. On the current rules, you are allowed to have those SPA standards all higher. Most of EU regulation in that area is about minimum standards. You can have those EU standards all higher. Why would you want to be in a situation where you just copy and paste those standards without having any say in them? That's what I said, yes, it's possible, but it's going to be legally yes. It is possible. It is possible, but is it going to be politically feasible as part of the negotiations, that you get yourself into a situation where you're basically the same as you are now, but without having a say over anything? That's what for me is a bit difficult to believe that this will be acceptable in particular. I mean, one thing is what you say, yes, we're going to guarantee you the same access, but are you really going to guarantee the same access by agreeing to just follow EU standards forever without ever having a say on those standards? Thank you very much. I'm going to have to move along so that other members get the chance to ask questions. Richard Lochhead followed by Jackson Carlaw. Thank you. I've got two questions. The first question is about Scotch whisky, which is kind of linked to the previous questions over food and drink. The Scotch whisky Association are very relaxed about the possibility of additional tariffs or being disadvantaged by the exiting of the European Union. I just want to know whether the panel believe that the Scotch whisky Association are correct to be so relaxed. If I can make the first response to that. I mean, I think that one of the reasons they are so relaxed about it is that, in terms of their major industrialised markets, they already face very low tariffs, so they have free trade access already into the United States. Currently, they have free trade access into Europe, so they effectively are going to retain their market access, and for them, the opportunity that they would like to embrace is the possibility of the UK pursuing other free trade agreements, because we keep on hearing about the BRIC countries—Brazil, Russia, India and China—as potentially large markets that could be accessed through free trade agreements. The Scotch whisky Association or whisky itself actually faces high tariffs, so opportunistically, for the Scotch whisky industry, the status quo and, in fact, the threat in changes through Brexit probably aren't too substantial for them, but there are opportunities for future deals that they would be able to benefit from. Can I turn to my second question then, which is going back to Nisan in the letter? The difficult, of course, is that we don't know what's in the letter. So ironically, the French Government, with a stake in Nisan, probably know what's in the letter, but the Scottish Government doesn't, which says a lot, but we've been kept in the loop in terms of the UK's negotiating strategy. When you were speaking about it earlier on, if I picked up correctly, you seem to put a lot of emphasis on membership of the single market, being perhaps more important to the car industry than the customs union. Yet prior to the referendum this year, the UK Government tended to put the emphasis on the customs union and the massive bureaucracy and cost of the rules of origin being implemented, etc. I'm just trying to understand my head the relative importance of the customs union versus the membership of the single market to the car industry, given that there are thousands of components within a car engine and the rules of origin are implemented. I'm trying to get to the bottom of what the UK offered in Nisan to off-see those threats. Again, it's one of those difficult questions to answer. The cost of not being part of the customs union, proving rules of origin and border controls depends a bit on what you negotiate. In other words, if you can negotiate, the WTO has a trade facilitation agreement, which aims to speed the flow of goods across borders. There are various techniques to do this, digital methods, and pre-acceptance of export customs documents, etc. If you left the customs union, you could still negotiate a fairly advanced co-operation arrangement between the UK customs authorities and customs authorities in the EU that would reduce your border costs. You wouldn't have trucks lining up at the borders, for example. Typically, the cost of proving conformance with rules of origin and border controls and the like can be 5% of factory gate costs, but these figures are a bit rough and ready. 5%, let's say. If the UK producers didn't have full ritual recognition for the car sector, I think the cost could be greater. Again, you're talking about estimates here, but the estimates that have been made for the car sector in the transatlantic relationship show that a move towards approximation of car standards and regulatory requirements could save significantly. That would be one of the major benefits from a transatlantic agreement. I'm a bit reluctant to give specific figures because there aren't really specific figures. The average figure given for compliance with EU regulatory requirements in the car sector is about 20% for manufactured goods. I've still maintained that the cost of moving away from full mutual recognition could be potentially greater than the cost of leaving the customs union. I just want to read my earlier comment that the idea of a sectoral standalone deal is unlikely when it comes to automobiles. It would have to be part of a much larger package, a much more comprehensive package. A standalone car deal, not possible. A standalone dairy deal, not possible. A larger comprehensive package, yes. The other thing that is probably not in the letter is that the UK Government under WTO law would be prevented from providing direct compensation to Nissan. The idea of direct compensation to the industry is something that would be very difficult and would open up and expose the UK to trade disputes. Jackson Carlaw. Thank you. I'd like to pursue the Nissan point