Tag: Trade

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.

Brexit Update – ‘All Change Please’

Earlier this month, we reported that Theresa May would try to get her Brexit Deal passed one more time.  Instead, Conservative backbenchers played a key role in calling time on her premiership and she is to resign on 7th June.  This has triggered a Tory leadership context and (at the time of writing) eleven candidates have put their names forward, including the Defra Secretary, Michael Gove.  With the Conservatives’ leadership contest to take place during June and July, a new Prime Minister will be in place by the time we reach 31st October, the UK’s current expected departure date from the EU.

For UK food and farming, a change in PM is likely to bring changes to Ministerial personnel and overall Government direction, irrespective of whether the Defra Secretary emerges victorious or not.  This could, in turn, mean changes to the Agriculture Bill which has already been subject to delays (currently awaiting details of its third reading) in its passage through Parliament due to the paralysis of Brexit.  Although Defra is continuing to develop its thoughts on future agricultural policy, there is still a significant degree of uncertainty surrounding the precise policies that will eventually emerge.

The Change theme is also evident in Brussels following recent European Parliament elections.  The focus is now shifting towards who will lead the next European Parliament and who will lead the European Commission and European Council from 1st November as the presidential roles for both of these institutions are up for renewal.  On 29th May, it was announced that Sabine Weyand (Michel Barnier’s Deputy Chief Negotiator in Brexit) is to become Director General for Trade in the European Commission. No doubt, her Brexit negotiating experience will prove useful in this role and she is likely to feature prominently in any future trade negotiations between the UK and the EU post-Brexit.  She will also play a crucial role in the EU’s trade negotiations with Mercosur, Australia and New Zealand, all of which will have significant implications for European agriculture.

The make-up of the future European Parliament also merits consideration as the Green Parties’ influence has increased.  Again, this could signify challenges ahead with regards to pesticides regulation, the role of GM crops, agricultural emissions and other environmental issues of relevance to agriculture.  Of course, the extent to which this would be applicable to the UK long-term remains to be seen.  However, the policy direction of Britain’s closest neighbours in the world’s largest trading-bloc would still exert a significant influence, no matter what the eventual trading relationship is.

Brexit Update

To say the least, it has been a tumultuous month for the UK Government on Brexit.  Once again, it has been defeated in its efforts to get the Withdrawal Agreement passed by the House of Commons whilst there have been widespread rumours of Ministerial resignations and the Prime Minister’s position now looks increasingly precarious.  All the while, businesses are no closer to getting clarification on where the UK’s relationship with the EU will be upon Brexit, let alone the eventual position of its future trading relationship.

On 12th March, the Government put the Withdrawal Agreement to a second Meaningful Vote in the House of Commons and was defeated by 149 votes.  Whilst not as substantial as the 230-vote defeat in January, the defeat was still comprehensive.  Despite the efforts of the Attorney General to secure legally binding changes to the Withdrawal Agreement (and the Irish Backstop in particular), the EU was only willing to provide the UK with clarifications in the form of a ‘joint legally binding instrument’ on the Withdrawal Agreement and a ‘joint statement’ adding to the Political Declaration.  Whilst these documents provided further information on how the UK could start a formal dispute with the EU if it felt that best efforts were not being made on obviating the need for the Backstop, they were insufficient to change the Attorney General’s legal opinion on the indefinite nature of the Backstop.  This was pivotal in the Government’s second defeat on the Meaningful Vote.

The defeat triggered two subsequent votes on the 13th and 14th of March.  In the first, the House of Commons was asked to give explicit consent to a No Deal.  This motion was defeated by 43 votes. However, it should be noted that whilst the UK Parliament voted against No Deal, the legal default if there is no Withdrawal Agreement between the UK and the EU upon Brexit remains that the UK’s future relationship with the EU would be based on WTO rules (i.e. a No Deal). 

