UK Signs Continuity Agreement with ESA Governments

While the Continuity Agreement addresses the immediate tariff issues facing ACP exporter to the UK, in the agri-food sector additional clarifications are required on trade administration questions under a ‘no-deal’ Brexit.

Specifically assurances will be needed on the UK’s continued recognition of EU trade administration documentation (e.g. the EUR 1 movement certificate) and EU SPS and food safety certification documentation (which is essential for trade in most agri-food products).  Continued recognition of EU documentation will be essential until such time as alternative ‘UK-only’ trade documentation systems are in place and fully functioning.

In addition while the signing of a ‘continuity agreement’ would secure current duty free-quota free access to the UK market from 30th March 2019 it would not address the longer term issues faced once the UK is freed from the disciplines of existing EU trade and associated policies.

These issues, for example, include the need to ensure the future value of current duty free-quota free access to the UK market. Once the UK leaves the EU customs union the UK government will be free to set its own tariffs independent of considerations in the other EU27 member states which have seen high levels of tariff protection maintained on agricultural imports which compete with EU27 production (e.g. banana and citrus fruit).

The absence of domestic production in the UK and the popularity of bananas and oranges amongst UK consumers could see early moves to reduce MFN tariffs on these products. This would be particularly the case if the trade disruptions arising from a no-deal Brexit increased food price inflation in the UK. While the removal of such tariff would have minimal effect on the overall food price inflationary picture, it would play well politically in terms of showing the ‘benefits’ of escaping the EU policy constraints.

By wiping out the margins of tariff preferences enjoyed by ACP banana exporters over $ banana exporters this would severely undermine the position of ACP banana exporters on the UK market, a market which is of major significance not only to Commonwealth African and Caribbean banana exporters but also the Dominican Republic.

The second major unaddressed issue relates to the impact of a ‘no-deal’ Brexit on the functioning of triangular supply chains, which have been built up to serve the UK market via other EU27 member states. If standard 3rd country controls are imposed on existing EU27/UK mutual trade the onward cross-channel shipment of these cargoes is likely to be subject to the same transport disruptions as other EU27/UK trade.

This is likely to most severely affect African cut flower exports to the UK market via the flower auctions in the Netherlands, which dominate the UK’s import trade for cut flowers (the source 80% of all cut flowers officially sold in the UK). It is estimated in the cut flower sector that a delay of just one day in current shipping arrangements would eliminate 30% of the profits of cut flower exporters.

A further issue which arises under a no-deal Brexit relates to the food safety and SPS controls the UK will apply. For example will the UK continue to apply strict controls on citrus fruit imports to check for citrus black spot, a fungal infection which is citrus specific and harmless to consumers, when the UK has no domestic production which could be affected by this fungal infection? There would be no agronomic basis for such controls solely for the UK market, while such controls would needlessly increase the cost of citrus imports.

The final and most fundamental unaddressed issue under the UK’s Continuity Agreements however relates to the rules of origin to be applied under such UK-only trade agreements. Put simply while the UK governments intention is to ‘replicate existing EU agreements’ it is far from clear whether for UK exports this can in fact be achieved, given ‘UK and EU content will be considered distinct’.

All preferential trade agreements require rules of origin, which define which products can benefit from the tariff preferences granted. This is aimed at preventing countries which are not a party to the agreement from benefitting from tariff preferences, simply by routing exports through a party to the agreement with minimal local processing taking place prior to re-export.

Currently under EU trade agreements the rules of origin apply to the customs territory of the EU. This means that any input produced in any EU27 member states can be used in a product exported by UK manufacturers under EU preferential trade agreements, since these EU27 input are considered to ‘originate’ in the UK since the UK alongside the other 27 EU member states is part of a single customs territory.

