Tag: Trade

Brexit Update

As has so often been the case with the Brexit process, it has been yet another tumultuous month in the UK-EU negotiations.  Whilst the Future Relationship negotiations have continued to get bogged down over the summer months, it was the admission by the Northern Irish Secretary (Brandon Lewis) that the UK Internal Market (UKIM) legislation currently working its way through Parliament would break international law that sparked the most controversy.  Not just with respect to the EU but also in terms of the prospect of a trade deal with the US.  Whilst the prospects of a No Deal scenario with the EU have increased, there are signs to suggest that progress continues to be made towards a Deal.

UKIM Legislation Flashpoint

The key flashpoint with respect to the UKIM legislation is the provision for the NI Secretary to disapply parts of the Northern Ireland Protocol (which was agreed in conjunction with the EU Withdrawal Agreement).  This relates to NI to GB trade and the reach of EU State Aid rules if the UK and the EU did not come to a satisfactory agreement.

From the UK side, given its promise of ‘unfettered access’ for NI businesses into the GB market, it objects to the prospect of NI businesses having to complete Safety and Security (Exit) Declarations on shipments into GB.  However, the bigger issue is the potential reach of EU State Aid rules to affect companies operating in GB that have subsidiaries in Northern Ireland.  The EU interpretation of the Withdrawal Agreement suggests that such companies, even if NI subsidiaries are small, would have to apply EU State Aid limits. The UK objects to this and wants to have the freedom to operate an independent State Aid regime from January.  The UK Government has also claimed that the EU has threatened to withhold the granting of third country approval for GB and British companies wishing to export into the EU post-Brexit.

All of this political rancour has eroded trust and caused significant damage.  That said, if one pays attention to the mood music concerning the Joint Committee which oversees the implementation of the Withdrawal Agreement, including the NI Protocol, then progress is being made.  Some believe that these discussions could result in the need for Exit Declarations being waived, overcoming one of the key issues concerning the UKIM legislation.  Most trade experts also agree that the UK will be granted third country status so that firms can continue exporting into the EU, as it granted such status to the UK previously on a temporary basis when the prospects of a No Deal loomed before.  There is also evidence to suggest that progress is being made on the border arrangements required to manage trade from GB into Northern Ireland, although doubts remain as to whether that will be ready on time.

Future Relationship Talks

The State Aid issue is more problematic and remains a key stumbling block in the UK-EU negotiations.  Of course, a State Aid agreement as part of a wider UK-EU trade deal would address the difficulties caused by the UKIM legislation, but that still seems a long way off.  Although there appears to have been some progress in resolving the issues around fisheries, the level-playing-field difficulties persist.  This, of course, will have a major bearing on agri-food in terms of the extent to which UK exports could access the EU market but also in terms of the standards that the UK would accept on imports from elsewhere.

Given that there are now just 98 days until the Transition Period ends, the prospects of a comprehensive Free Trade Agreement (FTA) between the UK and the EU are diminishing.  Instead, the prospects have increased of a more basic FTA that would have zero tariffs and zero quotas on goods (including agriculture) but would offer little in the way of reducing non-tariff barriers (e.g. SPS checks) or dealing with services.  However, to achieve this agreement the EU is still pushing for the UK to adopt a ‘shared philosophy’ on State Aid and to have a robust mechanism to deal with disputes (which is a relaxation of its stance on European Court of Justice (ECJ) oversight) as well as solid enforcement of domestic regulations.  These latter issue have arguably become even more important in the EU’s eyes given the UKIM legislation introduced by the UK Government.

So, although the outline of a ‘landing zone’ is beginning to take shape, it remains to be seen whether the UK Government will agree to this.  It is proposing an entirely independent State Aid regime based on WTO principles concerning such supports.  It also wants to pursue its own trade deals, which as the accompanying article shows, would have significant implications for UK agriculture. 

