Tag: Brexit

Free Trade Agreements Update

Although the UK-EU negotiations dominate the trade landscape, the UK is undertaking several other negotiations with non-EU countries which arguably could have as great an impact on the British food and farming sector.

UK-Japan Trade Agreement ‘In Principle’

On 11th September, the UK Government announced that it had secured a free trade deal with Japan; its first as a newly-independent trading nation.  Whilst a key achievement, it is noteworthy that the deal has only been agreed ‘in principle’ and a full text is anticipated in October.  Furthermore, whilst additional access was granted, it largely replicates the provisions of the EU-Japan trade deal.

Although it is difficult to tell precisely what benefits such an agreement will bring until the full text becomes available, the UK Government is keen to highlight increased market access for products such as Stilton, it also claimed increased opportunities to export products such as malt (Japan is already the leading export market for UK malt).  Furthermore, significant tariff reductions in terms of pork and beef were also cited and this could certainly create some niche export opportunities.  The other significant gain highlighted by the UK was Japan’s agreement to recognise 70 Geographic Indicators (GIs), it currently recognises just seven.

So, there have been some gains from a UK perspective but these are minimal when compared with Britain’s current trade with the EU.  It is also likely that part of the reason why the full text has not been published yet is that Japan is keen to ensure that its supply-chains are protected under a UK-EU trade deal, so that cars produced in Japanese-owned manufacturing plants in Britain can continue to enjoy good access to EU markets and would not be subject to arduous Rules of Origin requirements.

UK-US Trade Talks

The fourth negotiating round was completed recently and talks have now progressed towards dealing with more substantive issues such as Sanitary and Phyto-sanitary (SPS) regulations.  But a trade agreement is still some way off and will not be happening before the US election on 3rd November.  This is significant, particularly because if the Democrats’ candidate (Joe Biden) wins the election, any UK-US trade agreement would be heavily contingent on the UK upholding its commitments arising from the Good Friday Agreement (GFA).  Here, the proposed UKIM legislation is perceived by influential voices on Capitol Hill as contravening the UK’s commitments under the GFA.  Without a trade agreement with the US, the UK’s ‘Global Britain’ aspirations will be severely deflated.

Another negotiating round is anticipated mid-to-late October and it is likely to be next year at the earliest before a full trade deal is negotiated.

Australia and New Zealand Talks

These are also continuing to progress with second negotiating round with Australia commencing on 21st September.  Arguably, a trade agreement with these countries could have a bigger impact on UK farming than a US deal; particularly given the significance of these countries’  beef and sheep exports and dairy exports in the case of New Zealand.

The Department for International Trade has already acknowledged that achieving greater access to the UK market for agricultural produce is a key focus for both Australia and New Zealand and this will mean that the UK will need to offer concessions.  This, in turn, means greater competition for British farmers and the DIT’s analysis for the Australian FTA concedes that in the longer term output from UK agriculture and food processing would decline (DIT’s analysis for New Zealand contains similar projections).  Therefore, these negotiations need to be closely watched.

Roll-Over Agreements

The final issue is ‘roll-over agreements’.  These are deals ensuring continuity of trade under previous FTAs signed by the EU when the UK was a Member State – 40 FTAs covering 70 territories.  These are continuing to progress, with the UK concluding 19 agreements covering 50 territories.  This includes Switzerland, Chile, South Korea and Israel.  Another 18 are being negotiated including with Canada, Mexico, Turkey, Ukraine, Egypt and Vietnam.  An agreement with Canada is anticipated in October and similar to the CETA agreement with the EU is likely to result in increased access for Canadian beef in the UK market.  Otherwise, these roll-over agreements shouldn’t affect agricultural markets very much as they are all about maintaining the status quo for the UK in trade terms.   

UK Internal Market Legislation

The negotiations on a post-Brexit trade deal have been thrown into disarray as the UK has threatened to unilaterally override parts of the Withdrawal Treaty.  Boris Johnson’s Government proposes to use the Internal Market Bill currently progressing through Parliament to amend the implementation of the Northern Ireland (NI) Protocol.  This is despite the fact that the Treaty and Protocol were agreed by the Government less than a year ago, and that breaking Treaty obligations contravenes international law.

