Tag: Trade

Trade Update – July 2022

Although summer is often quieter on the trade front, there have been a couple of developments in recent weeks which merit mention. These relate to the UK-Australia Free Trade Agreement (FTA), and the announcement of the EU trade deal with New Zealand (NZ), which will be of interest to many in the UK agri-food sector.

UK-Australia FTA

The UK Government has failed to offer MPs the opportunity to debate the UK-Australia FTA within 20th July deadline as required by the framework set-out under the Constitutional Reform and Governance Act 2010. This means that the FTA can be ratified by the Government without the parliamentary scrutiny that it had promised to the farming industry on several occasions. Many in the UK farming industry see this as a betrayal and are concerned that it will create a precedent for future trade deals that the UK negotiates.

Separately, the House of Commons Library published its assessment of the UK-Australia FTA on 15th July. It noted that whilst the overall impact of the FTA is limited (adding 0.08% to UK GDP (£2.3 billion per year) in 2035), it does note that the effects on agriculture will be more sizeable. It references the UK Government’s own assessment from earlier in the year which projects that long-term agricultural output would decline by £94 million whilst semi-processed food output would also decline by £225 million as a result of the deal. The impacts would be strongest in the beef and sheep sectors.

The report has also highlighted concerns around environmental, animal welfare and food safety standards. The report has noted the importance of distinguishing between two aspects of standards:

  1. Product standards which must meet before they can be imported into the UK
  2. Wider questions of differences in animal welfare and environmental practices permitted in Australia and the UK.

On the former, it highlighted the Government’s conclusion that the FTA did not require changes to the UK’s import rules or statutory protections concerning human, animal or plant life or health, animal welfare or the environment. Regarding the latter, it highlighted concerns around Australian products being produced to lower animal welfare and environmental standards than what UK producers (farmers) must adhere to. It also noted that the Government has refused calls for Australian access to the UK to be contingent on adhering to “core standards” as advocated by the National Food Strategy.

Whilst it is unsurprising that the Government has taken this approach, it will add to concerns in British farming that its competitive position will be undermined as future FTAs are negotiated and agreed.

The House of Commons Library report is available via: https://researchbriefings.files.parliament.uk/documents/CBP-9484/CBP-9484.pdf

EU-NZ FTA Announcement

On 30th June, it was announced that the EU and New Zealand concluded negotiations for a trade agreement. In announcing the deal, the EU Commission projected that bilateral trade could grow by up to 30% and also emphasised what it claims were unprecedented sustainability commitments to align with the Paris Climate Agreement. From an agri-food perspective, the Commission also highlighted that key EU sensitivities around agri-food products were also safeguarded. Key provisions of the announced trade deal include;

  • EU agri-food exports to NZ: all tariffs would be removed from entry into force. This is unsurprising as most tariff lines for agri-food imports into NZ are already at 0% or at very low levels. Given the geographic distances involved, the benefits of this are likely to be limited to high-end niche food products, including chocolate, confectionary, ice-cream and wine.
  • EU beef imports from NZ: the EU will permit a tariff rate quota (TRQ) of 10,000 tonnes (t) with a reduced duty of 7.5%. This will be phased in over 7 years and will have to adhere to EU standards. This level of access is substantially lower than what the UK has permitted (12,000 t in Year 1, rising to unlimited  access from Year 16).
  • EU sheepmeat imports: an additional TRQ of 38,000 t will be permitted to be imported duty-free, again phased in after 7 years upon entry into force. As the old WTO TRQ was split evenly between the EU27 and UK as a result of Brexit (i.e. 114,000 t each), it is more likely that this new TRQ will be activated, given the EU’s market size and population (circa 450 million). But again, the level of access is lower than that ceded by the UK to NZ (35,000 t in Year 1 rising to unlimited access from Year 16).
  • EU dairy imports: the following provisions apply;
    • Milk powder: a new 15,000 t TRQ with a 20% duty will be phased in over 7 years.
    • Butter: NZ has currently access to the TRQ of 47,177 t allocated under the EU’s WTO schedule with the in-quota tariff of 38% of the MFN duty. Under the FTA, 21,000 t of this TRQ will have the tariff gradually reduced to 5%. The EU will also provide a new 15,000 t TRQ with the same gradually reduced tariff duty (i.e. from 38% to 5%).
    • Cheese: the EU will allow 25,000 t to be imported duty-free via a new TRQ. This will again be phased in over 7 years. In addition, for 6,031 t of cheese TRQ that NZ currently has under the EU’s WTO schedule, the tariffs will gradually be reduced from €176/t to zero.
    • High-protein whey: a new TRQ of 3,500 t with zero duty to be phased in over 7 years.

As with beef and sheepmeat, the concessions offered by the EU are generally less than what the UK has offered (more generous TRQs for butter and cheese with full liberalisation after 5 years).

