Tag: Trade

Brexit – EU and UK Negotiating Mandates

On 25th February, the European Council approved the negotiating Directive (mandate) which will be used by the European Commission as a guide in its talks with the UK on the future trading relationship.  It claims that the EU is ready to ‘offer an ambitious, wide-ranging and balanced partnership to the UK for the benefit of both sides’.  The UK is expected to publish its negotiating position shortly.

The EU is seeking to establish a Free Trade Agreement (FTA) with the UK which ensures that zero tariffs and quotas apply to trade in goods.  However, it is also pursuing robust commitments to ensure there is a level playing field for open and fair competition between the EU and the UK – effectively the UK having to adhere to current EU standards and regulations.  This is a clear problem for the UK Government which has stated that the whole point of Brexit is the the freedom to set our own rules.  It also points out that the EU has not required other countries that it has signed FTAs with, such as Canada, to align their regulations with Europe.  The EU counters that, given the volume of trade and close geographic proximity between the UK and EU, this is a special case.

Interestingly, in an ambassadorial meeting of EU Member States in drafting the EU’s negotiating mandate it has called for EU rules (‘union standards’) to be used as a ‘reference point’ to determine whether level playing-field requirements have been respected.  This indicates that there might be some wriggle-room for the UK to adopt slightly different standards to the EU in some areas.  This would hold as long as the EU views those standards as being essentially the same (or higher) in terms of the outcomes achieved.  This becomes crucial for sensitive products such as agri-food where there has been a huge amount of debate as to whether the UK will accept chlorinated (or lactic acid-washed) chicken in the future from the US.

It remains to be seen what will eventually be agreed as the negotiating mandates (positions) should be very much seen as an initial starting point.  Negotiations are set to formally begin in early March and the EU has indicated that these negotiations need to be completed by end of October to give the EU institutions and Member States sufficient time to ratify any deal.  As stated previously, this timeline is a very tall order given the amount of time it has taken in the past to negotiate FTAs.

Further information on the EU Council’s negotiating directives can be found via: https://www.consilium.europa.eu/en/press/press-releases/2020/02/25/eu-uk-relations-council-gives-go-ahead-for-talks-to-start-and-adopts-negotiating-directives/ 

Import Controls to be Introduced

The Government has recently (10th February) confirmed that it plans to introduce import controls on EU goods at the border after the Transition Period ends on 31st December.  The Chancellor of the Duchy of Lancaster (Michael Gove) confirmed this in a speech to the Border Delivery Group and was positioned as part of the UK’s commitment to leave the Single Market and the Customs Union in order to take back control of its borders and strike trade deals with the rest of the world.

This means that traders of agricultural produce between the EU and GB will have to submit customs declarations and be liable for regulatory checks (e.g. sanitary and phyto-sanitary controls).  Mr Gove stated that it was important that UK exports and imports are treated equally (the EU has already stated that it will impose checks on UK products entering Europe).  Earlier in the Brexit process, it had been suggested that the UK could unilaterally lower its requirements to ease trade flows.  This is not now going to happen. 

The imposition of border controls will create challenges for Dover port especially, given its volume of trade with Calais.  This would be more manageable if the UK’s standards were aligned with the EU’s.  However, the UK has expressed its intention to reserve its right to diverge which will mean an increase in the amount of regulatory checks required.  As we’ve mentioned previously, the current Transition Period appears to be inadequate for ports and businesses to adjust.

Notably, Northern Ireland (NI) was not mentioned in the speech.  It is trade between GB and NI that the greatest challenges will arise.  As a result of the Withdrawal Agreement NI, as a constituent part of the UK, remains within the UK customs territory; however, it will apply EU customs and regulatory controls.  This means some friction will be created between imports coming into NI from GB, particularly where there is a risk that such products could end up in the EU Single Market (e.g. Republic of Ireland).  Furthermore, although that UK has committed to providing ‘unfettered access’ to the GB market for NI goods, many believe that some form of regulatory controls will also be required for this trade.  This creates the potential for substantial upheaval to GB-NI trade, particularly for companies (e.g. retailers) which bring in a substantial amount of mixed goods loads on a daily basis.  Theoretically, if a load contains lasagnes, pizzas (meat-based and vegetarian) as well as dairy products, then several Export Health Certificates would be required for each load.  This would add a substantial amount of costs and trade would quickly diminish.

Separately, the HMRC has announced that it has extended its deadline for businesses to apply for customs support funding to 3 January 2021.  There is £26 million available in total, which seems relatively small given the scale of the challenge at-hand, but £18.5 million has already been applied for.  So businesses need to act now if they wish to avail of the remaining £7.5 million.  Notably, this funding is only available for GB-EU traders and not NI-GB traders, who are arguably in the greatest need for support.  Further information is available via:

https://www.gov.uk/guidance/grants-for-businesses-that-complete-customs-declarations?utm_source=905b7fb9-f378-41cb-88cc-59b2769ced26&utm_medium=email&utm_campaign=govuk-notifications&utm_content=daily 

Brexit Day Arrives

After 47 years and a month of being a Member State, the UK will formally exit the European Union at 11pm (midnight CET) on the 31st of January.  Whichever your viewpoint, the date will be historic. Whether it actually signifies the delivery of the promise to ‘get Brexit done’ is another matter.  There is much to be decided as the 2nd leg of the negotiations on the Future Relationship take centre stage.

