The (UK) Winter of our Discontent: Making sense of NZ-UK-EU trade and Brexit

A mere 64 days before the UK is due to leave the European Union, the UK-EU-NZ trade picture remains shrouded in the chill mists of confusion.   During her visit to London this week, the Prime Minister announced two welcome new UK-NZ agreements on aspects of our trade relationship, which will certainly help to minimise future compliance costs for New Zealand exporters to the UK market – but the risk of a catastrophic no-deal looms large, and important issues of agriculture market access have yet to be resolved.  It would seem that the ‘glorious summer’ of Global Britain has yet to arrive.

There was at long last some good news out of the UK this week: the Prime Minister’s mid-winter visit to London included the announcement of two new bilateral UK-NZ agreements on aspects of our trade relationship.  Both deals will (if and when the UK leaves the EU) help to reduce future compliance costs for New Zealand exporters to the UK.  The first is a UK-specific retooling of the NZ-EU ‘Vet Agreement’, a highly valued, world-leading set of rules for trade-related quarantine requirements on meat, dairy and other agriculture products, reflecting both sides’ high standards in this area.  The other, a ‘Mutual Recognition Agreement’ is likewise a UK replica of an EU-NZ arrangement that reduces compliance costs for exporters in meeting technical standards in a handful of sectors (electronics, machinery, medical devices and others).

Wintry winds of uncertainty

But while this positive news may suggest that the sun has at last broken through the clouds, in fact the wintry winds of uncertainty continue to blow.   As our blog last week reported, the risk of a no-deal British exit from the EU is high and growing, being the default option which will come to pass on 29 March unless deliberate action is taken in another direction.  Current UK Parliamentary chaos suggests that deliberate action may be some way off.  (If PM May’s Withdrawal Agreement is approved at the last minute, which is still a possibility, this will in effect give a two-year stay of execution, since a transition provision is included which preserves the status quo for all trade for that period.)

Absent an exit deal, however, New Zealand exporters may potentially face severe disruption in the market from 30 March – notwithstanding the welcome agreements mentioned above.  It is only possible to speculate at this stage on whether there will be a no-deal exit or what it might mean in practical terms, but at the least there could be procedural complications at the border (notwithstanding obviously well-disposed UK authorities and our new deals) and disarray in the market.

NZ-UK-EU trade complications

A further complication which remains unresolved is the terms of access that the UK will offer to New Zealand meat and dairy products – something that the UK is clearly finding difficult to clarify without having itself resolved the terms on which it leaves the EU.   As we have previously reported, in 2017 the UK and EU struck a deal between themselves to divide up various ‘tariff rate quotas’ (TRQs) laid down in the EU’s WTO market access ‘Schedule of Commitments’.  These include several New Zealand-specific TRQs for butter, cheeses, sheepmeat and beef, along with TRQs for the US, Brazil, Australia, Canada, China, Thailand and a host of others.  These TRQs were part of the finely-tuned balance of legally-binding commitments that was negotiated among WTO members (including the UK and other EU member states) in the 1995 Uruguay Round.  

TRQs provide an access opportunity for a fixed, often small, quantity of agricultural products to enter the EU at a lower-than-normal tariff rate – sometimes zero to create a truly level playing field, as is the case for New Zealand sheepmeat.  In other cases, in the in-quota tariff is set at levels that remain high enough to make the trade uneconomic, as for the New Zealand butter TRQ, where relative tariff protection has actually risen as internal European prices have fallen since 1995.  Tariffs outside of those TRQ volumes are normally prohibitively high and have the effect of preventing trade.   

The current WTO commitments provide TRQ access to any or all of the 28 EU members on an unrestricted basis, provided that the total volume is not exceeded.   The UK-EU27 deal would simply divide up the TRQs based on historical patterns of trade – in effect imposing two separate caps.   This does not, however, take account of commercial realities in which product may be placed in one market or another over time in response to consumer demand or logistical considerations.  In effect, this approach would represent a reduction in both the quality and quantity of access.   

The EU and UK have presented their proposed deal to WTO colleagues, but it has been resoundingly rejected.  The EU27 and UK are obliged to ensure that trading partners are “no worse off”, and many, including New Zealand, do not consider the proposal to meet this benchmark – while also being clear that we are not seeking any windfall gains out of the situation.   Both the EU and UK are now undertaking so-called Article XXVIII negotiations with affected trading partners, to seek a compromise outcome.  

The UK has a continuing obligation to respect its existing WTO commitments, including for market access for New Zealand, come what may on 29 March.   We can probably assume that the UK would prefer to implement its own preferred approach to the TRQs – but of course one would hope it would also have in mind establishing its credentials as a principled, rule-following independent WTO member.   While this remains unresolved, however, the gloomy picture of a chaotic next two months is all the more worrying for New Zealand and other exporters.

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