Category: Policy & Business

Future Trade Arrangements

On 9th July, the EU Commission released an update on its readiness for the changes to the UK-EU trading relationship once the Transition Period ends on 31st December.  The update (available here), was released just after the latest round of negotiations in London had finished which confirmed that ‘significant divergences’ remained between the UK and the EU’s positions. 

Changes in any Scenario

The key message is that significant change is going to happen from 1st January, irrespective of whether the UK and the EU reach a Deal, as the UK will become a third country from that point in its dealings with the EU.  Businesses must begin preparations now as barriers to trade will emerge in both directions. These changes include;

  • UK will leave the Single Market, Customs Union and all international agreements negotiated by the EU will no longer be applicable. (For trade, the UK is working on Continuity Agreements to replicate existing EU agreements).
  • Trade in Goods (note that these changes will not apply with respect to EU trade with Northern Ireland, due to the Irish Protocol):
    • Customs formalities: will apply and controls will be applied on a risk basis on exports into the EU from 1st January.
    • Economic Operators Registration and Identification (EORI) number: UK-issued EORI numbers will no longer be valid and companies will need a new EU EORI number or appoint a EU customs representative where applicable.  This is a crucial pre-requisite to doing any trade with the EU in the future.  
    • Authorised Economic Operator (AEO) authorisations or other authorisations: issued in the UK will no longer be valid in the EU. Where companies wish to obtain EU authorisations, they will need to apply in an EU Member State. 
    • Rules of Origin: originating status of goods traded between the UK and the EU will need to be proven, if it is to avail of any preferential treatment (e.g. under a UK-EU Free Trade Agreement (FTA)). Goods not meeting origin requirements will be subject to customs duties. 
    • VAT and excise duties: will be applicable upon importation into the EU from the UK. 
    • Product certification, authorisation and labelling: UK exports will need to comply with EU rules and will be subject to regulatory checks concerning safety and regulatory compliance controls. Labels for products placed on the EU market, issued by UK bodies will no longer be accepted in the EU (but existing stocks of products placed on the EU market before 31st December will still be permissible).
    • Pre-existing EU(28) WTO Tariff Rate Quotas (TRQs): it is intended that these will be apportioned based on historical trading patterns. However, other WTO members have raised objections to this approach and it remains to be seen how this issue will be resolved to the satisfaction of all parties (i.e. EU, UK and other WTO members). 
    • Additional information by product category: has been made available, in the form of Readiness Notices, by the EU Commission. Businesses trading with the EU should familiarise themselves with the applicable notices (accessible here). 
  • Trade in Services: UK companies and nationals will no longer have the freedom of establishment and provision of services when operating in the EU and vice versa for EU nationals and companies supplying services and operating in the UK.  Authorisations granted by UK authorities under the EU Single Market Framework will no longer apply from 1st January.  Whilst the agri-food industry primarily concerns goods, many products now have a service element as well.  Businesses offering services to the EU need to ensure that they are complying with the new requirements, this could potentially entail establishing a subsidiary company in the EU.
  • Irish Protocol: in previous articles we have reported that the Protocol would apply on goods trade, meaning that there would be no regulatory barriers on trade between Northern Ireland (NI) and the Republic of Ireland and the rest of the EU.  In that sense, Northern Ireland would be seen as an assimilated EU Member State with respect to its trade with the EU, whilst remaining part of the UK Customs Territory.  Regulatory checks imposed by the EU on third country trade would be applied to points of entry into NI.  This includes products shipped from GB into NI.   

No Trade Deal Scenario

The issues covered under the auspices of the Withdrawal Agreement (e.g. citizens’ rights, financial settlement and the Irish Protocol) will continue to apply even if the UK and the EU cannot agree a future trade deal.  However, as previous articles have noted, the application of customs duties to UK-EU trade will have the biggest impact under a No Trade Deal scenario.  The agri-food sector would be the worst affected as it is subject to the highest tariffs which have the potential to devastate UK-EU trade in some areas (e.g. sheepmeat exports to the EU).

