Tag: Trade

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.  

 

 

Brexit Update

Aside from details of the UK’s new Global Tariff regime published on 19th May (click here for article), there have been other notable recent developments in the Brexit negotiations.  These relate to the publication of the UK Government’s draft legal text for a UK-EU Comprehensive  Free-Trade Agreement (CFTA) and its proposals to implement the Northern Ireland (NI)-Ireland (IRL) Protocol.

Draft UK-EU Comprehensive Free Trade Agreement (CFTA)

This draft legal text was published on 19th May and forms a key part of the UK’s approach to the future relationship with the EU.  It elaborates on the objectives of the ‘Canada-style’ trading relationship which the Government set-out in February.  David Frost (UK’s Chief Negotiator) has insisted that the proposals approximate very closely what the EU has already agreed with Canada and Japan.

However, the EU is insisting that to get the kind of deal which the UK is seeking, it needs to agree to ‘level playing-field’ provisions designed to stop the UK from undercutting the EU’s rules on State Aid, tax, labour and environmental regulation.  According to trade experts, the UK’s ambitions in areas such as the mutual recognition of qualifications (e.g. lawyers) goes beyond what is contained in other FTAs, including Canada and Japan.  It is seen by Brussels as an attempt to ‘cherry-pick’ aspects of its current access to the Single Market, and the EU is unlikely to offer concessions on this without some commitments to its level playing-field requirements.

Other areas of friction relate to the EU’s demands for access to the UK’s fishing waters, Britain’s objections to any role for the European Court of Justice in overseeing any eventual deal and arrangements for the implementation of the NI-IRL Protocol (see below).

The draft legal text (292 pages) contains limited (six) references to agriculture and these primarily refer to the WTO Agreement on Agriculture. The legal text is accessible via; https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/886010/DRAFT_UK-EU_Comprehensive_Free_Trade_Agreement.pdf

Whilst it is useful to get sight of the UK’s proposed legal text, this should be very much seen as a negotiating position.  The situation is likely to evolve significantly as discussions progress with the EU in the coming weeks.

NI-IRL Protocol

On 20th May, the UK Government set-out its proposed approach on implementing NI-IRL Protocol.  A core focus of this document is on protecting Northern Ireland’s place within the UK Customs Territory and to minimise the scope for friction on GB-NI trade. It plans to do this by;

  1.  Unfettered access on trade going from NI to GB: meaning that trade should continue as it does now, with no additional processes, paperwork or restrictions on such trade. The EU is unlikely to have problems with this as it is an internal UK matter. However, one area where there may be a potential issues is the EU foresees NI businesses having to implement its Customs Code and, as a result, exit summary declarations would be required on shipments leaving NI to the rest of the UK or other non-EU countries. 
  2.  Trade going from GB to NI: no tariffs will be levied on such trade if the goods remain within the UK Customs Territory (i.e. stays in NI).  Only goods ultimately entering Ireland or the Rest of the EU, or have a high risk of doing so would face tariffs.  Here, the EU takes a very different view and sees all goods entering into NI from GB as ‘at risk’ of moving South.  It believes that where goods have tariff differentials between the UK and the EU, there is a significant risk of smuggling.  It is clear that this will be one of the main areas of contention when it comes to discussions within the Joint Committee that will oversee the implementation of the Protocol.
  3.  No new customs infrastructure in Northern Ireland: whilst acknowledging that there would be some additional processes and documentation for goods, particularly agri-food, arriving into NI, these would be ‘de-dramatised’ as much as possible and no new physical customs infrastructure would be built.  That said, there would be some expansion of additional entry points for agri-food goods to provide for proportionate controls.  This will be another issue to watch, but the UK Government’s proposals appear to give it some wriggle-room to expand existing infrastructure to manage arrangements.  There are still many challenges here concerning agri-food as these will be the most arduous controls to manage, but the UK has made some progress in recruiting additional veterinarians for example. 
  4. Northern Ireland benefits from UK trade deals with third countries: sets out the ambition for NI businesses to benefit from lower tariffs associated with any such deals, just as GB businesses would. What NI businesses can eventually avail of will also be contingent on the specific arrangements that third countries who strike FTAs with the UK are comfortable with.

