Tag: Trade

Brexit: Future Relationship White Paper

Following on from last week’s negotiating proposals supposedly agreed by the Cabinet at Chequers, the UK Government published, on 12th July, its long-awaited White Paper setting out its detailed vision on the future UK-EU relationship.  The 98-page document has received a cautious welcome by the EU-27 who are mindful of the deep divisions within the British Government.

In the White Paper, the UK Government is essentially seeking an ‘association agreement’ with the EU of unprecedented scale and depth so that the UK can achieve a ‘principled and practical Brexit’ which respects the referendum result and simultaneously acknowledges the deep trading relationship between the two parties.  The key points from an agri-food perspective are set out below;

  • Frictionless trade for goods: at the border between the UK and the EU.  This encompasses the establishment of a free trade area for goods as a means to protect the deeply integrated supply chains and ‘just-in-time’ processes developed over the past 40-plus years.
  • Common Rulebook for goods including agri-food: would seek to avoid customs and regulatory checks at the border but would only cover ‘those rules necessary to provide for frictionless trade at the border’.  The White Paper identifies three broad categories of rules relevant to agri-food and fisheries:
    1. Sanitary and Phytosanitary (SPS) rules – would be included in the common rulebook.  Linked with this, the UK would ‘make an upfront choice to commit by treaty to ongoing harmonisation with the relevant EU rules, with all those rules legislated for by Parliament or the devolved legislatures.’
    2. Rules relating to wider food policy – this would include marketing rules that determine how agri-food products can be described and labelled.  As these do not need to be checked at the border they would not be included in the common rulebook.  Geographical Indicators (GIs) (e.g Stilton cheese and Melton Mowbray Pork Pies) would also be included in this category and the UK will be establishing its own GI scheme after Brexit in accordance with WTO rules.  As part of this, the UK would open its GI scheme to both UK and non-UK applicants.
    3. Agricultural and Fisheries Policies – as previously communicated, the UK will leave both the CAP and the Common Fisheries Policies, thus enabling it to pursue domestic policies which best serve the UK’s interests.  Thus, these rules would not be included in the common rulebook. For fisheries, the UK is proposing annual negotiations with the EU on access to its waters.  Some EU Member States will have significant concerns about this.
  • Facilitated Customs Arrangement (FCA): would seek to ‘remove the need for customs checks and controls between the UK and the EU as if they were a combined customs territory’.  The Government claims that it would enable the UK to control its own tariffs for trade with the rest of the world.  For businesses this would mean;
    • where a good reaches the UK border, and the destination can be robustly demonstrated by a trusted trader, it will pay the UK tariff if it is destined for the UK, and the EU tariff if it is destined for the EU.  This is most likely to be relevant to finished goods; and
    • where a good reaches the UK border and the destination cannot be robustly demonstrated at the point of import, it will pay the higher of the UK or EU tariff.  Where the good’s destination is later identified to be a lower tariff jurisdiction, it would be eligible for a repayment from the UK Government equal to the difference between the two tariffs. This is most likely to be relevant to intermediate goods.

The UK Government claims that up to 96% of UK goods trade would be able to pay the correct or no tariff upfront, with the remainder most likely to use the repayment mechanism.  This is in effect combining the Customs Partnership and ‘Max-Fac’ proposals in the last year’s paper, both of which were rejected by the EU.  There was an acknowledgement by the UK that this system would become operational in stages as both sides completed the necessary preparations.  Given where the infrastructure is currently at, this process could take several years.  The UK Government has already stated that it envisages the UK remaining part of the EU Customs Union for a year after the end of the Transition Period.  This may well get extended.  It is unclear what ability the UK will have to strike Free-Trade Agreements (FTAs) with other countries whilst it remains within the Customs Union.