The EU was quick to react and told the UK that it must withdraw the relevant parts of the legislation before the end of the month.  The UK has, so far, declined to do this.  However, talks on a future Free Trade Agreement (FTA) will continue for now, although relations between the two sides have reached an all-time low.

The crisis began when the UK Government published its draft legislation on the UK Internal Market (UKIM) on the 9thg September.  This was subject to a consultation during July and August (click here for article summarising the Government’s initial proposals).  Whilst the draft legislation mainly deals with the functioning of the UKIM in a post-Brexit world, various elements impact on the implementation of the Northern Ireland Protocol.  The UK Government claims that this is largely an exercise in ‘clarification’ although a Minister had to admit in Parliament that the proposals were in breach of the Withdrawal Treaty obligations.  A senior UK Government legal adviser has resigned over the plans.

The UKIM legislation affects the NI Protocol in three main ways:

  1. Access from GB to NI: goods from GB entering into NI have to abide by EU standards based on the provisions of the Protocol. The UKIM legislation is not proposing to ignore that, however, in implementing the Protocol the UKIM legislation states that UK authorities have to show special regard for, and strengthen the integrity of the UK internal market. As things stand, this is not a controversial proposal and it is understandable that the UK would seek to uphold the integrity of its internal market. That said, it will be interesting to see how the UK defines goods that are ‘at risk’ of entering into the EU Single Market, which may be ineligible to do so if they are not covered by a Free Trade Deal or do not have the appropriate tariffs applied in a No Deal scenario. This is especially relevant for agri-food products and more detail on this is anticipated in the Finance Bill due to come before Parliament later in the year.
  2. Trade from NI to GB: here, the promise by the UK Government to give “unfettered access” for NI businesses to the GB market comes into play. The UKIM draft legislation gives the NI Secretary of State the powers to modify or disapply sections of the NI Protocol that requires NI businesses to complete additional EU paperwork (e.g. export summary declarations) for goods sold to the GB market. These intentions are causing concerns in EU circles as they are at odds with what the EU has understood to have been agreed under the Withdrawal Agreement. Exactly how the completion of this additional EU paperwork would operate in practice has still to be defined. Much of the information required will already be contained in commercial documentation. So, it should be possible to address this issue with information the NI businesses already compile, particularly as there is a Trader Support Service also available to NI businesses.
  3. State Aid Rules: this is perhaps the most controversial aspect as it continues to be a sticking point in the future relationship negotiations. Article 10 of the NI Protocol specifies that EU State Aid Rules apply to all trade relating to the Protocol. This includes GB companies with bases in NI and means that EU State Aid Rules reach into GB which the UK Government objects to.  The UKIM legislation would again give powers to the NI Secretary of State to modify or disapply these powers, despite the UK Government’s own admission that these powers would contravene international law, as the Withdrawal Agreement is now legally binding. This has caused the most alarm on the EU side and the negotiations are very much at a make-or-break point.  

Moving away from the Brexit-related aspects of UKIM, this legislation will be important for agri-food businesses operating throughout the UK.  Goods produced in one part of the UK (e.g. Scotland) and meeting the required standards will be mutually recognised when placed on the market in another part of the UK (e.g. England).  That said, if products produced in England are subject to lower standards than those applying in Scotland, the non-discrimination principle would mean that these products cannot be prevented from being offered on sale in Scotland.  Accordingly, this gives the potential for products produced to a lower standard to be supplied across the UK and this has drawn sharp criticism from the devolved administrations as they believe it undermines any powers which might be repatriated to them (from Brussels) as a result of Brexit. 

The draft UKIM legislation is accessible via: https://publications.parliament.uk/pa/bills/cbill/58-01/0177/20177.pdf

The introduction of the UKIM was always going to be controversial but recent statements in Parliament by the NI Secretary of State has raised tensions to a new level, particularly concerning UKIM’s incompatibility with international law and its implications for the UK-EU negotiations. Given how controversial the Brexit negotiations have been, it was always likely that a flashpoint such as this would emerge, especially as we are reaching the climax of the talks. The prospects of a No Deal Brexit have increased. That said, the controversial points can still be ironed out in the remaining negotiations – if there is the will on both sides to achieve this. Also, it is worth pointing out that the UKIM legislation is likely to be modified significantly as it passes through Parliament and the House of Lords could potentially delay its passing by a year as it will have grave concerns about its current incompatibility with international law. What is clear is that even if an agreement is reached between the UK and the EU, significantly more time will be needed to implement any agreement. Whilst the Transition Period might end on 31st of December, a further Implementation Period is now necessary, such periods are common in other Free Trade Agreements. 

