Summary
This article seeks to review the implications of three main elements of UK’s consensus position on future trade relations with the EU for ACP agro-food sectors. It reviews the impact of the UK’s proposed approach on 4 of the 6 main areas of impact of Brexit, namely: the value of ACP tariff preferences on the UK market; the impact on the functioning of triangular supply chains; the impact on non-tariff measures to be applied to future ACP agro-food exports to the UK and EU27 market; the scope for displacement of current EU27/UK trade onto ACP markets. The current UK proposals as set out in the post Chequers statement do not directly impact on the prospects for the retention of current ACP DFQF access to the UK market or the functioning of EU27 markets in the post Brexit period.
The Main Elements of the UK Position with Implications for ACP agro-food Exporters
On 6th July 2018 the UK Cabinet meeting at the Prime Minister’s residence at Chequers hammered out a consensus position on its initial negotiating position for future trade arrangements with the EU27. Amongst other proposals advanced by the UK government three stand out as potentially of greatest relevance to ACP agro-food sector interests, namely the UK proposal for:
- ‘the establishment by the UK and the EU of a free trade area for goods’
- the maintenance of a ‘common rulebook for all goods including agri-food, with the UK making an upfront choice to commit by treaty to ongoing harmonisation with EU rules on goods’;
- ‘the phased introduction of a new Facilitated Customs Arrangement that would remove the need for customs checks and controls between the UK and the EU as if a combined customs territory’ (1).
These three proposals can be seen as intimately linked, forming part of a single whole in terms of arrangements for future trade between the UK and the EU27.
Implications of the UK’s FTA Proposal For the Value of Future ACP UK Tariff Preferences
The UK proposal to establish of a free trade area between the UK and the EU27 is intended to allow the UK to leave the confines of the EU’s common external tariff, with the UK being free to determine its own tariff policy and negotiate its own trade arrangements consistent with UK economic interests (1).
For ACP exporters of agro-food products where current EU trade arrangements provide significant margins of tariff preference over third country suppliers, this UK proposal opens up the prospect of a rapid erosion of the value of traditional ACP tariff preferences.
Were the UK to use this new tariff freedom the obvious areas for tariff reductions/eliminations would be agro-food products the EU maintains high levels of tariff protection in the interests of producers in EU27 countries but where the UK has no domestic production interests or where the UK has a production.
The most obvious ACP exports to the UK which would be affected by any such process would be ACP bananas and citrus fruits where there is no domestic UK production, and sugar where the UK has a structural deficit. However any temperate, Mediterranean and sub-tropical products where the EU maintains high tariffs or a managed trade regime could also be affected, as could ACP exports of beef.
There are for example considerable concerns over the future profitability of African and Caribbean banana exports to the UK if existing EU tariffs on imports of bananas from $ banana exporting economies were to be removed in the post-Brexit period. This would most severely impact on Ghana, Belize, Dominican Republic and St Lucia whose direct exports of bananas to the UK in 2017 accounted for 50%, 62.8%; 52.4% and 100% respectively of their total banana exports to the EU28 market (2).
For ACP sugar exporters a UK-EU27 FTA which included free trade in agro-food products in a context where the UK was free to adjust its national import tariff on sugar would represent the worst possible outcome. Not only would ACP sugar exporters face the increased competition from EU27 beet sugar producers which has emerged on the UK market since October 2017, but would also potentially face competition from duty free world market sourced raw sugar which would either lower the prices paid for ACP raw sugar by UK refiners by €98/tonne or lead to their displacement from the UK market. This would be likely to severely impact on the value and volume of ACP sugar exports to the UK market, with potentially only niche market ACP suppliers retaining a presence on the UK market.
Implications of the Proposed Facilitated Customs Arrangement for Triangular Supply Chains
Closely linked to the UK’s FTA proposal is its proposal for ‘the phased introduction of a new Facilitated Customs Arrangement’. This is a somewhat bizarre and unique construct aimed at removing the need for customs checks and other controls on goods crossing EU/UK borders by treating the UK and the EU as if it were a ‘combined customs territory’ (1).
Specifically it proposes UK determined tariffs would be applied to goods remaining in the UK while the EU’s tariffs and trade policy would be applied for goods intended for the EU. Under the UK proposal these checks and duty collection activities on EU level tariffs would be carried out by the UK authorities with funds then being passed on to the EU (1).