  • Rules of Origin: agreement not to impose tariffs, quotas or routine requirements for Rules of Origin on any UK-EU trade in goods.  This would allow EU content to count as local content in UK exports to its FTA partners for Rules of Origin purposes, and UK content to count as local content in EU exports to its FTA partners.  ‘Diagonal cumulation’ would allow UK, EU and FTA partner content to be considered interchangeable in trilateral trade.
  • Trade with non-EU countries: the UK’s claims that the FCA will enable it to strike Free Trade Agreements with non-EU countries as the UK will have its own schedule with the WTO.
  • Participation in EU agencies: UK would seek continued participation in agencies which facilitate goods being placed on the EU market but conceded that it would not have voting rights.
  • State Aid: the UK would continue to apply the EU’s State Aid rules via a common rulebook. Although elsewhere in the document, the Government is seeking to reserve its right to make its own arrangements regarding tax. As highlighted in a recent article, there were questions about whether there would be limits on the UK implementing agricultural policy tools such as tax deposit schemes (e.g. similar to the Australian Farm Management Deposit Scheme) which do not comply with EU State Aid rules. This is an area that will require clarification, potentially via the Agriculture Bill due later in the year. 
  • Maintain high standards in environment, employment and consumer protection rules: includes ‘non-regression provisions’ to ensure that current high standards are maintained by the UK.
  • Northern Ireland/Ireland: taken together, the UK Government believes that its proposals (including the points set out above) would see the UK and the EU meet their commitments to Northern Ireland and Ireland through the overall future relationship.  It claims that this would preserve the constitutional and economic integrity of the UK, honour the letter and the spirit of the Belfast (‘Good Friday’) Agreement and ensure that the ‘backstop’ solution of the Withdrawal Agreement will not have to be used (i.e. Northern Ireland remaining in the Single Market).  The Irish Government in particular has responded positively to this as it is also seeking to resolve the frictionless border riddle via the overall UK-EU relationship.  However, the UK Government’s proposals are arguably narrower than what was envisaged in the December Joint Report which contained commitments on protecting the all-island economy and North-South cooperation. The latest UK proposals are very much focused on goods trade only (i.e. services are omitted). 
  • New Joint Institutional Arrangements: these are required to manage the future relationship in key areas such as the common rulebook, including a clear process to update relevant rules in a manner that respects the UK’s sovereignty and provides Parliamentary scrutiny.  This will include regular dialogues at leader (PM) and Ministerial levels.  There would be a Joint Committee to discuss and interpret regulations as well to resolve disputes which may arise.  At times, such disputes could be resolved via a binding independent arbitration.  These bodies would have oversight by the European Courts of Justice (ECJ) as the interpreter of EU rules, but only the UK courts (whilst giving regard to EU case law) could give judgements on rules which apply to the UK.  Here, the UK is effectively conceding that in areas where it commits to adhering to the common rulebook, the ECJ would (indirectly) hold sway. 
  • End to Free Movement: however, the UK proposes introducing new frameworks which would enable ‘UK and EU citizens to continue to travel to each other’s countries and businesses and professionals to provide services’.  In agri-food, the provision of services associated with the supply of input equipment for example, is an important consideration and whilst the UK proposals imply that such arrangements could continue along much the same lines as present, questions remain about the extent to which this will be the case. 
  • Mutual recognition of professional qualifications: including for those working in the veterinary and agri-food sectors.  The extent to which this includes low or unskilled workers remains to be seen and is unlikely to be clarified until the Migration Advisory Committee (MAC) publishes its report in September

The white paper is available via: https://www.gov.uk/government/publications/the-future-relationship-between-the-united-kingdom-and-the-european-union

Whilst there has been a polite initial response from the EU, the proposals are likely to raise several objections from their side including:

  • Indivisibility of the Single Market:  the EU will fundamentally object to the UK wanting to remain in the Single Market for goods, without accepting the EU’s rules on freedom of capital, services and movement.  This separation, combined with the potential for divergence in areas not covered by the common rulebook, could give the UK competitive advantages in years to come and could undermine the rationale for EU membership by others.  This could potentially include the protection currently afforded by GI designations to EU-27 brands (e.g. Parmesan cheese) sold to the UK if the UK decided not to continue with existing GI legal protections.
  • Trade with non-EU countries: whilst the proposals focused heavily on tariff-free access between the UK and the EU, the UK wants to reserve its right to do free trade deals with other countries, potentially including agri-food products.  Whilst the UK’s participation in a common rulebook for agri-food trade would limit the scope for cheap imports, there is still a possibility that such trade could significantly displace EU exports to the UK, if third countries met the standards required.  This would have an onward impact on domestic prices in the EU-27.  The EU is expected to push-back strongly on this to curtail any potential displacement.
  • Complexity and cost: the UK’s proposals amount to an elaborate set of mechanisms to replicate its current access to the EU across a wide variety of areas.  To some, it is akin to the arrangements between the EU and Switzerland which Brussels is keen to rationalise.  Therefore, the EU is likely to have serious reservations about the creation of new frameworks adding yet more complexity to what is already and intricate tapestry.  There is little detail in the White Paper as to how much all of this will cost, but one can anticipate that the EU will expect the UK to bear a substantial proportion of any funding involved.

Whilst many questions remain unresolved, the UK Government’s White Paper provides a credible starting point for the substantive negotiations with the EU to take place.  These need to be urgently accelerated as there is a huge amount of ground to cover between now and the autumn.  For the agri-food sector, the commitment to ‘ongoing harmonisation’ via a common rulebook for agri-food trade should provide some welcome reassurance for the industry generally, particularly those which are heavily dependent on EU export markets.  Furthermore, given President Trump’s claim that the UK proposals would likely ‘kill’ the prospect of the US-UK trade deal, this may also be seen as a positive by those concerned with the potential for cheaper imports to undermine UK farming.  That said, a lot of uncertainty remains especially given the principle that ‘nothing is agreed until everything is agreed’.

UK’s Brexit Negotiating Proposals

On Friday 6th July, the Cabinet finally appeared to reach agreement on its negotiating proposals for the future trading relationship between the UK and the EU.  These proposals are based on 12 key principles (see graphic below) which the Prime Minister had hoped would provide “a precise, responsible and credible basis” for progressing the negotiations.  It could be summarised that these proposals amount to ‘Norway plus’ for goods (including agri-food) and ‘Canada plus’ for services.