Trader Support Service: Northern Ireland Protocol

On 7th August, the UK Government announced plans for a Trader Support Service (TSS) to be established for Northern Irish businesses.  This will help them complete customs-related processes, required for importing goods into Northern Ireland as a result of the NI Protocol, and cost £200 million.  There will also be additional funding (£155 million) to develop new technology to ensure the new processes can become fully digital and streamlined.

The announcement has been welcomed by NI business groups as it will help to address a key aspect of operationalising the NI Protocol.  However, significant hurdles remain.  Most notably, Sanitary and Phytosanitary (SPS) processes are not included, although the Government is working with NI businesses to address these.  Furthermore, the tender for this work was also published on 7th August, leaving less than 150 days (before the Transition Period ends) to develop, test and roll-out the new system which has not been tried anywhere else before.

They focus of the Government’s announcement was on trade moving from GB to NI.  In this regard, the TSS will help NI businesses (traders), at no additional cost, by;

  • Recording electronic information on goods movements so that traders do not have to engage with new digital customs systems or processes.
  • Complete formalities (e.g. import declarations, safety and security information) on behalf of NI traders.  Therefore, businesses using TSS do not need to access HMRC customs systems (e.g. CDC, ICS) themselves.
  • NI traders, once registered, will receive guidance on what the Protocol means for them and will also receive assistance on understanding what information will need to be collected about their goods including their description, value and any supporting information needed.

For trade moving from NI to GB, the UK Government has claimed that due to unfettered access, there will be no special customs processes applied, apart from some exceptional cases (e.g. making use of duty suspensive procedures such as transit procedures).  For such businesses, support will also be made available via the TSS with more details in due course.

The UK Government is also intent on ensuring that there will be no tariffs on internal UK trade, even under No Deal, and full use of waivers and reimbursements would be made available in such a scenario.  However, arrangements will need to be made for goods ‘at risk’ of moving into the EU Single Market (including the Republic of Ireland) but this firstly requires a decision by the UK-EU Joint Committee on which products are deemed to be ‘at risk’.  These could potentially require a tariff (under a No Deal / limited Free Trade Agreement (FTA) scenario).  Further details on this issue will be announced in due course.  Further information can be found via: https://www.gov.uk/government/publications/moving-goods-under-the-northern-ireland-protocol

The announcement is seen as a big win for NI business groups who have been lobbying the UK Government hard on this over the past four years.   Their next focus is on getting similar support to help businesses to address the significant SPS regulatory hurdles which also need to be overcome in the agri-food sector.  The UK Government is expected to make further announcements on this in the coming weeks.  However, making the announcement and allocating the funding is only the start.  Operationalising all of this so that it is ready to function smoothly from 1st January remains a monumental task, particularly given the UK Government’s patchy record on IT systems.  GB-based businesses that trade with the EU continent are likely to be envious of this arrangement.  That said, the UK Government has previously announced that customs’ aspects of its Border Operating Model would be phased in over six months from January 2021, whereas arrangements under the NI Protocol need to be in place by January.

UK Trade Bill

On 20th July, the House of Commons voted to reject an amendment to the Trade Bill at the 3rd Reading, by 263 votes to 326, that would have given Parliament the right to approve future trade agreements.  Some fear that this will undermine the farming and food sector given the UK Government’s eagerness to agree trade deals with the likes of the US.  However, some trade experts claim that ultimately Parliament will have to be given a say in UK trade policy as trade agreements are too controversial to be left to prerogative powers.  They cite arrangements under the Constitutional Reform and Governance (CRAG) Act in 2010 as a means to do this.  However, invoking this mechanism is not straightforward as technically the ratification of a Bill (e.g. on a future Free Trade Agreement (FTA)) could only be delayed by 21 days, but the mechanism can be invoked repeatedly, provided the Government makes sufficient time available.  It would have been much more straightforward to give Parliament the right to scrutinise and approve trade deals directly, as is the case in the US Congress and numerous other Parliaments globally. 