The second subsequent vote, which passed by 210 votes, gave consent to request an extension to Article 50 and this is was the main area of focus at last week’s European Council meeting.  The UK Government initially proposed the end of June as the extension period and whilst there were many counter rumours from the EU side, it was eventually agreed to adopt a two-stage extension approach;

  1. Unconditional extension until 12th April: this date now replaces 29th March as the default Brexit day, unless the UK Parliament passes the Withdrawal Agreement or seeks to completely re-think its approach on Brexit (necessitating the UK’s participation in EU Parliamentary elections). Otherwise, the UK would exit the EU without a deal.
  2. Extension to 22nd May if Withdrawal Agreement passes: this would give the UK time to pass the additional legislation needed to give legal effect to Brexit and would also give the European Parliament the opportunity to pass the deal, before elections take place during 23rd to 26th May.

This, therefore, means that the focus shifts back to Westminster.  Today (25th March), MPs will be voting on a motion to permit Parliament to take control over the Brexit process on Wednesday by holding a series of ‘indicative votes’ which are intended to ascertain what options there might be a Parliamentary majority for.  The precise details of how these indicative votes would be held has yet to be finalised but MPs are often given ‘free votes’ (i.e. not subject to whipping) to discern which alternatives might command a majority.  These options are likely to encompass a softer form of Brexit such as the ‘Common Market 2.0’ (see January bulletin), a No Deal Brexit as well as the potential revoking of Article 50 in advance of holding of a second referendum.  However, it should be noted that these indicative votes are non-binding and it is highly possible that the Government could bring back the current Withdrawal Agreement for a third Meaningful Vote (subject to the Speaker allowing the vote to take place) in the next two weeks.

So, yet again, Westminster is in a state of chaos and agri-food businesses are no closer to getting any clarity.  The Brexit options still range from No Deal to No Brexit (or at least a lengthy delay to Brexit to facilitate a complete rethink to the UK’s approach, which would likely encompass a softer Brexit). Businesses are having to take decisions irrespective of the stalemate at Westminster.  There are several examples of investments which have been made to increase storage capacity to mitigate the impact of increased friction on cross-border trade.  There is also anecdotal evidence that trading positions are being adapted until further clarity is provided on the post-Brexit relationship.  These include delaying commitments for future purchases of on-farm materials destined to be traded between the UK and the EU after Brexit day.

All the while, Brexit fatigue is setting in and many industry professionals are expressing dismay at the current paralysis.  They are calling for decisions to be made so that companies can get on with their day-to-day business.  Unfortunately though, as the Future Relationship negotiations have yet to even start, the Brexit process is currently more akin to approaching injury time at the end of the first-leg of a European football tie and it has yet to be decided whether the second-leg will take place.

Brexit Update

Politically, it has been yet another tumultuous month regarding Brexit, but from an agri-food perspective, there have been relatively few developments of note and the Brexit fatigue factor has also been raised another few notches.

Last week Westminster witnessed the emergence of a new political group (The Independent Group) partly due to dissatisfaction with the Brexit policies of Labour and the Conservatives.  Yet again, the Prime Minister has decided to delay the ‘meaningful vote’ on the negotiated deal, which is now due to come before Parliament by 12th March.  This is in order to give the Attorney General more time to achieve clarifications from the EU, potentially permitting him to change his legal opinion on the indefinite nature of the backstop.

On 26th February, Theresa May offered MPs the chance to have two separate votes if her negotiated deal fails to pass on the 12th;

  1. On 13th March, MPs will be asked whether they support a No-Deal Brexit.  Therefore, the UK would only leave without a deal on 29th March if there is ‘explicit consent’ in the House of Commons for that outcome.  Such consent is highly unlikely.
  2. If this fails, then MPs would get a vote on 14th March requesting an extension to the Article 50 negotiation process to delay the UK’s withdrawal to beyond 29th March.

Whilst the PM still claims to be intent on securing a Brexit deal and the UK’s EU withdrawal on 29th March, the prospect of a short extension of Article 50 to the end of June have increased considerably.  Of course, such an extension would also require the approval of the EU.  However, noises from Brussels suggest a positive reaction to such a request.  Any request to extend Article 50 beyond the end of June would require the UK to participate in European Parliamentary elections in May, something which the Government has very little appetite for.  Last week, there were also claims in Brussels that the UK’s exit could be extended until 2021 which would coincide with the end of the current EU budgetary period.  However, there has since been a rebuttal of such claims in Brussels.  This approach appears to suggest that the PM is seeking to cajole the Brexiteers within the European Research Group (ERG) into accepting her negotiated deal with the EU.   If Parliament votes to rule out No-Deal, then what remains is likely to be a choice between the Government’s negotiated deal or No Brexit at all.

