By Stuart Harbinson
On March 29, 2017 the UK Government notified the European Union, under Article 50 of the Lisbon Treaty, of its intention to leave the EU. Under the terms of Article 50, the UK will leave the EU when a withdrawal agreement has been reached or, failing that, two years after the notification- i.e. in late March 2019. An agreement on withdrawal should, according to Article 50, also take account of the framework for the UK’s future relationship with the EU.
The UK has clearly signalled that it will leave the EU Single Market and Customs Union. However, it wishes to pursue a new strategic partnership with the EU, including an ambitious and comprehensive Free Trade Agreement (FTA), and a new customs agreement.
One of the UK’s important priorities on leaving the EU is to protect strong and historic ties with Ireland, and to maintain the Common Travel Area. Its aim is to have as seamless and frictionless a border between Northern Ireland and Ireland as possible. This point was re-emphasised in Prime Minister May’s recent letter of notification under Article 50(2) to EU President Tusk.
In terms of overall trade, the UK exported goods and services to Ireland worth £26.1 billion in 2015, and imported £17.7 billion. Goods accounted for 72 per cent of the UK’s imports from Ireland.
Snapshot of UK-Ireland agri-food trade
The UK and Irish economies are deeply integrated and there are particularly close and longstanding links in agri-food trade.
Total trade between the UK and Ireland in 2016 was worth an estimated € 37 billion, with very large and well diversified Irish exports accounting for some 18.5% of Irish GDP. When including imports, total external trade with the UK accounted for 35% of Irish GDP.
Both countries joined the European Communities at the same time in 1973. In general, UK accession to the EEC led to a significant re-orientation of trade towards other EEC members. Ireland was a significant beneficiary, for example, replacing Australia to become by far the largest source of UK beef imports. Due to special quota arrangements and the general lack of supply within the EEC, on the other hand, New Zealand has remained the largest source of UK imports of lamb.
The UK is Ireland’s largest market for food and drink, accounting for 37% of all food and drink exports in 2016, or over €4.1 billion. Ireland is also a significant importer of food, with almost €2.8 billion sourced from the UK.
Value of UK and Irish agri-food markets to each other
Table 1: Value of UK market for Irish agri-food exports 2016
Table 2: Value of Irish market for UK agri-food exports 2016
A Free Trade Agreement versus Single Market and Customs Union
The UK wishes to replace current Single Market and Customs Union arrangements with the EU by an FTA. What are the implications for bilateral trade?
- First, a high-quality FTA offering deep integration could mitigate many potentially negative effects of Brexit on UK/EU trade. Maintaining zero tariffs with suitable border arrangements could minimise disruption. It could not be taken for granted, however, that UK/EU trade would be fully liberalised. The EU applies Tariff Rate Quotas (TRQs) to sensitive agricultural products such as beef and dairy in all its existing FTAs and could seek to do similar in a UK/EU FTA.
- Second, there would still be costs for business. An FTA is by definition inferior to the Single Market and Customs Union, where goods can be freely re-exported to any EU country once inside the EU. Under an FTA, only goods originating in the UK would qualify for duty free import into the EU. The same would apply in reverse. Rules of Origin would have to be agreed between the EU and the UK with associated costs tied to their application and administration.Furthermore, the UK would be in the position of a rule-taker rather than a rule-maker, since it would have to abide by Single Market standards to have EU access but would no longer be able to influence such rules. True, it could set its own standards for access to the UK market but gradual regulatory divergence could become an issue.Will the UK adopt the same food safety standards as the EU? What will happen to the recognition of products such as Scotch or Irish whiskey, currently designated as EU Geographical Indications (GIs) and protected in third markets? How will the UK’s policy to issues such as hormone-treated beef and GMOs evolve? Problems of regulatory divergence could complicate EU-UK trade in the future.