The passing of any trade deal, particularly a UK-US FTA would have major implications for British farming.  There are likely to be many twists and turns ahead in this debate and it will be interesting to see the interplay between the Trade and Agriculture Commission’s findings and the position(s) ultimately taken by Parliament on these issues.

The UK Internal Market Post-Transition

The UK Government has published a White Paper on how the UK internal market (UKIM) will operate in the future.  Due to devolution, some policy areas (e.g. fiscal and monetary policy, State Aid) are ‘reserved’ for the UK Parliament whilst some 160 others, most notably agri-food and fisheries, environment and planning as well as product standards for agri-food products are devolved competences.  When the UK was a part of the EU Single Market, it provided the legal framework to enable goods and services to flow freely.  However, with Brexit, policy-setting powers will be ‘returned’ to the devolved administrations, leaving open the scope for greater divergence within the UK.  The UK Government’s White Paper seeks to address this and forms part of a four-week consultation period and the UK Government aims to fast-track legislation from September.  In developing the UKIM system the UK Government aims to:

  1. Continue frictionless trade between all parts of the UK
  2. Continue fair competition and prevent discrimination
  3. Continue to protect business, consumers and civil society by engaging them in the development of the market.

To achieve these aims, the white paper proposes a four main types of measures:

  1. Common UK Frameworks: designed to support the functioning of the UKIM, the management of common resources and the UK’s ability to negotiate, enter into and ratify trade and other international agreements. This includes setting a baseline of regulatory coherence across the UK.
  2. Market Access Commitment: would enshrine into law two key principles:  ‘mutual recognition’ and ‘non-discrimination’ which would enable UK companies to trade unhindered across the UK.  This could mean that products supplied in one part of the UK (e.g. England) which are produced to different standards than other parts of the UK, could still be offered for sale across the entire UK market.  This proposal has ignited tensions.  The SNP for instance fears that if English standards are lowered, it will erode Scottish standards.  Furthermore, as Northern Ireland will be applying EU regulations, products deemed not to be meeting the EU’s standards will not be permitted to enter.  The Paper acknowledges Northern Ireland’s commitments under the Irish Protocol but re-emphasises that Northern Ireland will have ‘unfettered access’ to the GB market.  Whilst the UK Government is seeking to make NI’s access to the GB market as frictionless as possible, the reality is that additional regulatory requirements will need to be adhered to (e.g. Summary Declarations).  Some business groups are seeking compensation or mitigation measures the impact of such friction but are awaiting further details from Government on how to do this.
  3. Uniform subsidy control regime: legislated for in the UK Parliament (as State Aid is a ‘reserved’ matter).  That said, EU State Aid regulations would continue to apply in Northern Ireland with respect to goods as a result of the Protocol.  Services would be applied based on the UK regime.
  4. Independent advisory group and intergovernmental responsibilities: whilst the evolution of the UKIM will be overseen by the UK Parliament, the White Paper stresses the scope for expanded intergovernmental arrangements.  These will help to monitor the health of the UKIM and will help to gather evidence for its future development.  There is also the possibility of an independent advisory body being set up to examine how the UKIM should evolve but these ideas are not fully developed yet.

Although the Paper emphasises the UK’s commitment to maintain its high standards, like a lot of Government publications, its language could be open to differing interpretations (e.g. “committed to promoting robust food standards nationally and internationally, to protect consumer interests”).  On the one hand, this could mean upholding the current standards inherited from the UK’s EU membership.  Alternatively, it could signify a move to evolve standards so that they are more aligned with those applicable elsewhere internationally if that is what (some) consumers want.  Whilst it acknowledges that any changes to food safety legislation would need to be brought before the UK and devolved Parliaments, the Market Access Commitment arguably leaves open the possibility the products deemed acceptable for import into England could be placed on the market in Scotland or Wales.