Once again the aim of this approach is to ‘enable the UK to control its own tariffs for trade with the rest of the world’ while minimising any disruption of trade between the EU and UK, particularly in regard to the integrated just-in-time supply chains which have been developed between the UK and the EU over the last 40 years (1).
Such a proposed ‘Facilitated Customs Arrangement’ by allowing the continued smooth flow of goods across EU/UK borders would:
- avoid any major disruptions of cross channel trade, removing the threat to the functioning of ACP/EU27/UK- ACP/UK/EU27 triangular supply chains arising from traffic congestion at channel ports as a result of the introduction of new 3rd country controls on EU27/UK trade, with this then impacting on the onward movement of ACP products first landed in a continental EU27 member state to the UK (e.g. cut flowers sold via the Dutch flower auctions);
- avert any adverse ‘knock-on’ effects to the functioning of major UK international trade ports such as Southampton, Portsmouth and London Gateway, which could arise from the diversion of EU27 trade to these ports if new controls had to be introduced in Dover and Folkestone;
- allow the continued smooth functioning of ACP supply chains serving markets in the Republic of Ireland via the UK.
Implications of the Common Rulebook Proposal for Non-Tariff Costs Faced by ACP Exporters
The proposal for the UK to adhere to the ‘common rulebook for all goods’ and ‘ongoing harmonisation with EU rules on goods’ (1), potentially could allow continued UK recognition of EU SPS and food safety approval and documentation processes thereby removing the prospect of additional costs arising from a duplication of SPS and food safety control requirements following the UK’s departure from the EU.
Uncertainty around the implementation of SPS and food safety controls could potentially be highly trade disruptive since if government officials are not clear on how to deal with imports on SPS ground, imports tends to be blocked at the port of entry. A commitment to adherence to a common rule book could thus be highly beneficial in removing this uncertainty if the details of future UK adherence to a common EU rule book could subsequently be worked out and politically sustained.
A complication in this regard however is that adherence to a common rule book would need to be comprehensive, including not only goods produced in the UK and the EU but also goods imported into the UK and EU. This would potentially carry implications for the UK’s capacity to negotiate new bilateral trade agreements, since non-tariff barriers are now seen as more important than tariffs as obstacles to trade.
Implications of the UK Package of Proposals for the Potential for Trade Displacement
Taken together the UK proposals for an FTA, a Facilitated Customs Arrangement and adherence to a common rule book could minimize the disruption of existing EU27/UK agro-food sector trade flows. This would also serve to minimise the danger of the displacement of currently traded EU27/UK agro-food products to third country markets, including ACP markets. This would remove the threat of a large scale expansion of EU27/UK exports of dairy products, poultry meat, beef and horticulture products (e.g. onions) to ACP markets, as EU27/UK traders sought alternative outlets for products where trade has been disrupted by a ‘hard’ Brexit
| Trade Displacement Concerns in the Dairy Sector
Dairy UK and the European Dairy Association (EDA) have warned that a hard Brexit could give rise to far greater trade disruption than the 2014 Russian import embargo. The Russian import embargo triggered not only a crisis in the EU dairy sector but as new market needed to be found quickly a large scale expansion of EU exports of milk powders to ACP markets, mainly to Sub-Saharan Africa. The joint Dairy UK and EDA analysis suggests the impact of limitations on free and frictionless trade in the post-Brexit period could be far more serious than the Russian embargo, since the ‘volumes of EU27 butter sold in the UK are three times higher than EU28 butter exports to Russia’, while EU27 cheese exports to the UK are ‘twice the volumes that were sold to Russia’. Dairyreporter.com, ‘Brexit-could-hurt-dairy-in-UK-and-Europe-EDA-and-Dairy-UK-say’ 26 June 2018 |
Political Prospects for a EU27/UK Agreement on These Key Elements of the UK Approach
However while there are certain benefits which ACP agro-food exporters could derive from the implementation of the UK’s proposed approach there are serious political and practical challenges faced in reaching agreement on the UK’s proposed approach. The political challenges faced arise both within the UK and in negotiations with the EU.
- Political Challenges in the UK
Domestically in the UK the proposed approach has been criticized by former Foreign Secretary Boris Johnson as a ‘semi-Brexit with large parts of the economy still locked in the EU system’ and the UK assuming the ‘status of colony’ in relationship to the EU. More specifically he has argued that by ‘surrendering control over our rulebook for goods and agrifoods (and much else besides) we will make it much more difficult to do free trade deals’.