All the while, the UK is also trying to implement plans to manage cross-border traffic from January. It has recently introduced the concept of a ‘Kent Access Permit’ which hauliers would require before being admitted to travel towards Dover and the Continent.  This is in a bid to reduce congestion as some estimates have suggested potential tailbacks of 7,000 trucks which would cause major disruption.  All of this highlights just how much work still needs to be done in the months ahead.  As reported previously, it is increasingly obvious that businesses need more time to operationalise all of these requirements, particularly if key pieces of infrastructure (e.g. Smart Freight System) are not going to be ready on-time.  Whilst the Transition Period will end in December, one person’s Transition Period extension can be another’s Implementation Period if managed correctly.  Such a period of at least 6 months is needed and is often a feature of other FTAs. 

Free Trade Agreements Update

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

UK-Japan Trade Agreement ‘In Principle’

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

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

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

UK-US Trade Talks

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

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

Australia and New Zealand Talks

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

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

Roll-Over Agreements

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

UK Internal Market Legislation

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

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

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

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

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

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

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

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

Trader Support Service: Northern Ireland Protocol

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

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

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

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

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

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

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

UK Trade Bill

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

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

UK Border Operating Model

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

Key Aspects of the UK Border Operating Model

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

The key points from an agri-food perspective are:

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

Business Preparations

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

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

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

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

 

Trade and Agriculture Commission: Membership

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

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

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

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

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

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

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

Future Trade Arrangements

On 9th July, the EU Commission released an update on its readiness for the changes to the UK-EU trading relationship once the Transition Period ends on 31st December.  The update (available here), was released just after the latest round of negotiations in London had finished which confirmed that ‘significant divergences’ remained between the UK and the EU’s positions. 

Changes in any Scenario

The key message is that significant change is going to happen from 1st January, irrespective of whether the UK and the EU reach a Deal, as the UK will become a third country from that point in its dealings with the EU.  Businesses must begin preparations now as barriers to trade will emerge in both directions. These changes include;

  • UK will leave the Single Market, Customs Union and all international agreements negotiated by the EU will no longer be applicable. (For trade, the UK is working on Continuity Agreements to replicate existing EU agreements).
  • Trade in Goods (note that these changes will not apply with respect to EU trade with Northern Ireland, due to the Irish Protocol):
    • Customs formalities: will apply and controls will be applied on a risk basis on exports into the EU from 1st January.
    • Economic Operators Registration and Identification (EORI) number: UK-issued EORI numbers will no longer be valid and companies will need a new EU EORI number or appoint a EU customs representative where applicable.  This is a crucial pre-requisite to doing any trade with the EU in the future.  
    • Authorised Economic Operator (AEO) authorisations or other authorisations: issued in the UK will no longer be valid in the EU. Where companies wish to obtain EU authorisations, they will need to apply in an EU Member State. 
    • Rules of Origin: originating status of goods traded between the UK and the EU will need to be proven, if it is to avail of any preferential treatment (e.g. under a UK-EU Free Trade Agreement (FTA)). Goods not meeting origin requirements will be subject to customs duties. 
    • VAT and excise duties: will be applicable upon importation into the EU from the UK. 
    • Product certification, authorisation and labelling: UK exports will need to comply with EU rules and will be subject to regulatory checks concerning safety and regulatory compliance controls. Labels for products placed on the EU market, issued by UK bodies will no longer be accepted in the EU (but existing stocks of products placed on the EU market before 31st December will still be permissible).
    • Pre-existing EU(28) WTO Tariff Rate Quotas (TRQs): it is intended that these will be apportioned based on historical trading patterns. However, other WTO members have raised objections to this approach and it remains to be seen how this issue will be resolved to the satisfaction of all parties (i.e. EU, UK and other WTO members). 
    • Additional information by product category: has been made available, in the form of Readiness Notices, by the EU Commission. Businesses trading with the EU should familiarise themselves with the applicable notices (accessible here). 
  • Trade in Services: UK companies and nationals will no longer have the freedom of establishment and provision of services when operating in the EU and vice versa for EU nationals and companies supplying services and operating in the UK.  Authorisations granted by UK authorities under the EU Single Market Framework will no longer apply from 1st January.  Whilst the agri-food industry primarily concerns goods, many products now have a service element as well.  Businesses offering services to the EU need to ensure that they are complying with the new requirements, this could potentially entail establishing a subsidiary company in the EU.
  • Irish Protocol: in previous articles we have reported that the Protocol would apply on goods trade, meaning that there would be no regulatory barriers on trade between Northern Ireland (NI) and the Republic of Ireland and the rest of the EU.  In that sense, Northern Ireland would be seen as an assimilated EU Member State with respect to its trade with the EU, whilst remaining part of the UK Customs Territory.  Regulatory checks imposed by the EU on third country trade would be applied to points of entry into NI.  This includes products shipped from GB into NI.   