The White Paper cites a coherent UKIM system as being particularly important for future Free Trade Agreements (FTAs).  This is because it would make the UK as a whole more attractive for countries to do business with it and claims a coherent framework would ensure that the UK as a whole would benefit from such FTAs and would enable UK businesses to compete internationally.  

Finally, it must be emphasised that without the proper regulatory framework, the coherence of the UKIM could easily unravel.  From 2021, one part of the UK (i.e. Northern Ireland) will be applying a different regulatory framework.  The greater the divergence between the UK and the EU in the future, the more challenging it will be to maintain UKIM coherence.  This will present significant hurdles for many aspects of agri-food regulation such as food standards and GM.  Until the post Brexit regulatory framework has bedded in and a new ‘steady state’ emerges with respect to the UK-EU trading relationship, it would be sensible for the UK to choose to have ongoing regulatory co-alignment with the EU.  This could then be reviewed in a few years’ time if required. 

UK Border Operating Model

On 13th July, UK published its plans for how the customs border between GB and the EU will function from January 2021 onwards when the Transition Period ends.  Although there is a lot of detail in the 206-page document, many agri-food businesses are still scratching their heads as to how they can operationalise its contents in the months ahead, especially as more information is still required in several areas including sanitary and phytosanitary (SPS) regulatory checks.  The document did not cover how the Irish Protocol would be implemented and further detail is expected on this in the near future.

Key Aspects of the UK Border Operating Model

A full copy of the UK Border Operating Model (BOM) is accessible via: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/899991/200713_BPDG_-_Border_Operating_Model_FINAL_1320_edit.pdf

The key points from an agri-food perspective are:

  • Three-stage approach to introducing UK border controls: our June article set out how border controls on imports to the UK would be phased-in.  However, UK exports to the EU (and goods going from GB to NI) will be subject to full controls from 1st January 2021. To recap, the phasing of import controls will be as follows;
    • January 2021: businesses will need to keep records of imported goods and consider how to account for VAT on imported goods.  They would then have six months to complete customs declarations on these consignments with applicable tariffs only becoming payable once the customs declarations have been made.  Safety and security declarations would not have to be made initially.  Regulatory checks would be required on products of animal origin and other high risk products (e.g. plants).
    • April 2021: pre-notification and health documentation required for all products of animal origin and all regulated plants and plant products.
    • July 2021: declarations required at the point of importation for all goods and tariffs must be paid.  Full safety and security declarations will be required.  Increased checks for animals, plants and their products which will take place at GB Border Control Posts (BCPs).
  • The ‘Core’ Model: sets out the requirements that will apply to all goods moving between GB and the EU.
    • Customs declarations: will be required on EU imports and exports. Some ports will require pre-lodgement of customs declarations prior to the movement of goods, which will particularly affect ‘roll on-roll off’ (RoRo) movements.
    • Customs duties (imports): to pay the UK Global Tariff (where applicable) importers will need to determine the origin, classification and customs value of their goods.  There are options to defer any payment that is due as noted above.
    • VAT: will be applied on imports from the EU.  VAT registered businesses can avail of postponed VAT accounting.  Non-VAT registered importers have the same options available to report and pay import VAT as they do for customs duties.
    • Safety and security declarations: will become applicable to all EU imports and exports.  They will apply to exports from 1st January and to imports from 1st July once the UK BOM is fully operational.  For goods leaving the UK for the EU, these declarations will need to be submitted 2 hours in advance of departure for short-sea journeys (e.g. Dover to Calais), 1 hour via Eurotunnel, 30 minutes via air and 24 hours for containerised shipments.
  • Additional Requirements: relates to controls applied to specific goods movements.  These frequently relate to foodstuffs and agricultural products and includes the following items:
    • International Conventions: such as Endangered Species of Wild Fauna and Flora (CITES) and temporary import of non-perishables without the application of customs charges (ATA Carnets).  CITES will apply to some agricultural products.  It will require additional authorisations to import and export via designated points of entry/exit.  These will be overseen by the Animal and Plant Health Agency (APHA).  ATA Carnets are useful for temporarily importing/exporting samples, equipment for tradeshows etc.  They simplify the customs processes.  However, it does not exempt traders where additional export permits and licenses (i.e. non-customs related) are applicable.
    • Sanitary and Phytosanitary (SPS) regulations: will apply to animal products (products of animal origin (POAO) and animal by-products); fish, shellfish and their products; high-risk food and feed not of animal origin (HRFNAO); live animals and germinal products; equines; plants and plant products.  These will obviously have a major impact on agri-food traders.  The BOM has set out specific requirements for each category and agri-food companies should review the sections relevant to their businesses.  For imports into the UK, requirements will include:
      • Import pre-notifications: importers give advanced notice of consignments arrival into GB to the relevant regulatory authority.  This will be done via the Import of Products, Animals, Food and Feed System (IPAFFS) and importers should register to join IPAFFS via: https://www.gov.uk/guidance/import-of-products-animals-food-and-feed-system
      • Health certification: must accompany the consignment during its passage and each species/type of product must have a different health certificate.  This has scope to create significant challenges for consignments containing multiple products (e.g. for retail).
      • Regulatory checks: documentary and identity checks will be applicable to goods arriving from the EU.  Physical checks to ensure imported products are complying with GB SPS and labelling requirements will be carried out on a proportion of consignments (which will vary by product).  A proportion of physically checked products will also be sampled (e.g. for laboratory testing).
      • Entry via Border Control Post (BCP):  a BCP is an inspection post designated and approved in line with that country’s relevant legislation for carrying out checks on animals, plants and their products arriving from the EU.  Goods subject to SPS checks will need to enter GB via a BCP.  The capabilities of each BCP to receive and check goods vary.  Accordingly, importers need to ensure that imported consignments enter via the appropriate BCP when this step becomes mandatory (from July 2021).
    • Controlled goods: include ammonium nitrate-based fertilisers, fish,  plants and plant-based products which present biosecurity risks and need to enter via a BCP.  From January 2021, traders must submit a standard customs declaration (or a simplified customs declaration if they are authorised to do so).
  • Devolved competences: the BOM notes that areas of food safety, the protection of human, animal and plant health, and the environment, are devolved to the governments of Wales and Scotland which may lead to differences in precise requirements and enforcement bodies. Although the UK Government claims to be working with the devolved administrations on these issues, it could give rise to friction within the UK internal market, particularly for agri-food, an issue explored further in our accompanying article. 