Conclusion

It is clear that whichever form the future UK-EU relationship takes, significant changes to agri-food trade between both parties is imminent.  Businesses should no longer be adopting a ‘wait-and-see’ approach or hoping for an extension to the Transition Period.  They must prepare now and ensure that their supply-chains are secure, both on the inputs and outputs side.  In many EU Member States, businesses are preparing for the worst and hoping that a somewhat better future relationship will emerge.  We are unlikely to know what form that might take until October.  Preparations need to be well underway by then. 

CS Deadline

The RPA has announced that those struggling to get a Countryside Stewardship (CS) Mid-tier application submitted by 31st July deadline can ask for an extension.  It recognises that, in particular, agents working on a number of applications are finding it is taking them longer to gather all the information required because of Coronarvirus restrictions.  In such cases, it is possible to email the RPA at [email protected] by 31st July to request an extension.  The email subject heading should be ‘CS 2020 Mid-Tier application extension’ and details of the application, such as business name, SBI and application number should be included.  No specific evidence is required as to why the application cannot be completed on time.  It is possible to phone the RPA helpline (03000 200 301) if email is not possible.  Once the RPA have been informed, this will give the applicant until midnight on 31st August to get their Mid-tier submission in.  The extension does not include the four simplified CS Wildlife offers; the deadline for these remains 31st July.

Covid 19: Second Phase Recovery Package

The Government has announced a package of measures designed to assist with the recovery from the Coronavirus pandemic.  This ‘Second Phase’ is about stimulating the economy as it reopens after lockdown – it comes after ‘First Phase’ schemes such as furlough and business grants that were designed to limit the immediate damage of the lockdown.  There will be a Third, ‘rebuilding’, phase – likely to be the focus of the Chancellor, Rishi Sunak’s, autumn Budget, probably held in October.  The Government has made little mention of what might be the ‘Fourth Phase’ – paying for all these measures.  This package alone amounts to £30bn worth of spending promises.  

The measures, announced in a ‘mini Budget; on the 8th July, were targeted at jobs – particularly in the hard-hit hospitality sector.  They included the following;

  • a reduction in VAT from the standard 20% to 5% for food and non-alcoholic drinks purchased in restaurants, bars, pubs cafes etc.  The reduction applies from 15th July to 12th January 2021.
  • VAT on the provision of accommodation and entrance to attractions will also be cut to 5% for the same period.
  • there will be a ‘Eat Out to Help Out‘ scheme.  Meals and non-alcoholic drinks will be subject to a 50% discount from Monday to Wednesday through the month of August at participating establishments – up to a limit of £10 per head.  The Government will reimburse restuarants, pubs etc. for the full cost of the 50% discount.
  • a Job Retention Bonus of £1,000 will be paid to employers for every furloughed employee that is kept on until the end of January 2021
  • a Kickstart Scheme will offer 16-24 year olds 6-month work placements.  The Government will fund 100% of the relevant minimum wage cost.  There will also be increased funding for Apprenticeships, the Careers Service, Traineeships and other job-support measures.
  • a Green Home Grant will provide funding up to £5,000 per dwelling for homeowners and landlords to make energy-efficiency improvements.
  • there will be a temporary increase in the nil-rate band of Stamp Duty Land Tax (England and NI only) from £125,000 to £500,000.  This runs from 8th July to 31st March 2021.
  • there was the usual announcement of infrastructure spending (although, also as usual, it was difficult to work out how much was new and how much was the recycling of existing annoucnments).

Full details of many of these initiatives is awaited.  For any diversified farm business, the VAT reductions might be useful.  There may also be opportunities within the employment schemes to find new staff members at reduced cost and within the energy efficiency grants.   The Government’s full announcement can be found at – https://www.gov.uk/government/publications/a-plan-for-jobs-documents.

Fox for WTO

The UK has nominated Liam Fox to head the World Trade Organisation (WTO).  Dr Fox was previously Trade Secretary and is a committed Brexiteer.  He famously stated that the trade deal between the UK and EU would be ‘one of the easiest in history’.  The WTO is looking for a new Director General to replace the Brazilian Roberto Azevedo.  The organisation is widely believed to need a new impetus as it has been damaged by the rise in global protectionism and especially the Trump administration’s hostility to it.  Other candidates have been put forward from Mexico, Kenya, Saudi Arabia, Nigeria, Egypt, South Korea and Moldova. Dr Fox is considered an outsider in the race.  With the UK embarking on an independent trade policy free of the protection/shackles [delete as appropriate – Ed] of EU membership, a strong, rules-based, international trading system is very much in our interest.  Having ‘one of our own’ in the top position would be no bad thing either.

