Tag: Trade

The UK Government has, once again, delayed the implementation of border controls on agri-food imports from the EU.  The postponement is blamed on the combined effects of the Covid-19 pandemic and food supply-chain issues, but it is equally a result of the Hard Brexit the Government negotiated.  This move was becoming increasingly inevitable in recent weeks as it is clear that the infrastructure required to deliver effective border controls for imports from the EU was not ready and businesses were becoming increasingly concerned about the lack of preparation time.  The key aspects of the revised timetable are;

• Pre-notification of Sanitary and Phytosanitary (SPS) goods: requirements which were due to be introduced on 1st October 2021, will now be introduced on 1st January 2022.
• Export Health Certificates: these requirements, which were due to be introduced on 1st October 2021, will now be introduced on 1st July 2022.
• Phytosanitary Certificates and physical checks on SPS goods at Border Control Posts: were due to be introduced on 1st January 2022, but will now be introduced on 1st July 2022.
• Safety and Security declarations on imports: will now be required as of 1st July 2022 as opposed to 1st January 2022.
• Full customs declarations and controls: will be introduced on 1st January 2022 as previously announced.

Remember that this only applies to imports from the EU – exports from the UK to Europe have been subject to the full range of EU checks since the start of this year.  More checks and bureaucracy on imports would raise costs and could reduce the competitiveness of EU goods on our market.  For this reason the delays outlined above might not be welcomed by the farming sector.  Particularly as the rules are currently ‘lopsided’ with imports exempt from many checks, but our exports being fully subject to EU rules.    

The delay will be seen as a welcome move by most businesses in the wider food chain.  But the UK Border Operating Model has already been delayed before and there is still a lot of work to be done before the revised timetable can be achieved.  Of course, a comprehensive veterinary agreement with the EU would help greatly on multiple levels.  For example, it would reduce the requirements for physical checks quite considerably (for instance, the New Zealand veterinary agreement with the EU reduces physical checks for red meat from the default of 15% down to 1%).

A veterinary agreement would also help to make the implementation of the NI Protocol more sustainable, as it is the levels of regulatory checks at NI ports which are seen by some communities as being the most invasive.  Reducing these towards the levels currently in place for live animals (which were subject to physical checks even before Brexit) would help the implementation of the Protocol.  Coincidentally, the delays to the UK Border Operating Model will also mean delays to the announcement of rules covering NI-GB ‘qualifying goods’ (i.e. NI-produced goods which would qualify for unfettered access to the GB market). 

Thirdly, it would also help UK-GB exports to the EU.  In addition to the revenue lost on trade with the EU, this has also had a significant indirect impact on the food supply-chain shortages that the UK is currently witnessing.  Previously, haulage companies carrying imports into the UK would use ‘backloads’ of goods being exported from the UK to the EU to contribute to the overall cost of travelling to and from the UK.  With such shipments being significantly reduced, in addition to the pandemic impacts which have made drivers more reluctant to travel to the UK, the HGV driver shortage has been exacerbated. 

There were calls for a 2-3 year ‘Implementation Period’ after the UK formally left the EU; the latest delays to the UK Government’s Border Operating Model are creating this by default.  Whilst the latest move from the UK Government will help somewhat to address the current supply-chain situation, this additional time needs to be used wisely.  In its press release announcing the new timetable (see link below), the Government calls its approach ‘pragmatic’.  If it seeks to be truly pragmatic then implementing a veterinary agreement with the EU combined with addressing the agri-food industry’s labour issues would go some way to addressing the problems generated by Brexit.   

Further information on the UK Government announcement is accessible via: https://www.gov.uk/government/news/government-sets-out-pragmatic-new-timetable-for-introducing-border-controls

The latest AHDB Horizon report, published on 18th March, examines the potential impact of a trade deal with the US.  It acknowledges that, being an agricultural powerhouse, any enhanced access for US suppliers into the UK would pose competitive pressures for UK farming.  However, it suggests that fears of a glut of cheap food, produced to lower standards flooding the UK market might be misplaced.

The report highlights the adaptability of US supply-chains to meet varying standards, if there are sufficient margins.   Furthermore, a market of 330 million affluent consumers will also present opportunities for high-quality UK exports. Indeed, exports of British products such as regional cheeses and whisky have risen significantly in the past decade and in the past year, the US market for beef exports has reopened.

Whilst a US trade deal would have a significant impact on UK farming, it is unlikely that an agreement will be concluded any time soon as the Biden administration has more pressing priorities.  In the more immediate future, trade deals with Australia and New Zealand are much more likely to be finalised.  These too will have a significant impact on UK farming and the industry needs to prepare for these as a priority.

The AHDB Horizon report can be accessed via: https://ahdb.org.uk/uk-us-free-trade-agreement-impact-on-uk-agriculture

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

NI Protocol

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

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

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

Sanitary and Phytosanitary Issues

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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