Business Preparations

The Government listed several actions that businesses need to take to prepare for the changes ahead. It emphasised that the UK’s negotiations with the EU will have ‘no impact’ on the need to take these actions. Key points include:

  • Apply for a GB EORI number: VAT registered businesses with EU trade have been previously enrolled with an EORI number. Businesses should check for this before applying.
  • Apply for an EU EORI number: businesses exporting to the EU will need to apply for this number irrespective of whether they use a customs intermediary.
  • Get a customs intermediary: the UK Government rather blithely stated that “customs declarations are complicated” and that businesses should procure the services of an intermediary (e.g. Freight Forwarder).  The challenge is that the demand for these services is set to heavily outweigh their supply. The Government estimates that 50,000 extra private sector customs agents will be required.  Whilst additional personnel can be trained up, this takes time and new personnel are more prone to making errors.  This, in turn, can add further strain and costs to businesses in addressing such errors.
  • Apply for a Duty Deferment Account (DDA): this will need to be authorised by the HMRC but would enable businesses to defer payment of duties as opposed to making payments for each consignment.
  • VAT on imported goods: businesses need to be prepared to pay or account for VAT on imports from the EU.  For VAT registered traders this can be done via postponed VAT accounting from January 2021.  Non-VAT registered businesses, or businesses not using postponed VAT accounting will need to report and pay import VAT via customs processes.
  • Commercial Arrangements: businesses are advised to work with their supply chains to ascertain how best to navigate the new requirements.  International traders are also advised to check the contractual obligations for international commercial transactions which are outlined in the Incoterms rules.  This because some of the changes under the BOM may alter the default legal responsibilities and requirements that such traders are expected to undertake with respect to EU trade.