For agriculture, what we do know is that until the end of the year at least, the UK will enter a Transition Period where its trading relationship with the EU will remain effectively the same.  The relationship with non-EU countries will also be unchanged as the EU is requesting those nations it has trade agreements with (circa 160 countries) to treat the UK as if it is still in the bloc, even though it will have formally left.  This will mean that the UK will still need to comply with the obligations placed on the EU by the international agreements (covering trade and non-trade issues) until the end of the Transition Period.  However, whether the UK continues to get the benefits of those international agreements is ultimately up to the partner countries. In practice, it is difficult to envisage partner countries refusing the UK as they are likely to be keen on striking up more attractive bilateral trade deals with Britain in the longer-term. This also means that while the UK can progress trade negotiations with other countries (e.g. the US), these could not become effective until after the Transition Period ends. 

Once the European Parliament formally ratifies the Withdrawal Agreement (29th January), the next step in the process will be for the European Commission to formally receive its negotiating mandate from the European Council (the remaining 27 Member States).  With the next Council meeting taking place on 20th February, formal negotiations with the UK are unlikely to begin in earnest until March.  As a decision on extending the Transition Period is due by 30th June, this leaves very little time to have the bulk of the trade negotiations completed, let alone other issues relating to data, aviation etc.  Despite the UK Government’s insistence, it is possible that an extension could be agreed.  It can be the EU that requests this, rather than the UK, thus enabling the Government to claim it has kept its promise.   Technically, only one extension is possible under the terms of the Withdrawal Agreement.  It is, therefore, likely that some form of ‘flex-tension’ will be agreed whereby specific parts of the Future Relationship become operational whilst others are still being negotiated.

For now, the food and farming sector will continue to trade with EU and non-EU partners on the same terms as present.  What happens with regards to standards in the longer-term remains to be seen.  The Government has made conflicting noises of late and it is clear that it is pushing hard for its right to diverge in future, whilst pointing out that it will not diverge for the sake of it.  The prospect of a ‘No Trade Deal’ with the EU at the end of the year cannot be ruled out either.  So, all we really know is that Brexit will formally take place on 31st January and that the Ireland/Northern Ireland Protocol (meaning no hard border on the island of Ireland) will apply, even in the event of a No Trade Deal. Aside from that, all of the uncertainty from last year will start to ratchet up as the clock (but not Big Ben) starts to tick once again.

Brexit: Withdrawal Agreement Bill

Having concluded negotiations with the EU on a revised Brexit Deal last week (see accompanying article), on 22nd October, Boris Johnson attempted to progress his Withdrawal Agreement Bill (WAB) through the remaining stages of the Parliamentary approval process. This involved two key votes;

  1. Second Reading Debate: to approve the General Principles of the Bill to enable it to progress to more detailed scrutiny.
  2. Programme Motion: which provides a timetable to progress the bill through the Committee, Report and Final Third Reading stages. It is only when the WAB passes the Third Reading (final vote by MPs) that it becomes law.

The Government won the first vote by 329 votes to 299, assisted by several Labour MPs from Leave-voting constituencies.  However, it lost the Programme Motion vote by 308 votes to 322.  The PM reacted by “pausing” the Brexit process to speak with EU leaders to get their thoughts on whether the EU would offer the UK another extension which the PM was forced to seek as a result of the Benn Act.  With the EU yet to formally respond, the Brexit process is now in limbo.  The Government has reiterated its desire to achieve Brexit by 31st October, but that is unlikely.

The EU is likely to offer an extension, but its duration is still being debated.  Some are advising an extension until 31st January 2020 (in accordance with the Benn Act) whilst others, notably the French, are mooting a much shorter (15-day) extension to exert pressure on the UK to make-up its mind.  Taking account of these diverging approaches, the most probable path is that the EU offers another ‘flextension’ which can extend to 31st January but can be brought forward if the WAB is ratified before then.  This would leave plenty of time for a General Election to take place.  Labour is dragging its heels on this, as it claims it wants to remove the threat of a No-Deal Brexit.  In reality, a No-Deal could conceivably take place at the end of a Transition Period (currently end-2020) if there was no agreement on the Future Relationship.

Revised Brexit Deal – Impact Assessment

On 21st October, in conjunction with the WAB, the Government released a 69-page impact assessment.  It indicates a cost of £167.1 million with the bulk of the cost (£145m) relating to the setting up of an Independent Monitoring Agency on citizens’ rights.  What was most notable about this assessment was the extent to which agri-food regulations relating to the Ireland / Northern Ireland Protocol were not costed in the analysis.  With over £5.8 billion in trade between NI and GB, based on 2015 estimates, this seems a rather large omission and calls into question the validity of the assessment.

The document also outlined the maximum extent of regulatory (sanitary and phytosanitary (SPS)) checks for agri-food goods going from GB to Northern Ireland.  Documentary and identity checks will apply to 100% of shipments whilst the maximum level of physical checks would be 20% for red-meat and dairy whilst poultry products would have a 50% check rate.  Live animal physical check rates are estimated at 5.5%.  The extent to which maximum check rates would apply would depend on the extent to which GB diverges from EU regulations in the future and whether a more favourable check rate could be negotiated as part of the future trading relationship negotiations.  Canada, via the CETA accord, enjoys a 10% physical check rate for beef.  That should also be doable for the UK. 

For NI to GB trade, there remains some debate as to whether some customs-related regulation would apply.  Whilst it will be much lower than for GB to NI trade, as SPS checks will not apply, there could still theoretically be a requirement for some form of “exit declarations” to be made.  It may take some time for clarity to emerge on this issue.