Chequers’ Proposals – 12 Key Principles

Some of the key points of relevance to agri-food include;

  • Free trade area for goods – seeks to avoid friction at the border, particularly between Northern Ireland and Ireland where agri-food accounts for almost half of total goods trade. For UK agriculture, this is positive as it would help safeguard key export markets in the EU.
  • Facilitated customs arrangement – seeks to remove needs for customs checks and controls between the UK and the EU “as if a combined customs territory”.  The UK would apply the EU Common External Tariff (CET) for goods destined for the EU-27 with the UK controlling its own tariffs so that it can have an independent trade policy.  Notably, this would become operational in stages as both sides complete the necessary preparations.  This effectively combines the customs partnership and ‘max-fac’ proposals of last year but is realistic to acknowledge that the infrastructure to do this is several years away.  There are concerns around what this would mean for agricultural trade as it will be very difficult for the UK to complete trade deals with other countries without having some increased access for agri-food goods.  The EU will be keen to minimise such scope as this would dilute what is a key export market for Irish, French, Dutch and Danish farmers particularly.
  • Common rulebook for all goods including agri-food – committing by treaty to ongoing harmonisation with EU rules on goods, covering only those necessary to provide frictionless trade at the border.  Following on from previous point, this would have to include agricultural goods meaning that for UK agricultural produce that is traded with the EU-27, EU rules would hold sway.  Some could interpret this as offering scope for divergence to emerge for agricultural produce that is not traded with the EU.  But this would be a minefield.  The capability to effectively manage dual standards in a manner that would satisfy consumer concerns and both EU and non-EU food inspectors is simply not available and would take years to establish.
  • Parliamentary oversight – for incorporation of EU rules into the UK statute with the ability to choose not to do so, recognising that there would be consequences to this. T his likely to cause concern to the EU who will be keen to ensure that potential future uncertainty if Westminster decided not to pass a given EU regulation is minimised.
  • State aid and competition – UK commitment to apply the common rulebook in these contexts would set limits on which agricultural policy tools the UK could adapt in the future.  For instance, tax deposit schemes such as the Australian Farm Management Deposit Scheme do not comply with EU state aid rules.
  • Maintain high regulatory standards – including in terms of consumer and employee rights as well as the environment.  This would mean a continuation of the standards currently in place which once again should help safeguard the UK agricultural industry from third country competition.  A strong environmental focus is already being pursued vigorously by the Defra Secretary.
  • Northern Ireland – the Government believes that these proposals meets its commitments relating to Northern Ireland and Ireland whilst maintaining the constitutional and economic integrity of the UK but would obviate the need for the ‘backstop’ solution envisaged by the EU (i.e. NI remaining part of the EU customs territory) to be brought into effect.
  • Leaving the Common Agricultural Policy – enabling the UK to pursue a domestic agricultural policy which would work in the best interests of the UK.  Here, some questions remain over how a level playing field would be upheld in Northern Ireland where its farmers would be competing directly with Irish farmers still operating under the CAP.  Potentially, the EU Commission’s proposals offering Member States added flexibility in developing national strategic plans in combination with similar flexibility (and funding) at a devolved level for Northern Ireland could minimise any potential policy gaps which could open-up.

The proposals seek to strike a delicate balancing act between Single Market access on the one hand and UK sovereignty on the other.  Of course, the EU has yet to formally respond but the initial signs are that they will be taken seriously by Brussels as a basis for substantive negotiations on the future UK-EU relationship.  As mentioned previously, it is high-time for the London-Brussels negotiations to take centre stage (despite this morning’s event covered by an accompanying article) as both parties have a duty to minimise the immense uncertainties which have emerged for both UK and EU citizens.

The UK Government plans to publish its White Paper setting-out the detail underpinning these proposals later this week.

Brexit Update

Last week marked the two-year anniversary of the historic Brexit vote and this week’s June European Council will be the culmination of a turbulent month for the UK’s Brexit journey.  Below is an overview of the key developments.

Withdrawal Bill Passes Parliament

After much wrangling and Tory-party infighting, the European Union (Withdrawal) Bill was finally passed by both Houses on 20th June and now awaits the final stage of Royal Assent when the Bill will become an Act of Parliament.  Royal Assent has yet to be scheduled.

At the heart of the debate was a proposed amendment by Dominic Grieve to guarantee that Parliament would have a ‘meaningful vote’ at the end of the Brexit talks – which the Government was opposed to.  At the last minute, Mr. Grieve backed down after receiving assurances that that MPs would be given Parliamentary time for a debate in the event that Mrs May’s exit talks break down.  In the end, the Government won by 319 votes to 303, a majority of 16, despite six Conservative MPs voting against the Government.

The Government’s assurances would provide Parliamentary time for MPs to ‘table motions and debate matters of concern’.  Whilst this stops well short of the legal assurance Mr Grieve had initially sought, he claims that it is sufficient for MPs to have a say and that the PM could not ignore the will of the Commons. However, like so many of the compromises struck by the Government in recent weeks, there is room for differing interpretations by both sides of the Conservative party.  In effect, there has been another fudge and the can has been kicked down the road once more, thus delaying the crunch point which will eventually come.

UK Edging Towards a Softer Brexit?

Some believe that the crunch point could arrive as early as July when the Customs Bill is due before Parliament.  Again, there are likely to be Tory rebellions as attempts are made to keep Britain within an EU Customs Union.  The Labour Party’s stance is that the UK should form a customs union with the EU and to strike a deal on retaining access to the Single Market but not as part of the European Economic Area (EEA) which requires the free movement of people.  There is also emerging evidence that Downing Street is pursuing a similar trajectory, although the PM continues to play a delicate balancing act to keep all wings of her party on-board.

In recent days, several business organisations (e.g. Airbus, BMW, Honda and Society of Motor Manufacturers and Traders) have warned about the damaging implications of a hard Brexit and the potential for plant closures.  Some have stated that the UK needs to continue to be part of a customs union with the EU as a minimum and that a deal should be struck to enable the UK to retain Single Market benefits.  Mrs May has promised that the Government will ‘always’ listen to the voice of business. Meanwhile, the Chancellor has been warning that there will be no money for defence and other public services if the economy does not grow.  Presumably, the promised increase in NHS funding falls outside of this warning.