 

Trade and Agriculture Commission

A new body is to be set up to protect UK food standards under future trade deals.  Liz Truss, the Minister for International Trade, announced on the 29th June that the Government had agreed “in principle” to set-up a Trade and Agriculture Commission.  This would advise Ministers on the UK’s approach to post-Brexit trade agreements.  Whilst it must be highlighted that any recommendations this body puts forward would be advisory only, and is intended to be time limited, the development was widely welcomed in the agri-food sector.  The Commission’s key areas of focus include;

  • Consider what policies the Government should adopt in free trade agreements to ensure that British farmers do not face unfair competition and that high animal welfare and production standards are not undermined.
  • Consider how the UK should engage at WTO level to advance higher animal welfare standards more globally.
  • Reflect consumer interests and those of developing countries.
  • Develop trade policy to open up new export opportunities for UK agrifood which benefits the wider economy.

This is seen as a success for the lobbying activities of farming bodies such as the NFU.  It is also a win for Defra; despite the Commission being set up under the auspices of the DIT, Defra has been arguing strongly for the implications of trade policy on agri-food to be recognised in policy-making. The critical issue will be who will be participating in this body, its precise terms of reference, and the extent to which the Government takes its views into account.  Commissions have been set-up in the past to great fanfare but have a chequered record in terms of their influence.  That said, it is vital that the UK agrifood industry engages constructively with this body and to ensure that its voice is heard loudly when new agreements are being negotiated. 

Agricultural Qualification

A new farming qualification is being developed as part of the new T-Level qualification.  T-Levels will be one of the three major options available to students aged 16-19 alongside A-levels and Apprenticeships.  A consultation has been launched by the Institute for Apprenticeships and Technical Education focused on the content of the course, which is expected to include crop production and livestock husbandry as well as floristry, habitat management, horticulture, land-based engineering and forestry.   T-Levels will be for two years with 80% classroom-based learning and 20% industry placement and will be equivalent to 3 A-levels.  The aim of the course is to try and attract more young people into agriculture as the average age of farmers increases to 60 years.

Financial Discipline

Those who made a BPS claim in 2019 in excess of €2,000 should be receiving a reimbursement shortly via the Financial Discipline Mechanism (FDM).  The rate being used for 2019 is 1.371% (1.346% in 2018).  The RPA calculates the reimbursement by taking the 2019 payment, deducting the first €2,000 and any other reductions (i.e. for a late claim), but not cross compliance penalties.  This figure is then multiplied by 1.371% and any cross compliance penalties are deducted to give the final amount.  Payments will start hitting bank accounts from 1st July.  This is considerably earlier than the usual September payment date.  Remittance advice slips will be sent with ‘FDM Reimbursement’ on them once payment has been made.

Financial Discipline is the mechanism which the EU allows for a crisis reserve to be available to the farming industry if required for such things as a disease outbreak, but without exceeding the European budget.  Each year a percentage is removed from the BPS across all Member States, called Financial Discipline.  If the FDM fund is not all used to relieve a crisis it is paid back to those with an eligible claim in the following year.  This refund is being paid to eligible 2019 claimants from the 2018 FDM fund.  In the future, (post Brexit) Financial Discipline will not deducted from payments.

Agricultural Transition & Autumn Lettings

Recently we have received a few queries regarding future farm support in England and in particular how this might affect agricultural lettings.  We therefore thought it might help readers if we refreshed what we do know and also highlighted possible problem areas.

The Agricultural Bill has passed through the House of Commons and is now in the House of Lords.  It is expected to become law by the end of the summer, without many amendments, particularly surrounding the future support mechanisms contained within it.  The Bill, however, only sets out the Government’s ‘broad powers’, it does not give details of how the powers will be used.  A consultation on how changes in support will be enacted (especially the phase-out of the BPS) is expected in the Autumn, with some commentators expecting something from Defra by September.