Another point to note is that the UK appears to be placing a greater emphasis on using the Joint Committee to oversee the implementation of the NI-IRL Protocol as a negotiating forum, whereas the EU sees it as a body to implement what has already been negotiated.  The issues above will no doubt be opened up for debate at the Joint Committee’s next meeting in early June.  Further detail on the UK’s approach is available via: https://www.gov.uk/government/publications/the-uks-approach-to-the-northern-ireland-protocol

Overall, there is a sense that momentum is building ahead of the next European Council (18-19th June) which will have a key role in any decision to extend the Transition Period beyond December 2020 (decision is due by 30th June), or to provide an alternative ‘fudge’ which extends the negotiating period until October possibly.  Whilst the UK is adamant that it will not extend the Transition beyond 31st December, influential voices are calling for an extended implementation period of 6-9 months beyond June 2020.  They claim that this would allow businesses to make the legal changes necessary to implement what has been agreed during the negotiating phase (taking place during the transition).  Whether all of this can be agreed and implemented within an additional 6-9 months remains a tall order, but any additional time would be welcomed by most businesses currently having to grapple with the Covid crisis.

New UK Global Tariff Regime

The UK farming industry will continue to receive protection from cheaper global imports.  This is the result of the new tariff regime announced on the 19th May and represents somewhat of a U-turn from earlier Government policy.

The UK Government has announced its new Most-Favoured Nation (MFN) tariff regime, the UK Global Tariff (UKGT).  This sets the tariffs that have to be paid on imports entering the UK after the end of the Transition Period when it will replace the EU Common External Tariff (CET).  If there is no trade deal in place with the EU by the end of the Transition then these tariffs will also apply to imports from the EU as from  1st January 2021. 

The Government claims that the new tariff regime is tailored to the needs of the UK economy and that the UKGT will be simpler and easier to use in comparison with the EU CET.  Nearly 6,000 tariff lines have been streamlined or simplified, which is claims will reduce the administrative burden on business and ‘nuisance’ tariffs (under 2%) have been removed.

From an agri-food perspective, as the table below illustrates, most of the tariffs under the CET have been maintained at pretty much the same levels, but converted from Euro into Sterling.  In most cases, the currency conversion rate is €1 = £0.83, but there are some variations due to rounding and simplifications.  Effectively, the protection around the UK market will be kept at the same level as it was round the EU Single Market. 

Tariffs for products such as beef carcases continue to have both a percentage (12.0%)  and a fixed component (£147.00 per 100kg).  Whilst still complex on the face of it, this is a response to the needs of industry insofar that if a percentage-only tariff was applied, cheaper imports would have a lower tariff in monetary terms.  That said, meat tariffs are still largely expressed in terms of per 100kg, it would surely have been simpler from a business perspective to have expressed these in per tonne or per kg terms?

For cereals, the tariffs for wheat (changed from €95 per tonne to £79 per tonne) and barley (€93 to €77) remain largely the same and have only changed due to currency conversion.  Maize grain tariffs have been reduced to zero (from €10.40 per tonne).  This might provide extra competition to UK-produced feed grains, notably feed barley.   For wheat flour, the tariff has changed from €172 per tonne to £143.  The tariffs for maize, barley and oat flour have been reduced to zero but these are marginal products.  

Across fruit and vegetables, the main changes are simplifications and rounding.  For instance, the tariff for potatoes has reduced from 14.4% to 14.0%.  However, products such as oranges have seen somewhat more significant changes (e.g. tariff for fresh oranges reduced from 16% to 12%), thus making it cheaper for businesses to import such products which are not normally produced in the UK.

Another noteworthy point is that the UK plans to discontinue the EU’s Meursing table which creates thousands of tariff variations for products such as biscuits, pizzas, confectionary and spreads which complicates the calculation of tariffs for these products.

