Summary
Even with a comprehensive EU27/UK free trade area agreement in place it is almost inevitable that costs along EU27/UK agro-food sector supply chains will increase. It is far from clear whether the customs partnership option, maximum facilitation options or some amalgam of the two, will offer any solutions to the driving factors behind the cost increasing consequences of Brexit in the agro-food sector within the time frame envisaged for the transition period. Negotiating EU27/UK free trade arrangements in the agro-food sector is likely to prove difficult, despite the EU27’s interest in ensuring the continued free flow of agro-food exports to the UK market.
It is within this context that ACP governments will need to explore how current options under discussion can best be deployed to address the potential disruptions which could arise along triangular supply chains utilized by ACP exporters serving UK markets via EU27 member states or EU27 markets via the UK (i.e.UK-Ireland trade).
The UK government’s commitment to leaving the EU customs union and single market on 30th March 2019 was reiterated in mid-May, amongst continued uncertainty as to what arrangements will be set in place up to 1st January 2021 (the proposed transition period) and beyond.
Reports had emerged that Prime Minister May was considering moving towards a position which accepted a transition period which extended beyond 1st January 2021. Such a move would be welcomed in the EU as ‘a sign of more realistic thinking in the UK’. However these reports were subsequently denied by Prime Minister May who re-asserted on 16th May 2018 ‘the United Kingdom will be leaving the customs union’, while ‘negotiating future customs arrangements with the European Union’(1).
These future customs arrangements are the subject of heated discussions in Prime Minister May’s Cabinet. The UK government is seeking an option for future relations with the EU27 which ‘could support UK-EU trade outside a customs union arrangement, while still removing the need for customs processes at the border’ (2). These are referred to as the ‘customs partnership’ option and the ‘maximum facilitation’ option (max-fac option), favoured by ‘soft’ Brexiteers and ‘hard’ Brexiteers respectively’.
Under the customs partnership option the UK would operate a tariff regime which ‘aligns precisely with the EU’s external customs border for goods that will be consumed in the EU market even if they are part of a supply chain in the UK first. The UK would then apply the same tariff as the EU and would provide the same rules of origin for those goods arriving in the UK and destined for the EU’. However within this arrangement the UK would ‘also be able to apply its own tariffs and trade policy to UK exports and imports from other countries destined for the UK market in line with our aspirations for an independent trade policy’. The UK government recognises this require both some entirely new thinking on the part of the EU and ‘robust enforcement mechanisms that ensured goods which has not complied with the EU’s trade policy stayed in the UK’ (2).
The maximum facilitation option would seek to deploy technical solutions smooth the movement of cross border trade. This would see a continuation of some existing arrangements and put in place some new arrangements. It would seek to ‘implement technology-based solutions to make it easier to comply with customs procedures…utilising the UK’s existing tried and trusted third country processes for UK-EU trade… and developing new innovative facilitations to deliver as frictionless a customs border as possible’.
Two Cabinet working groups have been established to explore the possibilities under each of the options, with each group having a mixture of ‘hard’ Brexiteers and ‘soft’ Brexiteers. The aim appears to be to build a consensus around some form of hybrid or these two options as a basis for negotiations with the EU27.
The principal problem faced in this latter regard however is that both of the options under discussion in the UK have already been dismissed as non-starters by the EU. What is more both of these option assume some form of EU27/UK free trade area agreement will be in place on which the ‘customs partnership’ option and the ‘maximum facilitation’ option can then build.
This raises the question: what would any future EU27/UK FTA look like in the sensitive area of agro-food sector trade?
A 25th March 2018 briefing by Professor Alan Matthews sought to explore this issue with particular reference to the agriculture sector. It was noted how ‘the EU has never concluded an FTA embracing fully free agricultural trade’. It was highlighted how ‘agricultural trade is either omitted from the FTA agreement or covered in a separate bilateral deal (e.g. in the European Economic Area agreement with Norway or the Customs Union with Turkey) or full trade liberalisation is withheld for sensitive agricultural products’. Sensitive agricultural products are then dealt with under specific tariff rate quota arrangements, which limited access within quantitative limits (3).
