Tag: Trade

On 24th December, the UK farming industry has received an early Christmas present as a Free-Trade Deal (FTA) was agreed with the EU, meaning that agricultural goods’ trade with the EU will not be subject to tariffs or quotas.  This Trade and Cooperation Agreement should minimise the disruption when the Transition Period ends on the 31st December.  However, with a whole range of Non-Tariff Measures (NTMs) (checks, paperwork etc.) being imposed from that point, there will be added friction.  In the case of seed potatoes, exports to the EU will be prohibited which is a major blow to regions such as the East coast of Scotland, where seed potatoes is a major agricultural sector.  This article examines some of the top-level implications of the FTA.  However, with the agreement text (including Annexes) running to 1,246 pages, we will digest it further over the coming days and weeks and provide further updates as appropriate.

A mere 1,644 days since the EU referendum, and after a whole series of missed deadlines, the deadlock was finally broken on Christmas Eve.  As previous articles mentioned, the negotiations culminated in a frantic final haggle on fish quotas.  When a breakthrough was achieved on this issue, the remaining level playing field (LPF) and governance issues were quickly addressed so that the Deal could be announced on Christmas Eve.  The key provisions of the FTA are:

• Trade in goods: will be tariff-free and quota-free on all goods trade between the UK and the EU.  This includes agri-food products.
• NTMs: will be applicable on UK exports to the EU from January.  For EU imports to the UK new rules will become applicable on a phased basis between January and June 2021, based on the provisions of the UK Border Operating Model (see previous article).  Linked with NTMs, additional provisions of the Deal include;
  • Rules of Origin (RoO): some rules have been relaxed for up to 1 year so that companies have more time to gather the information necessary to meet RoO requirements.  These are basically local content rules which need to be met to ensure that goods traded between the UK and the EU are eligible for tariff-free treatment.  As a rule of thumb for agri-food products, 85% or more of the goods’ contents (by weight) needs to be eligible (i.e. is UK/EU produced and not originating from another ineligible third country).  This relaxation is important and helpful to traders as it goes some way to providing an implementation period to permit companies to adapt to the changed trading environment. 
  • Sanitary and Phytosanitary (SPS) checks: will become applicable immediately on UK exports to the EU.  This means that lamb exports to the EU will be subject to 15% physical checks whilst there will be a 30% physical check rate for dairy products for human consumption.  In the SPS area generally, it is arguable that the UK-EU FTA is lacking in ambition.  There will be a Specialised Committee set-up for SPS within the Governance structure of the agreement, which might bring some further easements in the future.  However, for now, the treatment of UK exports to the EU will not be much better than that of a standard third country, and certainly significantly worse than the level of access that New Zealand enjoys on its exports to the EU.
• Fisheries: the quotas for EU fishing vessels’ access to UK waters will be reduced by 25% over a five and a half year transition period.  This quota will be repatriated to UK flagged vessels over this same period. Thereafter, annual negotiations would take place on the level of access that EU fishing vessels would have to British waters.  This arrangement has met with criticism from the UK fishing industry which was anticipating a greater Brexit dividend. 
• LPF: the EU pushed very hard on this issue which relates to upholding existing standards on the environment and labour laws so that the UK for instance cannot gain a competitive advantage in the future by undercutting EU rules.  The agreement includes mechanisms to enable one side to retaliate against the other if it is found that there is a breach of the LPF provisions.  Theoretically, this could mean that retaliatory tariffs could be introduced on agri-food trade in the event of such a breach, even if this violation occurs in another sector. 
• State Aid: importantly, from a UK perspective, Britain can have its own independent system of subsidy control and neither party is bound to follow the rules of the other.  However, LPF provisions apply to prevent one side from gaining a significant competitive advantage over the other.
• Ratification: is expected to take place swiftly in the UK, with Parliament being recalled on 30th December to vote on the deal.  As Labour has announced its intention to vote for the deal, its passing should be a formality in the UK.  In the EU27, the process is somewhat more complicated.  Given the limited time available, the EU has decided to “provisionally apply” the deal from January.  However, it will be scrutinised further by both the European Parliament and at Member State level. This process is set to be undertaken during January and February.

Implications for UK Agri-Food

The announcement of a UK-EU trade deal was greeted with a sense of relief by the UK food and farming industry as it provides much greater certainty for the sector.  The major exception to this is the seed potatoes sector as exports from the UK to the EU will become prohibited.  This is a significant loss as the EU is a major export market for the British seed potatoes’ sector, particularly Scotland, which has amongst the highest product standards for seed potatoes globally.

Overall, the anticipated impacts on UK agricultural output and trade are expected to be limited.  Below are the findings of a recent study by The Andersons Centre undertaken on behalf of the Scottish Government using the Agmemod partial equilibrium economic model.  For the sectors analysed (wheat, barley, beef, sheep and liquid milk (dairying)), the impacts of a UK-EU FTA are relatively small, particularly compared with No Deal.  The changes under the FTA scenario are primarily due to the imposition of NTM costs which generally range from 0..1% (wheat, barley) up to 3% (beef) under an FTA scenario.  These findings are corroborated by recent comments from the Tesco Chairman (John Allan) who believes that the Brexit Deal will not lead to any significant effects on consumer prices.