There are also rumblings that other business groups are privately conveying similar messages to Government including several agri-food organisations.  This suggests that the PM is veering towards a softer form of Brexit.  It is expected that the Government White Paper scheduled for publication after the Chequers Brexit meeting next week should provide some more clarity.  However, based on previous form, another fudge which permits multiple interpretations of what the proposals might mean, remains the likelier outcome.

EU Exerts More Pressure

As the Westminster wranglings continue, the real negotiation between the UK Government and the EU is taking a back-seat based on British media coverage.  Brexit is a core focus of the European Council taking place on 27th-28th June.  European leaders are likely to issue stark warnings about the possibility of negotiations breaking down meaning that the transition period – considered vital for stability – might be in danger.  Whilst the EU is keen for the Withdrawal Agreement to be finalised ahead of the October European Council, some are expecting that this timeline will slip.  The possibility of a special November Council has been mooted or similar to the Phase I negotiations last year, it may be December before an agreement is reached.

As part of the Withdrawal Agreement, the UK is pushing for the framework for the future relationship to be set-out in as much detail as possible.  In the negotiating time that remains, this is increasingly difficult to achieve, especially given what the UK Government has proposed thus far has been largely rejected by the EU.  The more likely outcome is that a general statement on the framework of the future relationship will be outlined in vague terms with the detail to be decided during the transition period.

Given the lack of progress in Phase II of the negotiations, the possibility of the Article 50 process itself being extended by a few months cannot be ruled out.  This would require unanimous agreement by both the EU-27 and the UK.  That said, the appetite on both sides for a significant extension is limited.  This scenario would only come to pass if there was sufficient evidence that the negotiations on a Withdrawal Agreement were nearing a successful conclusion and that there was enough visibility of what the future UK-EU relationship might look like.

What Should a Brexit Landing-Zone Encompass?

As previous articles have mentioned, it is crucial that the UK and the EU gets Brexit right so that any upheaval is minimised.  If this requires a short extension to the timelines so be it.  It is high-time that the main negotiations with Brussels takes centre stage.  Given the UK’s commitments on maintaining a frictionless border between Northern Ireland and Ireland and business needs for stable trading relationship with the EU, a customs-union type arrangement with the EU and a regulatory equivalence agreement that delivers most of the benefits (and obligations) of the Single Market should be the way forward.  This could potentially be catered for under an Association Agreement between the UK and the EU as has been suggested by both European and UK Parliamentary Committees in recent months.  For UK agriculture, this would be the best means to secure continued access to its largest export market whilst safeguarding British farmers, to a large extent, from cheaper third-country imports.

Admittedly, this will require UK compromises in terms of free-trade agreements with non-EU countries, particularly for goods.  However, it must be remembered that the EU has made major progress in agreeing trade deals with Japan and Canada recently whilst talks with Mercosur, Australia and New Zealand are continuing.  If UK goods manufacturers could have access to such trade deals as part of a customs-union type arrangement with the EU, this would still enable a ‘global Britain’ to emerge.  It could also offer the UK the potential to strike services-focused trade deals separately.  However, the UK would still need to offer something in return. This could potentially take the form of limited import quotas, including for agricultural goods, although the EU is likely to be heavily opposed to such a move.

Regarding EU compromises, it is becoming evident that in return for a close association with the UK, some concessions will have to be made on free movement as it currently stands.  It is worth recalling that the key issue which tilted the UK towards Brexit was controlling immigration and a way will have to be found to address this (or be seen to address it).  The Common Travel Area with Ireland solves most issues relating to a frictionless border on the island of Ireland.  The recent UK proposals on the future of EU migrants already resident in the UK (see separate article) provides much needed clarity for both immigrants and employers.  Potentially some form of a preference scheme which would allow prospective EU migrants to freely travel to the UK to seek work for up to 90 days, as is the case for EU/EEA migrants in other EU countries might be a way forward.

Implications for Agri-Food Businesses

A softer form of Brexit, as outlined above, would go a long way towards ensuring a level playing field for UK agriculture and its ability to safeguard access to EU markets whilst limiting potentially damaging competition from non-EU countries which are not subject to the same regulatory standards and policy-related costs (e.g. National Living Wage) as UK producers.

Undoubtedly issues would remain but these could be ironed-out during the transition period which needs to be as long as necessary in order to get Brexit right.  At the same time this period should be as short as possible so that the UK avoids a purgatory-like existence as a rule-taker with no influence.

EU-WTO Tariff Rate Quotas

On 26th June, the EU Commission was authorised to open formal negotiations with WTO on how to divide-up existing tariff rate quotas (TRQs) between the EU-27 and the UK.

In October 2017, the EU and the UK informed WTO members that they proposed to apportion existing EU TRQs based on existing levels of market access and historical trade flows under each TRQ.  This can be illustrated by the example the 228,254 tonnes of sheep meat TRQ that New Zealand has with the EU.  If it is assumed that, based on historical trade flows, that the UK imports 50% of New Zealand sheep meat exports to the EU under its TRQ, it would mean that the future UK TRQ would be 114,127 tonnes and the EU-27 TRQ would be the same amount.