More information on the EU-NZ FTA is available via: https://ec.europa.eu/commission/presscorner/detail/en/IP_22_4158

Overall, it is evident that despite agreeing this FTA, the EU will continue to offer a higher level of protection to its farmers than the UK has done with its FTA with New Zealand. That said, it must be emphasised that, like Australia, NZ continues to be heavily focused on the Asian markets, where it is getting strong prices for its produce. Just because increased access is available to the UK or EU markets, this does not necessarily mean that this access will be availed of. 

Northern Ireland Protocol Bill

On 13th June, the UK Government introduced the Northern Ireland (NI) Protocol Bill to the House of Commons. The highly controversial Bill, if enacted, would dis-apply large swathes of the NI Protocol which was agreed between the UK and the EU as part of the Withdrawal Agreement negotiations.  The Bill’s legal text which is highly complex and potentially far-reaching drew harsh criticism from multiple sources. It has been met with particular disdain by the EU which sees the Bill as a breach of international law and the Commission is set to respond in the near future. At a top-level, the Bill seeks to do three things;

  1. Disapplies large parts of the Protocol: relating to most provisions that apply EU rules on the movement of goods into NI.
  2. UK’s Protocol alternative: is outlined and the UK Government provides some guidance on how it would be implemented.
  3. European Court of Justice oversight: the Bill would remove the Court’s direct jurisdiction and the role for EU institutions

In essence, the Bill is effectively rewriting the Protocol, in a unilateral manner, outside of the structures agreed by the UK Government and the EU.  Whilst the political fall-out will continue to generate intense debate, it is the accompanying policy paper which provides practical insights on how the Bill would work and the implications for agri-food. The key points are;

  • Establish new ‘green channel’ arrangements for goods staying in the UK: it is claimed that this would fix the burdens and bureaucracy caused by the application of EU Customs and SPS rules.  This channel would only be available to firms registered as ‘trusted traders’ and this scheme would be overseen by UK Authorities.  Goods moving on to the EU or moved by firms not in the trusted traders’ scheme would use the ‘red lane’ and be subject to the full range of regulatory checks.  This would significantly reduce the sometimes complex certification requirements for agri-food produce.  Here, the UK proposals are not that far from the EU proposals published last October which suggested an ‘Express Lane’ for goods moved by trusted traders which would be consumed in Northern Ireland. 
  • Establish a new ‘dual regulatory’ model: this is intended to provide flexibility for NI firms to choose between UK or EU rules on product standards.  It is intended to remove barriers to trade within the UK internal market and the UK Government claims that it will encompass robust commitments to protect the EU Single Market.  For agri-food, goods could only move from GB to NI under the trusted trader scheme (otherwise they would be in the red lane and subject to checks).  There would be robust penalties for violations.  The EU strongly objects to this proposal on the grounds that it undermines the integrity of its Single Market.  There are also challenges around the bureaucratic complexities involved with dealing with two regulatory systems. Major NI agri-food businesses are also against these proposals as it would scare-off overseas customers from purchasing NI produce as they would be unsure on which standards the products are adhering to and would be deemed too complex and risky.
  • State Aid and VAT: the UK Government states that the Protocol restricts the UK from providing the same tax and spend policies in NI as the rest of the UK—with little room for flexibility.  This aspect of the Protocol was insisted upon by the EU so that there was a level playing field between NI and the EU Single Market and that NI firms, or GB firms with operations in NI, did not gain an unfair advantage.  The new Bill gives the UK freedom to disapply these rules so that NI can have the same tax rules as other parts of the UK.  Again, the EU strongly objects to these proposals.
  • Role of European Court of Justice (CJEU): would be removed in dispute settlement and would provide the means for UK Authorities and Courts to set out the arrangements which apply in Northern Ireland.  This is also highly controversial from an EU perspective as it would not have agreed the Trade and Cooperation Agreement (TCA) with the UK if the CJEU did not have ultimate oversight over the NI  Protocol.

Whilst the full EU response is awaited, it has confirmed on 15th June it is restarting the legal proceedings it had initiated last year against the UK Government for its unilateral extension of grace periods for checks on products such as sausages and mince.  These had been suspended for almost a year to facilitate negotiations on addressing the Protocol issues.  The EU response is also likely to state that it reserves the right to enact much more stringent measures if this NI Protocol Bill becomes law in the UK.  This would include suspending key aspects of the TCA or introducing some tariffs on UK exports to the EU.  That said, the EU will also be keen to get the UK back to the negotiating table and the Commission has set-out further proposals on how it thinks the outstanding issues on the NI Protocol should be dealt with.