From a business perspective, some clarity has emerged this month with respect to the shape that the new Brexit Deal with the EU would take.  The direction of the eventual Future Relationship (comprehensive Free-Trade Agreement) is now becoming clear.  Whilst some might continue to argue that this would leave the UK economy worse-off, the real impediment to business now is the continued deferment of a decision on Brexit.  With the avoidance of a No-Deal Brexit, the next-worst outcome is fast-becoming a ‘No-Decision on Brexit’ which is continuing to stall investment. 

Brexit – The Tumult Continues

This past month has been one of, if not the most, tumultuous of the entire Brexit process.  It started off on a fairly promising note with EU leaders (most notably the German Chancellor) giving the UK Government 30 days to put forward its proposals on an alternative to the Backstop.  However, the mood has become more downbeat since then with the publication of the Government’s plans for a No-Deal Brexit (Operation Yellowhammer – see previous article), the prorogation of Parliament which the UK Supreme Court has judged to be unlawful, and the disclosure of the UK Government’s alternative Backstop arrangements (delivered by a ‘non-paper’) which the EU deemed to have failed each of Brussels’ three key criteria.  All the while, the Government’s preparations for a No-Deal continue apace with some notable updates of relevance to agri-food trade.

Prorogation of Parliament ‘Unlawful’

This was the unanimous verdict of eleven Supreme Court judges delivered on 24th September.  The prorogation has been rendered void and Parliament resumed on 25th September.  This is another major setback for the Prime Minister as the Government no longer has a majority in the House of Commons (HoC) as it removed the whip from 21 MPs for voting against the Government.  The PM also lost his bid to have a mid-October election and there appears to be very little appetite for MPs to agree on any long-term course of action on Brexit.   A summary of the current state-of-play is;

  1. Brexit could still be achieved by getting a deal with the EU ratified by Parliament: despite the embarrassment arising from the Supreme Court ruling, Brexit is still achievable if the UK Government can achieve a deal with the EU at the EU Council meeting on 17-18th October, and thereafter, getting a majority of MPs to back that deal.
  2. If a deal with the EU is not achievable, Article 50 would be extended again:  the ‘Benn Act’ (officially titled the European Union (Withdrawal) (No. 2) Act 2019) passed by MPs a few weeks back would result in another mandatory extension of Article 50, if a Brexit Deal cannot be reached during the EU Council.  Theoretically, the PM could choose to ignore the Benn Act.  Such a course of action would likely result in another Supreme Court case, with an unfavourable ruling again likely.  In such a scenario, it is possible that the Supreme Court could instruct another official to sign an Article 50 extension letter if the PM refused to do so.
  3. Agriculture Bill reinstated: the Agriculture Bill is currently at the Report stage ahead of a third reading at the House of Commons.  With the prorogation of Parliament the Bill had ‘fallen’  – i.e. as it had not been passed by the end of the Parliament, it would have to be re-presented from scratch in the next Parliament.  But, now the prorogation has been ruled illegal, the Bill has risen from the dead,  As Brexit is likely to take up the vast proportion of Parliamentary time for the foreseeable future, it is likely that further progress on this Bill is still several weeks, if not months, away.

In this volatile environment, a General Election is becoming more likely, potentially in November if another Article 50 extension takes effect.  However, there is also increasing talk of a Government of National Unity, led by one of the parental figures in the HoC (Harriet Harman or Ken Clarke).  This move would require approval from Labour in a no confidence motion.  However, its leadership would prefer that an alternative Government be led by Jeremy Corbyn.  He would then seek to negotiate an alternative Brexit Deal with the EU and put that before the British people in a confirmatory referendum (with Remain the other option).  So all of this effectively means that after three years, the three broad Brexit options (Deal, No-Deal, No Brexit) all remain in play, but it does make a No-Deal at the end of October less likely.  Little wonder then that many think the Brexit process is going round in circles.

UK’s Alternative Backstop Proposals Not Legally Operable

Having been set the 30-day challenge by Angela Merkel a few weeks back to come up with a viable alternative to the Backstop, the UK’s proposals eventually emerged via a ‘non-paper’ (an unofficial document reflecting the ideas that the UK has put forward rather than concrete proposals representing a definitive UK Government view).  These were deemed by the EU to fall short on all of its three key tests on viability and were not legally operable. These key tests (objectives of the Backstop) are;

  1. Having no hard border on the island of Ireland
  2. Protecting the all-island economy
  3. Preserving North-South cooperation

The UK proposed an all-island Sanitary and Phytosanitary (SPS) zone for agri-food goods; thus expanding the regulatory frontier that already exists for live animals between Northern Ireland and Britain.  It would have only been applicable to some areas (e.g. animal health and food safety checks) and not others (e.g. labelling rules on ingredients, allergens and additives etc.).  Furthermore, industrial goods and customs procedures relating to Northern Ireland would remain within UK rules, and not the EU regulatory regime as proposed by the original (NI-only) Backstop.  From an EU perspective, this would potentially mean a gaping hole in the integrity of the Single Market as false declarations could potentially be made on what a consignment of goods contains, thus meaning that ineligible products would be smuggled into the EU market.  In such a context, the imposition of a hard-border between Northern Ireland and Ireland would eventually become necessary, as alluded to by EU Commission President Jean-Claude Juncker recently.

The UK proposals also referred once again to (frequently untried and therefore untrusted) technological solutions and trusted trader schemes which have already been rejected several times by the EU.  As we’ve argued previously, that is not to say that technology does not have a long-term role to play – it does – but given current capabilities, it cannot replace human intervention in undertaking physical checks to verify the eligibility of meat products and the like.  In the meantime, some form of insurance mechanism (Backstop) is required. 