Meanwhile, Labour has also been making noises about changing its Brexit position.  On 25th February, it claimed that if Labour’s preferred Brexit option (encompassing a UK-EU Customs Union) was rejected, then it would advocate a second Referendum.  However, given the PM’s latest announcement, it is currently unclear when there would be a vote on its preferred Brexit option in the next few days.

Just when one thought that the Brexit process had run out of road and the precipice of a cliff-edge Brexit was becoming a real possibility, it looks like the Government has managed to kick the can yet again.  All the while, the agri-food industry is none-the-wiser as to how it can manage Brexit-related uncertainties.  Such paralysis is have a material impact on investment decisions and productivity across the industry.

Brexit Reaching Tipping Point

On 15th January, the Government suffered a historic defeat (by 230 votes) in its first bid to get Parliament to accept the Withdrawal Agreement and accompanying Political Declaration.  As a result, the sense of chaos and uncertainty in Westminster has accelerated. Whilst it is clear that the Parliament does not want this deal (in its current form), what is not clear is what sort of deal there would be a majority for.  The EU is clear that the ball is now in the UK’s court and the Prime Minister, assuming she wins today’s confidence vote, needs to set-out a plan by Monday.  Following last month’s article, below is an update of the potential options available in the coming weeks and months.  It is likely that a combination of these will be required.