From an agri-food perspective, it is important to note that the House of Lords will vote against this Bill, thus delaying its enactment for at least a year.  This gives time for further negotiations to take place.  However, additional negotiating time has been wasted in the past.  Breaching International Law (which legal experts almost entirely agree would happen if this Bill were to be enacted)) is not the way to build trust.  What is needed now is quiet and determined diplomacy to reach a deal that all parties can live with.

NI agri-food businesses are adamant that the Protocol delivers major benefits in enabling NI to access the EU Single Market whilst having unfettered access to GB.  As we have mentioned previously, a UK-EU veterinary agreement would help greatly to reduce the burden of checks, not just GB to NI but also GB to the EU.  On this, the EU needs to be more flexible.  The UK will not opt for a Swiss-style veterinary agreement as that would mean following EU rules for the whole of the UK.  A bespoke veterinary agreement should be a key part of the framework to resolve the remaining Protocol issues.

Northern Ireland Protocol Wrangling

On 17 May, the Foreign Secretary, Liz Truss, made a statement in the House of Commons on the Government’s intention to introduce legislation to make changes to the Northern Ireland (NI) Protocol.  During her statement, the Foreign Secretary stated that her preference remains a negotiated solution with the EU.  To this end, she invited European Commission Vice-President Maroš Šefčovič to a meeting of the Withdrawal Agreement Joint Committee.  However, she also said that various aspects of the Protocol are not working.  She stated that the new Bill would address these issues whilst claiming it would also uphold the provisions of the Good Friday Agreement and be consistent with international law – points that the EU, in particular, disagrees with.

The new Bill, due to come before Parliament in the coming weeks would focus on addressing issues around;

  • The movement of goods: particularly relevant to agri-food, where the Protocol is not yet fully functional in some areas as a result of the grace periods already put in place by the UK Government for products such as sausages and mince
  • Goods regulation: also of relevance to agri-food, and concerns NI having to follow EU rules for goods which has precedence in NI over rules that the UK might introduce in the future (which could diverge from the EU)
  • VAT: NI remains within the EU’s regulatory orbit for VAT on goods
  • Subsidy control: the EU’s State Aid rules are applicable to NI and, in some instances, British based companies that do business in NI.
  • Governance: this links with the oversight that the European Court of Justice has over the NI Protocol.

The Foreign Secretary stated that the Bill would include a Trusted Trader scheme, effectively a ‘green channel’ for goods imported from GB and staying in Northern Ireland.  It would also encompass the provision of real-time data to the EU with the intent of giving them confidence that goods intended for NI do not enter the EU Single Market, via the Republic of Ireland.

A dual regulatory regime is also suggested so that NI could follow UK rules for goods that would stay in Northern Ireland.  Effectively, businesses would choose between producing goods to UK or to EU standards in Northern Ireland.  Liz Truss also stated that robust penalties would be imposed for those seeking to abuse the proposed new system and promised further detail in the coming weeks.

Unilaterally disapplying key parts of the NI Protocol via UK legislation has the potential to place the whole post-Brexit trading arrangements between the UK and the EU in jeopardy.  Whilst the EU has been somewhat muted in its response, Maroš Šefčovič clearly stated that the EU would respond ‘with all measures at its disposal’ should the UK follow through and enact legislation to override the NI Protocol.  However, we remain several steps away from retaliatory action being taken.

If a Bill is brought before Parliament in the coming weeks, it needs to go through Parliamentary approval process.  Most believe that the House of Lords would almost certainly vote against the Bill.  This would mean a delay by one year to the Bill’s enactment.  Some suggest that 20th June 2023 to be a potential key date, if the Bill gets to the final House of Lords vote by 20th June this year.

This gives some time for the UK and the EU to reach a negotiated solution. For agri-food businesses, it is unlikely that much will change in the interim.

There is a delicate balancing act required between the UK seeking to rewrite large chunks of the Protocol on the one hand and the EU Commission not having the mandate from EU Member States to renegotiate the Protocol on the other.  That said, there is the scope for all parties to improve the Protocol and this must be the focus.

As we have stated in the past, a veterinary agreement between the UK and the EU would go a long way towards addressing the most problematic Protocol issues around the movement of agri-food goods between Britain and NI.  This could be along the lines of the veterinary agreements that New Zealand has with the UK and the EU.  This would still give the UK the ability to negotiate free trade deals with third countries.  It would mean that some checks would remain, but at greatly reduced levels (e.g., 1% physical checks versus the default 15% for red meat).  The DUP NI Agriculture Minister, Edwin Poots, has suggested a similar concept in the past. 

It is most likely that a way will, eventually, be found to muddle through the current issues as this is what has occurred with the Brexit process to date.  We are probably into the territory of having Protocol 2.0, 3.0 etc. in the coming years.  This will most likely align, to some degree, with the vote that the NI Assembly will have on the Protocol every 4 years.  In some ways, this would be akin to new versions of MS Windows that Microsoft brings to the market periodically – each new version is fundamentally the same operating system (Protocol) but with scope for improvements, even if certain aspects remain imperfect to some. 