Agricultural Transition

We do know direct support (the BPS) will be phased-out from 2021 to 2027 (Agricultural Transition) and replaced by the Environmental Land Management (ELM) scheme, together with other schemes to help increase farm productivity, animal welfare and support for Producer Organisations.  There has been quite a lot of lobbying to delay the start of the Transition by one year, but Defra appear to be resisting this and as this date is included in the Agriculture Bill it looks set to commence next year.  This will mean in 2021 we expect to have a direct payment scheme similar to the current BPS but payments will be reduced as follows:

Currently we only know the deductions for 2021.  It is hoped the consultation later in the year may shed some light on future % reductions.  Our view is that as the ELM scheme is not due to be launched until 2024, the deductions in the first few years could be relatively slow.  These could then increase more sharply as funds are redirected/required for the ELM scheme later in the Agricultural Transition.

De-Linking

This is a mechanism that breaks the link between receiving support and occupying agricultural land.  Once support is de-linked a farmer could double the size of their holding, or stop farming completely – they would still get the same future stream of income tapering-off to 2027.  It effectively gives the claiming business a right to the future support.  The key point is that it will be based on what the claimant received in a ‘reference year’ (or years).  The reference year is not yet known and this will determine who gets the support through to 2027.

De-linking will definitely happen, it is written in the Agricultural Bill, but it cannot happen before the 2022 claim year.  So we are expecting the 2021 scheme structure to be similar (or the same) as the 2020 scheme year with entitlements, which presumably can be traded.  

The closer the reference year is to de-linking the less ‘problems’ there will be due to changes in business structures or land occupation.  It would therefore seem logical for it to be 2021, but earlier dates or even a range of dates is possible.  The EU has usually used a date before any announcement has been made so that people cannot ‘profit’ from the system.  There is likely to be force majeure and business change provisions similar to those which operated when the Basic Payment was introduced – but details of these are also unknown.   

Any Tenancy Agreements written pre-2019 are unlikely to have any clauses in them which deal with de-linked payments.  If a Tenant has made a BPS claim which included the reference year, the right to the future income stream would become vested in the Tenant.  If the Agreement is brought to an end during the Agricultural Transition the Tenant would still have the right to receive the de-linked income stream and the land may not have any ‘support’ for the incoming Tenant.  Of course the incoming Tenant may have some ‘support’ to ‘bring’ with him, and so we can already see the problems with what rent level can be asked or what price Tenant’s will be prepared to pay – every situation could be different.

Those preparing agreements this autumn will need to ensure they contain clauses to try and protect the Landlord’s position in case 2021 is the reference year, so that he/she can offer the right to receive future support along with the land for incoming Tenants.  If 2019 or 2020 turns out to be the reference year then it may already be too late.

Lump-Sum

This must not be confused or ‘bundled-up’ with de-linking.  It is the idea that the future stream of income from de-linked payments is rolled-up into one single payment.  But it is separate from de-linking and is only an option in the Agriculture Bill; it may not be introduced in 2022, it may not be available to everyone, it may not even be introduced at all.  More information is (again) expected in the upcoming consultation.  The idea is that it could be used as a retirement sum or allows for investments to be made.  If it is introduced, it is unlikely to be available to everyone at the same time, as there just wouldn’t be enough budget if everybody took it up!  But there might be an age threshold for example.  For those Agreements which come to an end within the Agricultural Transition, the Tenant could potentially leave with a de-linked lump-sum.

Environmental Land Management

Once the BPS has been phased out, the main support for farmers will be the Environmental Land Management (ELM) scheme.   But in a Landlord and Tenant situation or Contract Farming Agreement how is it going to be dealt with? This looks like an area where they’ll have to be a lot of ‘sorting out’ over the next 5-10 years as a new normal gets established.  It certainly does not look like it is going to be as simple as the BPS.

For AHAs and existing long-term (whole farm?) FBTs it will likely be down to the tenant to decide whether to enter or not.  But the ability to pick up ELM payments will presumably be part of the earnings potential of the holding and would therefore come into consideration of the rent.  This might become a contentious area in rent reviews in the future – what if the Tenant had entered into a low-level, low income, ELM agreement, but the Landlord thought that he/she should have gone for a higher-paying one and be paying more rent?

