Tag: Brexit

The UK-EU Trade and Cooperation Agreement (TCA) is continuing to experience ‘teething problems’.  This is perhaps hardly surprising as the agreement (click here for summary) was only agreed on Christmas Eve, with implementation beginning just over a week later.  From an agri-food perspective, these difficulties primarily relate to the Northern Ireland (NI) Protocol and Sanitary and Phytosanitary (SPS) issues which are examined below. Rules of Origin have also caused upheaval, but this issue was examined in a previous article (click here).

NI Protocol

Goods shipped from GB to NI are now subject to EU customs and regulatory controls upon entry into Northern Irish ports (e.g. Belfast and Larne).  It was obvious that difficulties would emerge both in terms of logistics but also from a political perspective.  Although some grace periods are in place, varying from 3 to 12 months, many businesses were unprepared for the new regulatory requirements.  There were numerous reports of GB-based firms being simply unaware of the new customs and SPS requirements.  This caused substantial delays in some cases.  Given the difficulties which have arisen, there was a meeting on 18th February of the Joint Committee overseeing the implementation of the Protocol and NI business groups.  The UK Government was represented by Michael Gove whilst the EU Commission was represented by its Vice President, Maros Sefcovic.  NI business groups called for pragmatism and are seeking the following;

• • Grace period extensions: to permit traders to have a longer timeframe to adapt to the changes set out in the Protocol.  This, they claim, would help to reduce pressure on supply-chains and give greater certainty to businesses that trade between GB and NI.  
  • Veterinary agreement: between the UK and the EU to reflect the low risk involved as both parties’ standards are effectively the same, particularly on trade from GB to end-users in NI.

The veterinary agreement issue is examined in further detail below.  It remains to be seen what the UK and the EU will be able to agree on the NI Protocol.  Michael Gove had already called for a grace period extension until 2o23.  The recent appointment of David Frost (previously Chief Brexit Negotiator) to the Cabinet to oversee UK-EU relations, a role which will also cover the NI Protocol, will add an uncertain dynamic as the Gove-Sefcovic working relationship had functioned quite well.  It remains to be seen what the EU will offer, but it is obvious that businesses need significantly more time to adapt and that rising political tensions need to be quelled.

Sanitary and Phytosanitary Issues

There were minimal easements in the SPS area within the TCA.  This, in addition to the EU implementing its border controls fully from January, meant that UK exporters were suddenly faced with a substantial increase in paperwork with only a few days’ notice.  Some have reacted by limiting the number of consignments being shipped to the EU until they get a greater understanding of how the procedures work.  There have been reports of hauliers being unwilling to depart warehouses, processing plants etc. until the paperwork for each shipment is in order.  As a result, port traffic volumes are lower than normal.  Holyhead-Dublin volumes are at 50% of normal levels.  Dover-Calais volumes are also down, but some recent evidence suggests they have been recovering in comparison with the drops witnessed in January.  As freight volumes increase during the spring, as is traditionally the case, border control systems are going to be tested.  Especially as additional certification and checks will be required on imports into the UK from April and will become fully operational in July.

Already there is evidence of insufficient veterinary capacity at ports. This creates backlogs for shipments needing to undergo physical checks.  These are effectively the same as the levels of checks that countries trading with the EU on WTO MFN terms experience.  Such checks, when coupled with sampling in some instances, can result in significant delays and create a major risk of product value deterioration.

To address this issue and the difficulties arising from the NI Protocol, the prospect of a UK-EU SPS (veterinary) agreement has been mooted. Here, there are two potential options:

1.  ‘Swiss-style’ SPS agreement: where the UK would align with, and follow, the EU’s standards as they evolve in future.  The Ulster Farmers’ Union (UFU) has stated that it would support such an arrangement. 
2. New Zealand-style agreement: where physical checks on red meat shipments for instance will be lowered from 15% to 1% to reflect the low risk levels and high alignment in standards.

The EU has stated that a veterinary agreement is ‘on the table’, however, they would envisage this being based on alignment with EU standards (i.e. Swiss-style).  Given the importance that the UK placed on sovereignty during the negotiations, it is unlikely to opt for this approach, particularly with David Frost at the helm.  However, a New Zealand-style agreement might be viewed more favourably.  Whilst this will not obviate the need for some border controls, particularly on GB-NI trade, if these could be moved in-land for ‘authorised (trusted) traders’, it would reduce the visibility of such regulatory checks to a significant degree. 

