Tag: Trade

Brexit – Future Relationship

Future Relationship Agreement

On 25th November, EU leaders agreed the Withdrawal Agreement (see accompanying article) in addition to a 26-page Political Declaration on the UK’s Future Relationship with the EU.  Although not legally binding, this Declaration turned out to be more substantial than the 5-7-page document rumoured before its publication.  That said, its contents unsurprisingly adopt a high-level approach given that Future Relationship negotiations have not yet formally begun.  Key points include;

  • Ambitious Partnership: the Declaration seeks to form parameters for a ‘broad, deep and flexible’ partnership spanning multiple areas including trade, security, and law enforcement.
  • Trade: no tariffs, charges or quantitative restrictions across all areas, with parties seeking to improve the Single Customs Territory (essentially a Customs Union) set-out in the Withdrawal Agreement.
  • Irish Backstop: linked with the previous point, parties stress their ‘determination’ to replace the Northern Ireland backstop with alternative arrangements.  These should ensure that the absence of a hard border on the island of Ireland are put on a permanent footing.
  • Trade Regulation: disciplines concerning technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) measures should go above and beyond respective WTO agreements.  This will be necessary to have any chance of achieving a frictionless border on the island of Ireland, or between Northern Ireland and the rest of the UK under a backstop arrangement. 
    • Technology: the Declaration acknowledges that technical solutions should be considered when seeking alternative arrangements to ensure that there is no hard Irish border.  However, as previously mentioned, such technologies appear to be several years’ away.
    • Regulatory checks and controls: in acknowledging the scope for technology and facilitative arrangements, it also highlights that the integrity of EU and UK markets and legal orders must be respected.  This reinforces the point that, even with advanced SPS and TBT arrangements, it will not completely obviate the need for regulatory checks on products of animal origin and live animals.  It also implies that a level of regulatory checks along the lines of New Zealand or Canadian arrangements with the EU will be required.
    • Competition: the document emphasises the need to ensure a level playing-field between the UK and the EU as there are concerns, on the EU side in particular, that once outside of the EU, the UK will seek to deregulate and gain a competitive advantage.
  • Migration and Travel: in the Withdrawal Agreement, the UK Government was keen to ensure that free-movement would end.  The Political Declaration echoes this, but mentions that arrangements for entry and temporary stay for specific business purposes will be permitted.  It is also intended to have mobility arrangements between both sides, based on non-discrimination and reciprocity between the UK and the EU.  The Common Travel Area between the UK and Ireland would remain unaffected. Building on the provisions of the Withdrawal Agreement, the status of EU migrants already residing in the UK should be relatively unaffected but future migration will be subject to restrictions.  Without an adequate agri-food migrant workers scheme, which encompasses full-time and seasonal workers, this is likely to make access to labour more challenging for businesses. 
  • Transport: there will be arrangements for continued connectivity across aviation, road and maritime transport.  Exactly what will be required for road hauliers to transport loads from the UK to the EU remains to be seen and is an important area to monitor from an agri-food trade perspective. 
  • Governance: a new overarching legal framework is envisaged with a Joint Committee to be established to oversee and manage the implementation of the Future Relationship.  The Declaration emphasises that both parties’ legal statues will be respected.  Any disputes that are unsolved by discussion and consultation would be referred to the Joint Committee which may seek input from an independent arbitration panels whose decisions would be binding on both parties.

Further information on the Political Declaration is available via: https://www.gov.uk/government/publications/withdrawal-agreement-and-political-declaration

Next Steps

The Withdrawal Agreement and Political Declaration will now be subject to ratification by both the UK and EU Parliaments.  The (first) vote in Westminster is due on 11th December.  At present, it looks highly unlikely that it will get passed as there is widespread opposition.  Many privately concede that a second Parliamentary vote will be required and it has a (somewhat) better chance of passing at that point.

All the while, there is momentum building for an alternative ‘Norway plus’ plan being put forward by Nick Boles MP.  As the name implies, the UK would be part of the Single Market (most likely via EFTA/EEA) but agri-food would also be included (agri-food is not part of the Norway deal).  Otherwise, it would not be possible to have frictionless trade on the island of Ireland.  Until alternative Customs arrangements are put in place between the UK and the EU, it is also likely that the UK would be part of a Single Customs Territory as envisaged in the Withdrawal Agreement.  This prevents the UK doing separate Free Trade deals with the rest of the world in the short term.  This plan has many attractions but the biggest issue is that the UK would have to accept free movement which, for many, was the main reason for voting Leave. Without some form of emergency brake on migration being applied for a period of time, it is difficult to see this option succeeding.

Brexit Impact

On 28th November, the Government published its estimates on how Theresa May’s Brexit plan would affect economic output.  It projects that, in 15 years time, using today’s prices, the UK would take a 3.9% hit on national income in comparison to staying within the EU.  These estimates were not modelled exactly on the Withdrawal Agreement provisions but were also partly based on the Chequers plan published during the summer.  Therefore, the Customs Union (Single Customs Territory) that now forms part of the Withdrawal Agreement was not explicitly modelled.  One anticipates that the Government could claim that this arrangement, although politically toxic to some, will mitigate a significant proportion of the GDP hit.

The projections also show that a Canada-style deal would result in a 6.7% hit whilst a No-Deal scenario would shave 9.3% off GDP.  If the UK kept frictionless trade and free movement (i.e. like the Norway plus option) the impact would be just 0.6% of GDP, whilst frictionless trade with migration restrictions would result in a 2.5% hit.

Overall, from an agri-food perspective, if the Withdrawal Agreement is ratified, there would be ‘little’ change for trade until the end of 2020.  Thereafter, regulatory checks of some description are likely to be introduced and these will have a cost impact if imposed.  In the past month, there has been significant progress on the path to withdrawal.  The next phase of the negotiations is likely to see more ‘national’ interests come to the fore from an EU perspective as the French President’s remarks on fisheries access have already alluded to.  All eyes are now on Westminster and the crucial December vote with all scenarios ranging from No-Deal to No-Brexit still in play.

Brexit Withdrawal Agreement

On 14th November, after ‘thousands’ of hours of negotiations, the UK and the EU finally reached an accord over the text on the Irish border enabling them to publish the draft Withdrawal Agreement.  Within hours of its publication, this 585-page legal document (see link below) led to the resignation of two Cabinet Ministers and at one stage, there were even rumours that Michael Gove would resign, having reportedly turned down the offer of becoming Brexit Secretary.  This would have added yet more uncertainty for the UK agri-food industry, particularly in the context of future agricultural policy, but at least the Defra Secretary is staying put for now.

The UK Government’s Chequers proposal (see August Bulletin) has been amended in some key areas.  The idea that, after the Transition period, a technology-based ‘Facilitated Customs Arrangement’ would be put in place to allow seamless trade was rejected by the EU.  Instead the UK will have to remain in a Customs Union with the EU until alternative arrangements are put in place that are acceptable to both sides.  There will be a review in July 2020 and if the EU is not satisfied, then the Transition Period will be extended.  This can only be done once, and the UK Government has stated that it should not be extended beyond 20222 (the date of the next General Election).