This point was reinforced when on the eve of his arrival in the UK President Trump announced UK adherence to a common rule book with the EU would ‘would probably “kill” any future trade deals with the United States’. President Trump increased pressure on Prime Minister May following a formal dinner by describing Boris Johnson as a ‘a very talented guy’ who ‘would be a great Prime Minister’ (9).
Former Foreign Secretary Boris Johnson further disparaged the proposed facilitated customs arrangement as ‘impractical and undeliverable’ (3). The criticisms advanced by former Foreign Secretary Boris Johnson can be seen as indicative of the major concerns which ‘hard’ Brexiteers have around the UK’s governments own proposed approach to future trade relations with the EU27.
Following the resignation of the Brexit Secretary David Davis and Foreign Secretary Boris Johnson in the immediate aftermath of the Cabinet Chequers agreement, there now appears to be a coordinated process of resignations by ‘hard’ Brexiteers designed to embarrass Prime Minister May and force a policy reversal. According to analysis in the Guardian ‘Hard Brexiteers have threatened Prime Minister May with ‘a “drip, drip” of resignations that would undermine her premiership’ (4). This raises question as to the domestic political sustainability of the position adopted by the UK government and hence the credibility of the UK government as a negotiating partner for the EU. These political machinations thus carry implications not only domestically in the UK but also in terms of the UK-EU27 negotiation process.
- Political Challenges in the EU: The Integrity and Sustainability of the UK Position
In the light of the political environment around the UK’s emerging position, issues arise for the EU at three levels: the integrity and sustainability of the UK governments current commitments; the consistency of the proposed arrangements with the EU’s ‘redlines’ and the practicality of the proposals advanced
It appears likely is the ongoing uncertainty within the UK government will strengthen the EU’s determination to pin down in legally binding texts any commitments which UK negotiators may agree to. This would appear to be particularly relevant to the future of the common rule book, where the UK is seeking to retain the right of the UK Parliament to reject any new EU regulations. This issue of the extent to which the UK will respect an evolving EU regulatory framework is not an issue for the long term as suggested by many UK politicians, but an immediate and on-going issue.
A case in point in this regard is the EU’s new Plant Health Regulations. The UK agreed to this regulation prior to the submission of its article 50 Withdrawal request while it was while still a full member if EU. However the various implementing regulations will only fully come into effect 9 months after the UK has formally departed from the EU. In this context the question arises: which elements of the new EU Plant Health Regulation will the UK Parliament choose to endorse? This could prove somewhat controversial if the EU Plant Health Regulation implementing instruments included stricter mandatory controls on product specific disease where the UK has not domestic production interest and where the disease in question poses no threat to UK agriculture arises (e.g. citrus black spot).
In addition uncertainty in regard to the political sustainability of the UK’s current position on future trade relations with the EU would appear to reduce the scope for ambiguous compromises designed to keep the process of an orderly Brexit on track.
- Political Challenges in the EU: Consistency with the EU’s ‘Redlines’
A major issue faced in the EU is whether the UK proposals are consistent with the EU’s redlines in regard to the indivisibility of the four freedoms. The EU has long been telling the UK it will not accept a single market a la carte which could compromise or lead to a questioning of the functioning of the EU single market built on the four freedoms (free movement of goods, services, capital and people).
Based on leaks on the UK’s proposed approach EC officials had dismissed the approach as ‘unrealistic’, since it threatened some of the EU’s ‘founding principles’. This focused on the UK’s desire to remain ‘indefinitely in a single market for goods after Brexit’ in order ‘to avoid the need for checks at the Irish border’, while putting in place restrictions on freedom of movement and going its own way on services regulation. This it was felt would be in violation of the ‘four freedoms’ underpinning the EU (7).
It has been argued the EC simply cannot allow the UK to choose which parts of the four freedoms to respect, since this would undermine respect for the four freedoms elsewhere in Europe. This view was reinforced by the Spanish Foreign Minister Josep Borrell who argued ‘while many member states could see the benefits of a deal on goods, and might be secretly willing to agree a reform of the free movement of people, the resistance from the most powerful member states’ (notably France, Germany and Spain) ‘would be too strong’ (8).