Whatever form a potential veterinary agreement between the UK and the EU would eventually take, the UK will insist on having the right to diverge in the future, if it so wishes (e.g. to do a trade deal with the US).  In such a scenario, the UK would give a notice period (e.g. the EU-NZ agreement has a 6-month notice period) and it would then be likely that SPS controls would revert back to the current default, with some additional arrangements under the NI Protocol.

What is increasingly clear is that the UK-EU relationship will be continually subject to negotiations.  In effect, the ‘teething problems’ are more like a permanent toothache and will require constant attention to keep their impact to ‘manageable’ levels.  The appointment of David Frost to the Cabinet confirms this.  Therefore, one should not see the ending of the Transition Period in January as the ‘end of Brexit’, perhaps it is more like the ‘end of the beginning’ of the new era of UK-EU relations. 

Having been agreed on Christmas Eve and becoming effective just over one week later, it is unsurprising that challenges have arisen for agri-food traders as a result of the UK-EU Trade and Cooperation Agreement (TCA).  The TCA (click here for summary) is perceived by many to be a ‘thin’ deal as it only focuses on delivering tariff-free and quota-free trade in goods; it delivers little in terms of services and reducing trade friction (non-tariff barriers).

It is in relation to the latter that agri-food trade has been significantly affected, as the EU’s border controls on UK exports became effective immediately.  Trade frictions have been experienced in two key areas:

1. Customs and Sanitary & Phytosanitary (SPS) controls: whilst there are some limited easements in the TCA on Customs issues (e.g. allowing the pre-lodgement of documents), these are less than many would have hoped for.  There are even fewer easements in the SPS area with most of these limited to trade between GB and Northern Ireland.  Here, a grace period has been agreed which varies from 3-12 months for specific items.  As a result, traders have suddenly been faced with a substantial increase in paperwork with only a few days’ notice.  Some have reacted by limiting the number of consignments being shipped to the EU until they get a greater understanding of how the procedures work.  Hauliers are unwilling to depart warehouses, processing plants etc. until the paperwork for each shipment is in order.  This has meant that port traffic volumes are lower than normal.  For instance, traffic on the Dublin-Holyhead route is down by 50%.  Volumes traditionally start to increase during the spring.  This will be a key test of the ability of border control systems to cope, especially as additional certification and checks will be required on imports into the UK from April and will become fully operational in July.

When both the UK and EU border controls are fully operational, the physical check rates for SPS purposes will be as follows:

• • live animals – 100%
  • minced & poultry meat, dairy products & eggs – 30%
  • red meat & poultry products, ambient dairy & eggs, fertiliser – 15%
  • semen/embryos, animal by-products – 5%; highly-refined products – 1%

These check rates are effectively the same as the levels of checks that countries trading with the EU on standard WTO MFN terms experience.  A proportion of these loads will then be subject to sampling.  Selections will be risk-based and shipments could be delayed by several days which will have a significant impact on product value deterioration for the ‘unlucky loads’ affected. 

1. Rules of Origin (RoO): essentially determine the ‘economic nationality’ of a goods consignment.  They aim to prevent goods manufactured in third countries, but routed through the UK (or EU), taking advantage of the zero tariffs.  They are particularly significant for industries (e.g. car manufacturing, composite foods) where components/ingredients are sourced from multiple countries.  RoO can be expensive for businesses as they have to demonstrate the origin of their product.  Whilst the TCA has allowed traders up to 12 months to supply evidence that the goods they are trading between the UK and the EU meet RoO requirements, this is considered to be of limited use as the evidence will still be required.  The TCA also allows both the UK and EU to count inputs from the other party when assessing the origin of goods.  The UK had wanted to include content from other countries towards meeting the rules of origin requirements (e.g. Canadian wheat used to produce flour for bread-making) but this was rejected by the EU.