The key points of the Withdrawal Agreement include;

  • Backstop via a Customs Union – This is to avoid a hard border on the island of Ireland.  It will be achieved by a UK-EU Customs Union (Single Customs Territory) which will avoid the need for customs checks on the Irish Sea.  This Single Customs Territory will be temporary but will apply “unless and until” a mutually-agreed new trading arrangement between the UK and the EU is introduced which, itself, avoids the need for a hard border on the island of Ireland.  However, using a swimming-pool analogy, under this Customs Union arrangement, Great Britain (GB) would be at the shallower end whilst Northern Ireland would be at the deeper end, applying the full “Union Customs Code” and essentially remaining fully aligned with both the Single Market and the Customs Union. To ensure a level playing field, the UK commits to following EU competition rules (including State Aid) and to keeping some existing laws on labour, environment and taxation.  From an agri-food perspective, this would mean that potential policy tools such as deferred taxation arrangements as used in Australia would not be permissible.  Free movement of labour would also end so there would be additional regulatory steps that would need to be adhered to when recruiting from the EU, although visas for short trips would be easily obtainable.  With respect to agri-food trade the following points are also noteworthy;
    • Checks on GB to NI agri-food trade such as live animals (which already takes place today) and products of animal origin would take place on a limited basis.  Some commentators believe that this will involve an online transit declaration which could be submitted in advance of a shipment via a back-office, as well as risk-based checks of goods upon arrival at the destination. However, these provisions have yet to be confirmed. 
    • The UK-EU Customs Union would avoid the need for tariffs, quotas and rules of origin on UK-EU trade.
  • Financial Settlement – as previously indicated, the UK would honour all its financial commitments so that there would be no shortfall in the current EU budget as a result of Brexit.  This figure is estimated to be in the region of £39 billion, but some estimates from the National Audit Office indicate that the eventual figure could surpass £50 billion, as some payments (e.g. pensions) could continue to 2064.  However, most contributions would be complete by 2025.
  • Citizens’ Rights – existing residence and social security rights would be maintained for the 3 million EU citizens living in the UK and the 1 million British citizens living in the EU.  EU nationals will also be permitted to claim permanent residence in the UK and most family reunion rights would also continue.  Any legal issues would have to pay due regard to the European Court of Justice. This will at least give some certainty to many agri-food workers from the EU working in British agriculture, but getting access to new workers remains a major issue. 
  • Transition Period – as previously outlined, there would be a transition period (aka implementation period) until the end of 2020.  But this can be extended for a specified one-off period, subject to mutual agreement.  During the transition, the UK would continue to apply EU regulations in full but would no longer have a formal say or influence on the setting of these regulations.  If the transition extends beyond 2020, then additional UK payments to the EU budget are likely.  This has prompted much talk of ‘vassalage’ from hard-line Brexiteers. 
  • Governance – this will be administered via a complex set of arrangements drawing upon dispute resolution mechanisms (similar to the EU’s association agreement with the Ukraine), provisions to ensure that the ECJ has the final say on EU’s laws, and independent arbitration to resolve relevant treaty disputes.

The full version of the report is accessible via: https://ec.europa.eu/commission/sites/beta-political/files/draft_withdrawal_agreement_0.pdf 

Whilst the agreement has been approved by the UK Cabinet, it has led to a series of Ministerial resignations including the Brexit Secretary as alluded to above.  For an agreement such as this, there were always going to be difficult compromises, particularly considering the UK’s relatively weak bargaining power in the process.  It should be remembered that the UK’s population is 66 million versus 450 million in the rest of the EU; the EU’s economy is nearly six-times larger than the UK, and the UK’s exports to the EU are estimated at 13% of its GDP, whilst the EU’s exports to the UK are equivalent to 3% of its GDP.  Nevertheless, although the Article 50 process is heavily weighed in the EU’s favour, it can be argued that the UK has not played its hand particularly well – for example, by invoking Article 50 before it had worked out its negotiating position

Whilst the Deal is undoubtedly unsatisfactory to some (many?), it is certainly better than a No Deal scenario for the agri-food sector.  However, there is considerable doubt as to whether the agreement will ever be enacted, as Teresa May will have significant difficulties getting it through Parliament.  Labour, the Liberal Democrats, the Scottish Nationalists and the DUP have already indicated they would vote against the deal as it stands.  A sizeable portion of the Conservative party is also unlikely to back it.  The Prime Minister seems to have little room for manoeuvre.  Neither the DUP nor the European Research Group of Conservative Brexiteers are willing to cede any further ground and are more likely to call for the Prime Minister’s resignation. Arch-Remainers are unlikely to move either, although the Government might be able to sway some Labour MPs to vote for the Deal.  However, this is still unlikely to be sufficient and will likely necessitate some form of concession to milder-Remainers who might be persuaded to vote for the Deal if there is an option to change course at a later stage (i.e. during the Transition, including the option to re-join the EU).  But all of this is just speculation at this point and it is very difficult to see how the next few days will pan out, let alone the next few months.

All the while, the EU-27 are showing a relatively united front and are making arrangements to hold a special EU summit on 25th November so that Member States can formally agree the deal which would then be subject to votes in both the European and Westminster Parliaments.  Many more twists and turns lay ahead.

No Deal Brexit Preparations

NAO Report on No Deal Readiness

On 24th October, the National Audit Office (NAO) released its latest report on the UK’s preparations for a No Deal Brexit. Although the report’s scope examines the economy in general, the estimates provided indicate stark implications for the agri-food sector. Key findings include;

  • Between 145,000 and 250,000 traders would need to make customs declarations for the first time in the event of a no deal
  • HMRC estimates that it would have to deal with 260 million customs declarations per annum, as opposed to the current 55 million, nearly a five-fold increase.
  • 11 of 12 critical systems needing to be replaced or changed to manage the border were at risk of not being delivered on time and to acceptable quality. Several of these systems including the TRACES replacement system which would need to be developed by the UK to manage sanitary-related border movements are at major risk of not being delivered by Brexit day.
  • There is an elevated delivery risk due to the high interdependence between ‘at risk’ government programmes reliant on another ‘at risk’ programme. For example, seven of the most critical border systems are interdependent with the Customs Declaration Service (CDS) and/or its legacy system CHIEF (Customs Handling of Import and Export Freight); and all must be ready on day one for the border to operate as planned.
  • New infrastructure to track and physically examine goods cannot be built before March 2019. Without this, the UK will not be able to fully enforce compliance regimes at the border on day one. With approximately 100 working days until Brexit, this is unsurprising. 
  • Border Force intends to recruit 581 staff by March 2019 and expects to increase its staff in the months following. However, given uncertainty regarding the future regime, and the length of time it takes to recruit, security clear and train staff, Border Force acknowledges that there is a significant risk that it will not deploy all the staff it plans to recruit by 29 March 2019. The intended numbers of new recruits appears low in comparison with plans by Ireland and the Netherlands to each recruit approximately 1,000 extra customs staff in preparation for Brexit.
  • The most complex issues concerning the movement of goods at the border, such as arrangements to apply at the Northern Ireland and Ireland border as well as a system that will allow roll-on roll-off ferry ports and Eurotunnel to operate smoothly still need to be resolved.

As a result, the NAO warns that there will be an increased danger of criminals exploiting any perceived weaknesses or gaps in the enforcement regime. This could lead to an erosion of trust in UK agri-food produce. For example, if non-UK origin beef enters Britain illegally, at a lower price, and is then repackaged to give the impression that it is British beef (at a higher price), then regulatory authorities in both EU and non-EU countries will become very concerned. Given the substantial progress that the UK has made recently in opening markets such as China, a No Deal Brexit has the potential to undo a lot of this valuable work.

Further information on the NAO report is available via: https://www.nao.org.uk/wp-content/uploads/2018/10/The-UK-border-preparedness-for-EU-exit-Summary.pdf

No Deal Technical Notices

Separately, the UK Government has released several additional technical notices on preparations for a No Deal Brexit. Some notices were also published in August (see previous article) Several of the latest notices are directly related to agri-food and are briefly summarised below.