Agmemod Projections of Brexit Impacts on Selected Scottish Farm Sectors (£m)

Sources: The Andersons Centre, Wageningen University and Research (WUR) and the Scottish Government

Other key issues to watch out for include;

• Exchange rates: these have a major bearing on the competitiveness of UK agri-food produce on international markets.  On the announcement of the UK-EU FTA, Sterling rose by 0.5% against the Dollar.  Generally speaking, a stronger Sterling is bad for UK farming as the prices of British agri-food produce become more expensive on global markets, whilst imports become cheaper.  In June 2016, following the referendum, Sterling weakened by 15-20% against the Euro and has not recovered since.  Where Sterling goes from here will have a major bearing on the UK agri-food sector’s financial performance.
• Other FTAs: the UK has already made significant progress in negotiations with Australia and New Zealand, as well as the US to a lesser extent.  Some anticipate deals to be struck with Australia and New Zealand in 2021.  Given the extent to which these countries trade in beef, lamb and dairy products, they could exert significant competitive pressure on British producers if they get better access to the UK market.
• Allocation of EU28 TRQs: now that a UK-EU FTA has been reached, the likes of New Zealand are already highlighting issues with the proposed allocation of EU28 TRQs by the UK and the EU27, who essentially suggested in December 2018 to split the existing TRQs on the basis of historic trade.  New Zealand amongst others objected to this at the time and are now bringing this topic back to the agenda. T his will need to be addressed at the WTO level in the coming months.

Given the extremely limited timeframe during which the UK-EU FTA was agreed, it is inevitable that a whole myriad of other issues will emerge once experts have had time to parse through the 2,000 pages of legal text and annexes.  Overall, the trade deal is historic and marks the beginning of a new era in the UK’s relationship with Europe.  However, as with trading relationships between other close neighbours (e.g. the US and Canada), the UK’s trading relationship with the EU is going to evolve and this will necessitate further negotiations in the the future, both on the implementation and governance of the existing agreement, but potentially on developing new accords.  In this respect, we’ve not reached the end of the road on Brexit.  Whilst the topic might (mercifully) move down the agenda as we move forward, it will not disappear from the news.

Further analysis will be provided in the coming days and weeks on this issue.  On 11th February, The Andersons Centre will also be running a webinar to examine in-detail the implications of Brexit. Further information is available via: https://theandersonscentre.co.uk/webinars-2/

Further information on the UK-EU Trade and Cooperation Agreement, including the legal text, is available via: https://www.gov.uk/government/publications/agreements-reached-between-the-united-kingdom-of-great-britain-and-northern-ireland-and-the-european-union

Last month, we reported that time was almost up in the Brexit negotiations and last weekend, it looked as if a make-or-break decision on the future of the talks would be made on 12th December.  As is nearly always the case with EU negotiations, and Brexit especially, the talking has continued beyond the latest deadline.  A few days’ back it was suggested that about 97% of the draft legal text had been agreed.  More recently, there have been signs of progress on addressing two of the three outstanding issues – the Level Playing Field (LPF) and Governance.  However, Fisheries remains unresolved.

On the LPF and Governance, the outline of the Deal is taking shape.  EU Commission President Ursula von der Leyen claimed that the architecture of the LPF is based on two pillars: State Aid and standards.  On State Aid, it appears that the common principles around robust domestic governance, and the right to autonomously remedy situations of unfair competition / distortions in trade have now been established.  In terms of standards, the EU Commission President also claimed that a mechanism of non-regression on labour, social and environmental standards has been agreed although there some issues remain around future-proofing such arrangements.

Sources close to the talks suggest that the negotiators’ energies are currently focused on resolving the remaining LPF/Governance impasses.  Thereafter, the final hard bargaining will take place on fish.  This looks set to come down to a pure numbers game in terms of quota access which both sides are able to live with.  The EU appears to be linking access to fisheries with access to its Single Market which gives an indication of how hard it intends to bargain.  There are also rumours that a five-year review mechanism will be included in the trade deal which will take stock of how the fisheries quota share and access arrangements are working on the one hand and whether the playing field has remained level.  A formal review of how any agreement is functioning would seem prudent.

Overall, it appears that the talks are inching towards a Deal, but hurdles remain which could still scupper the negotiations.  The European Parliament is unhappy that it will not have the necessary time to scrutinise the agreement before voting on it.  Although the EU would technically be able to ‘provisionally apply’ the Deal before MEPs get to vote, this is not desirable.  All EU institutions would much prefer an EU Parliamentary vote on 28th December.  To have any chance of meeting this timeline, an agreed text would be needed a few days in advance of Christmas.

If a Deal is not agreed until after Christmas, a short No Deal (interregnum) period in January becomes a distinct possibility.  Some claim that even if both sides agree to provisionally apply such a Deal, a range of procedural measures would still be required.  However, in such circumstances, one would surely think that some sort of brief standstill period could be agreed whilst the required measures are put in place?