No Trade Deal Scenario

The issues covered under the auspices of the Withdrawal Agreement (e.g. citizens’ rights, financial settlement and the Irish Protocol) will continue to apply even if the UK and the EU cannot agree a future trade deal.  However, as previous articles have noted, the application of customs duties to UK-EU trade will have the biggest impact under a No Trade Deal scenario.  The agri-food sector would be the worst affected as it is subject to the highest tariffs which have the potential to devastate UK-EU trade in some areas (e.g. sheepmeat exports to the EU).

Conclusion

It is clear that whichever form the future UK-EU relationship takes, significant changes to agri-food trade between both parties is imminent.  Businesses should no longer be adopting a ‘wait-and-see’ approach or hoping for an extension to the Transition Period.  They must prepare now and ensure that their supply-chains are secure, both on the inputs and outputs side.  In many EU Member States, businesses are preparing for the worst and hoping that a somewhat better future relationship will emerge.  We are unlikely to know what form that might take until October.  Preparations need to be well underway by then. 

EU Brexit Talks

Whilst multiple rounds of negotiations have taken place, talks with the EU have been stalling due to impasses on several key issues.  These include governance (role of the European Court of Justice), ‘level playing-field’ issues, fisheries, criminal and judicial cooperation as well as the implementation of the Irish Protocol.  On 15th June, the Prime Minister and the EU Commission President, Ursula von der Leyen, held talks where they agreed to intensify negotiations (to be held on a weekly rather than fortnightly basis) in a bid to secure a deal.  Most analysts now believe that it will be October before a deal is likely to emerge.

Transition Period Extension

It now seems that the deadline for extending the Transition Period beyond 31st December this year will pass with a whimper rather than a bang.  The UK Government has made it clear it will not be asking for an extension before the 1st July cut-off.  The EU sees little point in asking for one from its side as it simply provides an opportunity for the UK to say ‘no’.  There is a top-level committee that meets just before the deadline, but the conference call between Boris Johnson and von der Leyen has effectively ended the chance of extending the Transition.

There is still a wide gap between the parties to bridge on many issues over the next three or four months.  Many commentators now believe the most likely outcome is a ‘bare bones’ deal before the end of the year.  Negotiations may then continue in the months that follow, including January and beyond, to fill in the details.  Negotiators could return to the deal over the years that follow to add elements or deepen the provisions (depending on political will).  This all highlights Brexit is a process rather than an event.  And it is all a long way from the ‘easiest trade deal in history’ promised by Liam Fox back in 2017.  

Level Playing Field

From an agri-food perspective, much of the focus is on the level playing-field issues, particularly which standards will apply in the UK from January.  Whilst the UK Government has mentioned that the same high level standards will continue to apply, others believe that some dilution in standards is likely to take place as the UK tries to secure trade deals elsewhere.  During a House of Commons debate on 11th June, Michael Gove stated that the UK Government was “committed to making sure that high animal welfare and environmental standards continue to characterise British farming, which is the best in the world.”  During the same debate he also mentioned that the food available to consumers would “always meet high quality standards”.  Arguably, this latter statement could have a looser interpretation which leaves open the possibility of accepting alternative standards on some imports.  As previous articles have noted, the EU is keen to ensure that the UK’s standards remain as close as possible to the EU’s, otherwise, EU exports will not be as competitive in the UK market.  This would put pressure on prices within the EU due to an excess of supply if alternative markets cannot be found.

In an attempt to resolve the level playing field impasse, there are reports of a proposed compromise that the UK would reserve the right to diverge from the EU’s standards in the future but that Brussels would have the right to impose retaliatory tariffs or place restrictions on the UK’s access to the Single Market for services. Although some view this compromise as having the potential for constant friction in the UK-EU relationship, it has the potential to open-up a landing zone for a Deal. But, time is very tight and a breakthrough is needed soon if the October deadline is to be met.