Farming and Food

  • Regulating Pesticides: the UK would establish an independent standalone PPP regime, with all decision making repatriated from the EU to the UK. This would help to ensure that a stable regulatory framework for pesticides is put in place from the point that the UK leaves the EU and would retain the two main directly applicable EU regulations in national law, through the provisions of the EU Withdrawal Act. This is intended to ensure that human and plant health standards continue to be upheld whilst making it as easy as possible for businesses to place products onto the UK market. Other points include;
    • All current active substance approvals, PPP authorisations and MRLs would remain valid in the UK upon departure in March 2019. Initially, there would be no policy changes, aside from technical amendments to make EU law applicable in a UK context. However, long-term the notice acknowledges that the UK could diverge from the EU in certain areas in due course. This point will be particularly relevant to decisions on glyphosate renewal for example.
    • After departure, all applications for products to be authorised in the UK would need to be considered via a national regime and applications for EU approvals would need to be made separately.
    • The Health and Safety Executive (HSE) would continue to operate as the national regulator. Applications under the national regime after Brexit would need to be made to HSE, in the same way as now.
    • Other processes carried out at an EU level including by the European Food Safety Authority (EFSA) would be converted into a national process and processed as part of a national regime if they were applicable to the UK. Decisions on MRL approvals currently undertaken at EU level would be replaced by a new UK statutory register in the form of an online database.
    • Importantly, to ensure that processes run smoothly, there would be an extension of three years to active substance approvals which are due to expire in the three years after the UK leaves the EU. Also applications being considered by the UK at the point of exit would continue to be progressed via a national regime.
    • Elements of the current regime, which rely on EU membership, would no longer be able to operate in a no deal scenario e.g. the arrangements whereby EU countries can choose to mutually recognise product approvals and also parallel trade permits. To address this, parallel trade permits in force at the point of exit would remain valid for a transitional period of two years after the date of exit, or the extant expiry date (whichever is sooner). After expiry, businesses would need to obtain authorisations for marketing and use of their products in the UK.
    • A transitional period for seeds which have been treated with PPPs authorised for that use in other EU countries would also be provided so that they could continue to be lawfully marketed at the point of departure from the EU and could continue to be placed on the UK market for a period of three years after Brexit.

Having a transition period of three years after Brexit is wise although some might question whether it is enough time to adapt, particularly given the timelines required to gain regulatory approval in some cases. Further information is available via; https://www.gov.uk/government/publications/regulating-pesticides-if-theres-no-brexit-deal/regulating-pesticides-if-theres-no-brexit-deal

  • Manufacturing and marketing fertilisers: again current domestic regulatory framework would remain in place but would be separate to the EU framework. There would be some implications for material labelled ‘EC fertiliser’ in accordance with the EU Regulation and sold in the UK:
    • There would be a suitable time-limited adjustment period during which ‘EC fertiliser’ could be placed on the UK market as now, to ensure continued supply. There would also be consultation with industry as to how long this time period needs to be so that UK or EU manufacturers would not have to change labels immediately. However, the Government envisages that it would be no more than two years.
    • There would be an option to use a new ‘UK fertiliser’ label for fertilisers placed on the UK market after Brexit, in accordance with the EU Regulation as converted into UK law
    • Upon the end of the time-limited adjustment period, fertilisers placed on the UK market would need to comply with the current domestic regime or with the requirements of the new ‘UK fertiliser’ regime.
    • The Government would also publish a new list of laboratories approved to test to the standards required for the new ‘UK fertiliser’ label.

The notice also claims that UK manufacturers would still be able to manufacture their products as ‘EC fertilisers’ in accordance with the EU framework and UK companies could still export ‘EC fertilisers’ to the EU. However, exports would have to ensure that they comply with applicable EU regulation, including the requirement that the manufacturer is established within the EU, and that any sampling required is undertaken by an EU-approved laboratory. The notice also claims that there would be no material change for users of fertilisers as long as fertilisers that are marketed meet the requirements set-out. Further information is available via:  https://www.gov.uk/government/publications/manufacturing-and-marketing-fertilisers-if-theres-no-brexit-deal/manufacturing-and-marketing-fertilisers-if-theres-no-brexit-deal

  • Plant variety rights and seed marketing: EU plant variety rights granted up to the point of departure, including those held by UK businesses, would continue to be recognised in the remaining 27 EU countries. Those rights would also automatically be recognised and given protection under UK legislation, without rights holders needing to take any action. For applications that have been applied for but not approved by March 2019, an application for rights in the UK would need to be made to APHA, following the normal process for UK plant variety rights, and using the same priority date and DUS tests. New applications from that date would require two separate applications (one for UK and another for EU-27). For protection of rights after departure, a separate application would need to be made to the APHA in addition to the EU equivalent.

For seeds and propagating material, varieties registered solely via UK National Listing would no longer be listed on the EU Common Catalogue and would not be marketable in the EU. To ensure that UK product could be marketed in the EU, breeders would have to ensure that the variety is listed on the EU Common Catalogue and the seed would have to be certified by an EU-approved certification body. Whilst the UK will apply to the EU to have its certification processes recognised as equivalent, this recognition cannot be guaranteed upon departure and may take 12 months to get approval. Further information is available via: https://www.gov.uk/government/publications/plant-variety-rights-and-marketing-of-seed-and-propagating-material-if-theres-no-brexit-deal/plant-variety-rights-and-marketing-of-seed-and-propagating-material-if-theres-no-brexit-deal

  • Breeding animals: upon departure, UK-recognised breed societies and operations involved in live animals and germinal products trade would no longer be recognised societies or operations in the EU and therefore would be ineligible to enter their pedigree breeding animals into an equivalent breeding book in the EU and would have no right to extend a breeding programme into the EU. However, the EU has stated that breeding bodies meeting its requirements will be permitted to make entries as a third country but that animals would need to be accompanied by a zootechnical certificate. Defra is making preparations to enable zootechnical stakeholders to be listed as approved third country breeding bodies with the EU Commission so that thereafter these bodies can issue zootechnical certificates. Arrangements for EU-registered breeding bodies operating in the UK would not change initially and would have access to the UK in the same way as they do now. For further information visit; https://www.gov.uk/government/publications/breeding-animals-if-theres-no-brexit-deal/breeding-animals-if-theres-no-brexit-deal 

There are also additional notices related to;

Whilst comment has not been made on all of the technical notices related to agri-food trade, the notices examined above, as well as the notices covered in August, reveal the eye-watering scale of the challenge facing UK Government and businesses if a No Deal Brexit comes to pass. In addition to the Government not being ready as reported by the NAO above, it is apparent that businesses are not prepared either. At a Brexit Select Committee hearing on 24th October, it was suggested that businesses have had more than two years to prepare for a potential No Deal and should have been doing more in terms of preparation. Given that the Government’s initial batch of technical No Deal notices were only published from August, comments such as this are unjustified. Businesses are facing three or more different scenarios by March. To adequately plan for a no deal would require large investments in many cases which would be wasted in the event that a deal was struck. Businesses should not be blamed for the situation that the country now finds itself in. The Government needs to continue its focus on achieving a smooth and orderly Brexit process and to avoid a No Deal scenario in March 2019. 

Brexit Negotiations

In recent days, it has been reported that the Brexit negotiations are entering their final phases with respect to the Withdrawal Agreement (Phase 1) and the accord is now at 90% or 95% completion, based on the views of Michel Barnier and Theresa May respectively. Whilst the October European Council passed without the discord witnessed in Salzburg, it is evident that the Irish border remains the crucial stumbling block, and that the success or failure of the negotiations, hinges on finding a satisfactory solution (or ‘fudge’) to this intractable issue.

For some, the Brexit talks are now entering their end-game. However, given that any Political Declaration will only have limited references to the future UK-EU relationship, the analogy of a football match about to enter into stoppage time of a first-leg European tie, might be more appropriate. That said, we do not know how long the stoppage time will last – the EU decided to refrain from announcing a special European Council in November as it thought that there was insufficient progress to merit such a move, and instead, it could be December before a Withdrawal Agreement is reached.

Although football analogies can be useful to explain the current situation at a high-level, they have their limits, particularly in terms of explaining the Irish border question (backstop). In recent weeks, Michel Barnier has sought to de-dramatize the backstop by suggesting that only agricultural and food products would need to be checked upon entry into Northern Ireland in a backstop scenario. These would in effect be an extension of the checks on live animals which already take place in Larne port for example, but the scale would have to be increased significantly. This of course is unacceptable to the DUP, and the UK Government by extension.

Instead, the PM is proposing a UK-wide backstop. This concept is uncomfortable for many Brexiteers as they perceive it as ceding control to the EU. They insist that any such arrangement needs to be time-limited. It also draws criticism from those in the EU-27/Brussels side who emphasise that they are only willing to extend special allowances to Northern Ireland, unless of course that the UK opts to remain in a Customs Union with the EU. What is clear is that the EU side requires a backstop “unless and until” an alternative arrangement is in place that obviates it as a means to maintain frictionless cross-border trade on the island of Ireland. There is also some openness to extending the transition (implementation) period in order to facilitate this, although whether this is by a few months or by a year or more remains to be seen.