Further detail on the Foreign Secretary’s Statement to the House of Commons is available via: https://www.gov.uk/government/speeches/northern-ireland-protocol-foreign-secretarys-statement-17-may-2022

Border Check Postponement

It has been confirmed that there has been a (further) postponement to the introduction of the remaining border controls for imports into the UK from the EU.  The Minister responsible, Jacob Rees-Mogg, issued a statement to the House of Commons on 28th April which set out the reasoning behind these delays and the UK Government’s plans for the future operation of its border controls.

Mr Rees-Mogg claimed that introducing additional controls from July would have replicated the controls that the EU applies to its global trade which would have meant ‘complex and costly’ checks which would have to be altered in the future when the UK implements its transformation programme (including greater digitisation) for the operation of its border controls with both the EU and non-EU countries.

This means that no further controls on EU goods (notably agri-food products) will be introduced in 2022.  Instead, the UK Government plans to publish a Target Operating Model in  the autumn that will set out its new regime of border import controls.  Thereafter, the new import controls regime would be introduced by the end of 2023.  In effect, the following controls will now not be introduced:

  • A requirement for Sanitary and Phytosanitary (SPS) checks on EU imports to be done at a Border Control Post (BCP) (currently done at destination)
  • A requirement for safety and security declarations on EU imports
  • A requirement for further health certification and SPS checks for EU imports
  • Prohibitions and restrictions on the import of chilled meats from the EU

As alluded to in previous articles, it is no surprise that there is a further delay to the implementation of border controls on imports from the EU as the required infrastructure, particularly IT systems, were simply not ready.  In light of this, business organisations have broadly welcomed the announcement.  However, some firms had already spent quite heavily on preparing for the introduction of more controls from July, and potentially, this money will effectively be wasted.  This latest announcement is also different to previous delays in that a more fundamental review of import controls on all UK trade (EU and non-EU) is taking place.  Certainly, there are areas where greater efficiency is possible, particularly around the use of e-certification processes, which is widely used by New Zealand.

Within the farming sector, several organisations have rightly highlighted the lack of a level playing-field – in that UK exports to the EU are subject to the full range of regulatory checks, whilst UK imports from the EU continue to need far fewer checks.  This has put UK Farming Plc at a significant disadvantage.  In this context, it would surely have been better for the UK Government to have reached a veterinary agreement with the EU, to drastically lower the levels of checks on both sides?  Such an agreement would not have stopped the UK from introducing a separate border control regime in the future, but would have supported UK exporters. 

UK/New Zealand Trade Deal Signed

On 28th February, the UK and New Zealand signed the UK-New Zealand Free Trade Agreement (FTA), formalising the agreement-in-principle which was announced in October 2021 (see https://abcbooks.co.uk/uk-new-zealand-trade-deal/).  The FTA is similar in nature to the UK-Australia FTA announced in December.  The deal is seen by the UK Government as another important step towards joining the Comprehensive and Progressive agreement for Trans-Pacific Partnership (CPTPP).  The agreement will now be laid before Parliament for scrutiny.

The key points are;

  • Tariffs: upon entry into force, 100% of tariffs on UK goods exports to NZ will be removed whilst tariffs on 99.5% of goods imports into the UK from NZ will immediately be removed.
  • Tariff Rate Quotas (TRQs): will remain for the most sensitive product being imported into the UK including:
    • Beef: access would be limited by tariff rate quota (TRQ) in the first 10 years. This would commence with access to a duty-free transitional quota of 12,000 tonnes in year 1, rising in equal instalments to 38,820 tonnes in year 10.  Any beef imports above the annual TRQ allowance would be subject to the UK Global Tariff (UKGT).  In the subsequent 5 years (year 11-15 after entry into force) a product-specific safeguard will be applied on any beef imports exceeding a further volume threshold rising in equal instalments from just over 40,000 tonnes in year 11 to 60,000 tonnes in year 15. All TRQ allowances are on a product weight basis. All tariffs would be eliminated from year 16 onwards. 
    • Lamb: access would operate in a similar manner to beef, although tariff-free TRQ access would be managed in a series of step-changes as opposed to annual incremental increases and the allowances are calculated on a carcase-weight basis which is somewhat more limited than a product weight basis.  In years 1-5, an additional 35,000 tonnes per year could be imported tariff-free.  This, of course, is in addition to the 114,000 tonnes of the WTO TRQ that New Zealand has historically had available.  During years 5-15, the tariff-free access will increase to 50,000 tonnes per annum followed by unlimited access in year 16.  Importantly, trade via the FTA TRQ can only commence once utilisation of the WTO TRQ has reached 90%.  Any imports exceeding the FTA TRQ will be subject to the UKGT tariff rate. 
    • Dairy: similar structures will also operate for dairy products with unlimited access being phased in over 5 years.
      • Butter: initial duty-free TRQ of 7,000 tonnes rising to 15,000 tonnes in year 5.
      • Cheese: there will be an initial duty-free TRQ of 24,000 tonnes in year 1, increasing incrementally to 48,000 tonnes in year 5.
    • Fresh Apples: given the seasonal nature of production in both countries, tariffs on imports into the UK from 1st January to 31st July would be eliminated as soon as the deal comes into force.  Imports during August to December will be liberalised over 3 years.  During this time, there will be a tariff-free TRQ of 20,000 tonnes per year.  All fresh apple imports from NZ would then be tariff-free and quota-free from year 4 onwards. 

