Summary
If MFN duties are introduced on EU27-UK trade as a result of a failure to reach a new trade agreement this could disrupt existing ACP supply chains. However such a development could also present opportunities for ACP countries to expand their direct exports of value added products to the UK in sectors such as the cocoa sector. Marketing adjustment and investment support however could be needed to enable ACP exporters to respond positively to the challenges which lie ahead.
A study undertaken by the Economic and Social Research Institute in Dublin by Lawless and Morgenroth has sought to quantify the trade effects of the reintroduction of MFN duties on mutual trade between the EU27 and the UK. The paper analyses EU27-UK trade flows in over 5,200 products and by using the applicable EU WTO tariffs and calculations of the elasticity of the trade response to price increases seeks to determine the likely effects of the reintroduction of MFN tariffs on EU27-UK trade flows. (It should be noted, it is acknowledged that the basis for calculating price elasticities namely ‘sector level elasticity estimates’ is an imperfect tool for this purpose) (1).
Nevertheless at the sector level the report notes the ‘food and textiles trade are the hardest hit, with trade in these sectors reducing by up to 90%’. The sectors with the largest trade reductions are those where the highest MFN tariffs would apply. The report warns ‘any country within the EU reliant on trade with the UK in these sectors will clearly be disproportionately hit if a WTO scenario is the default trade arrangement’ (1).
While the two most affected sectors are both clothing the following ten most seriously affected sectors are all agro-food products. The table below lists the implied tariffs on EU27-UK trade in agro-food products arising from the mutual application of current MFN duties (1).
Goods with Implied Tariffs over 10% (1)
| Product | Tariff Rate UK to EU/EU to UK |
| Meat | 49.35% |
| Cereals | 45.71% |
| Sugars & confectionary | 42.00% |
| Tobacco | 38.14% |
| Processed meat & fish | 33.31% |
| Dairy, eggs, honey | 31.34% |
| Flour | 26.92% |
| Processed veg & fruit | 20.86% |
| Food residues & animal feed | 19.03% |
| Processed cereals | 15.11% |
| Other edible preparations | 14.44% |
| Cocoa & chocolate | 11.79% |
Were current EU MFN duties to be applied on mutual EU27-UK trade, given the elasticity of demand to price changes, the following effects in sectors where ACP countries have trade interests on the EU27 or UK market would arise:
- EU27-UK trade in sugar and confectionary would virtually come to a halt;
- Over 90% of EU27-UK trade in processed meat and fish would be halted;
- Over 90% of the EU27-UK trade in meat would be halted;
- Around 85% of EU27-UK trade in processed fruit and vegetables would be halted;
- Around 70% of trade in cocoa and chocolate products would be halted;
- Around 68% of trade in dairy products, eggs and honey would be halted;
- Around 40% of EU27-UK trade in vegetables would be halted;
- Around 40% of EU27-UK trade in fish and crustaceans;
- Over 30% of EU27-UK trade in fruit and nuts would be halted;
- Over 20% of UK exports of fats and oils would be halted and over 40% of EU27 exports to the UK;
- Over 20% of EU27-UK trade in coffee, tea and spices would be halted;
- Over 20% of EU27-UK trade in trees and plants would be halted (1).
These projections are based on the assumption that the full tariff would be passed on in the consumer price (1).
A review of this study by Professor Alan Mathews notes ‘these estimates are likely to be underestimates of the trade effects of reintroducing tariffs at current EU levels on EU-UK trade’. He further notes how resolving the future tariff basis for EU27-UK trade cannot be left until the last minute since ‘traders will want to know where they stand as they begin to enter into contracts with supermarkets from next summer onwards’ (2).