There are also reports that the EU is ready to offer a UK-wide customs union arrangement with the EU as a way around the backstop issue. This would have to be outlined in a separate treaty to the Withdrawal Agreement which will continue to have a backstop, albeit with the language toned-down significantly. This move is seen by some as a significant compromise by the EU, which has made few concessions thus far in the negotiations. However, on its own, it is unlikely to satisfy the DUP and may require further commitments from the UK Government that the backstop will not be activated in the future. Furthermore, a customs union on its own may be insufficient to avoid regulatory checks (e.g. sanitary and phytosanitary inspections) on channel ports and would need to be accompanied by a regulatory equivalence agreement (Common Rulebook) to minimise these. 

Perhaps now is the time for those who advocate the use of technology to obviate the need for a backstop to come forward and develop workable solutions? There has been a lot of theoretical talk  about technology, but there is limited evidence that it is near being capable of providing practical solutions to help to address this issue. It is also worth remembering that the Government’s record with IT systems is poor as those who have been through the online BPS payments issues in recent years would attest. Whilst not ruling out technology’s role, it is clear that such technology needs to be tried, tested and trusted by both the UK and the EU before large-scale deployment. Even in that event, it is highly likely that the UK will have to maintain ongoing alignment with the EU in a manner that is akin to harmonisation (i.e. both the processes underpinning the product standards and the standards themselves will need to be recognised by the EU and the UK as being equivalent). Where things currently stand, it will be several years before technology is capable of addressing such border control issues. In the meantime, a transition (UK in a customs-union type arrangement) and/or backstop will continue to be required.

Across several agri-food supply chains, it is becoming increasingly apparent that if clarity is not provided on the Withdrawal Agreement and Political Declaration by December, decisions will start to be implemented which are likely to have negative implications for UK agri-food for many years to come. Already, key investment decisions are being deferred and businesses cannot continue to operate in an environment where there are three or more drastically different scenarios which could come to fruition in the next 5 months. The impasse is already affecting competitiveness and productivity. Agri-food businesses need to plan 2-3 years ahead, for most operations, and it would be helpful if some clarity could at least be provided until 2020/21. 

Government No Deal Brexit Notices

The Government has stepped-up its preparations for a ‘No Deal’ Brexit.  On 23rd August it published 25 notices setting out what UK businesses and other stakeholders need to consider in the event of the UK leaving the EU without a comprehensive agreement in place.  Over the coming weeks, additional technical notices will be published.  In total, over 80 notices are expected.  These can be found at; https://www.gov.uk/government/collections/how-to-prepare-if-the-uk-leaves-the-eu-with-no-deal

The documents cover a wide range of topics spanning medical science, research, taxation, and workers’ rights, in addition to farming and international trade.  The key points from a food and farming perspective are set out below.

Agri-Food Production (incl. Labelling) and Funding

  • Farm Payments – as previously communicated, the levels of cash funding will continue until the end of this Parliament (expected to be 2022) with all EU legislation as it currently stands being transposed into UK law.  All rules and processes will remain in place until Defra and the devolved administrations introduce new agricultural policies, either through the Agriculture Bill (due in Autumn) or via devolved legislation.  Click here for the Notice on farm payments.
  • Rural Development Funding – as outlined previously, Government funding agreed before the end of 2020 will be maintained over the lifetime of any agreement (i.e. after 2022 if applicable).  However, after 29th March 2019 under No Deal, Rural Development schemes would be funded directly by the UK Government via existing national and local arrangements.  Operationally, there would be no substantive change for farmers, land managers or rural businesses.  For more details, click here.
  • Producing and Processing Organic Food – from a UK perspective, the same processes would remain in place as currently exist.  This includes maintenance of existing standards on labelling and food production, UK organic control bodies certifying British organic produce, recognition of third countries currently equivalent to EU and continued acceptance of EU’s organic products “at the UK’s discretion.”  However, as the EU would treat the UK as a third country, there would be changes including;
    • logos and packaging – UK organic operators would no longer be permitted to use EU organic logo, but they could continue to use the UK control body’s own organic logo.  Defra is investigating the development of a new UK organic logo.
    • exporting as organic to the EU – could only be done if business is certified by an organic control body recognised and approved by the EU to operate in the UK.  This means UK organic control bodies will need to apply to the EU Commission for recognition.  However, they cannot do so until the UK becomes a third country (in March 2019) and the process is estimated to take 9 months.  Whilst efforts are underway to speed-up this process, including the introduction of an equivalency agreement with the EU and for the EU to accept applications before March 2019, this would present a major challenge to UK organic exporters.  More details available here.
  • Genetically Modified Organisms (GMOs) – no significant implications for UK stakeholders.  All current EU legislation would be transposed into UK law.  Regulatory decisions on GMO trials would be made as they are now on a devolved basis.  Any existing EU decisions authorising marketing of GMO products would be applicable on Brexit Day 1 until current expiry date.  Thereafter, any decisions on marketing of GMO products would be made by the UK authorities.  For UK exports of GMOs to non-EU countries the rules in EU Regulation 1946/2003 as converted to UK law would continue to apply. See here for more detail.

International Trade

  • Trade Remedies – these enable WTO members to operate a trading safety net and protect domestic industry (usually via additional import duties) from injury caused by unfair trading practices (e.g. subsidised imports, dumping etc.).  As the UK adopts an independent trade policy after Brexit, responsibility for overseeing this area would transfer to the UK Trade Remedies Authority (TRA) which would be operational by March 2019.  After Brexit, UK businesses would need to contact the TRA instead of the EU Commission for any complaints relating to trade remedies.  In the lead-up to 29 March 2019, any new complaints raised by UK businesses would need to be lodged with the TRA in parallel with the EU Commission, and thereafter, with the TRA only.  Further detail on how the TRA would work is available here.
  • Trade with EU under No Deal – as one would expect, this is one of the more substantive Technical Notices (accessible here) and outlines the steps businesses should take before and during trade (import/export) with the EU under a No Deal scenario. The UK Government advises that businesses should take the following actions to prepare for a potential No Deal;
    • understand what the likely changes to Customs and Excise procedures will be to their businesses (more detail in link above)
    • take account of the volume of their trade with the EU and any potential supply chain impacts such as engaging with the other businesses in the supply chain to ensure that the necessary planning is taking place at all levels. The first part of this action should have been undertaken shortly after the Brexit vote. Supply chain planning is trickier and if No Deal occurs in March, there are limitations to what businesses can do at this stage to plan
    • consider the impact on their role in supply chains with EU partners.  If the UK and the EU do not have a Free Trade Agreement (FTA) in place in a ‘no deal’ scenario, trade with the EU will be on non-preferential, WTO terms.  This means that Most Favoured Nation (MFN) tariffs and non-preferential rules of origin would apply to consignments between the UK and EU
    • if necessary, put steps in place to renegotiate commercial terms (e.g. INCOTERMS) to reflect any changes in Customs and Excise procedures, and any new tariffs that may apply to UK-EU trade
    • consider how to submit customs declarations for EU trade in a ‘no deal’ scenario, including whether the services of a customs broker, freight forwarder or logistics provider are needed, or alternatively secure the appropriate software and authorisations
    • register for the HMRC’s EU Exit update service via the GOV.UK website
    • prepare to register for an UK Economic Operator Registration and Identification (EORI) number, although businesses do not need to do anything now as further information will be available later in the year
    • decide the correct classification of goods (i.e. appropriate HMRC commodity code) in advance of any shipments and when making customs declarations (after Brexit) ensure the correct value of goods is entered
    • check whether your business needs to apply for import or export licenses for trade with the EU (as a third country)
    • for carriers (e.g. hauliers, aircraft operators), ensure that the appropriate Safety & Security declarations can be made for UK-EU shipments
  • This notice also mentioned a series of mitigating actions that businesses could consider taking. These include;
    • customs warehousing – allows businesses to store goods with duty or import VAT payments suspended.  Once goods leave the warehouse, duty must be paid unless the business is re-exporting, or moving goods to another customs procedure. The warehouse must be authorised by HMRC.  This may be a worthwhile first step for businesses to take and further information on how to do this available here
    • inward processing – allows businesses to import goods from non-EU countries for work or modification in the EU.  Once this has been completed, any customs duty and VAT due must be paid, unless goods are re-exported or moved to another customs procedure, or released to free circulation. This could be particularly applicable for cross-border trade on the island of Ireland but will entail additional bureaucracy. (More detail here)
    • temporary admission – allows business to temporarily import and or/export goods such as samples, professional equipment or items for auction, exhibition or demonstration into the UK or EU.  As long as the goods are not modified or altered while they are within the EU, the business will not have to pay duty or import VAT
    • authorised use – allows a reduced or zero rate of customs duty on some goods when used for specific purposes and within a set time period.
  • Classifying Goods in the UK Trade Tariff – sets out the obvious point that anyone trading between the UK and the EU will be subject to customs procedures under No Deal, including the potential payment of duties. The detailed information is accessible by this link with key points below.
    • for imports into the UK, any tariff rates (i.e. under the UK Trade Tariff) will be based on the UK schedule that it submits to the WTO (a draft schedule is currently with WTO members for review).  Based on comments from those who have read this schedule, it appears that the tariff rates are essentially copied and pasted from the existing EU schedule (i.e. the EU’s Common External Tariff).  However, the UK will have the right to amend those post-Brexit or could choose to apply a lower tariff as long as it is applied fairly to all WTO members (i.e. under MFN terms)
    • for UK exports to the EU, the EU’s Common External Tariff (CET) will apply which as readers will know from previous articles is prohibitively high for some agri-food commodities
    • the UK intends to continue offering unilateral preferences to developing countries, and to seek to transition all EU Free Trade Agreements for Brexit Day 1 in order to ensure continuity for both goods imported to the UK, and for UK exports.  Further information on this point will be captured in a separate Trade Continuity Technical Notice
    • the UK does not immediately plan to change the classification of goods in a No Deal scenario meaning that UK 10-digit commodity codes for imports and 8-digit codes for exports will remain the same, except for a few exceptional standards where codes may need to change to ensure continued alignment with international standards for example
    • the Taxation (Cross-Border Trade) Bill provides the legislative powers for HM Treasury to establish a new UK trade tariff.

