DIT SACU Discussions to Extend Current Access to the UK Market More than a Technical Exercise

During the July 2017 visit of UK Secretary of State Lord Price to Southern Africa a commitment was made to replicating current market access arrangements post-Brexit. However it remains unclear how this to be achieved. The transitional extension of existing reciprocal preferences could not only face serious opposition from WTO members but would be far from a simple ‘technical exercise’. New rules of origin which took account of the UK’s departure from the EU agreement would be essential, in order to establish which products qualified for ‘originating status as UK products. The alternative would amount to an absence of rules or origin. Either would be a substantive modification of the existing terms of the UK’s export trade. The future of Tariff rate Quota (TRQ) arrangements under the EU agreement would also need to be resolved in the immediate post Brexit period. Looking to the longer term, there are a multiplicity of non-tariff issues related to post-Brexit UK trade and agricultural policies which give rise to profound uncertainties over the future value of any post Brexit preferential trade arrangement with the UK for certain SACU members. Many of these uncertainties will need to be addressed before the future value of a bilateral trade deal with the UK can be fully assessed.

On the 19th July  2017 in a joint statement with the Southern African Customs Union (SACU), Lord Price, the Minister of State for Trade Policy at the  UK Department of International Trade (DIT),  re-affirmed the UK governments’ ‘commitment to the trade arrangement under the current EU-SADC EPA and to maintain current market access to the UK following its withdrawal from the EU’. It also committed the parties to ensuring ‘continuity of the effects of the EU-SADC EPA’ (1).

A joint commitment was made to continued discussions to ensure ‘the existing trade arrangement between the UK and SACU currently governed by the EU-SADC EPA will not be disrupted by the UK’s departure from the EU’. The view was expressed that these discussions should focus on the steps needed to ensure ‘an arrangement that replicates the effects of the EPA once the UK has left the EU’. It was asserted ‘this would be a technical exercise to ensure continuity’.  Indeed the joint statement went further stipulating the focus should be on rolling over existing market access arrangements and should not be viewed as ‘an opportunity to renegotiate existing terms’ (1).

The roundtable meeting also maintained discussions should continue on ‘how best to work with Mozambique, in order to ensure continuity of the EPA for all partners’ (1).

In the run up to the Roundtable discussions Lord Price maintained the visit showed the UK governments commitment  to ‘securing trade links in both developed and developing countries’. This was a clear reference to South Africa’s developed country status in the WTO, in a context where other SACU members are either least developed or middle income countries (3).

Subsequent to the meeting SACU Trade Ministers ‘welcomed the UK’s undertaking to avoid disruption for its trading partners as it withdraws from the EU’, asserting the UK had ‘reaffirmed its commitment to the trade arrangement to maintain current market access’ (2). The joint statement referred to a commitment to replicating the EU trade deal in a  bilateral arrangement with the UK (1).

South Africa’s trade and industry minister Rob Davies said this technical arrangement would give assurances to importers and exporters that trade with Britain would continue as before after April 2019’. The process it was held would ‘mainly just involve changes to names and institutions in the SADC-EPA’. However for South Africa ‘some substantial matters would have to be negotiated before April 2019’, mainly the future market access for South African agro-food products where access to the EU market is currently regulated by TRQs (4).

It was indicated this was an important issue for South Africa since under these TRQ arrangements the UK was the main market in the EU. South African wine exports were cited as a case in point, with it being argued  ‘SA wine producers will be hoping that a large part of the quota is transferred into the new UK trade deal’ (4).

However this dimension should not be overstated, for while wine exporters have a ‘high dependence’ on the UK market in trade with the EU,  the major TRQ managed export, oranges, have a ‘below average dependence’ on the UK market. The only other TRQ managed product with a high dependence on the UK market is preserved pears, while 3 products have an ‘exceptionally high dependence’ on the UK market, namely  Chrysanthemums, ‘Apple juice other’ and ‘preserved pineapples’, with the combined total value of these exports to the UK market amounting to €8.7 million.

