Original publication: October 2017
Author: Alan Matthews
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On 29 March 2017 the United Kingdom (UK) notified the President of the European Council of its intention to withdraw from the European Union (EU). Article 50 of the Treaty of the European Union sets out the procedures to be followed when a Member State wishes to leave the EU.
The UK has set out its ambition for a bold and ambitious free trade agreement with the EU, while respecting its four ‘red lines’ of ending the jurisdiction of the European Court of Justice, controlling immigration from the EU, ending most contributions to the EU budget, and being able to strike trade deals with third countries.
The EU has set out its position through the European Council (Art. 50) guidelines, the Council’s negotiating directives and resolutions of the European Parliament, emphasising that a nonmember of the Union, that does not live up to the same obligations as a member, cannot have the same rights and enjoy the same benefits as a member. It also set out a phased approach to the withdrawal negotiations in which progress must be made on three key withdrawal issues before it will give a mandate to move to the second phase of negotiations on the future relationship.
Withdrawal negotiations began on 22 June 2017 but the European Council (Art. 50) decided on 20 October 2017 that insufficient progress had been made in the first phase of the negotiations to justify preparing a mandate for the second phase. However, it invited the Council (Art. 50) and the Union negotiator to start internal preparatory discussions in relation to the framework for the future relationship and on transitional arrangements, with a view to being able to move to the second phase of the negotiations in December 2017.
The issues at stake for agri-food trade
In the absence of a future trade agreement tariffs would be re-imposed on bilateral UK-EU27 trade. The tariffs applicable to UK exports would be those in the EU’s Common External Tariff (CET). The tariffs applicable to EU exports are not yet known, but at least initially may be kept at the CET level.
Even apart from the imposition of tariffs, the UK would be a less attractive market for EU exporters because exporters would lose the preferential trade transfers they currently earn on sales to the UK market. These represent the difference between the price paid by UK consumers for EU27 exports behind the EU tariff wall and the price EU exporters would receive if the products were sold instead at world market prices.
Customs clearance costs would be an additional cost for firms exporting or importing from the UK. These costs would be increased for certain agricultural and food products because of the need for additional border checks to ensure compliance with EU27 food safety, plant and animal health regulations.
In the absence of an agreement covering road transport services, hauliers travelling between the UK and EU27 could face additional costs because of the need to secure licences with individual Member States.
Ireland faces particular issues in the event of a ‘hard’ Brexit because of the importance of the UK land bridge for the transport of agri-food products to and from the EU27, and because transport from one location in Ireland to another may in some instances need to travel through Northern Ireland.
A range of potential trade arrangements are available which address one or more of these potential trade costs. However, the current ability to trade frictionlessly between the UK and the EU27 is due to the UK’s EU membership and can only be maintained if the UK were to remain a member of the EU.
There are a number of ‘models’ for the future long-term trade relationship between the UK and the EU27. These include the ‘Canada’, ‘Turkey’, ‘Ukraine’, ‘Swiss’ and ‘Norway’ models. The UK government has ruled out the Canada, Turkey and Norway models, but it has not defined where it might like to end up between the Ukraine and Swiss models. The EU27, for its part, is unlikely to make the Swiss model available because of its institutional deficiencies, though its attitude to the Ukraine model has not been clarified. The Ukraine model is implemented through an Association Agreement with the EU which has been specifically endorsed by the European Parliament.
Avoiding a ‘cliff-edge’ for agri-food trade
Even if the UK and the EU27 were to conclude an agreement on the withdrawal conditions and on the nature of their future relationship by 29 March 2019, traders face a ‘cliff-edge’ situation because of the lack of preparedness of customs administrations and other relevant authorities on both sides to manage border controls; the lack of knowledge on the part of the large number of new businesses that will face the need to seek customs clearance for their exports and imports; and the almost certain congestion at major ports of entry and exit because of the extra time required for these controls.
Both parties have indicated a willingness to consider a transition period. In this study, the purpose of a transitional period would be to maintain the trade status quo between the UK and the EU27 until the arrangements for the future trade relationship were put in place. Both parties have indicated their ‘red lines’ regarding matters on which they would insist during a transition period. There is little clarity, however, as to how extensive such a transition arrangement might be and what laws and regulations it would have to cover to ensure that trade, including trade in agri-food products, would continue on the same basis as it does today.
One option is that the UK would remain a Member State of the EU for a further time-limited period, either by including a withdrawal date later than 29 March 2019 in the withdrawal agreement or by unanimously agreeing to extend the Art.50 TEU deadline for the negotiations.
Another option is that the UK would agree to bind itself to following the relevant Union acquis as a non-Member State for a time-limited period after 29 March 2019 while also joining a temporary customs union for this period. Negotiating what would effectively be a complete if temporary trade agreement at the same time as the parties are negotiating a withdrawal agreement and the framework for their future relations may be more than can be achieved in the remaining time available.
Fall-back positions which would avoid some but not all of the additional trade costs, such as a temporary customs union on its own or just a free trade agreement in goods, should be considered if it proves impossible to reach an agreement in which the UK remains bound by the relevant Union acquis in the time available.
Following the mandate at the October 2017 meeting of the European Council (Art.50), the General Council (Art. 50) and the Union negotiator should seek to rapidly progress preparatory work particularly on models of transitional arrangements. This should help to clarify what might be the minimum requirements to ensure that trade can continue to take place with the UK as it does today for the duration of the transition period, and what the appropriate balance of rights and obligations might be during this period. Specific issues for consideration will include whether UK membership of the CAP and the Common Fisheries Policy (CFP) will be deemed necessary as a prerequisite for continued free trade in agricultural and fishery products during the transition period, as well as arrangements to ensure the continued protection of Geographical Indications in the UK.
Protecting agricultural interests following Brexit
The EU has gained considerable experience in recent years in the management of adverse shocks to agricultural markets which can be drawn upon in designing possible responses to a negative Brexit shock. They include the use of safety-net intervention; targeted aid; mobilisation of the crisis reserve; advancing direct payments; making use of the income stabilisation tool; permitting flexibility in state aids; and facilitating supply management.
Farmers and food businesses in the EU27 will need such support to adjust to the structural consequences of a ‘hard’ Brexit. This might include the provision of adjustment assistance; greater use of financial instruments; a strengthened promotion policy; and improved access to third country markets.
A specific market access concern is how UK TRQs will make provision for traditional EU27 export flows, and vice versa for EU27 TRQs. Merely splitting the EU TRQs does not go far enough to protect the interests of EU producers to access the UK market in the event of a ‘hard’ Brexit.
Link to the full study: http://bit.ly/602-009
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