Sources: UK Government and Andersons

  • Customs Procedures: the deal is ambitious with respect to minimising customs procedures and the promotion of e-certification.
  • Rules of Origin (RoO): are set to remain standard for agri-food – i.e. a threshold of 15% of products traded can be non-originating from the country of origin (i.e. UK or NZ) in order to gain tariff-free access.  The RoO for automotive vehicles (25% originating materials as opposed to the standard 55% threshold) will become much more liberalised.  This is seen as a big gain for the UK, given the extent of its integration with EU supply-chains. 
  • Sanitary and Phytosanitary (SPS) Measures: the The FTA seeks to minimise barriers in the area.  Both countries are to recognise equivalence where both countries have similar standards and the deal will function in parallel with the existing UK-NZ Sanitary (Veterinary) agreement.  The UK Government is also keen to emphasise that the deal “does not create any new permissions or authorisations for imports from New Zealand and does not compromise on our high environmental protection, animal welfare, plant health, and food standards.”
  • Animal Welfare: has a dedicated chapter in the agreement which includes non-regression and non-derogation clauses which the Government intends that neither country will lower its animal welfare requirements in a manner which impacts trade. There is also an ambition to work together internationally to encourage greater animal welfare standards and research cooperation on animal welfare issues. 

Overall, the main thrust of the UK-NZ FTA is very similar to the previous agreement-in-principle and is quite similar to the FTA that the UK has agreed with Australia.  As such, it creates another precedent for future trade deals.  It is clear that the UK has offered enhanced market access for NZ agri-food suppliers in return for greater access to the NZ automotive and services sectors.  The cumulative impact of these trade deals is also important.  Whilst there is a 15-year transition period for beef, by year 14, the combined Australian and NZ TRQs (~214Kt) access will have surpassed recent years’ annual imports from Ireland (204Kt).  That said, just because TRQ access is available, it does not mean that it will be fulfilled as Asia-Pacific will remain very important to Antipodean suppliers. 

Finally, in the case of NZ, it must be acknowledged that whilst there are some differences in its standards versus the UK, its standards are very closely aligned.  Something that the EU also acknowledges in its veterinary agreement with NZ.  Therefore, whilst the competitive pressure will increase, the playing field is quite level in this instance.  What UK farming needs needs to do is to focus much more on improving its market orientation (i.e. focus on satisfying consumer needs profitably and sustainably) and to improve its value proposition and marketing generally, both at home and abroad.  That is its best chance to successfully competing with the likes of NZ in the long-term.

More information on the UK-NZ FTA is available via: https://www.gov.uk/government/collections/uk-new-zealand-free-trade-agreement

Trade Update

In comparison with previous years, the negotiations relating to Brexit went relatively quiet over the Christmas period.  With the Foreign Secretary, Liz Truss, assuming the responsibilities of Chief Brexit negotiator, it is hoped that a breakthrough can be achieved on the remaining issues, particularly the Northern Ireland Protocol.  There have been lengthy lorry queues on the approach to Dover this month – a reminder, if one was needed, that Brexit is not yet done and we’re into the era of ongoing Brexit.

NI Protocol

In mid-January, Liz Truss met her EU counterpart Commission Vice-President Maroš Šefčovič at Chevening House (Kent) in what was described as a cordial atmosphere.  Whilst the tone between both parties has improved, significant issues relating to the NI Protocol remain.  Some of these such as the European Court of Justice (ECJ) oversight and the extent of the removal of regulatory checks on goods from GB destined for NI are well-known.  The EU was surprised by the extent to which the Foreign Secretary pushed for the removal of the approval system for State Aid under the Protocol (i.e. Government subsidies to companies with operations in NI that trade with the EU).  Whilst the EU are open to looking at ways of speeding up the notification and approval system for State Aid to NI-based companies, they are unlikely to agree to its removal.

Similarly, for regulatory checks, its (limited) proposals in October (see previous article) showed that the EU is willing to offer some flexibility on the extent of checks and it claimed that Sanitary and Phytosanitary (SPS) checks on meat and dairy could be reduced by half whilst customs checks could be reduced by 80%.  However, the EU will not countenance their removal as they are seen as vital to protecting the Single Market.