There are three general levels of RoO, all of which must be met in order for a good to be traded between the UK and the EU on a tariff-free basis:

• • Eligibility of goods: do the goods concerned meet the RoO criteria (e.g. ≥85% of content by weight) is eligible for tariff-free trade?
  • Certification: can the trader provide adequate certification that the goods are eligible (e.g. Rules of Origin certificate)?
  • Shipping and product-specific requirements: has the end-product undergone sufficient processing in the UK/EU before it is subsequently traded.  Generally speaking, if there is a change in the tariff code as a result of processing, it would be deemed as sufficient.  Other issues can include means of transportation, cumulation arrangements etc.  Retailers such as Marks & Spencer who operate a distribution hub covering the UK and Ireland have been particularly affected by this issue.  Some of their products are procured from the continent in large consignments and then broken down into smaller consignments for shipment to Ireland.  As such products have not undergone sufficient processing, a tariff is payable upon re-entry to the EU. 

Generally speaking, if a consignment fails on one of these levels, then the products will fail to meet RoO requirements.  This is why Rules of Origin are fiendishly complex.  

For each business, it is vital to assess how the TCA will affect the products that it trades, not just between Britain and Europe but also between GB and Northern Ireland, where the NI Protocol is now operational.  The challenges here have  prompted some suppliers (e.g. Ethical Dairy Company) to cease serving NI customers.  From a business perspective, trade has become more complex.  But, once businesses become more familiar with the specific requirements that apply to their goods, some of the teething problems will be overcome.  However, the UK-EU trading relationship has fundamentally changed, meaning some of the challenges are set to become permanent fixtures.  It is likely to mean more single-product, single-consignment loads being traded as opposed to the multi-product, multi-consignment shipments of the past.  This will have an impact on value-added, particularly on high-value exports (e.g. high-end prime boneless beef cuts). 

Finally, it merits mentioning that in terms of SPS especially, the TCA is a framework that can be built upon.  Particularly in terms of reducing the levels of physical checks in the future.  However, this is contingent on close alignment on standards between the UK and the EU.  Here, the British Government is going to have a delicate balancing act in terms of the trade agreements it completes with other countries and the importance it places on trade with the EU. 

On 24th December, the UK farming industry has received an early Christmas present as a Free-Trade Deal (FTA) was agreed with the EU, meaning that agricultural goods’ trade with the EU will not be subject to tariffs or quotas.  This Trade and Cooperation Agreement should minimise the disruption when the Transition Period ends on the 31st December.  However, with a whole range of Non-Tariff Measures (NTMs) (checks, paperwork etc.) being imposed from that point, there will be added friction.  In the case of seed potatoes, exports to the EU will be prohibited which is a major blow to regions such as the East coast of Scotland, where seed potatoes is a major agricultural sector.  This article examines some of the top-level implications of the FTA.  However, with the agreement text (including Annexes) running to 1,246 pages, we will digest it further over the coming days and weeks and provide further updates as appropriate.

A mere 1,644 days since the EU referendum, and after a whole series of missed deadlines, the deadlock was finally broken on Christmas Eve.  As previous articles mentioned, the negotiations culminated in a frantic final haggle on fish quotas.  When a breakthrough was achieved on this issue, the remaining level playing field (LPF) and governance issues were quickly addressed so that the Deal could be announced on Christmas Eve.  The key provisions of the FTA are:

• Trade in goods: will be tariff-free and quota-free on all goods trade between the UK and the EU.  This includes agri-food products.
• NTMs: will be applicable on UK exports to the EU from January.  For EU imports to the UK new rules will become applicable on a phased basis between January and June 2021, based on the provisions of the UK Border Operating Model (see previous article).  Linked with NTMs, additional provisions of the Deal include;
  • Rules of Origin (RoO): some rules have been relaxed for up to 1 year so that companies have more time to gather the information necessary to meet RoO requirements.  These are basically local content rules which need to be met to ensure that goods traded between the UK and the EU are eligible for tariff-free treatment.  As a rule of thumb for agri-food products, 85% or more of the goods’ contents (by weight) needs to be eligible (i.e. is UK/EU produced and not originating from another ineligible third country).  This relaxation is important and helpful to traders as it goes some way to providing an implementation period to permit companies to adapt to the changed trading environment. 
  • Sanitary and Phytosanitary (SPS) checks: will become applicable immediately on UK exports to the EU.  This means that lamb exports to the EU will be subject to 15% physical checks whilst there will be a 30% physical check rate for dairy products for human consumption.  In the SPS area generally, it is arguable that the UK-EU FTA is lacking in ambition.  There will be a Specialised Committee set-up for SPS within the Governance structure of the agreement, which might bring some further easements in the future.  However, for now, the treatment of UK exports to the EU will not be much better than that of a standard third country, and certainly significantly worse than the level of access that New Zealand enjoys on its exports to the EU.
• Fisheries: the quotas for EU fishing vessels’ access to UK waters will be reduced by 25% over a five and a half year transition period.  This quota will be repatriated to UK flagged vessels over this same period. Thereafter, annual negotiations would take place on the level of access that EU fishing vessels would have to British waters.  This arrangement has met with criticism from the UK fishing industry which was anticipating a greater Brexit dividend. 
• LPF: the EU pushed very hard on this issue which relates to upholding existing standards on the environment and labour laws so that the UK for instance cannot gain a competitive advantage in the future by undercutting EU rules.  The agreement includes mechanisms to enable one side to retaliate against the other if it is found that there is a breach of the LPF provisions.  Theoretically, this could mean that retaliatory tariffs could be introduced on agri-food trade in the event of such a breach, even if this violation occurs in another sector. 
• State Aid: importantly, from a UK perspective, Britain can have its own independent system of subsidy control and neither party is bound to follow the rules of the other.  However, LPF provisions apply to prevent one side from gaining a significant competitive advantage over the other.
• Ratification: is expected to take place swiftly in the UK, with Parliament being recalled on 30th December to vote on the deal.  As Labour has announced its intention to vote for the deal, its passing should be a formality in the UK.  In the EU27, the process is somewhat more complicated.  Given the limited time available, the EU has decided to “provisionally apply” the deal from January.  However, it will be scrutinised further by both the European Parliament and at Member State level. This process is set to be undertaken during January and February.

Implications for UK Agri-Food

The announcement of a UK-EU trade deal was greeted with a sense of relief by the UK food and farming industry as it provides much greater certainty for the sector.  The major exception to this is the seed potatoes sector as exports from the UK to the EU will become prohibited.  This is a significant loss as the EU is a major export market for the British seed potatoes’ sector, particularly Scotland, which has amongst the highest product standards for seed potatoes globally.

Overall, the anticipated impacts on UK agricultural output and trade are expected to be limited.  Below are the findings of a recent study by The Andersons Centre undertaken on behalf of the Scottish Government using the Agmemod partial equilibrium economic model.  For the sectors analysed (wheat, barley, beef, sheep and liquid milk (dairying)), the impacts of a UK-EU FTA are relatively small, particularly compared with No Deal.  The changes under the FTA scenario are primarily due to the imposition of NTM costs which generally range from 0..1% (wheat, barley) up to 3% (beef) under an FTA scenario.  These findings are corroborated by recent comments from the Tesco Chairman (John Allan) who believes that the Brexit Deal will not lead to any significant effects on consumer prices.

Agmemod Projections of Brexit Impacts on Selected Scottish Farm Sectors (£m)

Sources: The Andersons Centre, Wageningen University and Research (WUR) and the Scottish Government

Other key issues to watch out for include;

• Exchange rates: these have a major bearing on the competitiveness of UK agri-food produce on international markets.  On the announcement of the UK-EU FTA, Sterling rose by 0.5% against the Dollar.  Generally speaking, a stronger Sterling is bad for UK farming as the prices of British agri-food produce become more expensive on global markets, whilst imports become cheaper.  In June 2016, following the referendum, Sterling weakened by 15-20% against the Euro and has not recovered since.  Where Sterling goes from here will have a major bearing on the UK agri-food sector’s financial performance.
• Other FTAs: the UK has already made significant progress in negotiations with Australia and New Zealand, as well as the US to a lesser extent.  Some anticipate deals to be struck with Australia and New Zealand in 2021.  Given the extent to which these countries trade in beef, lamb and dairy products, they could exert significant competitive pressure on British producers if they get better access to the UK market.
• Allocation of EU28 TRQs: now that a UK-EU FTA has been reached, the likes of New Zealand are already highlighting issues with the proposed allocation of EU28 TRQs by the UK and the EU27, who essentially suggested in December 2018 to split the existing TRQs on the basis of historic trade.  New Zealand amongst others objected to this at the time and are now bringing this topic back to the agenda. T his will need to be addressed at the WTO level in the coming months.