  • Cross-party dialogue: this is the most obvious first-step that the Government needs to take and the noises from Downing St. suggest that it has already started to do this.  However, such an approach does not have much chance of succeeding if additional options to the PM’s deal are not considered.
  • Indicative votes: have been suggested by several MPs as a means to break the deadlock as the votes would be non-binding. It would help to gauge what there could be a majority for in the House of Commons.  The scale of the Government’s defeat on the Withdrawal Deal shows that another vote on the current deal has no chance of succeeding unless it can be changed fundamentally.
  • Renegotiate with the EU: on numerous occasions during the Brexit process Westminster has been operating in a silo and has not sufficiently considered the EU’s perspective in the negotiations.  Whilst some form of Brexit might eventually emerge as a favoured arrangement within the House of Commons, it has no chance of succeeding without agreement by the EU.  What is clear is that the EU will not back-down on the backstop and the UK Government’s strategy of trying to isolate Ireland has back-fired at every juncture.  It is therefore clear that if the UK wants to dilute the backstop, which is detested by many in Westminster, a lighter form of Brexit will be required. Below are some of the possibilities available;
    • Norway Plus / Common Market 2.0 – both of these options are broadly similar and essentially amount to the UK being within the European Economic Area (EEA) similar to Norway.  But, in addition, the arrangement would include agricultural products and the UK being part of a Customs Union.  As mentioned previously, this option has gained traction but the big drawback is that Freedom of Movement would have to be accepted, and as this was a major reason for the Leave vote in the first place.  It is unlikely to be favoured by many in the Labour party. Added to this, the UK would not have voting rights, would probably have to pay into the EU budget, and could not strike its own trade deals.  Therefore, it continues to be very difficult to see this arrangement being successful without some form of emergency brake on immigration as a minimum, even then it presents grave difficulties. 
    • Customs Union with the EU: this is  the favoured option by the Labour party as it would go some way towards addressing the Northern Ireland border but would potentially curtail free movement.  However, on its own, it would not prevent border checks on the island of Ireland as sanitary and phytosanitary (SPS) checks would still be required.  Unless the UK could agree some form of regulatory equivalence agreement with the EU, of the kind that has never been reached before, then Brussels will continue to insist on a backstop. It would also mean an independent UK trade policy for goods would be largely redundant.
    • Free-Trade Agreement with the EU: an accord similar to the CETA agreement with Canada is championed by many Brexiteers as the panacea to the current impasse and they claim that it will also address the Irish border problem.  A cursory assessment of the EU’s Official Controls Regulations (2017/625) would show that this is simply not the case, as SPS border controls would still be required on the island of Ireland.  Such controls would of course be unacceptable to the DUP and the famed technological solutions are years away (and some doubt whether they are feasible at all). 
  • Second Referendum: this is still the favoured option amongst many Remain MPs, however, as with all other options, there is not a majority in Parliament for this and the Labour leadership is lukewarm to say the least.  Even if a majority of MPs decided on a second Referendum, the path ahead would be fraught with difficulties.  Firstly, what question(s) would need to appear on the ballot box to reflect the now diverse range of opinions in the UK (from No Deal to No Brexit).  Secondly, it could lead to social instability as there would be heated opposition in some quarters and would at least entail another six months of uncertainty.  Some would argue that another Referendum, if framed correctly, could at least lead to a definitive answer (e.g. if Leave won, then the issue is dead for a generation).  However, all indications suggest that it would be another close vote, and if anything has been learned in the last few years is that the British public do not want more of the same, no matter what the outcome is.
  • No Deal: continues to be the default option and with 72 days until Brexit, its likelihood increases by the day, particularly if the House of Commons does not pass a cast-iron guarantee that No Deal will not happen. As outlined in previous issues, a No Deal has the potential to severely damage UK farming, especially as it may well eventually encompass a liberal trade policy with respect to imports.  On 16th January, the NFU has emphasised its view that a No Deal would be catastrophic for UK farming and most business associations agree with this view.  From an Irish perspective, a No Deal also presents a major dilemma.  If it does not introduce some forms of regulatory checks on produce coming in from the UK (including from Northern Ireland) in the event of a No Deal, then this may be viewed unfavourably by customers elsewhere in the EU and non-EU, who may in-turn place some additional controls on Irish produce. Such a development would have damaging ramifications for the Irish economy, whilst the re-introduction of a hard border would have severe social consequences. In such a situation, it is therefore likely that the Irish Government would first seek to introduce temporary measures along the border (citing safety concerns), similar to what was done during the foot-and-mouth crisis in 2001.  It could potentially keep these for weeks if not months in the hope that a more sustainable Brexit outcome could be achieved.  However, even such a temporary move is also likely to entail problems.
  • Extension to Article 50: all of the options set-out above contain unpalatable elements.  With the time relentlessly ticking towards the 29th of March and numerous Bills and secondary legislation still required to be passed by the Commons, the prospect of an extension to Article 50 grows by the day.  Rumours circulating in Brussels suggest that preparations are being made for a formal request by the UK for an extension and while a period of 3-months is doable (i.e. till early July) a longer period would present legal problems for the European Parliament if the UK is still a Member State and has no MEPs. Therefore, if an extension is to be accepted by the EU and its Member States, it will need to be coupled with a clear plan from the UK as to what form of Brexit or plan of action it could agree on which could be countenanced by the EU.

Overall, it now appears that an extension to Article 50 will be required and another attempt will be made by the Government to get some form of Withdrawal Agreement passed by the Commons.  It would appear prudent to do this after indicative voting to discern what sort of a deal would garner a majority, bearing in mind what would also be acceptable to the EU.  If the Government fails at the second attempt to pass a deal, much will then depend on Labour.  If it attempts another confidence motion and loses, will it call for a second Referendum?

Many questions remain. All the while, agri-food businesses have to try and cope with all of the uncertainty which does not show signs of dissipating just yet.

Brexit: More Tumult and Uncertainty

Brexit Options

To say the least, it has been a tumultuous month for Theresa May.  Despite reaching an accord on the Withdrawal Agreement and a Political Declaration on the Future Relationship with the EU in November, the Prime Minister’s plan has been faltering in recent weeks and culminated an eleventh-hour postponement of the meaningful vote on the proposed deal in Parliament on the 11th December.  Since then, she has overcome a confidence vote by Conservative MPs, but her position has weakened as a result. Following last week’s rebuttal at the European Council when the PM sought to obtain legal guarantees that the Irish backstop would only be temporary, there are serious doubts as to whether her proposed deal will be ratified by Parliament, even if the vote is delayed until mid-January.  In the House of Commons, there are now several schools of thought as to the end-point that the Government should seek in its relations with the EU.  These are summarised briefly below;