as well slightly. I spent 25 years in the retail motor sector, and colleagues of mine left the business to found Nissan UK and the plant in Sunderland in the 1980s. In my time in the retail and the broader automotive sector, I never found senior executives to be fools. Those are international businesses, they are international businessmen and they are capable of judging whatever they have in a piece of paper for what its value and worth is. I was interested in a comment Professor Woodden said that he thought that it was more likely to be a letter of intent than a letter of commitment, because a letter of commitment would contain things that would either be undeliverable or unsustainable. Obviously, the letter is now another example of the great plethora of speculative areas that everybody is seeking to shed some light upon, but is it not more likely that it at best can be a letter of intent of the Government's intended direction rather than a letter of commitment, which I think that several of you have now suggested would either potentially be making commitments that would be undeliverable legally or financially. Given the intelligence that one presumes of the companies and the investments that they have at stake, their own ability to understand that and therefore to be less impressed with something like that rather than the potential direction of travel that they have been given an indication that the UK Government intends to pursue? I think that it can only be a letter of intent. We haven't yet triggered article 50 and so the EU hasn't yet begun to reveal its hand and, indeed, it's not clear that the UK Government knows what's in its hand. This is a stop-gap measure. I'm sure that they're very sincere in telling Nissan that they'll do everything that they possibly can, but I think that it would be unbelievable if there were a firm commitment within it. And, effectively, Nissan executives have made a judgment about that and decided to pursue their investment. I presume so. It won't actually happen to southern rears down the road when the details of Brexit will be clear, so it's not obviously an immediate decision to move ahead. I have Stuart McMillan. Good morning, panel. It's just a question regarding the WTO. There are 164 members of the WTO. Is there a possibility that, with the UK needing to renegotiate the schedules, that some of the other members of the WTO might decide that it's an opportune moment to make things really difficult for the UK, either because the feel is that there is an economic advantage to do so, or because there is a political advantage in their own countries to do so? Thank you very much for your question. Certainly, I think these will be taken as an opportunity to ask concessions. That's always the case. When you want to renegotiate something, other members are not going to agree to a change for free. They're going to want to renegotiate. The point is whether the UK will have to do so or not legally speaking. That is clearly the case if the UK government decides to adopt a trade regime that is more restrictive than the one we currently have with the EU. Then you will have to renegotiate your shadow. If you want to adopt the same or a more liberal one, nothing prevents you in WTO law from being more liberal than what you are bound to. You have to respect what you have bound or you can be more liberal in practice. You can have a more liberal trade policy in practice than what you are bound to respect, but you can never go above. If you want to become more restrictive, then of course you will have to renegotiate. I think indeed that will be a challenge for the UK. First of all, because we now have 164 members, unlike when the original Leo shadows were negotiated in 1994, there were less members. Secondly, because negotiated as a UK alone, even though it is an important member in economic terms, it is not of the same weight that negotiated as a trading bloc. The concessions you're likely to get if you are promising the other side access to the EU market as a whole as opposed to the UK market might not be the same. But as I said, that's only in the case you are willing to adopt a more restrictive trade regime. If you want to maintain the same EU trade regime or apply a more liberal one, things could be easier in the sense that you could go down the road of rectification, meaning we keep this shadow as our own. We don't modify it in substance, we just keep it as our own. That will not require you to renegotiate with 164 members from the outset. However, you might be challenged later on in the WTO dispute settlement for having gone down that way, because as I said, we don't have a clear procedure in the WTO on what a member needs to do when you leave a custom territory. That's a legal option, but it's not a specific procedure. Other members could challenge you later on in the dispute settlement and say, we object with you adopting the EU shadow as your own. That could be a possibility, but it is not clear yet that you will need to negotiate with 164 members from the outset on your shadow. That is only the case if the UK government decides that it wants to adopt a more trade restrictive regimes. From what I hear, what they want to do is the opposite. They say they want to be more liberal than the EU currently is. You just wanted to add two points. I think it's a very astute observation that there's a lot of potential economic and political incentives for other WTO members to seek additional concessions from the UK. That would be logical. The situation presents itself where the UK has very little leverage because it just wants to negotiate the current level of access that it has, so it needs to give more to get what it currently enjoys. There are two broader issues at play. The first is that the WTO is an institution of political paralysis, and whether WTO members want to deal with the UK issue or just kick it down the line, presents some uncertainty on when they will