Post-Transition Border Controls

On 12th June, the UK Government also announced that it plans to delay the full imposition of border checks on imports from the EU, but acknowledges that exports from the UK to the EU27 are likely to be subject to checks from the outset. Border controls would be introduced over three stages from January to July 2021.

  • Stage 1 (from January 2021): traders importing standard goods will need to prepare for basic customs requirements (e.g. keeping sufficient records of imported goods) and will have up to six months to complete customs declarations. Although tariffs will need to be paid on all imports, payments can be deferred until the customs declaration has been made. Checks on controlled goods like alcohol and tobacco will take place. Businesses will also need to consider how they account for VAT on imported goods. There will be physical checks at the point of destination or other approved premises on all high risk live animals and plants.
  • Stage 2 (from April 2021): all products of animal origin (POAO) (e.g. meat, pet food, honey, milk or egg products) and all regulated plants and plant products will require pre-notification and the relevant health documentation.
  • Stage 3 (from July 2021): declarations required at the point of importation for all goods and relevant tariffs must also be paid. Full Safety and Security declarations will be required, while for SPS commodities there will be an increase in physical checks and the taking of samples. Checks for animals, plants and their products will take place at GB Border Control Posts.

Implementation of Northern Irish Protocol

Whilst these arrangements will give UK businesses some more time to prepare it is important to note that regulatory checks on trade moving from GB to Northern Ireland are likely from January 2021 as a result of the provisions of the Northern Irish Protocol. This has the potential to create significant friction on agri-food trade between GB and NI. Whilst the UK Government has sought to alleviate this by announcing plans to reimburse companies for any imposition of tariffs, there are a lot of questions around how all of this would work. For instance, what paperwork would be required? How long would it take for reimbursement as the application of tariffs would have a significant impact on cashflow, even if they are only applied where goods are deemed “at risk” of entering the Single Market? A concept that is still quite vague and it would be helpful if the EU could define more precisely what would constitute a material risk to its Single Market.

Furthermore, there are State Aid Rules issues (which NI businesses would still be subject to). These rules limit the amount of state aid that companies can receive (circa €200,000 over 3 years). Given the substantial tariffs applicable in agriculture, some companies will quickly run up to these limits. 

Although numerous challenges remain with the introduction and implementation of the Northern Irish Protocol, there has been progress in several areas recently. The HMRC have provided some details on the regulatory arrangements it plans to introduce on GB to NI trade. This includes;

  • Declarations: a Pre-Import Declaration and a Safety & Security Declaration will be required. A Transit Accompanying Document might also be needed, particularly if consignment is route from GB to Northern Ireland via the Republic of Ireland.
  • Goods Movement Reference: will be used to notify the authorities of the consignment details, vehicle and shipping details.
  • Pre-Lodgement Model: would be used so that declarations and pre-notifications would be undertaken before shipping from GB.
  • Risk Assessments: would take place whilst consignments are at sea.
  • Upon Arrival: a confirmation would be provided before arrival if consignment is okay to proceed, or if a check is required.
  • Goods Vehicle Movement Service (GVMS) IT platform: will link the various documentary declaration references with the vehicle registration references so that one reference can be presented at the frontier.
  • SPS checks: details emerging from the negotiations suggest for UK exports to the EU (including EU checks imposed at NI ports and airports) all consignments will be subject to Documentary and Identity checks and physical checks will take place on up to 30% of consignments, with a 15% physical check rate likely for red meat. Whilst these physical check rates are lower than the EU default for third countries (50% for poultry meat and 20% for red meat), they have the potential to create significant friction.

It has been reported that the HMRC plans to have its IT platforms ready for testing in September or October before they ‘go live’ from 1st January. Although it is reassuring that the HMRC appears to be making significant progress, the timeline remains immensely challenging. It leaves little room for error, which has been a challenge with previous IT systems. Of course, whilst the authorities might claim to be on course for “being ready” for the 1st January, it is another matter entirely whether businesses are ready. Business groups have been calling for a six-month delay before the Protocol becomes fully operational. The Covid Crisis has meant that many businesses have been unable to focus much on preparing for the post-transition period of late. Few believe that businesses will be ready for the changes due to come into force on 1st January. It is evident that some form of further implementation (or application) period is needed.