- Third, leaving the Customs Union would mean that Ireland’s border with Northern Ireland will become, in effect, the EU’s external border. This has the potential to inhibit the current free flow of trade over the border, both in terms of finished products and the significant intermediate trade in products such as all-island milk processing structures, with one third of all milk in Northern Ireland – around 600 million litres – exported to Ireland for processing annually. Total food exports from Ireland in 2015 were worth €690 million, while it imported €530 million.The UK Government has acknowledged the problem through stating its aim to have as seamless a border as possible and a new customs agreement with the EU. However, the technicalities are daunting and add yet another layer of complexity and the UK has not given any detail on how this might be solved.It might also be possible for a new customs agreement to address the issue of outward processing – by facilitating the flow of intermediate trade across a border, linked to a final product possessing a distinct “country of origin”. Such arrangements are complicated, and still come with administrative costs, but are doable.
The Regulatory Tangle
The UK Government has recently published a Great Repeal Bill which will transfer all EU laws currently in force on to the UK statute book. Over the next two years this huge body of law will be sifted through and decisions will be made on which laws to retain, modify or discard when Brexit takes effect in late March 2019.
In this process, the UK will need to create some new regulatory agencies to replicate functions currently carried out at the EU level, and to enlarge some of its existing agencies. Decisions will be taken on whether current EU regulation is appropriate or should be modified.
In the agri-food sector, issues such as food safety and animal welfare standards could be the subject of attention. Possibly the UK will opt simply to incorporate current EU standards, at least to start with, or some changes may be made.
The question of future regulatory divergence, with associated costs, again comes into the equation. There is also a potential big impact on regulatory certification arrangements. Questions such as laboratory accreditation and whether food processing facilities in the UK and EU conform with relevant standards will arise.
Mutual recognition arrangements could be put in place, but these would take time to work out and implement.
The UK Government has signalled its intention to match current EU farm subsidy policy, up to 2020. There will need to be a major consultation on post-2020 arrangements.
As regards the prospects for future levels of subsidisation, the UK agriculture sector would appear to be in a weaker position in the UK-alone context than the EU agriculture sector has been in the EU-wide context.
This raises the prospect of a farmer north of the border in Ireland being in a worse position post-2020 than his counterpart a few miles further south.
UK FTAs with Third Countries
One of the stated reasons for the UK to leave the EU is to give it the freedom to negotiate FTAs on its own with third countries. A number of candidates have been identified: the United States, Australia, New Zealand, Canada, South Korea, India, Brazil/ Mercosur, even China.
The phrase ‘sacrificial lamb’ might take on a new and wider meaning for UK farmers.
The EU already has FTAs with Canada and South Korea, is negotiating with India and Mercosur, and has just started negotiations with Australia and New Zealand. TTIP negotiations are in abeyance at present but could be revived.
So, in a sense, the UK is playing catch-up. There is however a distinct possibility that the UK will be able to negotiate deeper FTAs than the EU with some of these potential partners, and that agriculture will be one of the sectors in which the UK will be more liberal than the EU in terms of increased market access.
In this eventuality, some UK and Irish agricultural sectors could come under pressure, for example in beef and dairy. Irish exporters and UK producers would still enjoy the advantage of proximity in a sector of trade which is often very time-sensitive.
However, increased competition from the US, Australia and New Zealand could affect the prospects for Irish exports to the UK and the EU, while UK farmers could also be squeezed. The phrase ‘sacrificial lamb’ might take on a new and wider meaning for UK farmers.
Food safety standards would be an issue in UK/ US negotiations: would the UK accept US exports of hormone-treated beef and ractopamine-treated pork, and what about the use of GMOs? The UK may prove more tractable than the EU on such issues.
The UK Government has frequently complained about the constraints that EU membership has placed on it in terms of being able to strike new trade deals. It sees the UK, unfettered by the EU, forging ambitious new deals around the world.
While it is true that the UK may be able to offer more than the EU in such deals, there are a number of other constraints which might inhibit the UK from taking full advantage – the EU is already a global player, has a larger market and may get priority; some potential FTA partners may not fully share the UK Government’s commitment to free trade; and others will make uncomfortable demands (e.g. more work visas for entry to the UK).
The ‘Hard Brexit’ Scenario
The negotiation of a deep FTA between the EU and the UK within, effectively, about 18 months may not be impossible given that the starting point (unlike most other FTAs) is the current free trade and full regulatory compatibility. But it is undoubtedly a huge challenge.
The EU wants to sequence some of the discussions rather than having them run in parallel (progress on the “divorce” terms first, before addressing the question of future arrangements), which could add considerably to the time pressure.