However as the European Commission pointed out in its June 2018 Notice to Stakeholders on   ‘Preferential Origin of Goods’ (4) once the UK leaves the EU customs union it will not be part of the single EU customs territory. As a consequence for rules of origin purposes any UK inputs in EU27 goods exported under EU preferential trade agreements may not be used without running the risk of precluding the final product from preferential tariff treatment. This led the EC to advise EU manufacturers to no-longer source inputs from the UK for goods exported under EU preferential trade agreements from 30^th March 2019 if they wanted to avoid rules of origin complications which could lead to a denial of tariff preferences granted under EU trade agreements.

These rules of origin concerns apply equally to UK manufacturers seeking to export goods to any ESA country under the newly signed ‘continuity agreement’, with UK exporters not being able to use EU27 sourced inputs without running the risk of losing tariff preferences nominally available under ‘rolled over’ ‘Continuity Agreements’. This would be the case if the UK sought to apply the standard rules of origin included in EU trade agreements under ‘UK-Only’ Continuity Agreements.

The DIT information notice which states ‘each new agreement will individually specify what origin designations may be used to qualify for preferences’ (3) would appear to grossly underestimate the scale of the challenge a simple ‘rolling-over’ of existing EU rules of origin under ‘Continuity Agreements’ would give rise to.

The extent of the challenges is illustrated by the example of UK motor vehicles, which on average use inputs which are 60% sourced from other EU27 member states and hence would be ineligible for tariff preferences under ‘UK-only bilateral Continuity Agreements’ using rules of origin based on existing EU trade agreements.

These difficulties were reportedly recognized by Mauritian representatives at the signing of the UK-ESA Continuity Agreement, but a higher priority was accorded to maintaining duty free access to the UK market for preserved tuna, sugar and textile exports.

This ‘sign and sort out later’ approach adopted by the Mauritian government is consistent with the approach adopted by a number of African and Pacific governments in December 2017 when faced with concerns around the EU’s proposed interim-EPAs. However in this instance the more savvy African negotiators insisted on setting out their longer term concerns in a formal statement which was annexed to the initialled interim-EPAs. The final signature and ratification of the interim EPA was then made contingent on the listed issues being satisfactorily addressed. A similar such approach could usefully be adopted in regard to the UK’s proposed ‘Continuity Agreements’.

This is particularly the case since rules of origin issues arise not only in terms of UK exports but also UK imports. The different structure of the UK economy when considered on its own, offers considerable scope for improving rules of origin for imports from ACP countries which currently face rules of origin restrictions under EU trade agreements.  This includes:

· improved rules of origin for fisheries products to allow any fish caught in a countries EEZ to be granted originating status for the purpose of granting tariff preferences – with this being  a long-standing ACP demand which the EU has declined to comprehensively address given the fisheries access interests of  EU27 long distance fishing fleets;

· improved rules of origin for textile and clothing products involving only a singly change in tariff heading requirement;

· the removal of imported packaging materials and preservatives from the cost calculation of origin requirements for value added food products (e.g. the cost of plastic coffee pods and associated packaging can prevent tariff preferences being claimed under existing rules of origin, thereby hindering movement up coffee value chains in ACP countries)

Against this background the question arises: do these proposed ‘Continuity Agreements’ in reality replicate EU reciprocal preferential trade agreements or are they in fact simply a ploy to roll over existing ACP EPA signatory duty free-quota free access to the UK market, while nominally being reciprocal agreements?

This leads on to a more serious concern namely, if the UK government were to insist under these ‘Continuity Agreements’ that for rules of origin purposes EU inputs in UK exports seeking tariff preferences should be treated as if the UK were still part of the EU customs territories, then this could pose serious problems for ACP signatories with other WTO members who would be likely to insist on similar treatment to that accorded the UK.

Against this background from a development perspective it would appear more appropriate for the UK government to unilaterally extend existing terms and conditions of access to the UK market which ACP EPA signatories enjoy until at least 1^st January 2021, so as to allow time for a more thorough going negotiation of bilateral UK-only trade agreements which are WTO compatible, operationally applicable and development friendly.