These proposals were rejected by several influential WTO members including the US, New Zealand, Canada and Brazil.  They claimed that such an apportionment would put them in a disadvantageous position as they would lose the ‘option value’ of supplying any market within the EU (including the UK).

As things stand, the EU will need to modify its schedule with the WTO (including TRQs) whilst the UK will need to set-out its own schedule as it will be no longer an EU Member State from 30th March 2019. However, the transitional arrangements envisage that that the international agreements for which the EU is party would continue to apply to the UK until 31st December 2020.  This means that if an agreement is reached on the transition period, existing EU TRQs would continue in their current form until the end of 2020.

Some believe that the rejection of the initial UK-EU proposal by several WTO members was a move to increase their market access to the UK and the EU via TRQs.  It also illustrates that the WTO element of the Brexit negotiations could add significant complications in the next 18 months.

One potential means to resolve the TRQ impasse is to transpose the existing EU-28 TRQs into a joint UK-EU TRQ, similar to how the 11,500 tonnes of ‘Hilton”’Beef TRQ is jointly accessed by the US and Canada when exporting into the EU.  This would mean that future trade under TRQs would continue to be managed in effectively the same manner as present.  It would require close communication between the UK and EU to ensure that imports are managed in accordance with TRQ provisions.  If future TRQs are agreed either by the UK or the EU-27, these could be managed separately, similar to the autonomous beef TRQs that the US and Canada have individually with the EU.  It is rumoured that New Zealand for example would favour such an approach.  This principle would chime well with a close partnership between the UK and the EU which the PM is keen to pursue.  It would also help to mitigate a potentially complex negotiation with WTO members at a time when UK trade negotiating capacity is already seriously stretched.

Temporary Customs Arrangement

After a fraught discussions at Cabinet level, the UK Government has released a Technical Note setting out its proposals for a temporary customs arrangement.  The basic idea is that the UK will continue to be part of the EU Customs Union for a year after the end of the ‘transition period’.  This serves as a time-limited backstop to honour the commitment of avoiding a hard-border between Northern Ireland and Ireland, post-Brexit.  Key points include;

  • no imposition of tariffs, quotas, rules of origin and customs processes on all UK-EU trade.
  • the UK will be outside the scope of the Common Commercial Policy (CCP) except where it is required for the temporary customs arrangement to function.  This means the EU Common External Tariff (CET) will continue to be applied, alongside the Union Customs Code (USC). However, the UK is seeking the right to negotiate, sign and ratify new trade agreements with non-EU countries and to bring into force any provisions not covered by the terms of the temporary customs arrangement.
  • the temporary arrangement is to come into force at the end of the implementation (transition) period i.e. 31st December 2020 and would be replaced by an end-state customs arrangement which ideally would avoid a hard border under a wider UK-EU trading relationship.
  • time limit for the temporary customs arrangement: the UK Government expects this to be the end of December 2021 at the latest.
  • the is UK seeking to continue to benefit from all existing EU Free-trade Agreements (FTAs) or any new ones signed during this period, to ensure that it remains WTO compliant.
  • the UK to continue to participate in EU committees to have ability to develop and influence trade and customs policy during the temporary customs arrangement.
  • UK courts to respect the remit of the European Court of Justice (ECJ) with respect to laws underpinning the future UK-EU partnership.  This is where the UK appears most willing to compromise on its red lines.  Future oversight by the ECJ on trade-related matters in the UK-EU end-state relationship appears increasingly likely. 
  • the UK to reserve right to change the amount of customs duties it remits to the EU (currently 80% of collections).

The big talking point has been whether there would be a time limit on the backstop that the UK proposes.  Pro-Brexit MPs and Ministers fear that if there is no time limit, then the UK would be bound to the EU indefinitely.  However, the EU side claims that if the backstop has a time limit, then it is no longer a backstop.

At the time of writing, the EU has not officially responded but Michel Barnier has welcomed the proposals on the backstop and says that the EU will examine the document with three questions in mind;

  1. is it a workable solution to avoid a hard border?
  2. does it respect the integrity of the SM/CU?
  3. is it an ‘all-weather’ backstop?

Today’s Technical Note kicks the customs can down the road once again. Whilst the UK might ‘expect’ the temporary arrangement to terminate by December 2021, it might well be that this is not the case. What is clear is that it is time for the London-London negotiations to conclude and for serious discussions between the UK and the EU to accelerate.  Crucial decisions now need to be made and a path needs to be chosen. 

The Technical Paper is available via: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/714656/Technical_note_temporary_customs_arrangement.pdf

UK Goods Trade

Latest Department for International Trade statistics and shows that total UK trade encompassing goods and services is estimated at nearly £1,273 billion for 2017, which represents 62.5% of GDP.  Trade with the EU (£622.5 billion) accounted for 48.9% of this amount which equates to around £12 billion per week.

Although a breakdown was not provided for services trade between the EU and non-EU, as the chart below for goods trade illustrates, the value of UK imports from the EU (£262 billion) is substantially more than the corresponding value of exports (£167 billion), leaving a trade deficit of around £95 billion.  Whilst the UK also imports more from non-EU countries than it exports, the trade deficit is much smaller, standing at just under £41 billion.