| Comment and Analysis
A review of these findings at the sector level reveals some worrying prospects for ACP exporters who serve the UK market via a EU27 member state and EU27 markets via the UK. For example, in sectors such as cocoa products, the EU has no domestic production of the raw material, with 90% of EU cocoa bean imports being sourced from ACP member states. This imported raw material is processed and then traded across the EU. This includes processing in a EU27 member state and re-exporting to the UK. Indeed, in 2015 in value terms the UK imported approximately 63% more cocoa paste and 53% more cocoa butter from fellow EU member states than it did from all ACP countries combined (mainly Ghana, Cote d’Ivoire, but also with some specialist imports from Madagascar for cocoa paste). These intra-EU imports came mainly from Holland, but also from Germany, Belgium and France. For cocoa powder almost 97% of UK imports originated in EU member states and virtually nothing from ACP cocoa producing countries. Against this background the question arises: what happens to these cocoa product supply chains if MFN duties are re-imposed on EU27-UK trade and 70% of EU27-UK trade in cocoa products and confectionery falls away? While currently the EU MFN duty for cocoa beans is 0%, the corresponding duties for cocoa paste, cocoa butter and cocoa powder are 9.6%, 7.7% and 8.0% respectively. In this context even if Ghana, Cote d’Ivoire and other cocoa exporting African countries were to reconsolidate their duty free access to the UK market, any failure to conclude a UK-EU27 trade agreement post Brexit, which reconsolidates duty free access to the UK market for cocoa products when processed in EU27 member states, would still threaten to disrupt existing ACP cocoa product supply chains which go through other EU27 member states in serving the UK market. What this means for each cocoa exporting African country will need to be assessed based on how individual national supply chains function and the success so far attained by African cocoa exporters in producing and exporting value added cocoa products to the EU market. Potentially any failure to conclude a UK-EU27 trade agreement could present opportunities for larger ACP cocoa exporters such as Ghana and Cote d’Ivoire to move up the cocoa value chain, by expanding their production and export of cocoa butter and cocoa paste to the UK market. This should be seen in a context where · since 2007 the volume of Ghanaian cocoa butter exports to the UK has more than doubled and the value more than tripled (to €42 million); · since 2007 the value of Ivorian cocoa butter exports to the UK have risen from virtually nothing to €80 million in 2016; · since 2015 both Ghana and Cote d’Ivoire have once again begun to export cocoa paste to the UK, with a trade valued at over €20 million and €12 million respectively (3). However the commercial attractiveness of further investment in directly supplying the UK market with cocoa paste and cocoa butter willH depend on the immediate post Brexit and long term trade relationship established between the EU27 and the UK for trade in agro-food products (for some in-sight in this regard see companion article ‘Hard Brexit Could Severely Disrupt EU27-UK Agro-Food Sector Trade’, 21 August 2017). While the trade effects of the reintroduction of MFN tariffs on EU27-UK trade are most dramatic in the cocoa sector similar issues arise in sectors as diverse as coffee, cut flowers, sustainable palm oil and fisheries products. For fresh fish exports the functioning of ACP supply chains could be further complicated by the uncertainties surrounding future EU27-UK relations in the aviation sector, given the dominant role ‘hub’ airports play in the distribution of imported fresh fish across the EU28. Potentially opportunities for ACP sugar exporters could also arise from a failure to conclude a UK-EU27 trade agreement, since this would result in the virtual disappearance of EU27-UK trade in sugar. This needs to be seen in a context where currently EU member states (mainly France) provide 20% of UK sugar consumption. The opportunities in this regard however should not be over-stated given current plans to expand UK sugar beet production (see companion article ‘UK Beet Sugar Production Set to Surge’, 14 August 2017) and the projected decline in UK sugar demand, resulting from health related campaigns to reduce sugar usage in processed food products (see companion article ‘Multiple challenges pending for ACP sugar exporters’, 1 May 2017). Overall individual ACP exporters are likely to require assistance in: a) understanding the challenges which lie ahead under different Brexit scenarios; b) adjusting their export and marketing strategies to the new evolving realities; c) mobilising investment given the uncertainties which will continue to exist for some time. |
Sources
(1) ESRI, ‘The Product and Sector Level Impact of a Hard Brexit across the EU’, Martina Lawless and Edgar L. W. Morgenroth, Working Paper No. 550, November 2016
https://www.esri.ie/pubs/WP550.pdf
(2) CAP Reform, ‘Which EU countries will bear the brunt of a hard Brexit?’, Professor Alan Mathews, 21 July 2017
http://capreform.eu/which-eu-countries-will-bear-the-brunt-of-a-hard-brexit/
(3) EC, Market Access Data Base
http://madb.europa.eu/madb/statistical_form.htm
| Key words: Brexit, Cocoa beans, Cocoa paste, Cocoa butter, Cocoa powder, Sugar, cut flowers, fisheries products Area for Posting: BREXIT, Sugar, Horticulture |