  1. No Deal –  the UK-EU relationship would be based on WTO Most-Favoured Nation (MFN) conditions.  As highlighted previously, this would mean tariffs on UK exports to the EU and would cause significant damage to agri-food trade both as a result of new trade barriers and the potential for the UK to unilaterally reduce tariffs on imports.  Some MPs are advocating a variant of this called a ‘managed No Deal’ where limited agreements with the EU are reached in areas concerning aviation for example.  This option is likely to lead to a significant economic shock both for agri-food and the economy generally.  It would also lead to a hard border in Ireland which would add a volatile political element to the economic uncertainty that would ensue.  Whilst a motion put forward by Dominic Grieve last month and approved by Parliament limits the chances of a No Deal, with time running out and current legislation still putting the UK on the course for No Deal as a default, the prospect of crashing out on WTO terms cannot be completely ruled out. 
  2. Canada ‘plus, plus, plus’ – leading advocates of this option include David Davis and Boris Johnson.  Whilst it would permit tariff-free trade in goods, non-tariff barriers would be a major issue particularly on the island of Ireland.  Therefore, without a backstop in place, the EU-27 will simply not agree to this.  Proponents of this arrangement have devoted scant attention to addressing Irish border concerns and the proposals they have put forward recently, which are closely linked with technology, have not addressed issues such as sanitary and phytosanitary measures which EU official controls law states requires controls at the border.
  3. The Withdrawal Agreement (with modifications) – this is what Downing Street is still aiming for but as alluded to above, the EU is lukewarm towards any modifications.  Whilst the EU-27 will countenance some ‘clarifications’ to the Political Declaration and backstop-related provisions of the Withdrawal Agreement (WA) in a separate document, it will not agree to re-opening the WA legal text itself.  Whilst this option would mean that the UK would lose its influence (vote) on EU regulations and as a result become a rule-taker, it would permit an open-border on the island of Ireland and would permit tariff-free goods trade between the UK and the rest of the EU.  As reported last month, it would involve some regulatory checks on GB-to-continental EU trade and would permit the UK to end free-movement, one of the key driving forces behind the Leave vote.  However, it is clear that the ‘indefinite’ nature of the Irish backstop is the major hurdle which many MPs object to.  That said, for the EU side, the backstop is seen as a vital insurance mechanism to apply ‘unless and until’ a better solution can be found to maintain frictionless trade on the island of Ireland.
  4. Labour Renegotiation – Labour has mentioned its ‘six-tests’ on numerous occasions which it would use to assess the Government’s deal, but these look to have been set-up from the start to reject any proposed deal that the PM put forward.  Labour appear to be proposing a Customs Union-type arrangement with the UK with a high degree of regulatory alignment (around Single Market matters) which it would see as obviating the need for a hard border on the island of Ireland.  However, Labour would seek a say on future trade deals that would be struck under this UK-EU Customs Union and it is also keen to curb free movement.  Once again, the EU is likely to have serious misgivings about these requests, particularly the latter as it would contravene its red line on the ‘indivisibility of the four freedoms’ (of the Single Market).  It is also likely that it would still insist on a backstop as an insurance arrangement.  Of course, for the UK itself, being locked into a (goods) Customs Union with the EU will limit its ability to strike free-trade agreements elsewhere as trade deals in Services tend to be very limited in scope.
  5. Norway ‘plus’ – as reported last month, this option has gained traction amongst some MPs and it is thought that some in Cabinet (e.g. Amber Rudd) would be in favour of it if Theresa May’s deal were to fail.  This arrangement would entail Norway’s EEA/EFTA model.  The ‘plus’ would involve agri-food and potentially a Customs Union (or ‘Single Customs Territory’) with the EU until alternative customs arrangements could be found to ensure that no hard border emerges in Ireland.  Of course, the big drawback with this option is that free movement would have to be accepted.  So, without some form of emergency brake being applied in the UK for a period of years, it will remain a challenge to get a majority in the House of Commons for this option.
  6. Remain in the EU – advocates of this option are calling for a second Referendum (‘People’s Vote’) and would involve withdrawing the Article 50 letter and remaining in the EU, subject to the Referendum ratifying that approach.  However, this option also has challenges.  Not least is what some perceive as the democratic deficit which would ensue if the 2016 result is overturned. Furthermore, there are also issues around what the question should be on the ballot paper.  Will it consist of some form of preference vote on three options (Deal, No Deal and Remain) as suggested by its lead advocate Justine Greening?  It would also likely lead to Brexiteers calling for a ‘best of three’ if Remain were to win. Of course, if a Leave option were to win, it would close the issue for a generation and society could at least move on and address other issues which badly require attention (housing, NHS, social care etc. etc.). 