Taxation and VAT

  • VAT for businesses – is one of the most complex areas associated with Brexit.  Under a No Deal scenario there would be significant changes for businesses (click here for more details).  The UK Government intends to manage this by;
    • introducing postponed accounting on import VAT on goods brought into the UK.  This means that registered businesses could account for import VAT via their VAT return as opposed to paying upon arrival of goods at the border.  Importantly, under WTO MFN principles, these rules would be equally applicable to imports from the EU and non-EU countries.  Customs declarations and payment of other duties would still be required as set-out elsewhere.  This is a significant measure by the UK Government in a bid to minimise the amount of bureaucracy required under No Deal.  However, it also opens-up the possibility of increased “missing trader” fraud where goods enter the UK and circulate freely, while traders go missing and never pay the VAT due.  VAT-related fraud is already a major challenge for UK authorities and this proposal potentially exposes the UK further.
    • keeping the NOVA system for notification of vehicle imports into the UK.
    • employ a technology-based solution for goods valued under £135 to collect VAT from overseas businesses when selling into UK.  For goods over £135 VAT will be collected from recipients in similar manner to present arrangements for collecting VAT from non-EU countries
    • For exports to EU businesses, as a third country, the UK would no longer need to complete an EC sales list, but would need to retain proof that goods have left the UK. The Government also advises that UK businesses check with individual EU Member States on VAT arrangements as value-added tax would become due at the border upon export into the EU as rules can vary between Member States.

State Aid and Workers’ Rights

  • State Aid – the existing provisions of EU law (as transposed into the UK Statute) would continue to apply.  However, the Competition and Markets Authority would take over state aid regulation within the UK and would apply to all businesses with operations in the UK (click here for more details).  This would mean that from that point;
    • UK public authorities will need to notify state aid to any undertaking, through either the block exemption or through a full notification to the Competition and Markets Authority instead of the European Commission
    • existing approvals of state aid, including block exemption approvals, will remain valid and will be carried over into UK law under the Withdrawal Act
    • any full notifications not yet approved by the Commission should be submitted to the Competition and Markets Authority
    • any complaints from businesses about unlawful aid or the misuse of aid should be made to the Competition and Markets Authority. Further guidance will be published by the Competition and Markets Authority in early 2019.
  • Workers’ Rights – all existing EU employment legislation will be transposed into UK law.  There may be changes to the protections afforded to UK employees working in the EU-27 due to variations in how EU law is applied in each Member State.  There could also be changes to European Works Councils if there is no reciprocal agreement between the UK and the EU.  See here for more information.

Whilst the above ‘summary’ is quite long, it illustrates that there are going to be major repercussions of leaving the EU without a deal.  For readers who have banking, insurance or financial services-related interests in the European Economic Area (EEA) or transact with companies based in the EEA, they should also review this guidance (accessible here).  The Horizon 2020 Technical Notice should also be reviewed by organisations receiving funding under this mechanism and there is also separate guidance for organisations receiving funding through other EU-funded programmes (separate to Horizon 2020 and farming-related programmes) which can be accessed here.  Further notices (50-60 expected) are anticipated in the coming weeks where problematic areas such as Port Health will be addressed.

If a No Deal comes to pass, there is little doubt that business costs will rise, particularly when trading with the EU and there is the potential for major disruption to supply chains.  In the medicines sector for instance, the UK Government is advising six weeks’ of contingency stocks to deal with possible bottlenecks. In agri-food, there is already increased pressure on storage and given the highly perishable nature of some products, the effect of a No Deal would be even more pronounced.

It may appear to some that the No Deal Notices are rather alarmist and that it is perhaps a ploy by the UK Government to steer people towards an arrangement similar to Chequers proposals of last month. That said, the threat of a No Deal is real and needs to be planned for.  Three years’ ago, the odds of voting for Brexit were 3:1 (i.e. one in four chance) and it occurred.  As mentioned previously, businesses and policy-makers need to prepare for the worst whilst striving for the best deal possible.  To that end, The Andersons Centre is hosting a webinar on 19th September which will provide further insights on how to prepare for a No Deal and steps that should be undertaken when making contingency plans.  This will include suggested practical actions that businesses should take now and what is required in terms of contingency planning. Further details are available via: http://theandersonscentre.co.uk/webinars/

UK Export Strategy Launched

On 21st August, the UK Government launched its Export Strategy which seeks to raise exports as a percentage of GDP from 30% to 35% as part of an initiative which seeks to make Britain ‘a 21st century exporting superpower’.  Key points include;

  • Establishment of a £50 billion UK Export Finance (UKEF) fund – to provide loans and insurance support to businesses as they seek to grow their export business.  However, thus far, the Government has committed £22 billion of this amount.
  • Suite of online tools to help businesses to export – including a tool enabling businesses to submit non-tariff barriers that they face.  It is planned to host such tools within “great.gov.uk” as a single digital platform in a bid to facilitate domestic growth as well as supporting export capacity-building across UK supply-chains.
  • Peer-to-peer learning – is to be put at the heart of the process in order to encourage and inspire more businesses to export as both the Government and trade associations (rightly) believe that more regional UK businesses have the capacity to export if the requisite support is available.
  • Alignment with the UK Industrial Strategy – this was launched earlier this year.  In the agri-food sector, there will also be a linkage with the sector deal for Food and Drink Manufacturing, which industrial representatives are currently negotiating with Government departments, in order to grow agri-food exports more generally.

When launching the Strategy, the Secretary for the Department of International Trade (DIT) Liam Fox noted that the food & drink sector has strong export potential and cited recent efforts in encouraging China to allow imports of British milk.  A noteworthy remark however that he made however was that “free trade agreements will give you greater market access, but so will unilateral liberalisation”.  Whilst it must be acknowledged that this was mentioned in the context of removing non-tariff barriers which he sees as a greater impediment to exports, there will be concern amongst some that agri-food sector could be sacrificed at the expense of other industries (e.g. automotive).  Indeed, looking through the Export Strategy document in further detail (link below) shows that the food sector was only mentioned once (automotive and artificial intelligence (AI) feature much more prominently).