For new/short term FBTs, we might well see situations where the Landlord wants to be the claimant, both so that they are in control of what happens and so they are guaranteed the income.  Of course, it depends on the detailed ELM rules – will Landlords even be able to apply if the land is let out?   The land would therefore be let ‘naked’ without any support and the rent would reflect this.

Any tenancy agreement would have to bind the Tenant to adhere to the ELM requirements – as has been done in the past for ES / CS agreements etc.  But this is not always the best approach, as the Tenant (the actual land manager) hasn’t got any financial stake in the ELM agreement.  This might become more of an issue if the payment methods become more sophisticated over time – e.g. payment by results, reverse auctions etc.  Perhaps some revenue-sharing model would be the answer – but with the Landlord still remaining the agreement holder?

There are also Contract Farming Agreements (CFAs) to consider.  There has been differing opinions in the past on whether BPS has been included in the ‘pot’ or not.  Often agri-environmental payments have been kept out of agreements and remain with the farmer (land provider).  Will ELM payments go in the pot or not?  Perhaps not – which might have an effect on first charges and divisible surpluses in some cases.  But where the ELM scheme requires a sophisticated on-the-ground management, it might have to go into the agreement to get buy-in from the contractor.

Unfortunately we are posing more questions than answers, but hopefully this article highlights key areas which will need to be kept abreast of over the coming months, especially ahead of autumn lettings.  The consultation in the autumn should help to answer a few questions as we adjust to the new arrangements over the next 5-10 years.

EU Brexit Talks

Whilst multiple rounds of negotiations have taken place, talks with the EU have been stalling due to impasses on several key issues.  These include governance (role of the European Court of Justice), ‘level playing-field’ issues, fisheries, criminal and judicial cooperation as well as the implementation of the Irish Protocol.  On 15th June, the Prime Minister and the EU Commission President, Ursula von der Leyen, held talks where they agreed to intensify negotiations (to be held on a weekly rather than fortnightly basis) in a bid to secure a deal.  Most analysts now believe that it will be October before a deal is likely to emerge.

Transition Period Extension

It now seems that the deadline for extending the Transition Period beyond 31st December this year will pass with a whimper rather than a bang.  The UK Government has made it clear it will not be asking for an extension before the 1st July cut-off.  The EU sees little point in asking for one from its side as it simply provides an opportunity for the UK to say ‘no’.  There is a top-level committee that meets just before the deadline, but the conference call between Boris Johnson and von der Leyen has effectively ended the chance of extending the Transition.

There is still a wide gap between the parties to bridge on many issues over the next three or four months.  Many commentators now believe the most likely outcome is a ‘bare bones’ deal before the end of the year.  Negotiations may then continue in the months that follow, including January and beyond, to fill in the details.  Negotiators could return to the deal over the years that follow to add elements or deepen the provisions (depending on political will).  This all highlights Brexit is a process rather than an event.  And it is all a long way from the ‘easiest trade deal in history’ promised by Liam Fox back in 2017.  

Level Playing Field

From an agri-food perspective, much of the focus is on the level playing-field issues, particularly which standards will apply in the UK from January.  Whilst the UK Government has mentioned that the same high level standards will continue to apply, others believe that some dilution in standards is likely to take place as the UK tries to secure trade deals elsewhere.  During a House of Commons debate on 11th June, Michael Gove stated that the UK Government was “committed to making sure that high animal welfare and environmental standards continue to characterise British farming, which is the best in the world.”  During the same debate he also mentioned that the food available to consumers would “always meet high quality standards”.  Arguably, this latter statement could have a looser interpretation which leaves open the possibility of accepting alternative standards on some imports.  As previous articles have noted, the EU is keen to ensure that the UK’s standards remain as close as possible to the EU’s, otherwise, EU exports will not be as competitive in the UK market.  This would put pressure on prices within the EU due to an excess of supply if alternative markets cannot be found.

In an attempt to resolve the level playing field impasse, there are reports of a proposed compromise that the UK would reserve the right to diverge from the EU’s standards in the future but that Brussels would have the right to impose retaliatory tariffs or place restrictions on the UK’s access to the Single Market for services. Although some view this compromise as having the potential for constant friction in the UK-EU relationship, it has the potential to open-up a landing zone for a Deal. But, time is very tight and a breakthrough is needed soon if the October deadline is to be met.