Commodity CodeDescriptionEU CET Duty RateUK GT Duty RateChange
02011000Fresh/chilled beef carcases 12.80% + 176.80 EUR / 100 kg12.00% + 147.00 GBP/100kgCurrency conversion
02031110Fresh/chilled pig carcases 53.60 EUR / 100 kg44.00 GBP/100kgCurrency conversion
02041000
Fresh/chilled lamb carcases 12.80% + 171.30 EUR / 100 kg12.00% + 143.00 GBP/100kgCurrency conversion
02071110
Fresh or chilled, plucked and gutted chickens26.20 EUR / 100 kg21.00 GBP/100kgCurrency conversion
04051011Butter189.60 EUR / 100 kg
158.00 GBP/100kg
Currency conversion
04069021
Cheddar cheese167.10 EUR / 100 kg
139.00 GBP/100kg
Currency conversion
07011000
Seed potatoes
4.5%4.0%Simplification
07101000
Potatoes14.4%14.0%Simplification
08051080
Fresh or dried oranges (excl. fresh sweet oranges)
16.00% (01 JAN-31 MAR, 16 OCT-31 DEC), 12.00% (01 APR-15 OCT)
12.0%Simplification
1001990050
Common wheat (low quality)95.00 EUR / tonne
79.00 GBP/1000kg
Currency conversion
10039000
Barley (excl. seed for sowing)
93.00 EUR / tonne
77.00 GBP/1000kg
Currency conversion
10059000
Maize10.40 EUR / tonne
0.0%Liberalisation
11010015
Wheat flour172.00 EUR / tonne
143.00 GBP/1000kg
Currency conversion
17011210
Raw beet sugar
33.90 EUR / 100 kg / std qual
28.00 GBP/100kg std qual
Currency conversion
17011310
Raw cane sugar 33.90 EUR / 100 kg / std qual
28.00 GBP/100kg std qual
Currency conversion
3102309000

Fertiliser (ammonium nitrate) in pellet form6.5%6.0%Simplification

Source: UK Government (Department for International Trade)

Further information is available via: https://www.gov.uk/guidance/uk-tariffs-from-1-january-2021

Overall, the UKGT schedule differs substantially from the substantial reductions previously proposed in March 2019.  On the face of it, this reduces the scope for the competitive pressure to be exerted on farmers, post-Transition.  Simultaneously, it will also serve to focus minds within the EU as the tariffs will be very prohibitive for EU farmers under a No Trade Deal scenario.  It shows that the UK Government is learning that announcing higher level tariffs can be used as an effective bargaining chip in trade negotiations, not just with the EU but other countries as well.

As with all matters pertaining to trade, the devil will be in the detail.  Its announcement did not cover Tariff Rate Quotas (TRQs) – these allow specified volumes of agricultural commodities to be imported either tariff-free or at much lower tariff levels.  This announcement is due to be made later in the year.  Any new TRQs that the UK introduces on a MFN basis will have the potential to cause significant competitive pressures.  For instance, if the UK Government decides to introduce new TRQs for beef similar to the 230,000 tonnes proposed in March 2019, substantial volumes would enter into the UK tariff-free.  As the chart below shows for beef, this would severely undermine the competitiveness of British farmers.  It is only when the UKGT (previously EU CET) is applied, that GB prices are competitive.  Meanwhile for Ireland, whilst its prices were slightly below GB when both countries were part of the EU, the application of the UKGT on its beef would render it uncompetitive in the UK market.

At least the UKGT schedule has given some clarity to businesses on the tariff levels to expect post-Transition, and potentially under a No-Trade Deal Brexit.  With the UK-EU trade negotiations still experiencing difficulties, some influential voices have recently called for a ‘Preparation, Ratification and Engagement Period’ (PREP) of 6-9 months from the end of June to permit the completion of trade negotiations by October and thereafter, to use this time to help business and regulatory authorities to prepare to implement the major legal changes which would ensue.  This call appears to be gaining traction amongst trade policy experts.  Such a period would certainly help, but it would remain a tall order to iron out all of the technical arrangements required to handle the future UK-EU relationship. 

Brexit Negotiations Resume

The Brexit saga has (rightly) taken a back seat due to the Covid Crisis, however, with the help of video conferencing technology, negotiations on the future UK-EU relationship resumed last week.  The impasses which hampered the first phase of the Brexit negotiations have re-emerged as the deadline for deciding on whether to extend the Transition Period (30th June) looms on the horizon.

As our recent article noted, the UK Government’s position appears to have hardened on this issue. Previously, it said it would not ask for an extension, leaving open the possibility that if the EU requested one it might take a more conciliatory stance. However, it is now claiming that even if the EU requests an extension, it will reject it also.