Overall, the Export Strategy does represent a positive step forward with respect to developing exports in non-EU markets.  However, the big elephant in the room is Brexit and safeguarding the UK’s No. 1 export market (accounting for nearly 50% of goods trade) has to be a cornerstone of achieving 35% of GDP exporting target.  Rather disappointingly, no timeline was mentioned in conjunction with this target. Surely, one of the keys to a successful strategy is to have an ambitious (but achievable) timeline?  The Food Harvest 2020 and Food Wise 2025 strategic initiatives put forward by Ireland in recent years point the way in this regard.  However, the proof of any strategic initiative is in its implementation and only time will tell on that front.

Further information is available via; https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/735734/17814_Export_Strategy_brochure_web_v26.pdf  

Brexit Update

In what is becoming a familiar trend, the Brexit process is becoming increasingly turbulent with civil war in the Conservative party and the stakes being raised in negotiations with Brussels over the prospect of a ‘No Deal’ Brexit.

The publication of the Chequers White Paper changed the dynamic with Brussels insofar as there was finally a detailed paper on the table which the EU could negotiate on.  However, the sands have shifted in Westminster yet again following last week’s Commons debate on the Customs Bill.  Four key amendments were tabled by Conservative Brexiteers which are seen by some as an attempt to undermine the Chequers White Paper:

  1. Customs Duties’ Collection – bans the UK Government from implementing its plan to collect EU customs duties after Brexit unless the EU agrees to collect tariffs on behalf of the UK. The EU has already made it clear that it would oppose such an arrangement, something which is already conceded by the UK Government in its White Paper.
  2. New Customs Union with the EU – prevents the UK from entering into a post-Brexit customs union with the EU, without introducing a specific new piece of (primary) legislation.
  3. VAT regime – requires the UK to operate a separate regime to the EU.
  4. Northern Ireland – makes it illegal to have a customs border within the UK, thus seeking to rule out a hard border on the Irish Sea between NI and GB.  The Prime Minister has already made this commitment, as the UK Government’s opposition to the EU’s proposed backstop is well known. Notably, this amendment did not preclude a regulatory border as Northern Ireland already operates within a separate epidemiological area to the rest of the UK.

Of the four amendments, those relating to customs duties and VAT are the most problematic.  On customs, Downing Street is maintaining that the approach is consistent with its White Paper because it envisages that money from tariffs will flow both ways.  However, the White Paper has not provided much detail on how this would work aside from a vague reference to using a formula to govern flows of money based on trade patterns between the UK and the EU-27.

The situation regarding VAT is potentially more serious as it withdraws the UK from the EU’s VAT administrative system.  This could mean that authorities would have to impose a hard border to check if the proper tax has been applied to goods crossing the border.  This will be most problematic on the island of Ireland where there is a 500 kilometre land border.  If the UK chose not to impose a hard border, it would be exposed to massive fraud (smuggling) and tax evasion.  One possible way to negate this is for the Government to seek agreement from the EU to UK participation in its VAT information sharing arrangements, which would need new parliamentary legislation and would add further complexity, particularly because the EU would likely insist on ECJ oversight.

Although the four amendments complicate an already fraught position for the UK, the reality is that the Chequers White Paper is more of an opening gambit in the negotiations with Brussels.  What is crucial for the UK now is to increase the pace of the negotiations with Brussels and to pay attention to the sequencing which it has already agreed.  This requires the UK and the EU to firstly agree a Withdrawal Agreement, a legally binding treaty, which will include a backstop on Ireland.  This will also be accompanied by a Political Declaration setting out the future direction of the UK-EU relationship.  The details underpinning the future relationship would then be negotiated and agreed during the transition period.  Undoubtedly, the UK-EU negotiations are going to require further compromises.  If the terms of the negotiated deal go against existing domestic UK legislation, then the British Government will simply have to change the legislation.  So, in other words, the four amendments and key elements of the Chequers White Paper could be overturned at a later juncture if required.

That said, as the stakes get higher in the negotiations, the chances of a No Deal (whilst still less likely than a negotiated settlement) increase.  It is prudent that agri-food businesses start seriously planning for the prospect of No Deal.  At the business level, steps to consider include:

  • Contingency stocks – there is increasing evidence that businesses are starting to build contingency stocks to smooth over extra delays which could result from border checks being re-imposed.
  • Training – boost efforts to train-up staff on customs and official controls issues and procedures which must be followed if the UK is trading with the EU as a third country under WTO trading conditions.  Some of this knowledge is likely to be useful anyway once the eventual UK-EU trading relationship is finalised and will be applicable for businesses seeking to expand markets beyond the EU.
  • Licensing – ensure that UK businesses have undertaken the steps necessary to ensure that they can continue to export to the EU-27.  This could include providing proof of previous trade with EU Member States.
  • Mitigating tariffs – most businesses by now should know what the default EU Common External Tariffs are for the products they supply into the EU.  What is perhaps less well-known are the Tariff Rate Quota (TRQ) options potentially available to mitigate the impact of tariffs.  It should be noted that the TRQs available to the UK are limited and British businesses would be competing with other countries for access.
  • Managing cash flow – if UK businesses need to start lodging securities (e.g. licensing securities) with EU-27 authorities as well as potentially paying VAT on cross-border consignments, then cash flow will have to be carefully managed, particularly if goods are delayed in transit and payments by customers get delayed.

For policy-makers, actions to consider to help businesses would include:

  • Recruiting additional customs and border control staff – the UK Government has already started this process but faces competition from the likes of the Netherlands and Ireland which are increasing their recruiting efforts significantly.  In addition to customs staff, the need for veterinary staff is evident.  Incentives to encourage veterinarians working in small animal veterinary practices to assist with implementing official controls should be considered, even if they work on a part-time basis.  As in parts of the US, programmes to part-subsidise tuition fees for veterinary students if they commit to a period (e.g. 5 years) of working on border controls or associated duties in meat plants should also be examined.
  • UK-EU TRQs – given that the close historic trading links between the UK and the EU, a case should be made to the WTO to introduce new UK-EU TRQs that would reflect the historical trading patterns between both parties in the event of a No Deal.  Whilst this would not eliminate friction, it would go a long way in addressing tariff-related issues that could arise whilst simultaneously protecting farming livelihoods.  Admittedly, there may be some opposition within the WTO on this, but it is worth pursuing given the potentially exceptional circumstances of a No Deal Brexit.
  • Official controls and associated checks – given that UK and EU standards would essentially be the same on Day 1 of Brexit, there are grounds for UK exports having a lower frequency of physical checks for products of animal origin (e.g. 1% for sheep meat) than the EU’s default rates (20% for sheep meat).  Currently, New Zealand enjoys a 1% physical check rate given its closeness to EU standards, so there is a precedent.  This would work in both directions UK-EU and EU-UK as long as standards didn’t diverge and would help to lower the regulatory burden considerably.  This arrangement could also include reciprocal recognition of existing UK (and EU) licenses and authorisations so that existing trading patterns could continue and upheaval is lowered as much as possible.
  • EU-27 employees – grant all existing EU-27 citizens and residents in the UK something akin to settled status.  This will require clear and rapid communication to them, to their employers and their landlords to clarify their rights and obligations.  This would at least give businesses some degree of certainty that existing employees could continue to work in the UK whilst giving workers and their families the peace of mind they require to continue to be productive.

It is worth emphasising that the likelihood of a No Deal scenario is still relatively low and that an extension of the Article 50 process (of around 3-4 months) is deemed by experts in Brussels and elsewhere as being more probable if a negotiated deal was not reached in the time available.  However, as an industry which has been through many crises in the past, it is always prudent to prepare for the worst case scenario whilst striving for the best outcome possible.