The possibility of an interim or provisional FTA to be finalised further down the line may be more realistic – indeed the UK Government has recently been making more frequent references to the need for “implementation periods” in a variety of contexts.
Time could simply run out. Or talks could become acrimonious, leading to no deal. A UK Government mantra has been “no deal is better than a bad deal”. “No deal” in trade terms would mean falling back on the WTO – the commitments in terms of specific tariffs and general rules that come with being a WTO Member.
In the trade policy world, “no deal” is the bottom line for WTO Members. The EU and the UK cannot – and will not – treat each other in a way which would infringe basic WTO rules.
The EU’s simple average MFN applied tariff on agricultural products is 10.7 per cent. However a significant proportion of its tariffs exceed 15% and its maximum tariff is well above 100 per cent. In addition, Tariff Rate Quotas (TRQs) apply to a range of imported products, including grains/oilseeds, dairy, poultry, pork and beef.
The ‘Hard Brexit’ scenario represents the worst case for Ireland. While some sectors may cope, for others the application of tariffs and possibly Tariff Rate Quotas would present a serious challenge; 60% of Irish cheddar cheese is exported to the UK and there are no alternative markets. Similarly, 80% of Irish mushrooms are exported to the UK.
Another potential complication arises with respect to food processing across the border between Ireland and Northern Ireland. Depending on the exact circumstances, the act of processing could result in a change of tariff heading or affect whether the product is covered by a TRQ when re-exported. While special arrangements for outward processing could possibly mitigate some of the effects, the administrative and commercial complications are potentially very significant.
The UK and the WTO
The UK is a Member of the WTO. Its market access commitments are however currently subsumed into the EU’s WTO market access schedules – which list, tariff line by tariff line, the maximum (‘bound’) duty the EU will charge for the product concerned.
A duty reduction is allowable under two circumstances: a) when the WTO Member concerned decides to apply a lower level of duty in practice, in which case this must be done on a non-discriminatory (MFN) basis; or b) when a WTO-permitted exception is invoked which allows a Member to grant tariff preferences (e.g. for a properly constituted free trade agreement/customs union or a special scheme for least-developed countries).
On leaving the EU, the UK will need to have established its own schedules of commitments in goods (and services) in the WTO.
The UK has said that it will pursue a “replication” (or, in WTO legal parlance, a “rectification”) approach – in other words, as far as possible, it will simply ‘cut and paste’ its commitments from the EU market access schedules.
The new draft UK schedules would then be submitted to the WTO for certification. The Director-General would subsequently circulate the draft schedules to other WTO Members to see if there are any objections within a certain period.
Overall, this seems a sensible approach in order to minimise possible objections from the UK’s trading partners. The UK is portraying the process as one of continuity and “no change”.
However, there are a limited number of areas in which the replication approach is potentially problematic – in particular, in the field of agriculture, TRQs and the Aggregate Measure of Support (AMS) for trade-distorting subsidies.
Tariff Rate Quotas
There are a number of options potentially open for the UK to disentangle its WTO responsibilities from the EU’s in dealing with TRQs. For example, it could assume responsibility for a proportion of the existing EU28-wide TRQs; it could take the EU-wide figures and put them in their totality in the new UK schedule (which would open up the UK market to greatly increased competition); or it could establish new TRQs based on UK import figures for recent years and either make country-specific or global allocations.
The loss of preferential access to the UK market would greatly affect Ireland’s exports
Or it might even decide to abandon TRQs and opt for a tariff-only regime.
An important point to note is that, in the absence of an FTA with the EU (i.e. in the Hard Brexit scenario), the UK would have to treat the EU (including Ireland) in the same way as other suppliers, such as the US, Australia, New Zealand and Brazil. There would be no legal basis on which it could grant the EU preferential access.
This would present significant problems for Ireland as well as some other EU Member States. The loss of preferential access to the UK market would greatly affect Ireland’s exports, particularly in beef and dairy.
If there are objections to the way in which the UK has treated such issues in its draft WTO schedules, the dissatisfied WTO Member(s) can call for consultations or negotiations with the UK under a “modification” procedure, in order to reach a satisfactory solution.