From an agri-food perspective, the updated data show that the UK’s total Food, Beverage & Tobacco imports amounted to nearly £45bn last year.  Unsurprisingly, EU imports account for the majority (71%) of this total trade.  The UK’s Food & Beverage exports are estimated at £22.9 billion in 2017, with exports to the EU (£13.1 billion) accounting for 57%.  This is a £1.2bn increase on 2016 and, as previous articles have mentioned, a weaker Sterling has played a key role in this.  Exports to non-EU countries have also risen by £1.4 billion and are estimated at £9.8 billion in 2017.  This means that, in percentage terms, non-EU exports of Food & Beverage products now account for 43% of the UK total, which is up by about 3-4 percentage points on 2015 and 2016.  Again, the weaker Sterling is likely to have assisted the UK’s performance and the data also indicate that the proportional balance of UK’s exports between the EU and non-EU is beginning to shift.

For UK trade as a whole, the proportional balance between the EU and non-EU has remained consistent with previous years.  Indeed, with regards to goods trade, the EU’s share has risen by 1 percentage point versus 2016.  If there is a Hard Brexit, even a small decrease in trade with the EU will have a substantial impact, not just on agri-food trade but on the wider UK economy as well.

Further information is available via: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/709761/Pocketbook_21_May_accessible.pdf

Brexit and Customs

There has been much recent debate about the UK Government’s proposals on its future customs relationship with the EU.  This has centred on two key options put forward in August 2017 – a Customs Partnership and a Customs Arrangement (known as maximum facilitation (‘Max Fac’).  Both of these concepts, have been rejected, in their previous form, by the EU.  A third customs option also appears to have emerged, but it too is facing opposition from the EU.

Despite this, the Prime Minister recently established two Cabinet sub-groups to further examine each option put forward in August.  One group which includes Michael Gove (DEFRA Secretary), Liam Fox (International Trade) and David Lidington (Cabinet Office Minister) are considering the Customs Partnership.  Meanwhile, Greg Clark (Business Secretary), David Davis (DEXEU Secretary) and Karen Bradley (Northern Ireland Secretary) are examining Max Fac.  These options are generating intense debate within the Conservative party with the Brexiteers favouring Max Fac whilst the Europhiles are leaning towards the Customs Partnership. Both options are briefly summarised below;

  • Customs Partnership: involves the UK collecting tariffs on the EU’s behalf for goods transiting through the UK intended for use in countries within the EU Customs Union.  The UK would also apply its own tariffs for goods intended for use in the UK market.  At the border, importers would pay whichever tariff was highest and could subsequently reclaim the difference based on any proportion of the consignment was used in the lower tariff territory.  It is claimed that this approach would obviate the need for customs processes between the UK and the EU, including between Northern Ireland and Ireland.  Such a system would require an elaborate tracking system to check whether goods were being tariffed appropriately and a ‘robust enforcement mechanism’.  The EU has dismissed it as ‘magical thinking’.  Furthermore, whilst a customs border might be obviated there would still need to be border controls to check product standards (especially in the food sector) unless the UK continued to align all of its regulations with the EU. 
  • Max Fac: this would involves creating a border between the UK and the EU, but seeks to make this border ‘as frictionless as possible’ through the application of technology and recognition of ‘trusted traders’ amongst other mechanisms.  It would also allow smaller traders on the Irish border to trade as they currently do with no new restrictions.  This option has been criticised by many in industry, particularly in Northern Ireland, where some believe that it would create a ‘smugglers’ charter’ and would undermine the integrity of existing food safety systems.  It is also not clear that the technology exists, or that the Government could implemented it quickly enough, to make this option work (see below).

HMRC Weighs Into the Debate

The HMRC estimates that Max Fac would cost businesses between £17-20 billion per year to implement, primarily due to the increased costs associated with customs declarations.  This equates to about twice the UK’s annual net contribution to the EU budget.  Brexiteers such as John Redwood have rubbished these estimates claiming that they are highly speculative and claim that trade is already taking place with non-EU countries with costs nowhere near this amount.  Nevertheless, all credible analysis indicates that dealing with customs, even under a free-trade agreement, does create additional costs.

Jon Thompson (Head of HMRC) also said that the Customs Partnership would have a negligible cost to business over time – a view which will play into the hands of the PM who is said to favour a Customs Partnership-type model.  Mr. Thompson also stated that neither model would be ready to implement by 2021 and suggested that a lead-in time of between three to five years would be required to establish the systems needed, once it became clear what these would consist of.

A Third Customs Option?

In recent days, a third option appears to have emerged which, it was hoped, would help to overcome the deadlock in the Brexit negotiations.  This proposal, which some think of as a Hybrid Customs Partnership plan, was tabled by the UK this week in Brussels.  It is understood that it would also represent a backstop which would align the UK as a whole, not just Northern Ireland, with the rules of the Single Market and Customs Union for a time-limited period only (but longer than the ‘transition period’ already agreed).  This time-limited period would then give the UK the scope it needed to develop the systems required for its Customs Partnership model.

This too appears to have been rejected by the EU, although there are signs, that it has not been completely ruled-out.  The Brussels view is that the backstop envisaged in Paragraph 49 for the December Joint Report would apply to Northern Ireland only, given the wording in Paragraph 46 which states that the “commitments and principles outlined in this Joint Report will not pre-determine the outcome of wider discussions on the future relationship between the European Union and the United Kingdom, and are, as necessary, specific to the unique circumstances on the island of Ireland.”  The UK on the other hand has taken a broader view, claiming that the wording of Paragraph 49 states that “the United Kingdom will maintain full alignment…”, not Northern Ireland. Therefore, the backstop could apply to the UK as a whole.