Both parties have agreed to intensify talks from late January with the ambition of concluding talks by the end of February to resolve the remaining issues.  With the NI Assembly elections taking place in May, both sides would be keen to have the lingering issues resolved by then.  Much will depend on the extent to which Liz Truss will be prepared to compromise to do a deal.    Ultimately, both sides will need to show some more flexibility if there is to be an agreement.

Dover Queues

On 21st January, there were 17-mile tailbacks on approach to Dover.  In normal circumstances, there is usually a rebuilding of trade volumes following the Christmas period and it would appear that this coupled with the impact of absences due to Covid and Brexit-related checks (which have been imposed on UK to EU trade since January 2021) have caused the delays.  The situation has improved somewhat since, although there is concern that with the introduction of biometric checks for entry into the EU from September will lead to more substantial delays.  Of course, significant delays at borders between countries is not uncommon.  Similar issues arise at the US-Canada border, despite there being a free-trade agreement between both countries.

That said, the UK-EU situation could be improved significantly if the Trade and Cooperation Agreement (TCA) was enhanced further.  From an agricultural perspective, a veterinary agreement between both parties would be helpful, even if it is more akin to a NZ-style agreement which only cuts the volume of checks at the border, but does not remove the need for health certificates.  It is also evident that some form of agreement on mobility provisions is required to make work activities in the EU less onerous and to pre-empt issues caused by the introduction of biometric checks.  Improvements to the rules of origin provisions of the TCA to help to make it easier for goods with inputs from multiple sources to qualify for tariff-free trade would also help.

Overall, recurring queues at Dover will be an ongoing feature of UK-EU trade.  These can be mitigated to a large extent by a more pragmatic approach from both the UK and EU authorities but it may take some time before the political will is there to make such accommodations.

Chief Brexit Negotiator Resigns

On 18th December, Lord Frost, the UK Government’s Chief Brexit Negotiator, and co-architect of both the Trade and Cooperation Agreement (TCA) with the EU and the Northern Ireland (NI) Protocol, resigned with immediate effect.  In his resignation letter, he cited issues with the Government’s direction of travel on Covid policy and higher taxation as key reasons for his departure. However, many suspect that frustrations with how negotiations with the EU are progressing on the NI Protocol were also influential.  In recent weeks, some progress had been reported on medicines and the UK’s stance on the European Court of Justice had softened but negotiations will continue into 2022 with agri-food, particularly Sanitary and Phytosanitary (SPS) regulation continuing to be a key stumbling block.

Whilst some see Lord Frost’s resignation as a blow to the Prime Minister, others believe that the possibility of a deal on the NI Protocol in early 2022 has increased.  Particularly with the Foreign Secretary, Liz Truss, now taking on the responsibility of overseeing negotiations with the EU.  Ms Truss is popular with Conservative party grassroots and is viewed as more of a pragmatist than Lord Frost.  Her experience as Defra Secretary (2014-2016) and International Trade Secretary (2019-2021) should also be helpful in addressing remaining SPS and customs issues.  She will be deputised by Chris Heaton-Harris MP who has become Minister of State for Europe who will support the Foreign Secretary on EU Exit and NI Protocol issues.

UK:Australia Trade Agreement Signed

The UK-Australia Free Trade Agreement (FTA) was signed virtually on 17th December.  It is the first FTA that the UK has negotiated from scratch since its departure from the EU.  It means that all chapters of the agreement have now been agreed by both parties following the agreement-in-principle in June (click here for previous article).  From an agri-food standpoint, much of what was agreed in principle is now contained within the detailed agreement and will now be laid before Parliament for scrutiny.

The key points relating to agri-food are;

  • Tariffs:
    • UK Imports: there will be an immediate elimination of 99% of tariffs on goods imported from Australia to the UK upon entry into force (potentially sometime in 2022).  Pork, poultry and eggs are not included so the UK Global Tariff will continue to apply. However, restrictions will remain for other sensitive agricultural products as specified below.
    • UK Exports: almost all tariffs on UK goods will be eliminated upon entry into force. Tariffs on whisky, confectionary and biscuits will be phased out over 5 years. 
  • Tariff Rate Quotas (TRQs): the duty-free TRQs remain largely the same as previously outlined in the agreement-in-principle. These are summarised in the Table below.