EU Negotiations Timelines

Below is a summary of the key milestones anticipated in the months ahead.

  • 1st July 2020: deadline by which any extension of the Transition Period must be agreed. The UK has already said that it would not be seeking an extension and the EU has noted this.
  • 15-16th October 2020: European Council due to take place. A deal would need to be reached by this point, with legal texts finalised, to permit the EU to undertake its ratification process.
  • October – December 2020: conclusion and ratification of first UK-EU future relationship agreement.
  • 10-11th December 2020: European Council due to take place where any agreement is likely to be formally adopted.
  • 31st December 2020: Transition Period formally ends.
  • 1st January 2021: new UK-EU trading relationship applies. UK applies limited border control checks on imports from EU. EU likely to impose full regulatory checks on exports from the UK, including at NI ports and airports.
  • January 2021: negotiations on outstanding issues of the UK-EU trading relationship likely to commence. The various Joint Committees planned during the EU Withdrawal negotiations will play a key role.
  • April 2021: UK introduces full regulatory checks on all POAO and plant products.
  • July 2021: full regulatory checks and payments of tariffs on all goods at the UK border.

 

Trade Talks with Non-EU Countries

In recent weeks, there has been a noticeable increase in the pace at which the Department for International Trade (DIT) is seeking to conduct negotiations on free-trade with non-EU countries.  In addition to the highly-publicised negotiations with the US which commenced in mid-May, talks have also commenced, or are about to commence, with Australia & New Zealand and Japan.  This is in addition to negotiating ‘Continuity Agreements’ with various countries so that the UK can continue to trade with them after 31st December 2020 as it did when it was an EU Member State.  

UK-US Trade Negotiations

When the UK set out its negotiating objectives for a Free Trade Agreement (FTA) with the US back in March, it noted that US-UK trade was valued at nearly £221 billion and accounted for nearly 20% of the UK’s exports.  It claimed that, as a result of an FTA between both countries, trade could increase by £15.3 billion in the long-run.  It is therefore seeking to secure a comprehensive and ambitious FTA with the US, but was also keen to emphasise that it ensure high standards and protections for British consumers and workers.  This contrasts with the US negotiating objectives published in February 2019 which seek to ‘promote greater regulatory compatibility to reduce burdens associated with unnecessary differences in regulatory standards’ and to eliminate ‘unjustified trade restrictions’ (including labelling) that affect ‘new technologies’.

Although the UK Government have noted potential gains that could be achieved for British agriculture (e.g. increased access for lamb and cheese exports to the US), most debate has centred on the potential threat posed by permitting imports from the US which do not meet the standards that British farmers (or imports from the EU and elsewhere) currently adhere to.  In addition to issues posed by chlorinated chicken, there are also concerns around hormone treated and lactic-acid washed beef finding its way into the UK market.  It raises the prospect of UK farmers having to continue to adhere to current high standards on animal welfare and the environment whilst simultaneously being subject to competition from US importers producing to lower standards.

Whilst the UK Government might claim that it will seek for global food standards to be raised at the WTO level, relative to the US it is a small economy.  The US accounts for 23.7% of global GDP whilst the UK accounts for 3.4%.  Bargaining power is always crucial during trade negotiations and this dynamic becomes even more pronounced under an ‘America First’ US Presidency.  The threat to UK food standards is very real.  An FTA that permits significant volumes of US produce, produced to US standards, to enter the UK market would seriously erode the competitiveness of the British farming industry, not just domestically, but also in terms of exports to the EU.  For example, each year between 25% to 40% of the UK lamb crop is exported, almost entirely to the EU, which are valued at approximately £350 million per annum.  An FTA that gravitates towards US standards will significantly reduce access to the EU.  Increased access to the US market via UK-US FTA will not compensate.  For instance, the DIT estimates that lamb exports to the US would increase be £18m.

Australia and New Zealand Negotiations

On 17th June, the UK formally announced its objectives for the upcoming trade negotiations with Australia and New Zealand.  Again, agriculture is likely to feature prominently, especially given the historical trading relationships which existed before the UK joined the EEC.

Another major focus of these negotiations will be the reduction in non-tariff barriers to trade as New Zealand in particular has embraced e-certification.  New Zealand’s standards are quite close to the status quo in the UK (and the EU); therefore its non-tariff barrier costs are already low for several products (e.g. lamb).