In the coming weeks, it is likely that there will be an increased focus on finding a NI-only (or unique set of arrangements for NI’s circumstances) route to overcome the impasse.  As a minimum, this would have to encompass harmonisation with EU regulations on the entirety of agri-food-related regulations within Northern Ireland (and applicable to goods entering NI) whilst ensuring that the province’s constitutional status within the UK is not affected in any way.  Recently, the prospect of giving the Stormont Executive (currently suspended) a role in the acceptance of such regulations was mooted; however, the EU does not want NI to have a veto on the imposition of rules across the Single Market.  It is prepared to countenance a consultative role, similar to that offered to Norway and Switzerland in some areas. Perhaps one way to address this would be to give the NI Executive some voting rights in a qualified majority voting context, but no veto?  However, the extent to which that would be legally operable is questionable. 

More Brexit Preparation Notices Published

There has been a continued ramping-up of efforts by the Government to help businesses to prepare for post-Brexit trade with the EU.  Some of the key notices published recently are ;

Undoubtedly, the Government’s preparations for Brexit are accelerating but significant gaps remain, particularly when it comes to issues associated with Northern Ireland.  Furthermore, publishing guidance is one thing, ensuring that businesses and relevant competent authorities are operationally ready for the changes imposed is another matter entirely.  

Brexit Update

Although activity in Westminster and Brussels is usually subdued during the August holidays, this year it is more of a sense of calm before the storm as the Brexit process is expected to reach its climax in October. That said, there have been several noteworthy developments in recent weeks from an agri-food perspective.

Government’s No-Deal Brexit Preparations

Since coming to power last month, the Johnson Government has ramped up its preparations for No-Deal considerably.

On 21st August, the Chancellor announced that HMRC is automatically registering over 88,000 VAT-registered companies to be allocated an Economic Operator Registration and Identification (EORI) number.  This enables businesses to be identified by Customs authorities when conducting overseas trade. This is very much the first step required for businesses to continue trading with EU Member States post-Brexit and affected companies should start receiving notification letters in the coming days.  For businesses that trade with EU Member States which are not VAT-registered, and do not currently have an EORI number, they will still need to register if they wish to continue trading with the EU.  Further information on doing this can be found via; https://www.gov.uk/eori

For businesses trading in live animals and animal products, the Government has also published additional guidance on importing from, and exporting to, the EU (and countries such as Switzerland, Norway and Iceland which are also considered to be covered by EU trade). The following link lists the various certifications and approvals required when importing into Great Britain from the EU; https://www.gov.uk/guidance/moving-live-animals-or-animal-products-as-part-of-eu-trade

Earlier in the month, a leaked Government document on the Government’s No-Deal preparations reported by The Times (dubbed ‘Operation Yellowhammer’) suggested that the UK would face shortages of food and fuel in the short-term as there would be considerable delays at Ports as well as the re-imposition of a Hard Border in Ireland.  The Government subsequently claimed that the report was dated and that significant steps to prepare for a No-Deal Brexit have been taken since.

Whilst it is evident that the Government is ramping-up its preparations, it is also apparent that a No-Deal Brexit would cause significant upheaval in its immediate aftermath.  Although this could bring some longer-term opportunities, the concern amongst many in the industry is that the almost instantaneous change in the trading relationship with the EU would exert severe pressure on just-in-time supply chains at a time when storage capacity will be already limited in the lead-up to the busy Christmas period. 

Impact of a No-Deal Brexit on Farm Profitability

With the UK due to leave the EU on 31st October and the possibility of a No-Deal Brexit becoming more likely, The Andersons Centre (Andersons) recently conducted research on behalf of the BBC to assess its potential impact on the profitability of UK farming, 9-12 months after Brexit taking place.

To undertake this analysis, Total Income from Farming (or TIFF) is a useful measure to look at the farming industry as a whole.  It is an aggregate, so hides differences between sectors and individual businesses, but provides a simple measure of the profit of ‘UK Agriculture Plc’.  In technical terms, TIFF shows the aggregated return to all the farmers in UK agriculture and horticulture for their management, labour and their own capital in their businesses.  To allow for yearly variations in weather conditions, markets and exchange rates for example, a three-year average (2016 to 2018) was used as the basis for comparison.

Taking into account previous studies a top-level assessment of the impact of both a Brexit Deal and a No-Deal on the output of each farming sector was compiled in addition to an estimation of the effects of both Brexit scenarios on key costs which are incurred by UK farming.  This assessment considered the potential impact of tariffs (including the UK’s March 2019 announcement on its No-Deal Brexit tariff schedule), non-tariff barriers and tariff rate quotas.  Importantly, it was assumed that support levels to UK farming were kept constant as the UK Government has committed to farming receiving current levels of support until the end of this Parliament (scheduled to be 2022).

Under a Brexit Deal scenario, a small decline in profitability (3%) is projected; however, under a No-Deal, an 18% decline is forecast.

Impact of Brexit on UK Farm Profitability under a Deal and No-Deal Scenario

Sources: The Andersons Centre

Like all top-level industry averages, there is significant variation within the overall estimate.  For instance, where output is concerned, substantial declines are forecast for sheepmeat (-31%), whilst output for cereals, milk and beef production are also down.  Some increases are projected for horticulture and intensive livestock (pigs and poultry) provided there is sufficient labour available for undertaking operations.

With respect to costs, some decreases are forecast for inputs which would be affected by the introduction of lower UK import tariffs under a No-Deal scenario.  Examples here include animal feed, fertiliser and plant protection products.  However, other inputs such as veterinary costs are projected to rise as it is anticipated that there would be a significant increase in demand for veterinary staff to assist with border inspection operations.