EU/Japan Economic Partnership

On 18th July, the EU-Japan Economic Partnership Agreement was signed in Tokyo, thus finalising negotiations on a major new free-trade deal for Europe.  The EU Commission is claiming that this is another major success and pointedly mentions that it is a powerful signal that cooperation, not protectionism, is the way to tackle global challenges.  The deal still needs to be ratified by EU legislatures over the coming months.  Key points include:

  • Bilateral trade – offers substantial opportunities to further expand EU’s exports to Japan, estimated at €86 billion per annum (€58 billion for goods and €28 billion for services).
  • Customs duties – the deal seeks to remove €1 billion worth of duties which affect both European exporters and consumers.
  • Agri-food trade – the EU claims that its exports of processed agri-food to Japan could increase by more than half (circa €1 billion increase), with dairy exports potentially doubling.  The agreement will see Japan eliminating duties on more than 90% of EU agricultural exports from day one.  Current Japanese tariffs on EU food and drink products are 38-40% for cheese and 38.5% for beef.  For products that are too sensitive for Japan to remove duties completely, duty-fee quotas or reduce duties for EU produce will be increased.
  • Geographical Indications (GIs) – the EU wants Japan to recognise 205 GIs, so that only products with this status will be allowed to be sold in Japan under the corresponding name.  This list includes Scottish Farmed Salmon, West Country farmhouse Cheddar cheese, White Stilton cheese / Blue Stilton cheese and Scotch Whisky.
  • Food standards – the EU will continue to have the right to apply the precautionary principle and will apply its own standards to all goods and services sold in Europe.  For example, any food, clothing, or cars coming from Japan to the EU must respect all EU rules.  The deal also permits the EU to set higher standards for product or food safety, and higher levels of protection for labour or the environment, if it so wishes. T his, once again, emphasises the EU’s determination to continue to uphold its standards when trading internationally and is a signal to the likes of the US that the EU will not accept lower standards with respect to agri-food.

Whilst all of this sounds positive, from a UK perspective the big question concerns Brexit and whether the UK agri-food industry will see any benefit.  Central will be the eventual agreement which the UK strikes with the EU on its future relationship. The fact that some UK GIs are included in the list can be seen as a positive and, provided that the UK and the EU can agree a transition that gives the UK equivalent rights as present, implies that it would continue to benefit from such trade deals – at least during the interim.

What happens thereafter is highly questionable.  Japan has been unusually vocal in urging the UK to minimise any trade disruption arising from Brexit.

An overview of the EU-Japan Economic Partnership is available via: http://ec.europa.eu/trade/policy/in-focus/eu-japan-economic-partnership-agreement/

A chapter-by-chapter breakdown of the deal is available via: http://trade.ec.europa.eu/doclib/press/index.cfm?id=1684   Please note that the Trade in Goods chapter alone is over 500 pages long, and makes for pretty heavy reading!

Brexit: Future Relationship White Paper

Following on from last week’s negotiating proposals supposedly agreed by the Cabinet at Chequers, the UK Government published, on 12th July, its long-awaited White Paper setting out its detailed vision on the future UK-EU relationship.  The 98-page document has received a cautious welcome by the EU-27 who are mindful of the deep divisions within the British Government.

In the White Paper, the UK Government is essentially seeking an ‘association agreement’ with the EU of unprecedented scale and depth so that the UK can achieve a ‘principled and practical Brexit’ which respects the referendum result and simultaneously acknowledges the deep trading relationship between the two parties.  The key points from an agri-food perspective are set out below;

  • Frictionless trade for goods: at the border between the UK and the EU.  This encompasses the establishment of a free trade area for goods as a means to protect the deeply integrated supply chains and ‘just-in-time’ processes developed over the past 40-plus years.
  • Common Rulebook for goods including agri-food: would seek to avoid customs and regulatory checks at the border but would only cover ‘those rules necessary to provide for frictionless trade at the border’.  The White Paper identifies three broad categories of rules relevant to agri-food and fisheries:
    1. Sanitary and Phytosanitary (SPS) rules – would be included in the common rulebook.  Linked with this, the UK would ‘make an upfront choice to commit by treaty to ongoing harmonisation with the relevant EU rules, with all those rules legislated for by Parliament or the devolved legislatures.’
    2. Rules relating to wider food policy – this would include marketing rules that determine how agri-food products can be described and labelled.  As these do not need to be checked at the border they would not be included in the common rulebook.  Geographical Indicators (GIs) (e.g Stilton cheese and Melton Mowbray Pork Pies) would also be included in this category and the UK will be establishing its own GI scheme after Brexit in accordance with WTO rules.  As part of this, the UK would open its GI scheme to both UK and non-UK applicants.
    3. Agricultural and Fisheries Policies – as previously communicated, the UK will leave both the CAP and the Common Fisheries Policies, thus enabling it to pursue domestic policies which best serve the UK’s interests.  Thus, these rules would not be included in the common rulebook. For fisheries, the UK is proposing annual negotiations with the EU on access to its waters.  Some EU Member States will have significant concerns about this.
  • Facilitated Customs Arrangement (FCA): would seek to ‘remove the need for customs checks and controls between the UK and the EU as if they were a combined customs territory’.  The Government claims that it would enable the UK to control its own tariffs for trade with the rest of the world.  For businesses this would mean;
    • where a good reaches the UK border, and the destination can be robustly demonstrated by a trusted trader, it will pay the UK tariff if it is destined for the UK, and the EU tariff if it is destined for the EU.  This is most likely to be relevant to finished goods; and
    • where a good reaches the UK border and the destination cannot be robustly demonstrated at the point of import, it will pay the higher of the UK or EU tariff.  Where the good’s destination is later identified to be a lower tariff jurisdiction, it would be eligible for a repayment from the UK Government equal to the difference between the two tariffs. This is most likely to be relevant to intermediate goods.

The UK Government claims that up to 96% of UK goods trade would be able to pay the correct or no tariff upfront, with the remainder most likely to use the repayment mechanism.  This is in effect combining the Customs Partnership and ‘Max-Fac’ proposals in the last year’s paper, both of which were rejected by the EU.  There was an acknowledgement by the UK that this system would become operational in stages as both sides completed the necessary preparations.  Given where the infrastructure is currently at, this process could take several years.  The UK Government has already stated that it envisages the UK remaining part of the EU Customs Union for a year after the end of the Transition Period.  This may well get extended.  It is unclear what ability the UK will have to strike Free-Trade Agreements (FTAs) with other countries whilst it remains within the Customs Union.

  • Rules of Origin: agreement not to impose tariffs, quotas or routine requirements for Rules of Origin on any UK-EU trade in goods.  This would allow EU content to count as local content in UK exports to its FTA partners for Rules of Origin purposes, and UK content to count as local content in EU exports to its FTA partners.  ‘Diagonal cumulation’ would allow UK, EU and FTA partner content to be considered interchangeable in trilateral trade.
  • Trade with non-EU countries: the UK’s claims that the FCA will enable it to strike Free Trade Agreements with non-EU countries as the UK will have its own schedule with the WTO.
  • Participation in EU agencies: UK would seek continued participation in agencies which facilitate goods being placed on the EU market but conceded that it would not have voting rights.
  • State Aid: the UK would continue to apply the EU’s State Aid rules via a common rulebook. Although elsewhere in the document, the Government is seeking to reserve its right to make its own arrangements regarding tax. As highlighted in a recent article, there were questions about whether there would be limits on the UK implementing agricultural policy tools such as tax deposit schemes (e.g. similar to the Australian Farm Management Deposit Scheme) which do not comply with EU State Aid rules. This is an area that will require clarification, potentially via the Agriculture Bill due later in the year. 
  • Maintain high standards in environment, employment and consumer protection rules: includes ‘non-regression provisions’ to ensure that current high standards are maintained by the UK.
  • Northern Ireland/Ireland: taken together, the UK Government believes that its proposals (including the points set out above) would see the UK and the EU meet their commitments to Northern Ireland and Ireland through the overall future relationship.  It claims that this would preserve the constitutional and economic integrity of the UK, honour the letter and the spirit of the Belfast (‘Good Friday’) Agreement and ensure that the ‘backstop’ solution of the Withdrawal Agreement will not have to be used (i.e. Northern Ireland remaining in the Single Market).  The Irish Government in particular has responded positively to this as it is also seeking to resolve the frictionless border riddle via the overall UK-EU relationship.  However, the UK Government’s proposals are arguably narrower than what was envisaged in the December Joint Report which contained commitments on protecting the all-island economy and North-South cooperation. The latest UK proposals are very much focused on goods trade only (i.e. services are omitted). 
  • New Joint Institutional Arrangements: these are required to manage the future relationship in key areas such as the common rulebook, including a clear process to update relevant rules in a manner that respects the UK’s sovereignty and provides Parliamentary scrutiny.  This will include regular dialogues at leader (PM) and Ministerial levels.  There would be a Joint Committee to discuss and interpret regulations as well to resolve disputes which may arise.  At times, such disputes could be resolved via a binding independent arbitration.  These bodies would have oversight by the European Courts of Justice (ECJ) as the interpreter of EU rules, but only the UK courts (whilst giving regard to EU case law) could give judgements on rules which apply to the UK.  Here, the UK is effectively conceding that in areas where it commits to adhering to the common rulebook, the ECJ would (indirectly) hold sway. 
  • End to Free Movement: however, the UK proposes introducing new frameworks which would enable ‘UK and EU citizens to continue to travel to each other’s countries and businesses and professionals to provide services’.  In agri-food, the provision of services associated with the supply of input equipment for example, is an important consideration and whilst the UK proposals imply that such arrangements could continue along much the same lines as present, questions remain about the extent to which this will be the case. 
  • Mutual recognition of professional qualifications: including for those working in the veterinary and agri-food sectors.  The extent to which this includes low or unskilled workers remains to be seen and is unlikely to be clarified until the Migration Advisory Committee (MAC) publishes its report in September