What is clear from the UK BOM is that significant changes are afoot, even if there is a trade deal with the EU.  The obligation is on businesses to ensure that they have undertaken the necessary preparations ahead of January.  The Government  estimates that 215 million additional customs declarations will need to be made to UK authorities for imported and exported goods (costing £7 billion), with additional documentation needed for most agri-food products.  Many of the IT systems intended to manage these procedures are still under development, let alone being tested.  No wonder there is grave concern that there will not be enough time to make the necessary preparations. 

There is also evidence that some businesses have begun to stockpile so that adequate supplies are available on the GB side or the EU side of the border so that they could cope in a worst-case scenario.  Similar trends were also witnessed last year as the prospect of a No Deal Brexit emerged.  However, for perishable agri-food products, stockpiling is not very viable. 

 

Trade and Agriculture Commission: Membership

The membership of the new Trade and Agriculture Commission has now been announced.  As we reported last month (article here) this new body has been be set up to advise on UK food standards under future trade deals.

The Commission is to be chaired by Tim Smith (ex Tesco Technical Director and Chief Executive of the Food Standards Agency).  Farming Unions are well represented with members from NFU England, Scotland and Wales (Cymru) as well as the Ulster Farmers’ Union.  The Farmers’ Union of Wales is also represented as are the British Retail Consortium, UK Hospitality and the Food and Drink Federation.  Furthermore, it includes several members who are perceived to be more free-trade oriented (e.g. Shanker Singham (Institute of Economics Affairs) and Sir Lockwood Smith (Former New Zealand Trade and Agriculture Minister).

The Commission will report directly to International Trade Secretary Liz Truss.  Its terms of reference are advising on:

  • Trade policies the Government should adopt to secure opportunities for UK farmers, while ensuring the sector remains competitive and that animal welfare and environmental standards in food production are not undermined.
  • Advancing and protecting British consumer interests and those of developing countries.
  • How the UK engages the WTO to build a coalition that helps advance higher animal welfare standards across the world.
  • Developing trade policy that identifies and opens up new export opportunities for the UK agricultural industry – in particular for SMEs – and that benefits the UK economy as a whole.

The Commission will only operate for a six-month period.  It will submit an advisory report at the end of its work which will be presented to Parliament by the Secretary for International Trade.  More details can be found at https://www.gov.uk/government/news/trade-and-agriculture-commission-membership-announced 

Whilst seen as a lobbying success for the NFU, and the interests of farmers are well-represented, it has to be noted that its findings will be advisory only.  It contains some ‘heavy hitters’ who will be strong advocates of free trade and may be more favourable towards less stringent international standards compared to those currently operating in the UK and the EU.  Although the Government emphasises at every opportunity that the highest standards will continue to apply to British farming, some Ministers adopt a looser tone when speaking about ‘high quality’ food that will be available to consumers post-Brexit. 

Another noteworthy dynamic will be how the Commission interacts with the Devolved Administrations, some of which are likely to be at odds with what the Westminster Government eventually decides on the food standards it intends to adopt in the future.  Finally, the Commission’s six month remit means it is highly unlikely that any Free Trade Agreement will emerge with the US before the Commission is wound-up. 

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. 

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.

 

Brexit Update

Aside from details of the UK’s new Global Tariff regime published on 19th May (click here for article), there have been other notable recent developments in the Brexit negotiations.  These relate to the publication of the UK Government’s draft legal text for a UK-EU Comprehensive  Free-Trade Agreement (CFTA) and its proposals to implement the Northern Ireland (NI)-Ireland (IRL) Protocol.

Draft UK-EU Comprehensive Free Trade Agreement (CFTA)

This draft legal text was published on 19th May and forms a key part of the UK’s approach to the future relationship with the EU.  It elaborates on the objectives of the ‘Canada-style’ trading relationship which the Government set-out in February.  David Frost (UK’s Chief Negotiator) has insisted that the proposals approximate very closely what the EU has already agreed with Canada and Japan.

However, the EU is insisting that to get the kind of deal which the UK is seeking, it needs to agree to ‘level playing-field’ provisions designed to stop the UK from undercutting the EU’s rules on State Aid, tax, labour and environmental regulation.  According to trade experts, the UK’s ambitions in areas such as the mutual recognition of qualifications (e.g. lawyers) goes beyond what is contained in other FTAs, including Canada and Japan.  It is seen by Brussels as an attempt to ‘cherry-pick’ aspects of its current access to the Single Market, and the EU is unlikely to offer concessions on this without some commitments to its level playing-field requirements.