get around to dealing with the UK's renegotiations concessions. They may not be interested in doing this anytime soon because it just adds more complexity. The second is that at the WTO what really matters in terms of your negotiating position is alliances and your ability to have allies in the room. What the UK has essentially done is alienating its largest group of allies, which are the EU countries, and it can't assume that it's going to have a lot of political goodwill across the broad membership. There are many reasons why many countries, especially developing countries, which are the majority of the WTO membership, might have a lot of long-standing grievances against the UK. It is not entering the WTO as a member with many friends and ability to influence people, so I think that context needs to be considered. Just on one of your points there, after the article 50 has triggered, then have the two-year period and you said that the WTO is in paralysis. What would then happen in terms of discussions with the UK and members of the WTO? My understanding is that the UK is unlikely to be able to start discussions at the WTO until after its new trading relationship with the EU is settled, so that would depend on how long that process can take, which we've heard estimates from. That's not going to start from two years from now. That could take several years if they're going to pursue a CETA-like model. That took seven to eight years to negotiate. We just saw, I mean, they just agreed, I mean, they just got agreement to sort of move ahead, but that's still not finished. It still needs ratification for the ratification. If that's the model, that's a decade, so are we talking about a decade to renegotiate in terms of trade with the EU and then potentially many more years to renegotiate all those other agreements? I think that this is a long-term game. What then happens in terms of UK trade, both exporting and also importing? Legally speaking, in the WTO, in so far as you have not communicated any change to your current schedule, your schedule remains the EU schedule. That's why I was saying, the UK is not in a position of a new entran to the WTO. A new entran to the WTO has nothing, no rights, no obligations. It needs to renegotiate everything from scratch. That's not your position. What is happening from the WTO perspective, what is happening in Europe at the moment is an internal matter. It's a bit like with Article 50. Until you don't drag Article 50 what has happened in the UK, it was internal. It's the same for the WTO until you notify a change to your current schedule of commitments that you have jointly with the EU. As far as other WTO members are concerned, that's your schedule. Once you have agreed with the EU what you do with that schedule, then you will have to either communicate a modification if you want to change the trade regime completely or a rectification. In so far as this is not done by the UK, you remain bound by the EU schedule. It's not that you have no schedule. That's what makes the difference between the UK and a new exceeding country to the WTO. That has nothing. On Article 50, members and witnesses may wish to know that the High Court has just ruled that the Government has to consult Parliament before triggering Article 50. Dr Margulies. A quick point at that. Things like tariffs would be straight forward once, potentially more straight forward, but it's really the other commitments, like agricultural subsidies. Once the UK has renegotiated its relationship with the EU, its trading regime and has figured out what proportion of those subsidies, for example, agricultural subsidies, will keep from the EU, it still needs to get that approved from other WTO members, so there could be a situation potentially, and politically there's a lot of reason for this to happen, where the UK might not be able to, there might be uncertainty of whether it could provide certain kinds of programmes until it has a WTO broad membership agreement. This is unknown. It's not clear whether you will need to, because the fact is that currently the EU, and that might provide a little bit of flexibility in the negotiations between the UK and the EU, currently the EU is only using about 7% of its aggregate support measurement bound at the WTO. We have bound a level up to which we can subsidise as EU agricultural production, and we are currently using only 7% of that level, so there is still a margin for the UK to get a share about that 7% level, and there is also a question that, in so far as you're not going to change the level, you're not going to go about the maximum level, whether or not you will need the consent of the other members is not clear. You clearly need the consent of other WTO members when you're trying to change the concessions, go above. You cannot do that alone, but if you're trying to remain the same level or apply anything below what you have bound, it is not clear you will need the consent of the other members. So again, it all depends on what is negotiated with the EU, how far you will need to then go in the WTO. It all depends on what the terms of exit with the EU are. Thank you very much, Ross Greer. I was going to ask about timescales. I think that Stewart's questions covered that quite significantly. There seem to be pretty fundamental issues in that two years from now, we will be two years from spring of next year. We will find ourselves out with the European Union, but we are only beginning the process of new trade agreements. We mentioned SETA and TTIP already. SETA took seven years and almost fell at the final hurdle. TTIP looks to be dead in the water and took roughly the same amount of time to then fall. That presents huge issues for us moving forward, but I think that I have covered that. To complicate it further, there are significantly different political and economic desires within the UK for what those relationships are. Do you think that there is the possibility