Tag: Trade

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