An 18% decline in profitability would equate to a hit to UK farming generally of almost £850 million.  With many farms already struggling to break-even, the viability of many farming businesses will be in jeopardy. Unsurprisingly, grazing livestock farms (particularly sheep) would be the most exposed given the output declines mentioned above, but a No-Deal would also result in a significant downturn for dairy farming in Northern Ireland, given its reliance on having its milk processed in the Republic of Ireland.

For further information on how a No-Deal Brexit could affect farming and to address the trade-related risks arising, Andersons is running a webinar on Thursday, 12th September to provide further information on how businesses can prepare. Further information is available via:

https://attendee.gototraining.com/r/1384475755831393282

30 Days to Find Backstop Alternative

Despite its intransigence for much of the summer on renegotiating the Withdrawal Agreement (including the Backstop), the German Chancellor gave some hope to the Prime Minister when she suggested, on 21st August, to give the UK Government 30 days to come up with an alternative arrangement which is legally operable and would not result in infrastructure along the Irish border.  However, the EU was adamant that this did not mean that the entire Withdrawal Agreement could be negotiated which some in the UK have been seeking.

This additional flexibility from the EU is a welcome development as it is clear that the only way to resolve the outstanding issues is to at least have the opportunity to talk about them. The EU’s previous stance of seeing the Withdrawal Agreement as being completely closed and not up for any discussion was unhelpful and was ramping up the possibility of a No-Deal Brexit.  That said, the EU is not going to budge on the central issue of having a fall-back (Backstop) that would apply unless and until a legally operable alternative to the Backstop would be found.

To date, all of the Alternative Arrangements’ proposals put forward have fallen short of the EU’s requirements. This is because the proposals have either required some form of infrastructure on the Irish border, checks between NI and GB or would undermine the integrity of the EU Single Market in some way.  Time will tell whether new ideas will come forward in the next three weeks or so to resolve the impasse or whether some ‘fudged Backstop’ will emerge containing elements of the existing Backstop, the previously proposed ‘NI-only’ Backstop and some additional alternative arrangements.

Opposition Coalescing Around Avoiding a No-Deal

Meanwhile in Westminster, various opposition parties (and some Conservative rebels) have been working more closely together to avoid a No-Deal Brexit on 31st October.  Although such discussions previously centred on putting forward a No Confidence motion in the Prime Minister, it now appears that the main focus is on forcing the Government to extend ‘Brexit Day’ beyond 31st October if the alternative would be a No-Deal Brexit.  This approach is thought to have the best prospects of getting Conservative rebels onboard as their support would be crucial.  The Prime Minister has not ruled out the possibility of proroguing (suspending) Parliament so that it would be unable to vote on such a motion.

Overall, as Brexit reaches its climax something is going to have to give. The Government is intent on exiting on 31st October “come what may” and the opposition is uniting around avoiding a No-Deal Brexit, initially via another extension.  Whilst the EU has made some very small concessions, it will not U-turn on its red lines which include the Backstop.  Amongst all of this, the possibility of another UK General Election should not be ruled out. 

For the UK food and farming industry, whilst the uncertainty continues, every effort should be made to prepare for a No-Deal Brexit because according to most experts, it is more probable now than at any time throughout the Brexit saga thus far. 

Impact of Trade Barriers on UK Beef and Sheepmeat

Beef and sheepmeat trade with the EU could plummet by over 90% under a ‘No Deal’ Brexit.  This is one of the headline findings of a study recently published by the AHDB in collaboration with QMS and HCC.  The report, complied by The Andersons Centre, looks at the impact of trade barriers on the UK beef and sheepmeat sector post-Brexit.  It examined two scenarios; a Brexit Deal and a No Deal Brexit.  Some of the main points include;

  • Trade impact under a Brexit Deal scenario is relatively small:  total exports would decline by about 1% in volume terms (imports 0.8% lower), driven by EU27 declines.  Sheepmeat exports to EU27 are forecast to decline by 1.5% whilst corresponding imports would be 3% lower. These declines are chiefly due to Non-Tariffs Measures (NTMs) – i.e. the increased trade ‘friction once the UK was not part of the Single Market.  There would be minimal changes to non-EU trade.
  • Significant upheaval under No Deal: trade with the EU27 would plummet (by 92.5%) due to the imposition of tariffs, TRQs and higher impact of NTMs.  Sheepmeat trade with the EU would be almost completely wiped out.  Substantial declines in trade with the EU27 would also ensue for beef – exports down by 87%, imports declining by 92%.  Somewhat better market access for beef compared to sheep, due to TRQs, would permit some UK-EU trade to continue.  The introduction of a new 230Kt TRQ for UK beef imports would cause non-EU imports to soar by over 1,300%.  This would lower prices and drive-up UK consumption by approximately 7%.  Sheepmeat imports from non-EU countries are not anticipated to change whilst consumption is projected to rise by 14% due to declining prices.
  • Price impacts: there would be small declines under a Brexit Deal scenario (-1 to -3% respectively).  Under No Deal severe price declines would be seen.  Sheepmeat is particularly exposed (projected 24% price fall under No Deal).  Downward price pressure for beef (-4%) under No Deal arises due to competition from lower priced world-market imports.  This would be exacerbated if significant volumes of Irish beef enter the UK barrier-free via NI.
  • Value of carcase meat output: under a Brexit Deal, output would decline by an estimated 1.7% whilst under a No Deal the decline would increase by nearly ten-fold (-11.7%) with sheepmeat output nearly 31% lower which would be devastating for incomes in the sector.  Growth in exports to non-EU markets under No Deal would be insufficient to compensate for the loss of access to the EU27.