This being noted the EU guidelines for negotiation with the UK ‘unambiguously see agriculture being covered in the future FTA’. For the EU the aim is ‘zero tariffs in all sectors and no quantitative restrictions’. This it is held reflects the huge agro-food sector surplus the EU has in trade with the UK. Currently the EU exports some $47 billion of agro-food products to the UK while importing $18 billion in agro-food products from the UK. In this context it is self-evident that any mutual restrictions on EU27/UK agro-food sector trade would disproportionately impact on EU27 exporters 3).
However this situation is complicated by the complete absence of clarity on future UK trade policy towards 3rd country agro-food exporters which do not yet have trade agreements with the EU in place. There are concerns that future UK agro-food sector trade policy choices could give rise to ‘trade displacement.’
For example, under a comprehensive EU27/UK FTA which included all agro-food products a situation could arise where cheaper beef imports from Brazil, lamb imports from New Zealand or chlorine washed poultry meat imports from the USA could outcompete domestic UK producers and displace domestic UK production onto EU27 markets. It should be noted these trade displacement effects could occur even where the imports of these newly preferred products were subject to rigorous controls which ensured they remained on the UK market and were not exported to EU27 markets (3)
Given the political sensitivity of the trade displacement dimension in the EU, EU farmers are likely to favour the use of TRQ arrangements in trade with the UK to minimize these potential trade displacement effects. However the application of TRQ arrangements by the EU on imports form the UK would be likely to give rise to demands from UK farmers for the UK government to apply similar TRQ based trade arrangements on imports from EU27 suppliers. Such reciprocal action would be seen as unjustified in the EU since EU policies will have remained unchanged and it is the UK which would have moves away from the common external tariff by lowering imports duties.
Further complications arise for value added food products containing sugar imported under ‘UK only’ trade arrangements. In the UK 85% of sugar used goes into the food and drink industry. For high sugar content food products this could lead to serious rules of origin issues which could structurally distort the sourcing decisions of UK food and drink manufacturers. If UK raw cane sugar refiners sourced sugar under new ‘UK-only’ trade arrangements and not from countries which also enjoyed full duty-free quota free access to the EU27 market, this would create uncertainty over whether the EU would apply supplementary duties on the sugar content of value added food products containing raw cane sugar imported under new ‘UK-only’ trade agreements. This concern was raised by Tate & Lyle Sugar in its submission to the Business, Energy and Industrial Strategy (BEIS) Committee in November 2017 (4).
How generalized these rules of origin problems could become even under a free trade area agreement was highlighted in the House of Lords “Brexit: Food prices and availability” report. Citing a submission from the Food and Drink Federation it highlighted how ‘a frozen pizza made in the Republic of Ireland, but with flour milled in the UK form grains bought from Canadian, US and UK growers’ could fail to meet rules of origin requirements which would mean ‘the flour would be subject to EU MFN tariffs when imported from the UK’, while the pizza would ‘be subject to tariffs if imported for sale to the UK’ (5).
It is far from clear whether the ‘customs partnership’ option and the ‘maximum facilitation’ option are capable of disentangling the complexities existing along integrated pan-EU28 supply chains which have been built up over the past 45 years. According to Professor Tim Benton the problem of the border control implications of Brexit is ‘we are going to go into something relatively sudden’ while in contrast ‘Norway and Sweden have been doing this for 30 or 40 years’ (6).
The increased demands on the system will thus be dramatic in a context where the UK government’s track record on the introduction of new technology into government services is not an impressive one. According to Professor Benton ‘every major infrastructural project that the UK Government have tried around some big electronic system, whether it is passports or national health records, has not worked’. This is a serious issue since the UK will ‘not have 40 years to develop a smart border’, but a little over 30 months (6).
The Director General of the Food and Drink Federation went further stating ‘there is no chance that our customs system will be ready in two or three years’ time. It simply is not going to happen. The technology is not there. It is not tested’ (6).
What seems likely is that it will take a considerable amount of time to disentangle these complexities, with these requiring detailed negotiations. What is more even if these complexities are disentangled and a comprehensive free trade deal is negotiated which ‘keep tariffs at zero and minimise non-tariff barriers, according to modelling undertaken by the UK Trade Policy Observatory, ‘the cost of border inspections and some low-level non-tariff barriers would see food prices rise by 3.8%’ (7).