for differentiated agreements, i.e. for Scotland to retain closer relations with the rest of Europe? It is a situation in which Scotland was within the EU, but the rest of the UK was not. That is a huge question that is so late on in our discussions. It very much depends. The structure of the negotiations is unclear whether that is even going to be a possibility that is going to be afforded to us by the UK Government. However, just to treat it on a fundamental level, our exit from the EU as the whole of the UK is going to involve some form of border. It is inevitable. We have essentially been borderless with the single market. There is going to be some form of border. What you are raising is the possibility that is the location of that border. It is an absolutely fascinating notion, but it is essentially uncharted territory unless some of my fellow panellists have some insight into it. It is something that does exercise me, but at present I have no answers. I mean, looking at it from a Brussels point of view, the EU has exclusive confidence for trade. I am not sure if you are talking about after the UK leaves, or before, but before the article 50 process, if we are going into an article 50 process, before that is completed, there is no way that any part of the EU-separate region can negotiate a trade agreement because the EU has exclusive confidence over international trade and most aspects of international trade. The only thing would be in areas where there is no exclusive confidence in trade promotion, investment promotion and such things, there is scope for Scotland or any other region to promote its own economy, but not to conclude specific agreements. Subsequently, it is a question of who has confidence then for negotiating international trade agreements, whether it is Scotland or whether it is the UK. Can I come back to one particular point? Dr Margulis said a few minutes ago that a standalone car deal is not possible, but he had noted previously that there was a standalone car deal within WTO rules between the US and Canada some years ago. When you say no possible, I take it that is a political judgment rather than a legal prohibition. I think that it is a combination of both. Dr Ewing was referring to the US-Canada Autopact, which is a unique and very old agreement from the 50s and 60s. The US historically, because of its role in the global economy and in global politics, has always been able to get historically special deals in the gap in the international trade system. The UK is not the US, and I think that is important to note. It does not have that kind of special significance to the global trading economy. It is not such a significant player. I think that there is both a political dimension to this, but also legally you cannot have special sectoral deals unless it is under a comprehensive trade agreement. You have to have both. It is a clear legal prohibition. The rule in WTO law is when you enter in a free trade agreement, you need to satisfy the requirements of article 24 of the GAT, which requires you to negotiate a free trade agreement that covers substantially all trade between the parties. No matter how big one sector is, I do not think it will qualify in most systems as being equivalent to substantially all trade, meaning about 80-90% of the trade between the parties entering the agreement. Unless you are in a situation where that one sector covers 80-90% of your trade with the other party, no, then you will be infringing WTO rules. On that topic, I know that CETA has considered one of the most comprehensive free trade agreements ever to be negotiated, but, certainly, from our briefing, there are a number of exceptions that do not cover financial services and tariffs applied to beef and pork after 50,000 tonnes. Clearly, even the most comprehensive free trade agreement is not nearly as comprehensive as being a member of the single market. Article 24 is not the legal expert, but it seems to be a case that there is a degree of flexibility in it. The free trade agreement, as Dr Maran Dura has said, is to cover substantially all trade, but that substantially gives you some wiggle room. As far as I am aware, none of the free trade agreements that have gone through and there are now hundreds of them that have been accepted by the WTO have been turned down on the basis of article 24. That includes things like the European Free Trade Area, which, when it was established, was only on manufacturing. It excludes agriculture and fisheries. However, if you could go back to the days of the US-Canada Autopact and say that if it works for Canada and the United States, Nissan can get the same deal, I think that that is probably pushing it too far. Just in terms of the practical application of the rule, there is room to interpret substantial, but I do not think that the car industry will be enough. I think that there are two issues there. Substantially all trade does give you some flexibility also, but if you look at the practice of the WTO, the risk that you are challenged in the dispute settlement, because your free trade agreement is not compliant with article 24, is very small. We do not know what substantially all trade means, because it has never been interpreted. The reason is that WTO members do not challenge each other on the compliance of the regional trade agreements, because they are only involved in regional trade agreements. Once you challenge me, and we have a clear interpretation of what substantially all trade means, I go and challenge you. There has been this political pragmatism of avoiding direct challenges to regional trade agreements in the WTO. Whether they are compliant or not, we do not know. They have not been challenged. That is all very interesting. Thank you very much for your contributions today. We could have gone on longer, but unfortunately we are over our time already. Thank you very much for coming to give evidence today, and I will now suspend the session.