Projected Impact of Trade Barriers on Domestically-Produced Beef and Sheepmeat (Farm-Gate Level)

Sources: Defra (2019) and The Andersons Centre (2019) *Baseline Figures derived from Defra data.

  • Similar Impacts at Farm Level:  Andersons’ Meadow Farm model projects a 27% decline in profitability (£68 per Ha versus the current £93 per Ha) under a Brexit Deal, but the farm would still be profitable provided it can maintain its current support levels.  Even with support unchanged, Meadow Farm starts to generate unsustainable losses under No Deal with a projected deficit of £45 per Ha, equating to a £7,000 loss.
  • Domestic Market Opportunities: could arise for domestic producers if trade barriers reduce the competitiveness of imports.  However, the proposed access granted under additional TRQs in the beef sector would diminish this.  There are also fears that future changes to standards might make imports more competitive, thus limiting domestic market opportunities even further.
  • Frictionless trade with the EU27 as a third country is not currently possible: and looks set to remain so for at least a decade as the required technology has not yet been developed, let alone tested.  Long-term, technology can contribute to reducing this via e-certification systems, but friction cannot be reduced completely.  Post-Brexit increases in trade friction are inevitable.
  • Most significant non-tariff measures relate to value deterioration: value deterioration (especially fresh meat) arising from border-related delays associated with physical checks and sampling (associated with sanitary and phytosanitary (SPS) regulations) is of most concern to industry and is the biggest contributor to non-tariff costs generally.  Its impact on frozen products is much lower but still a factor in terms of potential penalties imposed on delayed consignments.
  • Uncertainty about future border arrangements:  under No Deal centres particularly on trade on the island of Ireland which the UK Government has claimed would remain frictionless.  If there are also no checks on NI-GB trade, whilst any exports routed from Dublin to Holyhead would be subject to tariffs and regulatory checks, the potential for re-routing meat from the Republic of Ireland via NI and onwards to GB without any checks, could result in substantial volumes of Irish beef being placed on the UK market (beyond the 230Kt TRQ) by the ‘backdoor’.  If significant volumes enter the UK in this fashion, substantial price declines for UK beef farmers would ensue.
  • Disproportionate impact on Small and Medium-Sized Enterprises (SMEs): arising from higher operating costs, fewer loads dispatched and a lower propensity to avail of special authorisations such as AEO status (which confers a lower risk on operators from a regulatory authority perspective).
  • Inflationary pressures: particularly for farm-level imported inputs from the EU27 (e.g. fertiliser, medicines etc.) but also elsewhere.  These costs are unlikely to be absorbed by the supply trade and would be passed on to consumers and/or to primary producers (i.e. farmers).  Any meat price rises are likely to cause consumers to increase their propensity to substitute with cheaper sources of protein, thereby making it more likely that beef and sheep farmers would beat the brunt of price pressures.

The study concluded that a Brexit Deal based on a comprehensive FTA and close customs and regulatory arrangements with the EU would be far preferable to a No Deal Brexit, which could have a devastating impact, especially for sheepmeat.  Whilst developing overseas markets will be crucial to the long-term success of British beef and sheepmeat, close attention must be paid to protecting existing markets, specifically the domestic UK market and the EU27 export market.  The study also found that even if the UK had never entered the EU (or EEC) in the first place, it is highly likely that markets such as France would still be vital to the British sheepmeat industry due to proximity.  To minimise any upheaval post-Brexit, the report states that having a comprehensive mutual recognition agreement between the UK and the EU is crucial.

The report’s findings were similar to several previous studies; however, this study goes into significantly more detail on how non-tariff measures could affect the sector.  It also provides useful insights on the implications of a No Deal Brexit for carcase balance in the sheepmeat sector where it estimates that up to 22% of the annual UK lamb kill (3.1 million head) could be affected.  This would be a major challenge to a sector where approximately one-third of the lamb crop is exported each year.  If it wasn’t already clear, this report underscores the importance of a good Brexit Deal for the grazing livestock sector.  The report is available via: https://ahdb.org.uk/knowledge-library/red-meat-route-to-market-project-report 

EU Agrees Mercosur and Vietnam Trade Deals

On 28th June, twenty years to the day that negotiations started, the EU and Mercosur reached a political agreement on a substantial free trade deal.  The EU estimates that, when fully implemented, the deal will reduce tariffs its exporters face by approximately €4 billion.  On a busy weekend for Cecilia Malmström, EU Trade Commissioner, the EU also signed the free trade agreement with Vietnam which had been largely negotiated in 2018.  Both deals are meant to send a message that, with the backdrop of the US-China trade dispute and the increased friction likely to result from Brexit, that the EU is open for business and keen to conclude trade deals with other global partners.   These announcements follow similar recent deals with Japan and Canada.  From an agri-food perspective, the Mercosur deal is attracting most attention as it could have significant implications for sectors such as beef, poultry and sugar.

EU-Mercosur Trade Deal

The details of the Mercosur deal are complex.  In summary, the South American trade-bloc, consisting of Brazil, Argentina, Uruguay and Paraguay, would see tariffs removed on 92% of all its imports to the EU over a period of 10 years.  Focusing on the agri-food sector, tariffs will be cut on 82% of imports coming from Mercosur, with remaining agri-food imports subject to more partial liberalisation.  Notably, this includes beef where a quota of 99,000 tonnes will be permitted to be exported to the EU at preferential rates.  This will be implemented over a five-year period.  Additional volumes of imports will also be allowed of poultrymeat (180,000 tonnes) and pigmeat, (25,000 tonnes), with import restrictions on sugar and ethanol also eased.