Post-Transition Border Controls

On 12th June, the UK Government also announced that it plans to delay the full imposition of border checks on imports from the EU, but acknowledges that exports from the UK to the EU27 are likely to be subject to checks from the outset. Border controls would be introduced over three stages from January to July 2021.

  • Stage 1 (from January 2021): traders importing standard goods will need to prepare for basic customs requirements (e.g. keeping sufficient records of imported goods) and will have up to six months to complete customs declarations. Although tariffs will need to be paid on all imports, payments can be deferred until the customs declaration has been made. Checks on controlled goods like alcohol and tobacco will take place. Businesses will also need to consider how they account for VAT on imported goods. There will be physical checks at the point of destination or other approved premises on all high risk live animals and plants.
  • Stage 2 (from April 2021): all products of animal origin (POAO) (e.g. meat, pet food, honey, milk or egg products) and all regulated plants and plant products will require pre-notification and the relevant health documentation.
  • Stage 3 (from July 2021): declarations required at the point of importation for all goods and relevant tariffs must also be paid. Full Safety and Security declarations will be required, while for SPS commodities there will be an increase in physical checks and the taking of samples. Checks for animals, plants and their products will take place at GB Border Control Posts.

Implementation of Northern Irish Protocol

Whilst these arrangements will give UK businesses some more time to prepare it is important to note that regulatory checks on trade moving from GB to Northern Ireland are likely from January 2021 as a result of the provisions of the Northern Irish Protocol. This has the potential to create significant friction on agri-food trade between GB and NI. Whilst the UK Government has sought to alleviate this by announcing plans to reimburse companies for any imposition of tariffs, there are a lot of questions around how all of this would work. For instance, what paperwork would be required? How long would it take for reimbursement as the application of tariffs would have a significant impact on cashflow, even if they are only applied where goods are deemed “at risk” of entering the Single Market? A concept that is still quite vague and it would be helpful if the EU could define more precisely what would constitute a material risk to its Single Market.

Furthermore, there are State Aid Rules issues (which NI businesses would still be subject to). These rules limit the amount of state aid that companies can receive (circa €200,000 over 3 years). Given the substantial tariffs applicable in agriculture, some companies will quickly run up to these limits. 

Although numerous challenges remain with the introduction and implementation of the Northern Irish Protocol, there has been progress in several areas recently. The HMRC have provided some details on the regulatory arrangements it plans to introduce on GB to NI trade. This includes;

  • Declarations: a Pre-Import Declaration and a Safety & Security Declaration will be required. A Transit Accompanying Document might also be needed, particularly if consignment is route from GB to Northern Ireland via the Republic of Ireland.
  • Goods Movement Reference: will be used to notify the authorities of the consignment details, vehicle and shipping details.
  • Pre-Lodgement Model: would be used so that declarations and pre-notifications would be undertaken before shipping from GB.
  • Risk Assessments: would take place whilst consignments are at sea.
  • Upon Arrival: a confirmation would be provided before arrival if consignment is okay to proceed, or if a check is required.
  • Goods Vehicle Movement Service (GVMS) IT platform: will link the various documentary declaration references with the vehicle registration references so that one reference can be presented at the frontier.
  • SPS checks: details emerging from the negotiations suggest for UK exports to the EU (including EU checks imposed at NI ports and airports) all consignments will be subject to Documentary and Identity checks and physical checks will take place on up to 30% of consignments, with a 15% physical check rate likely for red meat. Whilst these physical check rates are lower than the EU default for third countries (50% for poultry meat and 20% for red meat), they have the potential to create significant friction.

It has been reported that the HMRC plans to have its IT platforms ready for testing in September or October before they ‘go live’ from 1st January. Although it is reassuring that the HMRC appears to be making significant progress, the timeline remains immensely challenging. It leaves little room for error, which has been a challenge with previous IT systems. Of course, whilst the authorities might claim to be on course for “being ready” for the 1st January, it is another matter entirely whether businesses are ready. Business groups have been calling for a six-month delay before the Protocol becomes fully operational. The Covid Crisis has meant that many businesses have been unable to focus much on preparing for the post-transition period of late. Few believe that businesses will be ready for the changes due to come into force on 1st January. It is evident that some form of further implementation (or application) period is needed.