Other areas of friction relate to the EU’s demands for access to the UK’s fishing waters, Britain’s objections to any role for the European Court of Justice in overseeing any eventual deal and arrangements for the implementation of the NI-IRL Protocol (see below).

The draft legal text (292 pages) contains limited (six) references to agriculture and these primarily refer to the WTO Agreement on Agriculture. The legal text is accessible via; https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/886010/DRAFT_UK-EU_Comprehensive_Free_Trade_Agreement.pdf

Whilst it is useful to get sight of the UK’s proposed legal text, this should be very much seen as a negotiating position.  The situation is likely to evolve significantly as discussions progress with the EU in the coming weeks.

NI-IRL Protocol

On 20th May, the UK Government set-out its proposed approach on implementing NI-IRL Protocol.  A core focus of this document is on protecting Northern Ireland’s place within the UK Customs Territory and to minimise the scope for friction on GB-NI trade. It plans to do this by;

  1.  Unfettered access on trade going from NI to GB: meaning that trade should continue as it does now, with no additional processes, paperwork or restrictions on such trade. The EU is unlikely to have problems with this as it is an internal UK matter. However, one area where there may be a potential issues is the EU foresees NI businesses having to implement its Customs Code and, as a result, exit summary declarations would be required on shipments leaving NI to the rest of the UK or other non-EU countries. 
  2.  Trade going from GB to NI: no tariffs will be levied on such trade if the goods remain within the UK Customs Territory (i.e. stays in NI).  Only goods ultimately entering Ireland or the Rest of the EU, or have a high risk of doing so would face tariffs.  Here, the EU takes a very different view and sees all goods entering into NI from GB as ‘at risk’ of moving South.  It believes that where goods have tariff differentials between the UK and the EU, there is a significant risk of smuggling.  It is clear that this will be one of the main areas of contention when it comes to discussions within the Joint Committee that will oversee the implementation of the Protocol.
  3.  No new customs infrastructure in Northern Ireland: whilst acknowledging that there would be some additional processes and documentation for goods, particularly agri-food, arriving into NI, these would be ‘de-dramatised’ as much as possible and no new physical customs infrastructure would be built.  That said, there would be some expansion of additional entry points for agri-food goods to provide for proportionate controls.  This will be another issue to watch, but the UK Government’s proposals appear to give it some wriggle-room to expand existing infrastructure to manage arrangements.  There are still many challenges here concerning agri-food as these will be the most arduous controls to manage, but the UK has made some progress in recruiting additional veterinarians for example. 
  4. Northern Ireland benefits from UK trade deals with third countries: sets out the ambition for NI businesses to benefit from lower tariffs associated with any such deals, just as GB businesses would. What NI businesses can eventually avail of will also be contingent on the specific arrangements that third countries who strike FTAs with the UK are comfortable with.

Another point to note is that the UK appears to be placing a greater emphasis on using the Joint Committee to oversee the implementation of the NI-IRL Protocol as a negotiating forum, whereas the EU sees it as a body to implement what has already been negotiated.  The issues above will no doubt be opened up for debate at the Joint Committee’s next meeting in early June.  Further detail on the UK’s approach is available via: https://www.gov.uk/government/publications/the-uks-approach-to-the-northern-ireland-protocol

Overall, there is a sense that momentum is building ahead of the next European Council (18-19th June) which will have a key role in any decision to extend the Transition Period beyond December 2020 (decision is due by 30th June), or to provide an alternative ‘fudge’ which extends the negotiating period until October possibly.  Whilst the UK is adamant that it will not extend the Transition beyond 31st December, influential voices are calling for an extended implementation period of 6-9 months beyond June 2020.  They claim that this would allow businesses to make the legal changes necessary to implement what has been agreed during the negotiating phase (taking place during the transition).  Whether all of this can be agreed and implemented within an additional 6-9 months remains a tall order, but any additional time would be welcomed by most businesses currently having to grapple with the Covid crisis.