The white paper is available via: https://www.gov.uk/government/publications/the-future-relationship-between-the-united-kingdom-and-the-european-union

Whilst there has been a polite initial response from the EU, the proposals are likely to raise several objections from their side including:

  • Indivisibility of the Single Market:  the EU will fundamentally object to the UK wanting to remain in the Single Market for goods, without accepting the EU’s rules on freedom of capital, services and movement.  This separation, combined with the potential for divergence in areas not covered by the common rulebook, could give the UK competitive advantages in years to come and could undermine the rationale for EU membership by others.  This could potentially include the protection currently afforded by GI designations to EU-27 brands (e.g. Parmesan cheese) sold to the UK if the UK decided not to continue with existing GI legal protections.
  • Trade with non-EU countries: whilst the proposals focused heavily on tariff-free access between the UK and the EU, the UK wants to reserve its right to do free trade deals with other countries, potentially including agri-food products.  Whilst the UK’s participation in a common rulebook for agri-food trade would limit the scope for cheap imports, there is still a possibility that such trade could significantly displace EU exports to the UK, if third countries met the standards required.  This would have an onward impact on domestic prices in the EU-27.  The EU is expected to push-back strongly on this to curtail any potential displacement.
  • Complexity and cost: the UK’s proposals amount to an elaborate set of mechanisms to replicate its current access to the EU across a wide variety of areas.  To some, it is akin to the arrangements between the EU and Switzerland which Brussels is keen to rationalise.  Therefore, the EU is likely to have serious reservations about the creation of new frameworks adding yet more complexity to what is already and intricate tapestry.  There is little detail in the White Paper as to how much all of this will cost, but one can anticipate that the EU will expect the UK to bear a substantial proportion of any funding involved.

Whilst many questions remain unresolved, the UK Government’s White Paper provides a credible starting point for the substantive negotiations with the EU to take place.  These need to be urgently accelerated as there is a huge amount of ground to cover between now and the autumn.  For the agri-food sector, the commitment to ‘ongoing harmonisation’ via a common rulebook for agri-food trade should provide some welcome reassurance for the industry generally, particularly those which are heavily dependent on EU export markets.  Furthermore, given President Trump’s claim that the UK proposals would likely ‘kill’ the prospect of the US-UK trade deal, this may also be seen as a positive by those concerned with the potential for cheaper imports to undermine UK farming.  That said, a lot of uncertainty remains especially given the principle that ‘nothing is agreed until everything is agreed’.

UK’s Brexit Negotiating Proposals

On Friday 6th July, the Cabinet finally appeared to reach agreement on its negotiating proposals for the future trading relationship between the UK and the EU.  These proposals are based on 12 key principles (see graphic below) which the Prime Minister had hoped would provide “a precise, responsible and credible basis” for progressing the negotiations.  It could be summarised that these proposals amount to ‘Norway plus’ for goods (including agri-food) and ‘Canada plus’ for services.

Chequers’ Proposals – 12 Key Principles

Some of the key points of relevance to agri-food include;

  • Free trade area for goods – seeks to avoid friction at the border, particularly between Northern Ireland and Ireland where agri-food accounts for almost half of total goods trade. For UK agriculture, this is positive as it would help safeguard key export markets in the EU.
  • Facilitated customs arrangement – seeks to remove needs for customs checks and controls between the UK and the EU “as if a combined customs territory”.  The UK would apply the EU Common External Tariff (CET) for goods destined for the EU-27 with the UK controlling its own tariffs so that it can have an independent trade policy.  Notably, this would become operational in stages as both sides complete the necessary preparations.  This effectively combines the customs partnership and ‘max-fac’ proposals of last year but is realistic to acknowledge that the infrastructure to do this is several years away.  There are concerns around what this would mean for agricultural trade as it will be very difficult for the UK to complete trade deals with other countries without having some increased access for agri-food goods.  The EU will be keen to minimise such scope as this would dilute what is a key export market for Irish, French, Dutch and Danish farmers particularly.
  • Common rulebook for all goods including agri-food – committing by treaty to ongoing harmonisation with EU rules on goods, covering only those necessary to provide frictionless trade at the border.  Following on from previous point, this would have to include agricultural goods meaning that for UK agricultural produce that is traded with the EU-27, EU rules would hold sway.  Some could interpret this as offering scope for divergence to emerge for agricultural produce that is not traded with the EU.  But this would be a minefield.  The capability to effectively manage dual standards in a manner that would satisfy consumer concerns and both EU and non-EU food inspectors is simply not available and would take years to establish.
  • Parliamentary oversight – for incorporation of EU rules into the UK statute with the ability to choose not to do so, recognising that there would be consequences to this. T his likely to cause concern to the EU who will be keen to ensure that potential future uncertainty if Westminster decided not to pass a given EU regulation is minimised.
  • State aid and competition – UK commitment to apply the common rulebook in these contexts would set limits on which agricultural policy tools the UK could adapt in the future.  For instance, tax deposit schemes such as the Australian Farm Management Deposit Scheme do not comply with EU state aid rules.
  • Maintain high regulatory standards – including in terms of consumer and employee rights as well as the environment.  This would mean a continuation of the standards currently in place which once again should help safeguard the UK agricultural industry from third country competition.  A strong environmental focus is already being pursued vigorously by the Defra Secretary.
  • Northern Ireland – the Government believes that these proposals meets its commitments relating to Northern Ireland and Ireland whilst maintaining the constitutional and economic integrity of the UK but would obviate the need for the ‘backstop’ solution envisaged by the EU (i.e. NI remaining part of the EU customs territory) to be brought into effect.
  • Leaving the Common Agricultural Policy – enabling the UK to pursue a domestic agricultural policy which would work in the best interests of the UK.  Here, some questions remain over how a level playing field would be upheld in Northern Ireland where its farmers would be competing directly with Irish farmers still operating under the CAP.  Potentially, the EU Commission’s proposals offering Member States added flexibility in developing national strategic plans in combination with similar flexibility (and funding) at a devolved level for Northern Ireland could minimise any potential policy gaps which could open-up.

The proposals seek to strike a delicate balancing act between Single Market access on the one hand and UK sovereignty on the other.  Of course, the EU has yet to formally respond but the initial signs are that they will be taken seriously by Brussels as a basis for substantive negotiations on the future UK-EU relationship.  As mentioned previously, it is high-time for the London-Brussels negotiations to take centre stage (despite this morning’s event covered by an accompanying article) as both parties have a duty to minimise the immense uncertainties which have emerged for both UK and EU citizens.

The UK Government plans to publish its White Paper setting-out the detail underpinning these proposals later this week.