It is likely that increased access for beef, lamb, dairy and horticultural products will be amongst the key asks from Australia and New Zealand.  This would bring about increased competitive pressure on UK farmers but it is not attracting as much controversy because both countries’ production standards are perceived to be more acceptable than the US for example.  Geographic distance from the UK also limits their influence.  Indeed, both countries have been focusing more heavily on Asia in recent years.

From the UK side, its focus is on increased access for services, investment and digital trade.  Opportunities on the agri-food and drinks side appear to be limited to niche sectors such as the export of British sparkling wine and chocolate.

Japan Negotiations

These talks also commenced recently and, given that Japan recently concluded an FTA with the EU (which at the time included the UK), it is anticipated that such negotiations would be wrapped up quickly.  The Japanese Government is pushing for the talks to be concluded in approximately six weeks as it claims it needs to secure Parliamentary approval during the autumn session in order to be ready to become applicable in January.  The UK had initially hoped that it could roll-over the existing EU-Japan FTA into a UK-Japan equivalent, but the Japanese Government has sought separate negotiations in what is seen as a bid to secure greater concessions from the UK.  Like most FTAs, agriculture is a key issue.  Since the completion of the EU-Japan FTA, the Japanese Government has come under pressure from its highly protectionist domestic farming lobby to limit access to its market for agri-food.  The Japanese are also keen to secure the supply chains of its companies which use the UK as a base to supply into the EU so it is likely that it is also using these negotiations as leverage so that the UK secures a trade deal with the EU.

The UK Government claims that a UK-Japan FTA could increase trade between both countries by over £15 billion and that the UK economy could see a £1.5 billion benefit.  It remains to be seen what specific concessions Japan will seek on agri-food.  The UK already exports significant volumes of grain (e.g. wheat and barley) to Japan.  Export opportunities also exist for products such as whisky.

Other Negotiations

  • Comprehensive and Progressive Agreement Trans-Pacific Partnership (CPTPP): the UK has also reaffirmed its interest in becoming a member of the CPTPP which is one of the world’s largest free trade areas accounting for 13% of global GDP in 2018.  The CPTPP includes Japan, Australia and New Zealand amongst its members and negotiations with these countries are seen as a stepping stone towards joining this larger trade bloc which also includes Canada, Chile, Malaysia, Mexico, Singapore and Vietnam.
  • Continuity (Rollover) Agreements: with the UK leaving the EU, it is seeking to replace the FTAs which the EU had agreed with other countries whilst the UK was still a Member State.  To this end, it has been pursuing Continuity Agreements with these countries.  To date, agreements have been concluded with approximately 50 countries, including Switzerland, South Korea, Chile and South Africa, as part of the South Africa Customs Union and Mozambique (SACUM) trading block.  Negotiations are ongoing with 16 others, including Canada, Mexico and the Ukraine.  Such rollover agreements are anticipated to have a limited impact on agri-food as they are largely seeking to replace FTAs that the FTA was subject to as part of the EU.

Whilst pursuing trade deals around the world is a crucial aspect of the UK’s independent trade policy, one must not lose sight of the fact that exports to the EU (£300 billion) accounts for 43% of total UK exports.  Furthermore, imports from the EU, which accounts for 47% of the UK’s total, plays a crucial role in the supply-chains of numerous companies.  Any major disruption in the supply of inputs would inhibit UK manufacturers’ ability to assemble finished products for export.  This is also true within the agri-food sector.  Therefore, securing a comprehensive FTA with the EU should continue to be the priority.  This can be done whilst also securing FTAs elsewhere but a considered approach must be taken.

A key danger is that the UK Government agrees trade deals in haste and that this could come back to haunt the UK in decades to come.  The global geopolitical tectonic plates are shifting quite rapidly.  The danger of a new Cold War, between the US and China is emerging.  Trade between both countries could become seriously curtailed.  The US is already a big agri-food exporter to China.  If it needs to look elsewhere, the UK will be a key target market. 

In any trade deal there are (excuse the pun) trade-offs between different sectors to get an agreement.  The danger is that agri-food might be sacrificed to allow trade gains elsewhere.