Importance of the UK Market to South African Exports Where TRQ Restrictions on trade with EU Exist (2015) (€)

Product EU UK % UK
Wine (220421) in 2 litres of less 220,871,332 75,636,629 34.2%
Wine (220429) other wine less than 2 litres 166,252,460 57,840,287 34.8%
Oranges (080510) 306,251,244 46,250,984 15.2%
Cut flowers – Roses (060311) 65,177 1,272 2%
Cut flowers  – Orchids (06013) 135,798 0 0%
Cut flowers – Chrysanthemums (060314) 8,041,185 7,666,684 95.3%
Cut flowers – Others (060319) 7,863,021 1,399,218 17.8%
Cut flowers  – others (060390) 2,008,841 411,984 20.5%
Strawberries – (081010) 36,752 36,752 100%
Citrus Jam  (200791) 1,371,915 1,245 0.1%
Apple juice Brix value (200971) 146,032 0 0%
Apple juice other (200979) 835,193 525,810 62.9%
Pineapple Juice (200941) 1,142 0
Pineapple Juice (200949) 4,591,978 0 0%
Preserved pears (200840) 16,028,496 6,687,411 41.7%
Preserved Pineapples ( 200820) 603,633 492,761 81.6%
Frozen orange juice (200911) 1,321,898 0 0%
Ethanol (220710) 631,194 0 0%

Source: EC, Market Access Data Base

In addition it is recognized that rules or origin issues on both sides will need to be addressed (4).

The negotiation of such a transitional arrangement would then allow the two sides time to ‘sit down together to discuss a new and different free trade deal to kick in some time in the future’. (4)

Comment and Analysis

It needs to be recognized the existing trade arrangement between the UK and SACU is a reciprocal preferential free trade agreement. This is governed by complex procedural rules which set out which products can benefit from the tariff reductions granted under the agreement. This applies equally to imports into the SACU from the EU and imports into the EU form the SACU.

Rolling-over SACU access to the UK market can be seen as a relatively straight forward technical exercise, since the underlying conditions in the SACU will not have changed.  However rolling over UK access to the SACU market is far more complex, with the situation of the UK post-Brexit changing dramatically.

Since the UK will no longer be part of the EU the territorial scope of the application of rules of origin to UK exports to the SACU market under any arrangement with the UK will have changed. These rules of origin stipulate in detail what level of processing is required in one party to the agreement for products not originating in that party to be granted ‘originating status’ and hence benefit from the duty free preferences granted.

Under the SADC-EU EPA the territorial coverage under which ‘originating status’ is granted was the entire territory of the EU28.  Under any bilateral arrangement with the UK, whether transitional or long term, the territorial coverage under which originating status would be granted would be the UK. In most of the EU EPAs the rules of origin provide for either a maximum 15% value tolerance for non-originating products in the ex-works price of the product or are subject to product specific % tolerances set out by mutual agreement.

The question arises: how many of the UK’s current exports to the SACU would qualify under these rules of origin principles, given the removal of 27 other EU member states from the territorial coverage which confers originating status on an input? This potentially carries important commercial implications for EU27 exporters, and is thus unlikely to be viewed as simply a ‘technical exercise’.

In addition a whole new set of administrative procedures will need to be set in place to verify that goods exported from the UK enjoy ‘originating’ status (proof of origin documentation, movement certificates etc), with systems for calculating originating status, verifying originating status and confirming this applies to the goods actually being imported, all needing to be set up.

This will take place in a context where the same goods which formerly faced no such rules of origin questions under the EU28 agreement, will now find themselves having to be accompanied by documentary proof they indeed meet the rules of origin required to confirm originating status.

The alternative is to de facto dispense with rules of origin altogether.  However this could have far reaching implications. If rules of origin were simply dispensed with, this could open up new opportunities for SACU exports to the UK of ‘manufactured goods’, since if there were no rules or origin, all manner of goods could be exported to the UK from the territory of a SACU member states under the duty free market access provisions.

Either way a substantive renegotiation of existing terms of the EU agreement which governs SACU-UK trade will be needed.

While after 30 March 2019 the UK will no longer be a part of the EU and will no longer benefit from the SADC-EU EPA, South Africa’s tariff rate quota obligations which open up the SACU market in sensitive sectors to EU28 exports will remain in place, but with the beneficiaries being restricted to the remaining EU27 member states. The UK will have no rights of access to these EU TRQs once it leaves the EU.

This is most likely to be felt in the dairy sector, where, for example between 2013 and 2016 UK cheese exports to South Africa grew 20-fold, compared to a mere doubling of EU28 cheese exports.  By 2016 the UK accounted for almost 24% of EU28 cheese exports to South Africa, up from a mere 2.3% in 2013. To put this in perspective in 2016 South Africa accounted for 7.4% of extra-EU UK cheese exports (5).

