UK Signs Continuity Agreement with Caribbean ACP Countries

There can be no doubt about the short term economic significance of rolling over existing EPA tariff preferences under a UK-Caribbean Continuity Agreement. The imposition of standard MFN duties on bananas and sugar which the lapsing of existing EU agreed trade agreements would have given rise to without an alternative trade arrangement being put in place, would have driven most Caribbean banana and sugar exporters out of the UK market. The only exception being banana exporters from the Dominican Republic which may have maintained a presence in the UK mark, but with reduced levels of profitability.

Not only does the Continuity Agreement secure this access under a no-deal Brexit scenario, but also leaves Caribbean sugar and banana exporters well placed to capitalise on new short term market opportunities which are likely to arise under a no-deal Brexit scenario.

For example the imposition of MFN duties on EU27 sugar imports would be likely to virtually halt a EU27-UK sugar export trade which accounted for some 550,000 tonnes of UK sugar refined sugar consumption in the 2017/18 season.

Similarly if existing EU trade agreements are not rolled over by the UK before departure from the EU, then there will be reduced levels of $ banana exports to the UK market and hence more market space for Caribbean banana exporters.

The conclusion of the UK-Caribbean Continuity Agreement could thus bring some immediate short term benefits. However these benefits could well be short lived.

While a temporary no-deal UK MFN tariff schedule has been agreed, the UK government is committed to reviewing this MFN schedule within 12 months of the UK’s departure from the EU (see companion epamonitoring.net article ‘The UK’s Proposed New  MFN Tariff Regime: Protects ACP Interests in the Short Term But….’, 14 March 2019).

This could see the UK review its MFN tariffs on bananas, a sector where the UK has no domestic production interests to protect and which provides the most consumed fruit in the UK. Eliminating MFN tariffs on bananas, so as to combat food price inflation arising from the lapsing of current trade arrangements concluded while part of the EU (including especially with the EU27) could prove politically attractive given the absence of any domestic constituency arguing against such a tariff reform.

Unless firm policy commitments are secured to the contrary, this could see the short term benefits derived by Caribbean banana exporters under the UK-Caribbean Continuity Agreement disappear by as early as May 2020.

Similarly in the sugar sector where the UK has a structural supply deficit, while the imposition of MFN tariffs on sugar imports from the EU27 will ease the long standing financial pressures on the operation of Tate & Lyle Sugars Thames refinery (Tate & Lyle Sugars like Belize Sugar industries is owned by American Sugar Refiners Group), it is far from clear whether this will lead Tate & Lyle Sugars to abandon its lobbying effort to secure duty free access to world market priced sugar.

At a minimum under the tariff review which is scheduled to take place within 12 months of the UK’s departure from the EU under a no-deal Brexit scenario, Tate & Lyle Sugars is likely to press for an expansion of the TRQ for duty free sugar above the current 260,000 tonnes the UK government is currently proposing as part of its no-deal MFN tariff schedule. Any such expansion would intensify competition for Belizean and Guyanese sugar exports to the UK market, both of which serve Tate & Lyle Sugars Thames refinery.

This would be likely to be more of a problem for Guyanese sugar exports than Belize’s sugar exports, since in recent years Belize has diversified away from the UK market. While in 2015 the UK was taking 100% of Belize’s sugar exports to the EU, by 2017 only 21% of Belize’s sugar exports to the EU were going to the UK market. This in part could be linked to the close corporate links which Belize Sugar Industries has with the ASR Group, which in addition to Tate and Lyle Sugar Thames refinery in the UK, has ownership interests in refineries in Portugal and Italy, the two other main destinations for Belize’s sugar exports in 2017.

The position of Guyanese sugar is somewhat different. While Guyana is no longer wholly dependent on the UK market in its sugar sales to the EU, in 2017 the UK still took 84% of total Guyanese sugar exports to the EU market. In 2017 Guyana exported 3-times more sugar to the UK market than Belize and is thus far more vulnerable to any change in UK MFN tariffs applied to sugar imports.

However, it should be noted that the imposition by the UK of MFN duties on EU27 sugar under a no-deal Brexit scenario would be likely to increase price pressures on EU27 sugar markets, as current exporters of sugar to the UK sought alternative markets. This could potentially reduce the returns on Caribbean sugar exports to EU27 markets  This needs to be seen against the background of an already difficult sugar market situation in the EU

Future UK MFN sugar tariff and TRQ arrangements will thus have a critical bearing on the value of the rolled over duty free quota free access which has been set in place under the UK-Caribbean Continuity Agreement. The hard reality is these benefits could be substantially eroded by as early as May 2020, unless wider policy commitments are secured.