It is understandable that the UK has taken this more expansive view and there are attractions to this perspective for several EU Member States, particularly Ireland whose 2016 trade with the UK is valued at €66 billion. This includes €32 billion in goods, of which nearly €9 billion is in agri-food, and €34 billion in services. Other countries, such as the Netherlands and Denmark, which rely heavily on trade with the UK, particularly for agricultural products are also believed to see the attractions of this proposal.  That said, EU Member States are reluctant to break ranks on this issue, as it is seen as another attempt by the UK at cherry-picking.

This impasse looks set to drag on to the European Council in June, but as Michel Barnier has reminded us on many occasions, time really is ticking, and there are now just a few months left to get all of this agreed.  A time-limited, interim arrangement beyond the current transition period is the only realistic way to achieve this whilst facilitating a ‘smooth and orderly Brexit’ which the PM called for back in January 2017.  Whatever form the eventual relationship takes, no matter what its name is, it is crucial that the time is taken to get it right.  For agriculture, this is especially critical.  In this regard, the five-year ‘agricultural transition’ envisaged in DEFRA’s recent consultation might be a prudent model to apply elsewhere as well.

EU Free-Trade Deals

Australia and New Zealand Talks

On 22nd May, EU ministers gave the go-ahead to commence talks with Australia and New Zealand (NZ) on a free trade deal. The move is the latest in a series of initiatives to strike bilateral deals with major economies coming on the back of deals with Canada (CETA), Japan and Mexico as well as negotiations with Mercosur (including Brazil and Argentina).

Bilateral trade between the EU and Australia is estimated at €45.5 billion per year, whilst EU-NZ trade is estimated at €8 billion.  Agricultural trade forms an important component of this, particularly in terms of EU imports and both Australia and NZ will be keen to expand this further.  However, the EU’s has already stated that its focus will be on reducing existing barriers to trade whilst taking account of its agricultural sensitivities.  It is therefore clear that the EU does not envisage full liberalisation in agricultural trade but may contemplate increased access via tariff rate quotas (TRQ) for sensitive agricultural products, with long tariff dismantling periods, similar to the CETA deal.

Any increase in market access for Australia and NZ will exert pressure on EU producers particularly in dairy, beef and sheep meat where both countries hold strong competitive advantages.  However, it must be borne in mind that NZ already has a TRQ of around 228,000 tonnes for sheep meat exports to the EU and it has struggled to fill this in recent years, partly due to strong demand in China.

Mercosur Negotiations Progress

Meanwhile, sources in Brussels suggest that a trade agreement with Mercosur is on course to be signed next month and would include provision for a 99,000 tonne increase in beef imports, via TRQs, into the EU.  The move comes as Mercosur has agreed to a phasing-out of its tariffs on European cars and it is also rumoured that France might be getting imminent access to China for its beef, thus lifting some opposition to the deal.   Again, it is likely that any increases in market access will be phased in over a long period, with EU Commissioner Phil Hogan claiming that any agreement would ‘take 10 years to implement’.

Given the flurry of recent progress on trade deals, it appears that Brexit has jolted the EU into action. However, it looks like a case of being too little, too late, and one wonders what the impact might have been had some of this progress taken place years ago.  From a UK perspective, given that it is now in the EU departure lounge, it will be seeking to replicate similar trade deals as soon as possible. The fear amongst farmers is that it adopts a more aggressive ‘meat for motors’ approach and exposes agriculture to cheaper competitors in a much shorter timeframe.

Brexit Committee Hearing

Speaking in front of the Commons Brexit committee on 25th April, Brexit secretary David Davis suggested that MPs would be allowed to vote to amend any Brexit deal in the autumn.  This means that the Prime Minister (PM) could be instructed by Parliament to seek changes.  This is an apparent U-turn on previous statements by the PM who said that Parliament would only get a take-it-or-leave-it choice.

Such comments are likely to give some hope to remain-leaning MPs that want, as a minimum, for the UK to remain in the Customs Union (but it should be noted that Mr Davis also stated that the expected Parliament to ‘uphold’ the Government’s policy of leaving the Customs Union).  The comment may also be an overture to remain-backing Conservatives who might vote against the Government in important House of Commons votes in the coming weeks. 

Mr Davis did point out that if MPs returned Theresa May to Brussels to renegotiate parts of the deal, then he was “not entirely sure how much force a government sent back with its tail between its legs by Parliament would have in such a negotiation.”

His comments come amidst reports in Bloomberg and the FT that Europe might be willing to strike a customs deal with Britain which mooted the possibility of setting up ‘UK-EU dialogue on trade’.  Although, Mr Davis claimed that it would be a failure if the UK ended up in a Customs Union, there appears to be efforts being made behind the scenes to arrive at a customs arrangement which officially places the UK officially outside of the EU Customs Union but still within the gravitational pull of the EU’s trading framework.

When speaking on Northern Ireland, where agri-food trade accounts for 45% of total goods trade with the Irish Republic, the Brexit Secretary mentioned that the Customs Union on its own would be insufficient to ensure a frictionless border after Brexit.  Mr Davies believes that the best solution was a comprehensive free trade deal in conjunction with a deal to recognise shared regulations and customs procedures. This would encompass mutual recognition on standards and all-island arrangements for agri-food (i.e. the island of Ireland being a single epidemiological unit for animal disease as it at present).