  • More detail has been provided on what is included within each TRQ:
    • Beef (TRQ 1): the products (commodity codes) which are applicable include fresh/chilled beef (0201); frozen beef (0202); and a range of other chilled and frozen beef offal, preserved beef, beef-based meat mixtures and selected blood preparations.
    • Sheep meat (TRQ 2): products applicable include chilled lamb carcases/half-carcases (020410); chilled sheep carcases (020421); other sheep meat cuts with bone-in or boneless (020422; 020423); frozen sheep meat; edible flours/meals of sheep meat offal; and blood preparations.
    • Milk, Cream, Yoghurt and Whey (TRQ 3): applicable products are milk/cream whether concentrated or unconcentrated (0401; 0402); buttermilk and yoghurt (0403); and whey (0404 (excluding 0404.10.48)).
    • Butter (TRQ 4): all products under the 0405 HS code.
    • Cheese and Curd (TRQ 5): all products under the 0406 HS code.
    • Wheat (TRQ 6): this 80Kt TRQ applies to all types of common wheat but excludes seed (HS code 1001.99).  Wheat seed will have its £79 per tonne duty removed in 4 equal instalments and after Year 4, the duty will be removed. 
    • Barley (TRQ 7): this 7Kt TRQ applies to malting and other (feed) barley (HS code 1003.90), but excludes seed. Barley seed will also have its £77 per tonne duty removed in 4 equal instalment and will be duty free after Year 4.
    • Long-grained Rice (TRQ 8): a 1Kt TRQ applying to selected commodity codes.
    • Broken Rice (TRQ 9): an 11.5Kt TRQ applying to broken rice of all varieties (HS code 1006.40).
    • Sugar (TRQ 10): the TRQ is 80Kt (Year 1) rising to 220Kt (Year 8). It includes cane sugar, white sugar and other sugar (HS codes 1701.13; 1701.14; 1701.91; 1701.99). Beet sugar (1701.12) is excluded.
  • Sanitary and Phytosanitary (SPS) Measures: both parties emphasise their commitments to a science and risk-based approach to implementing SPS measures.  However, there is no mention of any changes to import standards.  Such changes, if they were to be introduced, would be set-out separately in future either by the UK or Australian Governments.  Therefore, this area will need to continue to be monitored closely. 
  • Rules of Origin: there is some more flexibility for UK exporters in terms of percentage of processed food ingredients that must be of UK origin, with a greater focus on the production process as opposed to the list of ingredients. This means that biscuits made from imported flour will qualify for tariff-free access to Australia under the FTA. It is also notable that whiskey from the Republic of Ireland used as inputs into Northern Irish whiskey will qualify for preferential access to the Australian market.  Effectively, NI whiskey will enjoy the same tariffs as Scotch whisky. 

Overall, the UK-Australia FTA is significant as it is the first trade agreement negotiated independently by the UK in nearly 50 years.  The UK farming sector, particularly grazing livestock and sugar beet will be more exposed to competitive pressure from Australian imports in the long-term.  However, it is worth emphasising that Australia is currently heavily focused on the Asia-Pacific region and that having generous quota access with eventual full liberalisation does not necessarily mean that Australian imports will reach these levels.  That said, from an Australian perspective, the UK market is an important diversification opportunity, particularly given its recent tensions with China. 

From a UK farming standpoint, the Australian FTA of course sets an important precedent, that other deals are likely to follow.  We’ve already seen this with the NZ agreement-in-principle.  The UK has also relented on its efforts to base beef and sheepmeat import TRQs on carcase weight equivalent.  The HS codes included show that the TRQs will be based on product-specific weight.  This is unsurprising as both Australia and NZ have been digging their heels in on this.  They also have leverage with the UK in terms of its application to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).

The deal will now go before both the UK and Australian Houses of Parliament for further scrutiny and ratification.  Once domestic ratification has been completed, both parties will notify each other.  The agreement could enter into force as soon as 30 days after both parties have completed ratification.  Some anticipate that entry into force could occur as soon as the middle of 2022, others think the process might take longer.  More detail is available via: https://www.gov.uk/government/collections/uk-australia-free-trade-agreement

Australia and NZ Trade Agreements

Trade deals with Australia and New Zealand (NZ) have been announced with much fanfare over recent months.  However, progress has stalled in converting these agreements-in-principle into legal texts.  The target that this would be concluded by the end of the year now looks unlikely.

It is claimed that this is chiefly due to the UK rowing-back on the market access offered on beef and lamb so that the annual tariff-free quotas are based on carcase weight equivalent and not product weight (i.e. products shipped such as boneless beef or legs of lamb).  A carcase weight equivalent basis would essentially mean that there would be less scope for Antipodean suppliers to export high-value beef and lamb cuts to the UK market and capture the shares of British producers.

Whilst the proposed EU-Mercosur trade agreement (which is being stalled by EU Member States) provided tariff-free quotas based on carcase weight equivalents, such arrangements are the exception in international Free-Trade Agreements (FTAs).  As the UK has formally applied to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which Australia and NZ are members of, both countries are threatening to stall the UK’s application if their tariff-free market access for beef and lamb are calculated on this basis.

