Brexit: Should I stay or should I go now?

Just over a week before the Brexit deadline, the UK faces the prospect of a lengthy delay – but equally, the possibility of a “no-deal” Brexit looms larger than ever.  It is hard to predict which of these two extremes we may see next Friday.   In anticipation of no-deal, however, the UK has released a new temporary post-Brexit tariff schedule.  While most imports would be duty-free, sensitive agriculture products, including New Zealand exports of lamb, beef and dairy, would still face barriers.

If anything, the roadmap to Brexit is less clear than it was even at the start of this week.  (See our last blog here.)  The Parliamentary process has descended into chaos after “meaningful vote 3” was disallowed, under which PM May’s Withdrawal Agreement would have come back again to the House to attempt to clear the path for an orderly Brexit.   All eyes are now on Brussels.  The European Council meets on Thursday and will consider an extension – although this would need to have a clear purpose to satisfy EU member states.

Against the no-deal contingency, last week the UK issued a temporary tariff schedule that would apply for a year from 29 March.  Nearly 90 percent of imports would become duty-free overnight, but unsurprisingly, “sensitive” – mainly agricultural – products would still face tariffs and tariff rate quotas (TRQs).  

“…in the main, New Zealand lamb, beef, butter and cheese exports would still only (economically) be able to enter the UK via TRQs – but in lower quantities than before…”

UK and EU consternation

British business has been highly critical of the last-minute timing, the lack of consultation and the potential economic impacts – particularly the National Farmers’ Union, conscious that under no-deal, UK agriculture would face high tariffs into EU export markets while also being exposed to new competition at home.

EU Agriculture Commissioner Phil Hogan has also been critical, asserting that the UK approach would be “illegal” under WTO rules.  The UK proposal would effectively allow duty-free trade from the Republic of Ireland (EU) to Northern Ireland (UK).  Under WTO “MFN” requirements, the UK may not treat one trading partner more favourably than others except under an FTA or similar – but under the proposal, Ireland would seem to enjoy more favourable access.  (As a practical matter, it also seems likely that EU exporters would flock to use this “back door” rather than paying tariffs at ports in Great Britain.)

New Zealand exports would continue to face barriers

What would this mean for New Zealand?  The UK is proposing tariffs on New Zealand exports such as lamb, beef, butter and some cheeses, along with pork, poultry, sugar, bananas, some fish, cars and textiles.    Key sheepmeat tariffs remain unchanged; beef and dairy product tariffs are lower, but in the main, New Zealand livestock exports would still only (economically) be able to enter the UK via TRQs – but in lower quantities than before.

UK/EU TRQ split still in play

New Zealand is currently able to export to the EU/UK under so-called country-specific TRQs (CSTRQs).  In its new schedule, the UK has set out New Zealand CSTRQs in accordance with the “deal” it struck last year with the EU.    Readers may recall that this would split existing CSTRQs based on historical trade patterns.  The split was made over the strenuous objections of New Zealand and other similarly-affected trading partners (who are currently in negotiations in Geneva with the EU and UK over the proposed change).  As we have commented previously, the TRQ split fails to honour both parties’ existing WTO legal obligations and undermines the quality and quantity of access which New Zealand and others have effectively bought and paid for already. A double standard would also seem to be at play: unlike the treatment meted out to WTO partners, it has been reported the EU will honour existing bilateral FTA quota volumes in full, while the UK will establish its own additional TRQs.

Tariffs and TRQs on sheepmeat, beef, dairy

A quick review of the temporary tariff schedule and paper on tariff rate quotas reveals that:

• for sheepmeat, a new New Zealand CSTRQ will be fixed at around half of the current volume.   (While UK sheepmeat producers remain protected, in turn British exports would face prohibitive tariffs into the EU, likely meaning major market disruption);
• for beef, a New Zealand CSTRQ would be set at around one-third of the current volume;
• for butter and cheddar cheese, New Zealand CSTRQs would be established at around one-third of the current quantities, and the in-quota tariff would be unchanged – for butter, meaning that this tariff was higher than the new over-quota tariffs.   In recent years, the high in-quota rate has made New Zealand butter exports largely uneconomic. 

Challenging times

The UK approach is not entirely surprising – agriculture sensitivities drive the trade policy of many countries, even self-styled champions of free trade and multilateralism – but it is disappointing given the broader context.   As NZIBF has argued in relation to potential FTAs with the UK and EU, there are many complementarities in agriculture, including counter-seasonal production and a strong shared interest in growing consumption and value, both in the UK/EU and into third markets in Asia and elsewhere.  Further, in the case of dairy, the UK and EU are internationally competitive producers; and British and European consumers (and taxpayers) have long paid more than they needed to for high-quality food.  The UK approach is a troubling fit with these realities.

This post was prepared by Stephanie Honey, Associate Director of NZIBF.