It is clear that whatever course of action eventually gets chosen, difficult challenges will have to be overcome.  For more than two years, our Brexit articles have argued that judgement needed to be suspended until it was clear what a deal would entail, both in terms of Withdrawal but also in respect of the Future Relationship.  Whilst the current deal partially answers this question, insofar as it is clear what the backstop would involve, it is neither the UK’s nor the EU’s preferred option.  Parliament urgently needs to get its act together and work in the national interest to firstly coalesce on which option it would approve.  This will involve a deal of some description as there is simply not the will within Parliament for a No Deal. Options 2-5 above involve compromises and all arguably go against the ‘will of the people’ as expressed in 2016 in some form (e.g. continued acceptance of free movement, rule-taker, splitting the UK into two customs territories etc.).  However, with the result as close as it was in 2016, some form of compromise was always going to be needed.

Brexit – Key Dates in Coming Months

With all of the uncertainty at present, the following dates are worth bearing in mind as the Brexit drama unfolds;

  • Week commencing 14th January – the Government will bring the Withdrawal Agreement and Political Declaration before Parliament for a ‘meaningful vote’.
  • 21st January – deadline for the UK Government to have made a decision on whether to proceed with the PM’s deal.  If the Government has not presented the deal before then, powers for MP’s to influence Ministers’ next steps will kick-in.  Alternatively, if the Government is defeated on its meaningful vote deal, it would have 21 days to report back on what it believes the next steps should be based on the provisions of the 2018 EU Withdrawal Act.  If the Commons passes the deal, then the Government would put forward the EU (Withdrawal Agreement) Bill.
  • 11th March – according to some, this is the latest available date for the European Parliament’s vote on the Brexit deal, which is required before formal EU ratification.  The potential for an alternative special plenary session to vote on the Withdrawal Agreement cannot be ruled out either.
  • 21st – 22nd March – next European Council meeting and set to be the UK’s final Summit as a Member State.  It is at this point that a ratified UK-EU Withdrawal Agreement would be rubber-stamped.  Failing that, this would be the juncture that the UK could request a suspension, extension to, or revocation of, the Article 50 process.  The UK could also choose to delay its Article 50 notification at any time before 29th March.
  • Before 29th March – UK Parliament will have to pass the European Union (Withdrawal Agreement) Bill by this point, assuming that Parliament has approved it beforehand.
  • 29th March (‘Brexit Day’) – UK formally exits the European Union based on the current Article 50 timeline (at 11pm).  If a deal has not been ratified (by both UK and the EU) by this point, a No Deal would be the default as things stand.
  • After 30th March – assuming that the UK has an agreed Withdrawal Deal from the EU, fully-fledged talks on the UK’s Future Relationship with the EU could begin.  Until the UK has withdrawn, such formal talks are not permitted under EU law.
  • 18th April – last session of outgoing European Parliament.
  • 23rd – 26th May – European Parliament elections to take place across EU Member States.  If the UK decided to suspend/extend Article 50 in March, there are questions around what would happen to its representation at the European Parliament.
  • 2nd July – inaugural plenary session of the new European Parliament.  If Article 50 was delayed, and the European Parliament still had to vote on the Withdrawal Agreement, it would be after this point that a new vote could take place.

Thereafter, the next key dates to note are July 2020, by which point it is expected that a decision will be taken on whether the Irish backstop would apply, if the current Withdrawal Agreement were to be ratified. Alternatively, a decision could also be taken at this point to extend the Transition (Implementation) period which is due to end in December 2020.  For those who think that talk of Brexit would end on the 29th of March, there will be some disappointment as the process is set to continue on for many more years to come.