While the EU’s initial official response to the 6th July Cabinet level agreement was cautious (5) and ambiguously upbeat following the UK government resignations (6), the EU has long accepted that given the UK governments ‘red lines’ some form of standard FTA is the most likely option for an future EU27/UK trade arrangement if the integrity of the EU institutional process and wider EU project is to be maintained.
In addition the EC has made it clear that it is reluctant to consider any form of special arrangements with the UK which could complicate and compromise EU trade relations with other third countries.
The proposed Facilitated Customs Arrangement, which aims at maintaining frictionless trade across UK/EU27 borders, can be seen as precisely the kind of special arrangement which, if acceded to, could complicate the EU’s trade relations with major 3rd country trade partners.
These concerns can be seen as an issue of the acceptability of the UK proposal at the level of principles. Principles which if violated could carry important implications for both the future functioning of the EU and the EU’s future trade relations with 3rd countries.
It is against this background that the EU may feel unable to move beyond a conventional free trade area as the framework for its future trade relations with the UK.
- Political Challenges in the EU: The Practical Challenges Around UK Proposals
The third area of concern relates to the practicality of some of the UK’s proposals, particularly the UK’s proposal for a Facilitated Customs Arrangement. While the UK wants to create an ‘as if’ situation in regard to customs arrangements between the EU and the UK it is clear that in terms of domestic UK production the UK would only be partially a part of a common customs territory with the EU27 with the UK choosing to deviate from the common customs tariff where it deemed it appropriate to do so. The UK would then apply its own tariffs on imports of goods which stayed in the UK but would apply EU tariffs to goods which subsequently went on to the EU.
In the agro-food sector this is potentially highly problematical, since any deviation from the EU common external tariff on agricultural inputs used in value added food product destined for export to EU27 markets would require the application of strict rules of origin to ensure value added products contained no inputs from 3rd countries imported at duties below those applicable by the EU. This could be an administrative nightmare for UK food and drink manufacturers, particularly in regard to the sugar content, where products could potentially contain
- domestically produced sugar,
- sugar which would anyway be imported duty free-quota free to the EU27 (i.e. from LDCs or most EPA signatories);
- sugar which would normally attract a €98/tonne duty but which the UK could choose to import duty free
- sugar which would otherwise attract the EU’s standard MFN duty of €339/tonne for raw sugar but which the UK could choose to import duty free.
Only domestically produced sugar and potentially sugar sourced from LDCs and EPA beneficiaries would be deemed to originate and hence avoid heavy EU supplementary duties on the sugar content of the value added food product. In this context documenting sugar usage by the final destination of the product could become an administrative nightmare
Administrative challenges and problems could even arise with a product seemingly as homogenous as bananas. Currently once banana imports clear customs in the UK, they can freely move across EU27 borders, most notably to the Republic of Ireland. However, if the UK were to use its new found tariff freedom to set its own tariffs which deviate from the common EU tariff regime for bananas then any bananas moving across the UK-Republic of Ireland border would need to be subject to rules or origin checks to determine whether or not additional EU level duties would need to be applied and at what level. Currently the EU applies no less than 3 separate import tariffs on bananas depending on their origin: zero duty for LDCs and EPA signatories; €114 /tonne for bananas imported under the MFN regime; €75/tonne under EU $ banana FTAs.
While technically solutions could be found the question arise as to the additional costs such arrangements would give rise to and whether the need for controls would prove disruptive of the functioning of existing supply chains.
- The Interface Between the Political and the Practical
In addition since under the UK proposal these checks and duty collection activities would be carried out by the UK authorities this would create an unprecedented situation where a 3rd country collected duties and exercised controls on products imported into the territory of the EU, in place of bone fide EU27 authorities carrying out this task.
In addition it should be noted past experience suggests the capacity of unscrupulous traders to evade controls has generally stayed ahead of the ability of public authorities to police their activities. This could create some serious complications which would require an act of considerable faith on the part of the EU if the UK proposals were to be accepted.
In this context the ‘mood music’ around the Brexit process would become a critical consideration. This ‘mood music’ is far from favourable as EU politicians lose patience with the UK government’s equivocation, continued dissension within the UK Cabinet and the growing threat of a backbench revolt against Prime Minister May
What Can Usefully Be Drawn Out From the UK Proposals?
Despite the political and practical concerns and limitations around the UK’s proposed approach and its implications for ACP agro-food exporters there are a number of areas where elements of the proposed approach could be built on.