For ACP products where exports to the UK via ports of landing in Belgium and Holland take place, such and fruit and vegetables these border inspection costs and low level non-tariff barriers would increase costs by 5.1% and 4.8% respectively (7).
| Comment and Analysis The UK proposals to facilitate unrestricted onward trade between the EU27 and the UK, where the tariffs applied by the UK and EU27 are the same, potentially offers a strong basis for establishing administrative arrangements for dealing with triangular trade issues along ACP supply chains which have been built up over the 43 years to serve EU28 markets through single points of entry to the EU. This would be particularly relevant for countries which currently enjoy full duty free-quota free access to both the EU27 and subsequently the UK market (i.e. LDCs and all ACP countries – except for South Africa – which have economic partnership agreements in place with the EU). This could provide these countries with continued preferential treatment compared to countries exporting to the UK under new ‘UK-only’ trade agreements which establish UK import tariffs at variance with those from the EU. This ‘preference’ would arise from the certainty this would give UK food and drink manufacturers that there exports to the EU27 will not face supplementary duties based on the non-originating content used. This could be particularly valuable for ACP sugar exporters. However to be of substantive value such arrangements would have to extend beyond tariff treatment to continued UK recognition of all EU trade, SPS and food safety documentation. For short shelf live fresh produce it would also need to involve special customs clearance arrangements to enable these exports to side-step traffic congestion at UK ports which would arise under a ‘Hard’ Brexit scenario. The ‘max-fac’ option if it were to be further elaborated could also potentially offer mechanisms for minimizing disruption of triangular supply chains. However this being noted, the findings by the UK Trade Policy Observatory that even with a comprehensive EU27/UK FTA in place, non-tariff measures could increase UK consumer prices by an average of around 5% for fruit traded along EU27/UK supply chains, needs to be taken on board. However taking on board what this finding would mean for individual ACP agro-food exporters can only be achieved by ‘drilling-down’ to the product level implications along specific triangular supply chains. In some instances this may require ACP exporters to either find alternative routes to serving the UK market or diversify their exports to serving EU27 markets. This is where the establishment of some form of ‘Be Prepared Grant Facility’ and ‘Market Repositioning Support Facility’ for ACP exporters could prove invaluable The extent to which Brexit related cost increases are passed on to smaller scale ACP exporters could well be influenced by how effectively new EU regulations on the elimination of unfair trading practices (UTPs) are interpreted and applied in practice ‘see companion epamonitoring.net article ‘EC Proposes New UTP Regulations Should Cover Sourcing from Developing Country Suppliers’, 23 April 2018). This is potentially a further area to which ACP representatives in Brussels will need to pay close attention in the coming months, particularly those from East Africa where UTPs are common along horticulture supply chains serving EU markets. |
Sources:
(1) Guardian, ‘Theresa May denies customs union climb down’, 17 May 2018
https://www.theguardian.com/politics/2018/may/17/theresa-may-denies-customs-union-climbdown
(2) HMG, ‘Future customs arrangements: A future partnership paper’, 15 August 2017
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/637748/Future_customs_arrangements_-_a_future_partnership_paper.pdf
(3) CAPReform.eu, ‘The Brexit negotiations on the future trade relationship’
http://capreform.eu/the-brexit-negotiations-on-the-future-trade-relationship/
(4) UK Parliament, Business, Energy and Industrial Strategy (BEIS) Committee ‘Evidence from food and drink manufacturers warns of dangers of ‘no deal’ – Written evidence Tate & Lyles Sugars (BRF0012)’ pages 60-64, November 2017
https://www.parliament.uk/documents/commons-committees/business-energy-and-industrial-strategy/Written-evidence/written-evidence–Brexit-food-and-drink.pdf
(5) House of Lords European Union Committee, ‘Brexit: Food prices and availability’ 10th May 2018
https://publications.parliament.uk/pa/ld201719/ldselect/ldeucom/129/129.pdf
(6) Select Committee on the European Union Energy and Environment Sub-Committee, ‘Corrected oral evidence: Brexit: Food Security’, 7 February 2018
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/eu-energy-and-environment-subcommittee/brexit-food-security/oral/78383.html
(7) UK Trade Policy Observatory (UKTPO), University of Sussex, ‘Dr Ilona Serwicka’ (BFS0009)
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/eu-energy-and-environment-subcommittee/brexit-food-security/written/79665.html