The negotiations themselves seem to have been focusing on different interpretations of the Political Declaration which both parties agreed to at the end of last year.  The EU side is insisting that the UK needs to accept the conditions of a level playing field on issues relating to environmental law, State Aid and labour rules.  However, the UK is pushing for a standalone Free Trade Agreement (FTA) similar to the EU-Canada (CETA) FTA with add-on arrangements covering issues such as access to fishing waters, which the UK wants to be negotiated annually.  The UK does not want the future relationship to refer to EU law (i.e. interpretation by the European Court of Justice) when issues arise and cites relationships that the EU has with Canada as examples of how this would be possible.

There are discrepancies in both sides’ arguments.  The Political Declaration did not state the UK as a whole should stay within the EU’s State Aid framework (but Northern Ireland would be subject to EU State Aid provisions for agricultural and industrial goods’ trade).  However, having a tariff-free and quota-free trade deal with the EU, which is what the UK is striving for, has not been granted by the EU to any other major economy in the trade deals it has negotiated to date.  Therefore, some form of close co-alignment with EU rules would be required for such a trade deal to be achieved.

It is difficult to see how much progress could be made on these substantive matters between now and the end of June, when a stock-taking exercise will be conducted before making a decision on whether the Transition Period would be extended, without some high-level political intervention.  Back in October, it was a meeting between the Prime Minister and his Irish counterpart, Leo Varadkar, which broke the impasse on the backstop.  Perhaps, as both the Prime Minister and Michel Barnier have been struck down by the coronavirus in recent weeks, that period of self-isolation would have given them some time for reflection, and to adopt a more constructive approach.

The agri-food sector has enough on its hands to deal with the Covid crisis and the economy as a whole is facing its most difficult slump since the Great Depression.  What needs to be avoided now is another major disruption to supply-chains, which is what a No-Trade-Deal Brexit in December would bring.  The UK is already out of the EU.  It is better to take the time needed to put the frameworks in place to have a stable and secure future trading relationship with its closest neighbours, which as recent weeks have shown, remains very important for future food security.

Brexit Update

As with everything else, the Brexit negotiations have been affected by the Covid-19 outbreak.  The EU Commission’s Chief Negotiator Michel Barnier recently tested positive for the virus.  However, there have been some developments over the past month which merit comment.

Firstly, both sides have been focusing on issuing their draft texts for a potential Free-Trade Agreement (FTA) between the UK and the EU-27.  The UK tabled its draft text on 18th March ‘in confidence’ as part of the negotiating process.  The EU also shared its draft with the UK on the same date, but has recently published its draft text (440 pages, accessible via: https://ec.europa.eu/info/sites/info/files/200318-draft-agreement-gen.pdf).

Unsurprisingly, the EU is pushing for the UK to have minimal divergence from EU State Aid rules.  The UK would also have to align closely with EU environmental, labour and quality standards (including sanitary and phytosanitary standards for food).  A ‘Specialised Committee’ on the Level Playing Field would also be set-up to oversee arrangements.  This would encompass 16 sub-committees to address specific issues.  If arbitration was required on the interpretation of EU law, then it would have to defer to the European Court of Justice for a ruling, something which will be hotly disputed by the UK.

From an agricultural perspective, the FTA draft texts would have minimal impact on future support as it is acknowledged that the UK would be free to pursue its own support system, as long as WTO limits were respected.

Both sides remain intent on agreeing a comprehensive future trading partnership which permits tariff-free and quota-free trade between the UK and the EU.  However, non-tariff barrier costs would inevitably increase, particularly in agri-food as sanitary and phytosanitary checks, customs checks and rules of origin would apply.

Although both sides have committed to studying the other party’s text in detail, large portions of the EU draft will be unacceptable to the UK, particularly in terms of the role of the European Court of Justice.  That said, these draft texts are very much the starting point in the trade negotiations and it is fairly standard at this point to have significant differences of opinion between both parties.

Looking ahead, whilst the UK’ had intended not to extend the Transition Period beyond December, with the Covid-19 situation, it is becoming increasingly likely that the negotiations will need to be extended.  Privately, some UK Ministers are already acknowledging this.  However, dealing with the pandemic is rightly at the forefront of both parties’ minds at present.