From an agri-food perspective, there is a big element of wait-and-see in terms of what Deal might be agreed.  However, irrespective of a Deal/No Deal, major changes are afoot.  Whilst arrangements such as those recently agreed under the NI Protocol (see accompanying article), might provide for a limited grace period, preparations for friction on UK-EU trade in early 2021 need to continue with urgency.  Customs agents need to be booked.  There are reports that some do not want to become involved in agri-food because it is too complicated given all of the additional Sanitary and Phytosanitary regulations which can result in difficulties in getting consignments through Customs.  For agri-food companies trading with the EU, training and upskilling in Customs and other regulatory formalities will also be necessary.  This is especially the case for exporters to the EU, as it appears that regulations will apply to a greater extent from January in comparison with importing from the EU into the UK.

As has seemed to be the case for several months now, the Brexit negotiations are at a crucial stage and, although the EU side believes that 95% of the text for the trade deal has been agreed, three stubborn sticking points remain.  These are the so-called level playing field provisions, State Aid and fisheries.  Given that several deadlines have now passed and the Transition Period will end on 31st December, time is now the biggest threat.

Addressing The Remaining Issues

Of the three outstanding issues, the level playing field is deemed to be the most problematic.  On one side, the EU is adamant that the integrity of its Single Market and its competitive position must be protected.  It wants an agreed set of baseline environmental, climate change and labour protection standards to be agreed between the UK and the EU, which would evolve over time.  The EU is pushing for the right to swift retaliatory action if the UK seeks to diverge from these.  The UK, on the other hand, is resisting such moves as it sees its sovereign right to diverge as one of the key gains from Brexit.  The UK also wants as much flexibility as possible on these issues to have greater leverage in agreeing trade deals with other countries from 2021.  This is particularly the case for agri-food.  Food standards were once closely linked to the level playing field requirements, but they tend not to be mentioned recently – a tacit acknowledgement by the EU that the UK could diverge in this area in future.  However, that will come at a price in terms of Single Market access for UK agri-food producers.

Well-connected sources believe that if the level playing field issues can be overcome, that will be the key to unblocking the impasse.  This because progress has been made on State Aid recently and areas such as aviation, energy, road haulage and rules of origin have not been finalised only becuase they are linked to the level playing field issue.  That would leave fisheries, which is likely to come down to a last minute trade-off at a political level involving the Prime Minister, the President of the EU Commission and EU Member State leaders, most notably Emmanuel Macron.

Time Constraints

Although there are signs that both sides are inching towards a deal, it increasingly looks like whatever will be agreed between the UK and the EU will be a bare-bones agreement.  As previous articles have noted, this should mean zero-tariff and zero-quota free trade in agri-food goods but non-tariff measures (NTMs) will be significant.  Taking beef and sheep meat for instance, this would mean physical check rates of 15% at border control posts. To date, the default check rates for such products has been 20% (i.e. for countries trading with the EU on a Most-Favoured Nation (MFN) basis).

On 24th November, the French Customs Authorities tested their customs and Border Control Post facilities in Calais and it caused severe queues in Kent.  This indicates that in the first weeks and months of 2021, there will be significant delays at the border.  Concerningly, the UK authorities have not yet begun testing their arrangements, because in many cases the infrastructure and systems are not in place yet!  The fact that the French are testing indicates that they are close to being ready.  There is unease that from January the delays on the UK side will be even more substantial.  All of this gives rise to the prospect of significant value deterioration on UK agri-food exports to the EU as time delays erode shelf-life.  It could also mean the loss of high-value export sales, particularly in the retailing sector.

On the imports’ side, the UK is phasing in the introduction of its Border Controls over six months in 2021.  This should help imports of highly perishable agri-food products (with the exception of some high-risk categories) from the EU.  However, added friction is going to become a fact of life from 2021 and supply-chains are going to have to adapt sooner or later.

Time will also be an issue in terms of ratifying any trade deal, particularly on the EU side as it normally requires a vote at the European Parliament.  The last session of the European Parliament is currently scheduled for 14th December, however, there have been suggestions that MEPs have been advised to keep the 28th December available. Another option being mooted by the EU is to “provisionally apply” any UK-EU trade deal from 1st January with the ratification process at EU Parliament and potentially at Member State level (if the deal includes areas solely within the remit of each Member State).  Either way, the EU Council scheduled for 10th-11th December will be crucial and it is thought that a deal will need to have been agreed by that point and the process of translating the deal into legal text and other EU languages will need to be well underway.

If a trade agreement can be reached between the UK and the EU, any initial agreement can be improved over time as is the case with trade deals elsewhere.  That said, the prospect of a No Trade Deal remains significant.  If a Deal is reached, there are many technical issues, including transit arrangements in the UK and Ireland, which have not had any time devoted to them, and will need to be ironed out from January.  Although it is inevitable that elements of a phasing-in period will need to be implemented by both sides (e.g. Belgian customs authorities have acknowledged that some of its customs requirements will be relaxed initially), businesses need to brace themselves for significant change from January.

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. 

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.