Given the extremely limited timeframe during which the UK-EU FTA was agreed, it is inevitable that a whole myriad of other issues will emerge once experts have had time to parse through the 2,000 pages of legal text and annexes.  Overall, the trade deal is historic and marks the beginning of a new era in the UK’s relationship with Europe.  However, as with trading relationships between other close neighbours (e.g. the US and Canada), the UK’s trading relationship with the EU is going to evolve and this will necessitate further negotiations in the the future, both on the implementation and governance of the existing agreement, but potentially on developing new accords.  In this respect, we’ve not reached the end of the road on Brexit.  Whilst the topic might (mercifully) move down the agenda as we move forward, it will not disappear from the news.

Further analysis will be provided in the coming days and weeks on this issue.  On 11th February, The Andersons Centre will also be running a webinar to examine in-detail the implications of Brexit. Further information is available via: https://theandersonscentre.co.uk/webinars-2/

Further information on the UK-EU Trade and Cooperation Agreement, including the legal text, is available via: https://www.gov.uk/government/publications/agreements-reached-between-the-united-kingdom-of-great-britain-and-northern-ireland-and-the-european-union

Last month, we reported that time was almost up in the Brexit negotiations and last weekend, it looked as if a make-or-break decision on the future of the talks would be made on 12th December.  As is nearly always the case with EU negotiations, and Brexit especially, the talking has continued beyond the latest deadline.  A few days’ back it was suggested that about 97% of the draft legal text had been agreed.  More recently, there have been signs of progress on addressing two of the three outstanding issues – the Level Playing Field (LPF) and Governance.  However, Fisheries remains unresolved.

On the LPF and Governance, the outline of the Deal is taking shape.  EU Commission President Ursula von der Leyen claimed that the architecture of the LPF is based on two pillars: State Aid and standards.  On State Aid, it appears that the common principles around robust domestic governance, and the right to autonomously remedy situations of unfair competition / distortions in trade have now been established.  In terms of standards, the EU Commission President also claimed that a mechanism of non-regression on labour, social and environmental standards has been agreed although there some issues remain around future-proofing such arrangements.

Sources close to the talks suggest that the negotiators’ energies are currently focused on resolving the remaining LPF/Governance impasses.  Thereafter, the final hard bargaining will take place on fish.  This looks set to come down to a pure numbers game in terms of quota access which both sides are able to live with.  The EU appears to be linking access to fisheries with access to its Single Market which gives an indication of how hard it intends to bargain.  There are also rumours that a five-year review mechanism will be included in the trade deal which will take stock of how the fisheries quota share and access arrangements are working on the one hand and whether the playing field has remained level.  A formal review of how any agreement is functioning would seem prudent.

Overall, it appears that the talks are inching towards a Deal, but hurdles remain which could still scupper the negotiations.  The European Parliament is unhappy that it will not have the necessary time to scrutinise the agreement before voting on it.  Although the EU would technically be able to ‘provisionally apply’ the Deal before MEPs get to vote, this is not desirable.  All EU institutions would much prefer an EU Parliamentary vote on 28th December.  To have any chance of meeting this timeline, an agreed text would be needed a few days in advance of Christmas.

If a Deal is not agreed until after Christmas, a short No Deal (interregnum) period in January becomes a distinct possibility.  Some claim that even if both sides agree to provisionally apply such a Deal, a range of procedural measures would still be required.  However, in such circumstances, one would surely think that some sort of brief standstill period could be agreed whilst the required measures are put in place?

From an agri-food perspective, there is a big element of wait-and-see in terms of what Deal might be agreed.  However, irrespective of a Deal/No Deal, major changes are afoot.  Whilst arrangements such as those recently agreed under the NI Protocol (see accompanying article), might provide for a limited grace period, preparations for friction on UK-EU trade in early 2021 need to continue with urgency.  Customs agents need to be booked.  There are reports that some do not want to become involved in agri-food because it is too complicated given all of the additional Sanitary and Phytosanitary regulations which can result in difficulties in getting consignments through Customs.  For agri-food companies trading with the EU, training and upskilling in Customs and other regulatory formalities will also be necessary.  This is especially the case for exporters to the EU, as it appears that regulations will apply to a greater extent from January in comparison with importing from the EU into the UK.

As has seemed to be the case for several months now, the Brexit negotiations are at a crucial stage and, although the EU side believes that 95% of the text for the trade deal has been agreed, three stubborn sticking points remain.  These are the so-called level playing field provisions, State Aid and fisheries.  Given that several deadlines have now passed and the Transition Period will end on 31st December, time is now the biggest threat.