EU Negotiations Timelines

Below is a summary of the key milestones anticipated in the months ahead.

  • 1st July 2020: deadline by which any extension of the Transition Period must be agreed. The UK has already said that it would not be seeking an extension and the EU has noted this.
  • 15-16th October 2020: European Council due to take place. A deal would need to be reached by this point, with legal texts finalised, to permit the EU to undertake its ratification process.
  • October – December 2020: conclusion and ratification of first UK-EU future relationship agreement.
  • 10-11th December 2020: European Council due to take place where any agreement is likely to be formally adopted.
  • 31st December 2020: Transition Period formally ends.
  • 1st January 2021: new UK-EU trading relationship applies. UK applies limited border control checks on imports from EU. EU likely to impose full regulatory checks on exports from the UK, including at NI ports and airports.
  • January 2021: negotiations on outstanding issues of the UK-EU trading relationship likely to commence. The various Joint Committees planned during the EU Withdrawal negotiations will play a key role.
  • April 2021: UK introduces full regulatory checks on all POAO and plant products.
  • July 2021: full regulatory checks and payments of tariffs on all goods at the UK border.

 

Trade Talks with Non-EU Countries

In recent weeks, there has been a noticeable increase in the pace at which the Department for International Trade (DIT) is seeking to conduct negotiations on free-trade with non-EU countries.  In addition to the highly-publicised negotiations with the US which commenced in mid-May, talks have also commenced, or are about to commence, with Australia & New Zealand and Japan.  This is in addition to negotiating ‘Continuity Agreements’ with various countries so that the UK can continue to trade with them after 31st December 2020 as it did when it was an EU Member State.  

UK-US Trade Negotiations

When the UK set out its negotiating objectives for a Free Trade Agreement (FTA) with the US back in March, it noted that US-UK trade was valued at nearly £221 billion and accounted for nearly 20% of the UK’s exports.  It claimed that, as a result of an FTA between both countries, trade could increase by £15.3 billion in the long-run.  It is therefore seeking to secure a comprehensive and ambitious FTA with the US, but was also keen to emphasise that it ensure high standards and protections for British consumers and workers.  This contrasts with the US negotiating objectives published in February 2019 which seek to ‘promote greater regulatory compatibility to reduce burdens associated with unnecessary differences in regulatory standards’ and to eliminate ‘unjustified trade restrictions’ (including labelling) that affect ‘new technologies’.

Although the UK Government have noted potential gains that could be achieved for British agriculture (e.g. increased access for lamb and cheese exports to the US), most debate has centred on the potential threat posed by permitting imports from the US which do not meet the standards that British farmers (or imports from the EU and elsewhere) currently adhere to.  In addition to issues posed by chlorinated chicken, there are also concerns around hormone treated and lactic-acid washed beef finding its way into the UK market.  It raises the prospect of UK farmers having to continue to adhere to current high standards on animal welfare and the environment whilst simultaneously being subject to competition from US importers producing to lower standards.

Whilst the UK Government might claim that it will seek for global food standards to be raised at the WTO level, relative to the US it is a small economy.  The US accounts for 23.7% of global GDP whilst the UK accounts for 3.4%.  Bargaining power is always crucial during trade negotiations and this dynamic becomes even more pronounced under an ‘America First’ US Presidency.  The threat to UK food standards is very real.  An FTA that permits significant volumes of US produce, produced to US standards, to enter the UK market would seriously erode the competitiveness of the British farming industry, not just domestically, but also in terms of exports to the EU.  For example, each year between 25% to 40% of the UK lamb crop is exported, almost entirely to the EU, which are valued at approximately £350 million per annum.  An FTA that gravitates towards US standards will significantly reduce access to the EU.  Increased access to the US market via UK-US FTA will not compensate.  For instance, the DIT estimates that lamb exports to the US would increase be £18m.

Australia and New Zealand Negotiations

On 17th June, the UK formally announced its objectives for the upcoming trade negotiations with Australia and New Zealand.  Again, agriculture is likely to feature prominently, especially given the historical trading relationships which existed before the UK joined the EEC.

Another major focus of these negotiations will be the reduction in non-tariff barriers to trade as New Zealand in particular has embraced e-certification.  New Zealand’s standards are quite close to the status quo in the UK (and the EU); therefore its non-tariff barrier costs are already low for several products (e.g. lamb).