ACP exporters potentially have a keen interest in elements of the Facilitated Customs Arrangement approach, which could offer a means of averting disruptions of existing triangular supply chains (ACP/UK/EU27 or ACP/EU27/UK); with this being particularly relevant for UK/Republic of Ireland trade.
Affected ACP governments could usefully launch a political dialogue with the EU to secure a political commitment to setting in place administrative arrangements to minimise disruption of existing ACP export supply chains serving all EU28 markets both directly and indirectly.
In addition ACP exporters could benefit from an agreement by the UK to continue to recognise EU documentation dealing with SPS and food safety approvals of imports from ACP countries. This would be consistent with UK proposals to adhere to the common rule book and would serve to remove any threat of trade disruption purely on administrative grounds link to inadequate SPS and food safety documentation. It would also avoid any duplication of costs in documenting SPS and food safety compliance.
ACP governments, particularly Commonwealth ACP governments, signed up in ‘good faith’ to EPAs to preserve access to what was for many their major EU market for those exports which enjoyed significant tariff preferences under EU trade arrangements, namely the UK.
Against this background the Brexit process fundamentally transforms the balance of economic benefits generated by existing trade agreements with the EU. In this context it would appear incumbent upon the EU to open discussions with affected ACP governments on the policy measures required to minimise disruptions of ACP exports established under EPAs. This should at a minimum include:
- setting in place administrative arrangements to allow the continued free movement across EU27/UK borders of ACP products exported duty free-quota free to both EU and UK markets;
- allow continued free movement of ACP products exported duty free-quota free to both EU and UK markets across EU27/UK borders, even where processing and packaging activities take place in the UK/EU27 provided this does not alter the tariff heading under which such products are traded (e.g. ACP raw cane sugar refined and packaged in the UK);
- allow full ‘cumulation’ for ACP sourced inputs traded on a duty free-quota free basis in food products subsequently traded between the UK and EU27;
- ensure continued UK recognition of EU SPS and food safety documentation in trade with ACP countries, so as to avoid duplication of documentation costs and any trade disruption arising from administrative uncertainty around SPS and food safety documentation requirements.
Sources:
(1) Statement from HM Government, ‘Harmonisation on goods. Flexibility for services. UK management of EU tariffs in Britain. Government Brexit Chequers proposal’, 6 July 2018
https://www.conservativehome.com/parliament/2018/07/harmonisation-on-goods-flexibility-for-services-uk-management-of-eu-tariffs-in-britain-government-brexit-chequers-proposal-full-text.htm
(2) EC, Market Access Data Base
http://madb.europa.eu/madb/statistical_form.htm
(3) Full texts of Boris Johnson’s resignation letter and PM’s reply, 9 July 2018
https://www.theguardian.com/politics/2018/jul/09/full-text-of-boris-johnsons-resignation-letter-to-the-pm
(4) Guardian, ‘Theresa May promises ‘orderly’ Brexit as two more Tories quit’, 10 July 2018
https://www.theguardian.com/politics/2018/jul/10/theresa-may-promises-orderly-brexit-as-two-more-tories-quit
(5) Guardian, ‘Theresa May secures approval from cabinet to negotiate soft Brexit’, 7 July 2018
https://www.theguardian.com/politics/2018/jul/06/theresa-may-secures-approval-from-cabinet-to-negotiate-soft-brexit
(6) Guardian, ‘Michel Barnier says 80% of Brexit deal has been agreed’, 9 July 2018
https://www.theguardian.com/politics/2018/jul/10/eu-michel-barnier-brexit-deal-four-fifths-agreed
(7) Guardian, ‘UK’s latest Brexit proposal is unrealistic, say EU officials’, 2 July 2018
https://www.theguardian.com/politics/2018/jul/02/uk-latest-brexit-proposal-is-unrealistic-say-eu-officials
(8) Guardian, ‘France and Germany will block May’s single market plan, says Spain’, 26 June 2018
https://www.theguardian.com/politics/2018/jun/26/france-and-germany-will-block-mays-single-market-plan-says-spain
(9) New York Times, ‘The Latest: Trump Says Johnson Would Be ‘Excellent’ PM’, 12 July 2018
https://www.nytimes.com/aponline/2018/07/12/world/europe/ap-eu-brexit-the-latest.html