Addressing The Remaining Issues

Of the three outstanding issues, the level playing field is deemed to be the most problematic.  On one side, the EU is adamant that the integrity of its Single Market and its competitive position must be protected.  It wants an agreed set of baseline environmental, climate change and labour protection standards to be agreed between the UK and the EU, which would evolve over time.  The EU is pushing for the right to swift retaliatory action if the UK seeks to diverge from these.  The UK, on the other hand, is resisting such moves as it sees its sovereign right to diverge as one of the key gains from Brexit.  The UK also wants as much flexibility as possible on these issues to have greater leverage in agreeing trade deals with other countries from 2021.  This is particularly the case for agri-food.  Food standards were once closely linked to the level playing field requirements, but they tend not to be mentioned recently – a tacit acknowledgement by the EU that the UK could diverge in this area in future.  However, that will come at a price in terms of Single Market access for UK agri-food producers.

Well-connected sources believe that if the level playing field issues can be overcome, that will be the key to unblocking the impasse.  This because progress has been made on State Aid recently and areas such as aviation, energy, road haulage and rules of origin have not been finalised only becuase they are linked to the level playing field issue.  That would leave fisheries, which is likely to come down to a last minute trade-off at a political level involving the Prime Minister, the President of the EU Commission and EU Member State leaders, most notably Emmanuel Macron.

Time Constraints

Although there are signs that both sides are inching towards a deal, it increasingly looks like whatever will be agreed between the UK and the EU will be a bare-bones agreement.  As previous articles have noted, this should mean zero-tariff and zero-quota free trade in agri-food goods but non-tariff measures (NTMs) will be significant.  Taking beef and sheep meat for instance, this would mean physical check rates of 15% at border control posts. To date, the default check rates for such products has been 20% (i.e. for countries trading with the EU on a Most-Favoured Nation (MFN) basis).

On 24th November, the French Customs Authorities tested their customs and Border Control Post facilities in Calais and it caused severe queues in Kent.  This indicates that in the first weeks and months of 2021, there will be significant delays at the border.  Concerningly, the UK authorities have not yet begun testing their arrangements, because in many cases the infrastructure and systems are not in place yet!  The fact that the French are testing indicates that they are close to being ready.  There is unease that from January the delays on the UK side will be even more substantial.  All of this gives rise to the prospect of significant value deterioration on UK agri-food exports to the EU as time delays erode shelf-life.  It could also mean the loss of high-value export sales, particularly in the retailing sector.

On the imports’ side, the UK is phasing in the introduction of its Border Controls over six months in 2021.  This should help imports of highly perishable agri-food products (with the exception of some high-risk categories) from the EU.  However, added friction is going to become a fact of life from 2021 and supply-chains are going to have to adapt sooner or later.

Time will also be an issue in terms of ratifying any trade deal, particularly on the EU side as it normally requires a vote at the European Parliament.  The last session of the European Parliament is currently scheduled for 14th December, however, there have been suggestions that MEPs have been advised to keep the 28th December available. Another option being mooted by the EU is to “provisionally apply” any UK-EU trade deal from 1st January with the ratification process at EU Parliament and potentially at Member State level (if the deal includes areas solely within the remit of each Member State).  Either way, the EU Council scheduled for 10th-11th December will be crucial and it is thought that a deal will need to have been agreed by that point and the process of translating the deal into legal text and other EU languages will need to be well underway.

If a trade agreement can be reached between the UK and the EU, any initial agreement can be improved over time as is the case with trade deals elsewhere.  That said, the prospect of a No Trade Deal remains significant.  If a Deal is reached, there are many technical issues, including transit arrangements in the UK and Ireland, which have not had any time devoted to them, and will need to be ironed out from January.  Although it is inevitable that elements of a phasing-in period will need to be implemented by both sides (e.g. Belgian customs authorities have acknowledged that some of its customs requirements will be relaxed initially), businesses need to brace themselves for significant change from January.