Trade Update – TRQs Split and EU-Japan FTA

UK-EU Proposed TRQs Split

One of the (many) issues that the UK and EU need to agree on is the split of Tariff-Rate Quotas (TRQs).  These allow a set quantity agricultural goods into the Single Market with  a lower-than-usual tariff applying to them.  With the UK splitting from the EU, these quantities need to be apportioned between the two parties.  This is necessary whatever form Brexit takes – even under a ‘no-deal’ scenario there will be a requirement for the UK to have an agreed schedule of TRQs lodged with the WTO.

On 7th December, the Permanent Representatives Committee (COREPER) of the European Council approved the split of the current EU import TRQs between the UK and the EU.  Both the European Parliament and the Council needs to approve this ‘apportionment’ before the Regulation enters into force by publication in the Official Journal.  However, it is also important to emphasise that it is not just a matter for the European Union (EU-27) and the UK to approve these TRQ splits, as the eventual adoption of these new TRQs will be contingent on agreement amongst other WTO members, some have whom have already opposed the UK-EU’s suggested approach.

The tables below provide a summary of the proposed splits for selected TRQs. For each TRQ, the share has been calculated based on the imports over a “recent representative 3-year period”.  It should be noted that, for a given commodity (e.g. poultry meat), there are additional TRQs which have not been shown as there are over 160 TRQs which have been split in a similar manner.

In terms of meat, the New Zealand sheepmeat TRQ (228Kt) has been evenly split between the UK and the EU and this is reflective of historical trade patterns.  Interestingly, 80% of Australia’s sheep meat TRQ (19Kt) would be allocated to the UK.  The UK’s shares of poultry and selected pigmeat import TRQs are also relatively high and reflects the fact that UK is not self-sufficient in these areas.  The British share of beef TRQs varies quite significantly but historical trading patterns with the likes of Australia remain evident as is the case with dairy products.

Table A: Proposed UK-EU27 TRQ Splits – Selected Meat and Dairy Products

Source: COREPRER analysed by The Andersons Centre

For cereals the UK’s proposed TRQ share is relatively low for most of the commodities shown, the notable exception is malting barley.  The UK’s proposed share of sugar and wine imports is also substantial. Arguably, this could present difficulties for the UK sugar beet sector in the future, particularly if the UK seeks to boost trade facilitation arrangements with non-EU countries such as Brazil and Indonesia.

Table B: Proposed UK-EU27 TRQ Splits – Selected Cereals and Other Products

Source: COREPRER analysed by The Andersons Centre

However, attention will now move towards WTO members to ascertain the extent to which the proposals will be acceptable.  One anticipates that some countries will object as they will perceive that they are losing the ‘option value’ of sending products into either the UK or the EU-27 in the future.  It is therefore likely that they will seek expanded TRQs to compensate for this perceived loss.  Whilst the appetite amongst the EU-27 to do this might be lukewarm, the UK may adopt a different view, particularly if it helps to reach Free-Trade Agreements with these countries at a later date.

EU-Japan Free Trade Agreement

On 12th December, the European Parliament ratified the EU-Japan Free Trade Agreement which is the largest ever negotiated by the European Union.  As reported in the July edition, the EU claims that this agreement could lead to an increase in agri-food exports to Japan of around €1 billion with dairy exports projected to double and more than 90% of Japanese duties on imports of European food products to reduce by 90% on Day 1 of application (which is expected to occur in February 2019).  The Free Trade Agreement brings together the two major players in the global economy representing about one-third of global GDP and over 600 million people.

Of course, the extent to which the UK might benefit from this deal is highly questionable in the context of Brexit.  However, the UK is keen to pursue a Free-Trade deal with Japan in its own right and has mooted the possibility of joining the Trans-Pacific Partnership (TPP) which is a trade agreement covering 11 countries including Japan, China, Australia and Malaysia.  Although trade deals with such countries are a positive development, given the geographic distances involved, they are unlikely to compensate for a significant loss in trade which could occur with the EU in the event of a hard Brexit.