It is likely that increased access for beef, lamb, dairy and horticultural products will be amongst the key asks from Australia and New Zealand.  This would bring about increased competitive pressure on UK farmers but it is not attracting as much controversy because both countries’ production standards are perceived to be more acceptable than the US for example.  Geographic distance from the UK also limits their influence.  Indeed, both countries have been focusing more heavily on Asia in recent years.

From the UK side, its focus is on increased access for services, investment and digital trade.  Opportunities on the agri-food and drinks side appear to be limited to niche sectors such as the export of British sparkling wine and chocolate.

Japan Negotiations

These talks also commenced recently and, given that Japan recently concluded an FTA with the EU (which at the time included the UK), it is anticipated that such negotiations would be wrapped up quickly.  The Japanese Government is pushing for the talks to be concluded in approximately six weeks as it claims it needs to secure Parliamentary approval during the autumn session in order to be ready to become applicable in January.  The UK had initially hoped that it could roll-over the existing EU-Japan FTA into a UK-Japan equivalent, but the Japanese Government has sought separate negotiations in what is seen as a bid to secure greater concessions from the UK.  Like most FTAs, agriculture is a key issue.  Since the completion of the EU-Japan FTA, the Japanese Government has come under pressure from its highly protectionist domestic farming lobby to limit access to its market for agri-food.  The Japanese are also keen to secure the supply chains of its companies which use the UK as a base to supply into the EU so it is likely that it is also using these negotiations as leverage so that the UK secures a trade deal with the EU.

The UK Government claims that a UK-Japan FTA could increase trade between both countries by over £15 billion and that the UK economy could see a £1.5 billion benefit.  It remains to be seen what specific concessions Japan will seek on agri-food.  The UK already exports significant volumes of grain (e.g. wheat and barley) to Japan.  Export opportunities also exist for products such as whisky.

Other Negotiations

  • Comprehensive and Progressive Agreement Trans-Pacific Partnership (CPTPP): the UK has also reaffirmed its interest in becoming a member of the CPTPP which is one of the world’s largest free trade areas accounting for 13% of global GDP in 2018.  The CPTPP includes Japan, Australia and New Zealand amongst its members and negotiations with these countries are seen as a stepping stone towards joining this larger trade bloc which also includes Canada, Chile, Malaysia, Mexico, Singapore and Vietnam.
  • Continuity (Rollover) Agreements: with the UK leaving the EU, it is seeking to replace the FTAs which the EU had agreed with other countries whilst the UK was still a Member State.  To this end, it has been pursuing Continuity Agreements with these countries.  To date, agreements have been concluded with approximately 50 countries, including Switzerland, South Korea, Chile and South Africa, as part of the South Africa Customs Union and Mozambique (SACUM) trading block.  Negotiations are ongoing with 16 others, including Canada, Mexico and the Ukraine.  Such rollover agreements are anticipated to have a limited impact on agri-food as they are largely seeking to replace FTAs that the FTA was subject to as part of the EU.

Whilst pursuing trade deals around the world is a crucial aspect of the UK’s independent trade policy, one must not lose sight of the fact that exports to the EU (£300 billion) accounts for 43% of total UK exports.  Furthermore, imports from the EU, which accounts for 47% of the UK’s total, plays a crucial role in the supply-chains of numerous companies.  Any major disruption in the supply of inputs would inhibit UK manufacturers’ ability to assemble finished products for export.  This is also true within the agri-food sector.  Therefore, securing a comprehensive FTA with the EU should continue to be the priority.  This can be done whilst also securing FTAs elsewhere but a considered approach must be taken.

A key danger is that the UK Government agrees trade deals in haste and that this could come back to haunt the UK in decades to come.  The global geopolitical tectonic plates are shifting quite rapidly.  The danger of a new Cold War, between the US and China is emerging.  Trade between both countries could become seriously curtailed.  The US is already a big agri-food exporter to China.  If it needs to look elsewhere, the UK will be a key target market. 

In any trade deal there are (excuse the pun) trade-offs between different sectors to get an agreement.  The danger is that agri-food might be sacrificed to allow trade gains elsewhere.