As has so often been the case with the Brexit process, it has been yet another tumultuous month in the UK-EU negotiations.  Whilst the Future Relationship negotiations have continued to get bogged down over the summer months, it was the admission by the Northern Irish Secretary (Brandon Lewis) that the UK Internal Market (UKIM) legislation currently working its way through Parliament would break international law that sparked the most controversy.  Not just with respect to the EU but also in terms of the prospect of a trade deal with the US.  Whilst the prospects of a No Deal scenario with the EU have increased, there are signs to suggest that progress continues to be made towards a Deal.

UKIM Legislation Flashpoint

The key flashpoint with respect to the UKIM legislation is the provision for the NI Secretary to disapply parts of the Northern Ireland Protocol (which was agreed in conjunction with the EU Withdrawal Agreement).  This relates to NI to GB trade and the reach of EU State Aid rules if the UK and the EU did not come to a satisfactory agreement.

From the UK side, given its promise of ‘unfettered access’ for NI businesses into the GB market, it objects to the prospect of NI businesses having to complete Safety and Security (Exit) Declarations on shipments into GB.  However, the bigger issue is the potential reach of EU State Aid rules to affect companies operating in GB that have subsidiaries in Northern Ireland.  The EU interpretation of the Withdrawal Agreement suggests that such companies, even if NI subsidiaries are small, would have to apply EU State Aid limits. The UK objects to this and wants to have the freedom to operate an independent State Aid regime from January.  The UK Government has also claimed that the EU has threatened to withhold the granting of third country approval for GB and British companies wishing to export into the EU post-Brexit.

All of this political rancour has eroded trust and caused significant damage.  That said, if one pays attention to the mood music concerning the Joint Committee which oversees the implementation of the Withdrawal Agreement, including the NI Protocol, then progress is being made.  Some believe that these discussions could result in the need for Exit Declarations being waived, overcoming one of the key issues concerning the UKIM legislation.  Most trade experts also agree that the UK will be granted third country status so that firms can continue exporting into the EU, as it granted such status to the UK previously on a temporary basis when the prospects of a No Deal loomed before.  There is also evidence to suggest that progress is being made on the border arrangements required to manage trade from GB into Northern Ireland, although doubts remain as to whether that will be ready on time.

Future Relationship Talks

The State Aid issue is more problematic and remains a key stumbling block in the UK-EU negotiations.  Of course, a State Aid agreement as part of a wider UK-EU trade deal would address the difficulties caused by the UKIM legislation, but that still seems a long way off.  Although there appears to have been some progress in resolving the issues around fisheries, the level-playing-field difficulties persist.  This, of course, will have a major bearing on agri-food in terms of the extent to which UK exports could access the EU market but also in terms of the standards that the UK would accept on imports from elsewhere.

Given that there are now just 98 days until the Transition Period ends, the prospects of a comprehensive Free Trade Agreement (FTA) between the UK and the EU are diminishing.  Instead, the prospects have increased of a more basic FTA that would have zero tariffs and zero quotas on goods (including agriculture) but would offer little in the way of reducing non-tariff barriers (e.g. SPS checks) or dealing with services.  However, to achieve this agreement the EU is still pushing for the UK to adopt a ‘shared philosophy’ on State Aid and to have a robust mechanism to deal with disputes (which is a relaxation of its stance on European Court of Justice (ECJ) oversight) as well as solid enforcement of domestic regulations.  These latter issue have arguably become even more important in the EU’s eyes given the UKIM legislation introduced by the UK Government.

So, although the outline of a ‘landing zone’ is beginning to take shape, it remains to be seen whether the UK Government will agree to this.  It is proposing an entirely independent State Aid regime based on WTO principles concerning such supports.  It also wants to pursue its own trade deals, which as the accompanying article shows, would have significant implications for UK agriculture. 

All the while, the UK is also trying to implement plans to manage cross-border traffic from January. It has recently introduced the concept of a ‘Kent Access Permit’ which hauliers would require before being admitted to travel towards Dover and the Continent.  This is in a bid to reduce congestion as some estimates have suggested potential tailbacks of 7,000 trucks which would cause major disruption.  All of this highlights just how much work still needs to be done in the months ahead.  As reported previously, it is increasingly obvious that businesses need more time to operationalise all of these requirements, particularly if key pieces of infrastructure (e.g. Smart Freight System) are not going to be ready on-time.  Whilst the Transition Period will end in December, one person’s Transition Period extension can be another’s Implementation Period if managed correctly.  Such a period of at least 6 months is needed and is often a feature of other FTAs.