Ultimately, if no solution can be reached, other Members could seek to “retaliate” by suspending concessions to the UK equivalent to the degree of trade adversely affected, or the matter might be referred to the WTO dispute settlement mechanism.
Similarly, in the absence of an EU/UK FTA, the EU would have to treat the UK on a par with other non-EU suppliers, which would mean allocating TRQs to the UK in areas such as beef, lamb and dairy.
Summary of the Main Risks for Ireland/UK Trade in the Agri-food Sector
- A hard border with Northern Ireland would considerably complicate the highly integrated current trade in live animals, final products and products for processing, and result in higher costs. This risk could be mitigated to some extent if a special customs arrangement is put in place but at present there is no certainty or detail about this.
- A comprehensive EU/UK FTA is the best case scenario as it would allow for tariff-free and TRQ-free access in both directions. But an FTA is inferior to current Single Market/Customs Union conditions and will increase administrative and regulatory burdens, and thereby increase costs both for Ireland and the UK.
- The UK’s pursuit of its own FTAs is likely to increase competition in the UK market with third countries such as the US, Australia, New Zealand and Brazil, although it should be borne in mind that the EU is pursuing similar FTAs anyway (albeit probably with less ambitious liberalisation).
- In the absence of an EU/UK FTA, Ireland will be competing in the UK market on similar terms as other suppliers such as the US, Australia, Argentina and Brazil in beef, and New Zealand in lamb and dairy. TRQs and in quota tariffs (for example a 20 per cent in quota duty currently applies to “Hilton” beef) would impact significantly on Irish market share in the UK. And the UK will similarly be competing in the EU market on the same terms as those other suppliers.
- For sectors such as Irish whiskey, the production of which is legislated and carried out on an allisland basis, it remains to be seen how this can be accommodated post-Brexit. Leaving aside the cross-border supply aspect, Irish whiskey is designated as an EU Geographical Indication (GI) and it is uncertain as to how the EU will continue to protect this category when part of it originates from a non-Member State.
- The relationship between agri-food exports and the historical exchange rate shows that weakness in Sterling results in a reciprocal drop in Irish exports to the UK, with resultant losses of Irish jobs. In 2016, Irish agri-food exports were an estimated €570m less than they otherwise would have been in 2016, due mainly to the weakening of sterling.
- There are considerable regulatory challenges to be overcome in both the FTA and “Hard Brexit” scenarios. This will take time to sort out so, at a minimum, suitable transitional arrangements are called for.
The debate in the UK up to now has been about the nature of the future trading relationship with the EU that the UK should aim for. The general contours of that have now been made clear – an ambitious and comprehensive FTA. The ground has now shifted to what the EU is prepared to offer.
The EU’s attitude will be conditioned by the outcome of upcoming elections in France and Germany. Brexit has been a shock and we may see a more unified EU in future, at least for a while.
Prime considerations on the EU side at present are the need to safeguard the future of the EU and insist on a fair financial settlement. So far European business has not been particularly vocal in calling for a non-disruptive trade settlement, but this may change.
The highly complex Article 50 negotiations now getting under way constitute a huge challenge on both sides. Things could go badly wrong, particularly for the agri-food sector. Failure to conclude an FTA would be hugely disruptive to current UK/Ireland trade. While, even with an FTA, the trading relationship is likely to become somewhat more complex and costly.
For the UK farming sector, increased competition and (possibly) reduced subsidies would mean that some sectors might need to re-invent themselves in order to remain viable. Both sides may ultimately back away from the cliff edge and produce a comprehensive FTA deal which is not too far away from present arrangements, albeit with some element of added cost and inconvenience and probably involving a transitional period.
But this certainly cannot be taken for granted. The devil, as ever in trade negotiations, is in the detail. The EU has never before completed an FTA within such a short time frame. An EU/UK FTA is not a typical negotiation in that both sides start not from a position of high barriers, but rather from a position of full free trade and full regulatory compatibility.
Even so, it is a major challenge.
The stakes are high. The agri-food sectors in Ireland and the UK need to be on high alert to ensure that their concerns are taken on board throughout the negotiations or that, in a really Hard Brexit scenario, they are prepared for the worst.