From an EU export perspective, tariffs will be eliminated on 91% of its total exports and 95% of agri-food exports.  The dairy sector in particular will benefit from improved market access, with a quota of 30,000  tonnes for cheese, 10,000 tonnes for skim-milk powder and 5,000 tonnes for infant milk formula (Mercosur tariffs are currently at around 28% for dairy products).  These volumes will be phased-in over 10 years.   Whilst improved market access for dairy was welcomed in some quarters, market experts opined that demand for dairy products in the Mercosur market is quite lethargic and is hampered by high inflation, sluggish economic growth and a volatile political environment. 

Mercosur has also committed to protecting the Geographical Indications of 357 EU food and drink products.  The EU is also keen to point out that its food standards on Sanitary and Phytosanitary (SPS) matters would not be compromised in any way.  The EU-Mercosur deal also has a Sustainable Development chapter which commits both parties to upholding their Paris Climate Accord commitments

European beef, poultry, sugar and ethanol producers are expected to come under increased pressure from cheaper imports from South America as a result of this proposed deal.  The agreement has already attracted condemnation from the EU’s farming lobby with organisations such as Copa-Copega and the Irish Farmers’ Association (IFA) complaining that agriculture had been sold out to facilitate a wider deal.  Tellingly, the EU Commission also announced a €1 billion fund to help farmers to adjust to the market disturbances that could be potentially caused by the EU-Mercosur trade deal which indicates that there will be a significant impact on European farmers.

The feedback from the EU farming and food industry points to trouble ahead because, as our previous article on 26th June noted, the agreement thus far has only been at the political level and a number of hurdles remain.  Firstly, it will be translated into legal text before being put forward for ratification by EU Member States and the European Parliament.  Like the EU-Canada (CETA) agreement, there can still be several twists and turns in the process and the deal could be scuppered by a Member State or by a regional Parliament such as Wallonia.  Already, there is significant pressure being exerted on the Irish Government not to back the deal and it is anticipated that there will be similar calls elsewhere.

Any on-farm effects from this deal remain some way off, and in any case would be phased in over several years.  By the time this happens, the UK is likely to have left the European Union, so the impact of this particular deal might be negligible.  That said, the EU-Mercosur deal increases the competitive threat of South American products in European markets.  It is also likely to offer a template for any future trade deals between the UK and Mercosur which the UK is likely to prioritise post-Brexit. 

EU-Vietnam Trade Deal

This pact will eventually see duties removed on 99% of the EU’s imports from Vietnam.  Whilst the formal text has been approved by the European Commission, it still requires ratification by the European Council (representing the EU Member States) and by the European Parliament.  This is expected later this year.

From an agri-food export perspective, Vietnam with its population of around 95 million represents a fast-growing South East Asian market.  Its dairy industry is valued at approximately £5 billion and it currently imports 80% of this demand.  Average incomes have also been rising thereby driving demand for beef and pork products in particular, although the US and New Zealand account for the vast majority of these imports.

As with Mercosur, the UK’s pending exit from the EU means that it may not benefit significantly from this deal.  That said, much will depend on the length of the transition (implementation) period arising from the eventual Brexit deal and the UK’s access to third country market that have free-trade deals with the EU as part of this.  However, the South East Asian market is lucrative and the UK needs to prioritise the development of such markets as it resumes its independent trade policy. 

Race for Next PM – The Final Two

At one stage, there were thirteen candidates seeking to become the next Prime Minister (and leader of the Conservative party) and, in some ways, the leadership race was akin to the Grand National with a varied range of runners and riders, some of whom had little chance of success.  In recent weeks, this has been whittled down to two candidates – Boris Johnson (previously mayor of London and Foreign Secretary) and Jeremy Hunt (Foreign Secretary).  This article examines the credentials of both, particularly from an agri-food perspective.

Boris Johnson

Whilst being the front-runner from the outset, the former mayor of London does not have much form when it comes to agri-food matters.  One of his few utterances related to complaints about the burden of EU regulations (e.g. on sheep disease) to protect consumers in advance of the referendum.  He also promised farmers that their subsidies would be preserved post-Brexit.

With regards to trade, at a January 2019 conference in Dublin, he was keen to emphasise that the UK still wants to do business with Ireland, noting to the audience that “we buy 78,000t of your cheese every year,” whilst also emphasising that he does not want to see a hard border in Ireland and that other solutions can be found.  Although Mr. Johnson’s preference is for the UK to leave the EU with a deal, he is of the view that it is possible to leave the EU on 31st October without a Deal, claiming that it would be possible to extend existing arrangements for as long as necessary to negotiate a free-trade agreement under GATT: Article XXIV (24).  Most trade policy experts dispute this claim, noting firstly that the application of this Article would require the EU’s agreement (highly unlikely in the event of a No Deal).  In addition, according to paragraph 5, sub-paragraph (c) of Article XXIV, it could only be applied if there was a “plan and schedule” for the formation of a free-trade area or customs union with the EU “within a reasonable length of time.”  By definition, none of this would be in place if there were to be No Deal on 31st October.  Thus leaving the UK Government in the same conundrum as that faced by the May administration.

Jeremy Hunt

Jeremy Hunt does not have much of a track-record with regards to agriculture either.  Before going into politics, Mr Hunt was an entrepreneur in technology marketing consultancy and in online publishing.  In Government, he has held roles as Health Secretary and Foreign Secretary.  Whilst not having much direct involvement in food and farming, he was the driving force behind a plan to halve childhood obesity by 2030 which he sees as a major cost burden to the NHS.  Although his website devotes some attention to the Agriculture Bill, post-Brexit environmental protections, and policy, as well as food safety and food labelling, it is very much a reiteration of the current Government line on these issues.