It remains to be seen how the impasse will be resolved, but one suspects that given the UK Government’s eagerness to join the CPTPP, it will concede on offering both countries access based on product weight.  This would mean some increased competition for UK producers and exporters from the EU but, as previous articles have noted, both Australia and NZ are heavily focused on the Asia-Pacific markets presently, thus limiting their capability to supply the UK market as well.

UK / New Zealand Trade Deal

The UK and New Zealand have announced an agreement in principle on a Free Trade Deal (FTA).  The deal, announced on the 20th October, is similar in nature to the UK-Australia trade deal announced back in June.  Like the Australian FTA, the UK-NZ FTA agreement-in-principle is subject to further negotiations on the legal text.  Whilst there is an eventual aspiration to fully liberalise agri-food trade, there are adjustment periods for several agri-food products which the UK deems to be sensitive.  These include;

  • Beef: access would be limited by tariff rate quota (TRQ) in the first 10 years. This would commence with access to a duty-free transitional quota of 12,000 tonnes in year 1, rising in equal instalments to 38,820 tonnes in year 10.  Any beef imports above the annual TRQ allowance would be subject to the UK Global Tariff (UKGT).  In the subsequent 5 years (year 11-15 after entry into force) a product-specific safeguard will be applied on any beef imports exceeding a further volume threshold rising in equal instalments to 60,000 tonnes.  All tariffs would be eliminated from year 16 onwards. 
  • Lamb: access would operate in a similar manner to beef although tariff-free TRQ access would be managed in a series of step-changes as opposed to annual incremental increases.  In years 1-5, an additional 35,000 tonnes per year could be imported tariff-free.  This, of course, is in addition to the 114,000 tonnes of the WTO TRQ that New Zealand has historically had available.  During years 5-15, the tariff-free access will increase to 50,000 tonnes per annum followed by unlimited access in year 16.  Importantly, trade via the FTA TRQ can only commence once utilisation of the WTO TRQ has reached 90%.  Any imports exceeding the FTA TRQ will be subject to the UKGT tariff rate. 
  • Dairy: similar structures will also operate for dairy products with unlimited access being phased in over 5 years.
    • Butter: initial duty-free TRQ of 7,000 tonnes rising to 15,000 tonnes in year 5.
    • Cheese: there will be an initial duty-free TRQ of 24,000 tonnes in year 1, increasing incrementally to 48,000 tonnes in year 5.
  • Fresh Apples: given the seasonal nature of production in both countries, tariffs on imports into the UK from 1st January to 31st July would be eliminated as soon as the deal comes into force.  Imports during August to December will be liberalised over 3 years.  During this time, there will be a tariff-free TRQ of 20,000 tonnes per year.  All fresh apple imports from NZ would then be tariff-free and quota-free from year 4 onwards. 

Elsewhere, the deal is ambitious with respect to trade facilitation and the minimising of customs procedures in particular.  There are ambitions to promote e-certification where possible.  Whilst Rules of Origin (RoO) for agri-food remain quite standard (i.e. a threshold of 15% of products traded can be non-originating from the country of origin (i.e. UK or NZ) in order to gain tariff-free access, the RoO for automotive vehicles (25% originating materials as opposed to the standard 55% threshold) will become much more liberalised.  This is seen as a big gain for the UK, given the extent of its integration with EU supply-chains.  The agreement also seeks to reduce barriers in the Sanitary and Phytosanitary (SPS) area.  Both countries are to recognise equivalence where both countries have similar standards. 

Overall, it is evident that the market access offered to NZ suppliers is significant and that agri-food has been used by UK negotiators as a means to open up access in other areas (e.g. automotive and services).  It can also be seen that the Australian FTA announced has become an important precedent for future trade deals.  Taking both the NZ and Australian trade deals together, significant competitive pressure will be exerted on domestic British producers and traditional suppliers from the EU, particularly Ireland.  Looking at beef for example, in year 1 both countries could theoretically export 47,000 tonnes of beef to the UK, rising to 148,820 tonnes in year 10.  By year 15, their tariff-free access will have reached 230,000 tonnes, significantly surpassing recent year’s imports from Ireland into GB (just over 200,0000 tonnes).

That said, it must be acknowledged that both Australia and NZ are heavily focused on the Asia-Pacific market in recent years and imports of NZ lamb have been nowhere near their TRQ allowances of late.  Things could of course change in the future, particularly given the geopolitical tensions between Australia and China.  The UK will be seen by Antipodean suppliers as a high value and dependable market.  British agriculture needs to prepare for this increased competitive pressure which is likely to become more pronounced as future trade deals (e.g. an updated FTA with Canada) are agreed.  More information on the UK-NZ FTA is available via: https://www.gov.uk/government/publications/uk-new-zealand-free-trade-agreement-negotiations-agreement-in-principle/uk-new-zealand-fta-negotiations-agreement-in-principle