Mr Davis also acknowledged that if an ambitious deal, or alternative technological suggestions to avoid a hard border cannot be agreed with the EU, that a proposed ‘Plan c’ (backstop) to align all regulations was still a potential “emergency parachute”.  Some believe that the extension of Customs Union participation, beyond December 2020, as agreed in the transition phase, has emerged as a fall-back option as the Government’s alternative customs proposals will take time to implement.

The Brexit secretary also added that the Irish border question could wait until a final deal is struck in October, as issues around mutual recognition of standards and rules of origin would only bite from 2021. He saw the June deadline as being an “artificial” hurdle set by the EU side.  Brexit Committee MPs including its chair Hillary Benn expressed concern that an October deal would give Parliament very little time to scrutinise its implications properly which could even then be based on a mere political statement rather than a binding treaty.

It is unsurprising that on Northern Ireland, the can looks set to be kicked down the road yet again. It is by far the most complex and nuanced issue in the negotiations.  Some might argue that if agreement is reached on all other parts of the withdrawal deal with the EU and the framework for the future trading relationship, then the pressure exerted on the Irish Republic would ramp-up substantially. As the Brexit Secretary pointed out there is about £1 billion worth of trade between the Irish Republic and the UK each week, far more than North-South trade which for goods is estimated at €3.2 billion (£2.8bn) per annum. Any significant impact on this East-West trade would hurt the Irish economy.  If agreement is reached on all other major areas and Northern Ireland remains outstanding, the Irish Government could be forced to relent on some key issues.

Brexit Committee Sets Out 15 Key Tests

On 4th April, the Commons Select Committee for Exiting the European Union (Brexit Committee) published its report on the future UK-EU relationship.  It contains 15 criteria (key tests) by which it will judge any future deal agreed between the UK and EU negotiators.  The key tests which are of relevance to agriculture include;

  • Maintaining an open border between the Republic of Ireland and Northern Ireland: with no physical infrastructure or any related checks and controls as agreed in the Phase 1 Withdrawal Agreement. Data from the Irish Central Statistics Office (CSO) for 2017 reveal that agri-food trade accounted for 45% of all cross-border goods trade on the island of Ireland in 2017, and is therefore the primary concern when it comes to solving the border issue. 
  • No tariffs on goods trade between the UK and the EU 27: this could potentially be achieved via a comprehensive free-trade agreement (FTA) between the UK and the EU, but will need to be more in-depth than the EU-Canada (CETA) FTA agreed last year.  However, this will not address non-tariff barrier issues.
  • No additional border or rules of origin checks on goods trade: these would delay the delivery of perishable or time-sensitive deliveries or impede the operation of cross-border supply chains. At present, the UK’s stated desire of being outside the Single Market and the Customs Union makes it virtually impossible to meet this test and will require a blurring of the UK’s so-called red lines.  As a minimum, the UK would need to participate in a Customs Union with the EU (which includes agricultural goods).  It would also require a robust regulatory equivalence agreement; the likes of which the EU has never agreed with any other third country, to avoid non-tariff barriers such as border or rules of origin checks. 
  • No additional costs to businesses that trade in goods or services: most businesses are resigned to the fact that there will be some increase in administration and other costs even with a very soft Brexit.  This test therefore appears very difficult to meet.
  • Any new UK-EU immigration arrangements must not impede the movement of workers: covers those providing services across borders and the recognition of their qualifications and their right to practise. Given the labour difficulties in some agricultural sectors, continued access to labour from the EU will be vital.  This is particularly important in areas such as veterinary services in abattoirs but will also be important for drivers of HGVs transiting to and from the EU.
  • UK to maintain convergence with EU regulations necessary to maximise access to European markets: the report noted that Norway has to accept all EEA relevant EU legislation (estimated to account for 30% of all EU legislation that currently applies to the UK).  A similar level of compliance would be needed if the UK is to meet this test and, potentially, more considering that agriculture does not come under the current EEA arrangements.

The report also stated that should the negotiations on a deep and special partnership between the UK and the EU not prove successful, then EFTA/EEA membership should remain an alternative and would have the advantage of continuity of access for UK services. However, as mentioned previously, it must be emphasised that such an EFTA/EEA arrangement would not automatically cover agriculture and would, therefore, be insufficient to avoid a hard border on the island of Ireland. 

It must also be highlighted that the Brexit Committee is deeply divided over this report and those objecting to its conclusions include the high-profile Jacob Rees-Mogg who has claimed that the report seeks to “thwart Brexit by stealth”.

Finally, the report mentions the EU’s Association Agreements with Ukraine, Georgia and Moldova which cover most of the Internal Market rules and also provide for selective participation in many of the EU’s agencies and programmes whilst not including free movement of people.  However, it acknowledged that binding arbitration is provided for dispute resolution and referrals to the Court of Justice of the EU are limited to interpretations of EU law.  The Committee also noted the recent EU Parliament’s support of the Association Agreement option. It appears that the Association Agreement option is gaining traction as it offers greater flexibility than other ‘off-the-shelf’ models frequently cited.  Ultimately, the future UK-EU relationship will need to have its own distinct model, particularly considering the commitments of both parties with respect to the Irish border.  It is now time for the UK and the EU negotiators to put some ‘meat on the bones’ of a future relationship deal. Only then can any future deal be fairly judged. 

The report is accessible via: https://publications.parliament.uk/pa/cm201719/cmselect/cmexeu/935/935.pdf