Whilst siding with Remain in the June 2016 referendum, Mr Hunt was quick to row-in behind the effort to leave the EU by securing a deal which would enable the UK to continue to trade closely with the EU whilst emphasising the Government’s commitments to guarantee workers’ rights, consumer protection and environmental protection.  He has mentioned that if there was no possibility of a Deal with the EU on 31st October that he would leave without a Deal if necessary.  However, he is also open to a short extension if a Deal is within sight.

Although Mr Hunt claims to have a good rapport with EU leaders such as Merkel and Macron, he did attract the ire of Donald Tusk in October 2018 for comparing the EU with the Soviet Union.  However, Mr Hunt’s track-record for controversy is much less than that of Mr Johnson and he is also seen as much less of a charismatic figure.  Based on the voting to date, it appears to be an uphill task for Mr Hunt to become the next Prime Minister.  His main hope might be for Boris Johnson to discredit himself with a major gaffe during the head-to-head contest over the next few weeks.  He may also need to create a “stop Boris” alliance within the party, potentially giving key roles to the likes of Michael Gove, Sajid Javid, Rory Stewart and Amber Rudd in a bid to appeal to all sections of the Conservative party to re-unite after the ructions of Brexit.  That said, it looks most likely that it will be Boris as PM after 22nd July. Whilst the Brexit journey has been eventful thus far, it looks set to go into overdrive in the Autumn.

For the farming sector, it is a case of wait-and-see what might happen.  Although Mr Gove is now out of the running to be PM, the possibility of a new Defra Secretary after a cabinet reshuffle has heightened.  A Hunt administration is likely to mean more of the same in terms of the direction of agricultural policy.  As for a Boris-led administration, who knows?  Whilst farming might be lower down his policy agenda, trade is likely to be centre-stage and this could have significant long-term implications for the competitiveness of UK agri-food. 

Brexit – North-South Cooperation Areas

On 20th June, details were released of an exercise which outlined the scale of the areas of north-south cooperation on the island of Ireland which could be affected by Brexit.  This exercise informed the UK-EU negotiations which led to the emergence of the Irish backstop.  It shows that there are 142 areas of cross-border cooperation encompassing healthcare, policing, the environment and, of course, agri-food.

Nearly 30 of these areas of cooperation (20%) have direct linkages to agriculture whilst a further 17 are linked to water, waste and the environment.  Areas relating to agriculture and food include;

  • Food safety: linked with the application of EU Regulation 178/2002 on General Food Law.
  • Trade: appears in various guises, whether related to North-South trade promotion (via InterTradeIreland) or the management of cross-border trade with respect to the joint management of customs, transit of goods, mutual recognition of authorised economic operators (AEOs) etc. It also includes collaboration on promoting dairy trade.
  • Common Agricultural Policy: discussion around policy choices and implementation issues which are faced by both jurisdictions on the island of Ireland. It does not involve policy formulation.
  • Rural Development: EU LEADER cooperation including the facilitation of application for funding for collaboration projects including landscape management.
  • Plant health and associated regulatory checks for quarantine pests: a working sub-group oversees cooperation on plant health, pesticide and bee health issues and joint actions delivered through a joint work programme. This area has linkages to external border controls (documentary checks, identity checks etc.) relating to external trade in these products.
  • Collaboration on regulatory checks on live animals and products of animal origin: cooperation encompasses information exchange on consignment movements and trade as well as discussions on topics of mutual interest including the registration of traders and the use of the Trade Control and Expert System (TRACES) which controls the import and export of live animals and animal products in the EU. This area is seen as crucial towards avoiding a hard border. 
  • Animal health, welfare and disease control: includes collaboration initiatives on Tuberculosis (TB) and Brucellosis, veterinary medicines regulation and trade as well as animal transport.
  • Equine industry collaboration: covering cross-border movements and strategy development for the Irish equine sector.
  • Academic partnerships in agri-food: encompasses a variety of partnerships to promote cross-border initiatives including access to research funding as well as programmes to provide a range of higher and further education courses in agriculture.
  • Farm Safety: initiatives to jointly manage issues across the island.

Overall, the information released by the EU Commission and DExEU reveal the extent to which north-south collaboration has evolved over the past 21 years since the Good Friday Agreement.  Tellingly, many of the 142 collaboration areas go well beyond the technical and fiscal aspects of customs and single market regulation and it is implied that technology alone will not be able to solve all of the challenges posed by the Irish backstop trilemma.  Undoubtedly, the continued operation of the Common Travel Area facilitating the free movement of people across the island of Ireland and the UK will be a crucial component of tackling the issue.  However, there are many unanswered questions in other areas, particularly the regulation of agri-food trade which the UK Government will need to address.

To this end, DExEU have also announced the establishment of a Technical Alternative Arrangements Advisory Group to explore alternatives to replace the Irish backstop by the end of 2020. The group will be co-chaired by the Brexit Secretary, Steve Barclay, and Jesse Norman (Financial Secretary to the Treasury) and includes several Northern Ireland-based members (e.g. Declan Billington, Michael Bell and Dr. Katy Hayward) who have been to the forefront of tackling Brexit challenges, particularly from an agri-food perspective. Having such Northern Irish involvement should hopefully lead to more realistic proposals on how to obviate the need for a Backstop in comparison with previous initiatives which have repeatedly come up short in terms of understanding and addressing the complexities involved.