TRQs for the UK will need to be separately negotiated under a future bilateral SACU-EU agreement and cannot simply be granted during a transitional period, without potentially facing challenges from WTO members. Since this potentially carries important commercial implications for EU27 exporters, this is unlikely to prove to be a simple ‘technical exercise’.

Similarly the TRQs granted for South African exports to the EU will remain unchanged, with the UK having no obligation to take over part of these TRQs under transitional bilateral arrangements. The UK will de facto need to make a commitment to unilaterally granting TRQ access proportionate to current levels of South African exports to the UK market under the TRQ. This type of arrangement could be negotiated, without affecting South Africa’s rights and obligations under the agreement concluded with the EU.  However, if this were to occur outside of a formal FTA this could face challenges from WTO members with competing export interests.

The question arises how are these substantive issues to be effectively dealt with under the proposed transitional arrangement? These are not simple questions and could take time to resolve.

It is against this background that it would appear essential for the UK government make an early and  binding commitment to the unilateral rolling over of existing SADC EPA terms and conditions of access to the UK market on a non-reciprocal basis, while the issues related to the application of SADC EPA market access provisions to imports from the UK in the radically changed post Brexit circumstances are sorted out.

Looking to the longer term agreement, given the prospect of radical changes to UK trade and agricultural policies post-Brexit in areas where SACU member states have export interests (most notably sugar) important issues related to the erosion of the value of future tariff preferences on the UK market will need to be addressed.

For example given current campaigning by Tate & Lyle Sugars (TLS) (see companion article ‘What are the implications for ACP sugar producers of Tate & Lyle Sugars expectations on UK sugar sector policy post-Brexit?’, 10 April 2017),  the UK government could move swiftly to remove the €98/tonne duty on CXL sugar. This would alter the pattern of sugar sourcing by TLS.  This needs to be seen in  context where Swaziland exported 58,679 tonnes of sugar to the UK market, almost 26% of its exports to the EU28 market in 2016.  Such a UK policy move could result in a decline in the price offered for imported Swazi sugar.

However this is not the only uncertainty. With around 20% of UK white sugar consumption coming from EU27 suppliers (mainly France) any failure to establish an alternative basis for UK-EU27 trade from 30th March 2019 could see high MFN duties imposed on sugar imports from EU27 countries. This could then create new opportunities for Swazi sugar exporters and could impact on UK sugar prices.  However, this needs to be seen in the context of the planned increase in UK beet production by 1/3 in the coming years and plans for a major new investment in beet processing in Yorkshire (see companion article, ‘UK Beet Sugar Production Set to Surge’, 14 August 2017).

Similarly in the citrus sector, once the UK is no longer part of the EU, there will be no plant disease control reason for maintaining high levels of controls on the fungal infection citrus black spot on imports into the UK. Since 2012 increasingly strict EU CBS controls have seen the collapse of Swazi citrus fruit exports to the EU (see companion article ‘ACP Citrus Exporters and Brexit: Part 2: The Case of Smaller Scale ACP Citrus Exporters’, 22 June 2017). Removing unnecessary SPS controls on citrus exports could potentially create new export opportunities for Swazi citrus producers.

However it needs to be borne in mind that disengaging from 44 years of UK and EU food safety and plant and animal health (SPS) regulations could create a legal vacuum in the UK which could carry additional costs for SACU exporters, if this complex process is not carefully managed.

These are just some of the uncertainties and non-tariff dimensions affecting trade with the UK which will need to be addressed before it makes sense for SACU countries, such as Swaziland, to enter into a new long term trade agreement with the UK.

(1) SACU/UK DIT, ‘Joint statement on the roundtable discussions with the United Kingdom on trade relations post Brexit’, 19 July 2017
(2) ftwonline, ‘SACU trade ministers hopeful post-Brexit trade relationship with UK will continue’, 20 Jul 2017
(3) UK DIT, ‘Lord Price visits Africa to build shared trading links’, 19 July 2017
(4) Daily Maverick, ‘Southern African Customs Union trade with UK not to be disrupted’, 19 July 2017
(5) EC, Milk Market Observatory ‘EU Exports of CHEESES in 2016 (by origin / destination)’, 12 June 2017

Key words:         BREXIT, South Africa, UK, SACU, Swaziland, Sugar, Cheese,
Citrus, Wine
Area for Posting: BREXIT, SADC EPA, Sugar, Horticulture, Dairy