This needs to be seen in a context where those commodities which benefit most from the rolling over of current duty free-quota free access are also the products most vulnerable to a radical UK review of its MFN tariff schedule. In 2017 these, products accounted for:

·         89% of the value of Belize’s exports to the UK;

·         84% of the value of St Lucia’s exports to the UK;

·         76% of the value of the Dominican Republic’s exports to the UK; and

·         71% of the value of Guyana’s exports to the UK;

Turning to rum, the 3^rd product identified in the UK government’s press release where the Continuity Agreement brings particular benefits, while the assertion that the newly concluded Continuity Agreement will allow businesses across the Caribbean ‘to trade like they do now, without any additional barriers or tariffs’, is accurate for exports of bottled quality differentiated Authentic Caribbean Rum the same cannot be said for Guyanese exports of bulk rum.

This bulk rum is currently exported to Rotterdam, where it is then forwarded for bottling in France from where it is then exported across the EU, including to the UK.  It is unclear to what extent other Caribbean rum exporters are involved in similar triangular supply chains, with this needing to be assist at a company by company level. Nevertheless it needs to be recognised that for triangular traded products such as bulk rum, which is much more price sensitive, a no-deal Brexit will create a range of new barriers to trade, the commercial significance of which will need to be assessed and which may require  rethinking of routes to market for lower value bulk rums.

Beyond bulk rum there are a multiplicity of products where exports to the EU have been developed over the past 25 years to exploit the economies of scale gained through serving a single EU market of 28 member states, which has always to date included the UK. In a Caribbean context these products include:

· Dominican horticulture products air freighted to the Netherlands for a variety of markets in the EU, including the UK;

·  Belize Fairtrade sugar refined and bagged in the UK for distribution across the EU;

·  single origin coffee and cocoa products used in value added food and drink products
produced and traded across the EU, including into the UK.

A no deal Brexit is likely to pose significant challenges for these Caribbean exports which serve UK markets along triangular supply chains. In this context additional trilateral trade facilitation agreements will be needed if these existing Caribbean trade flows are not to be disrupted.

An additional area of concern for Caribbean horticulture exporters such as the Dominican Republic is the UK’s future phytosanitary control regime. This is potentially also an issue of concern to Belize and smaller scale horticulture exporters in the Caribbean.  Specifically the issue arises as to whether the UK will continue to adhere to the EU’s increasingly strict phytosanitary control regime.

The EU phytosanitary control regime is drawn up on the basis of the varied agro-climatic conditions which exist across the EU single market. Agro-climatic conditions in the UK mean a far more limited range of phytosanitary challenges need to be taken into account when making risk assessments solely for the UK. This is the case for example, for the citrus black spot fungal infection which is a citrus specific infection in a context where there is no domestic UK citrus production and where in addition agro-climatic conditions mean it could never take hold (even if trade was proven to be a vector of transmission for CBS, which a fiercely contested issue in the international citrus scientific community).

In this context the question arises: will the UK pursue its own phytosanitary control regime based on the risk posed in the context of the specific agro-climatic conditions prevailing in the UK or will the UK government continue to take its lead from the EU and continue to implement regulations drawn up in an EU wide context?

This is an important question given the increasing costs faced in complying with increasingly strict EU phytosanitary control requirements and the disproportionate burden this imposes on smaller scale exporters. It is a question which should be addressed in the framework of the UK-Caribbean Continuity Agreement through the establishment of a mechanism for dialogue around the removal of unnecessary phytosanitary controls in the context of risk assessments being undertaken purely on the basis of agro-climatic conditions prevailing in the UK (see companion epamonitoring.net article ‘UK Procedures for SPS Inspections of Plant and Plant Products under a No-Deal Brexit’, 8 April 2019).

Against this background there would appear to be a need to attach an “Annex of Concerns” to the newly conclude UK-Caribbean Continuity Agreement, setting out both areas where the rolled over provisions of the existing EU EPA can and should be improved to enhance current trade and where additional agreements are needed to preserve current triangular trade flows. The full application of tariff preferences for UK exports to the territory of Caribbean signatories should then be linked to the issues raised in the “Annex of Concerns” being comprehensively addressed.

This would appear to be essential to ensure that the newly concluded ‘Continuity Agreement’, preserves and enhances Caribbean exports to the UK. Such a move would be wholly consistent with the UK’s development policy commitments which nominally lie behind its approach to using trade as a tool for sustainable economic development.