Splitsville: Tariff rate quotas after Brexit

As part of the Brexit “divorce talks” to prepare for the UK to leave the European Union in 2019, the European Commission and the UK have reportedly reached a preliminary agreement to divide up the EU’s current WTO tariff rate quotas (TRQs) on agricultural products. This would have significant implications for New Zealand access for meat and dairy products into the UK and EU. Under WTO rules, such a “deal” cannot simply be imposed on New Zealand and other WTO members.

The EU TRQs are part of the EU’s legal commitments in the WTO, and were part of the finely-tuned balance that was negotiated among WTO members in the Uruguay Round.   They include so-called “country-specific tariff quotas” for New Zealand sheepmeat, butter and cheeses. A range of other WTO members, including major traders such as Brazil, Canada, Australia, China, Thailand and the US also have country-specific tariff quotas that were negotiated during the Uruguay Round or subsequently. The EU also has other TRQs for meat, dairy products, sugar and other products that can be accessed by some or all WTO Members, depending on the quota.

The tariff rate quotas provide a market access opportunity for a fixed quantity of farm products to enter the EU at a lower tariff rate. (Tariffs outside of those TRQs are normally prohibitively high and make trade uneconomic.)   The current WTO commitments provide TRQ access to the 28 EU Member States on an unrestricted basis – that is, product can be imported into any Member State, in whichever proportion, provided that the total volume is not exceeded overall.

The “deal” struck by the UK and Brussels would reportedly simply divide up the current volumes between the UK and the remaining 27 Member States. The basis for this division (according to media reports) would be determined by a historical average of import shares into, respectively, the UK and other EU Member States – although of course this does not take account of a common trade pattern in which product may be imported into a single port in the UK for logistical reasons but then sent on to other European Member States for consumption, or vice versa. Apparently a letter setting out the proposed approach will be circulated to WTO Members in the coming week.
In effect, this approach would represent a reduction in the quality and quantity of the market access opportunity for exporters into Europe and, as such, would not deliver on the UK’s and EU’s bound WTO commitments.   While currently the full volume of a given TRQ can be imported into any Member State, under the proposed approach those volumes would be reduced.  Further, any product sent into the UK currently enjoys effectively “frictionless” onward trade into the remaining Member States, thanks to EU Single Market rules – which is highly unlikely to be the case following Brexit, thereby further diminishing the “quality” of access provided.

The EU and UK are obliged to ensure that there is no diminution to the market access commitment that the EU has made – in other words, entirely reasonably, that trading partners are “no worse off”.   To that end, any proposal made by the EU and UK would need to be agreed by all WTO Members, including New Zealand – the EU and UK cannot simply impose a deal on others.

It should be possible to reach a negotiated solution that ensures such an outcome that properly preserves the existing market access commitments. We understand that New Zealand officials have been working on developing constructive approaches that might help to deliver on this. But clearly the first step is to engage in detail; what will not work is presenting a fait accompli to the WTO membership.  Breaking up is hard to do, as our British and European friends are finding out.

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