Trading into uncertainty: Two months to Brexit

Photo: Even Newton’s Cradle stops eventually – but only after the shockwaves are transmitted along the chain.

We are now less than two months out from the Brexit deadline.  A “no-deal” UK exit seems increasingly likely – but the picture for trade remains uncertain.   New Zealand has agreed on some useful regulatory continuity with the UK for the post-Brexit era, but the tariffs, and indeed the market situation that Kiwi businesses will face, are far from clear.

It seems that one of the defining characteristics of Brexit is that the only certain thing is uncertainty.   The UK is now less than two months away from “Brexit Day” on 31 October, but quite what will happen at the political or economic and trade level is still unclear.  

Parliamentary chaos

Last week, Prime Minister Boris Johnson moved to “prorogue” Parliament, meaning that it will not sit from the end of this week through to mid-October, provoking both widespread protests and legal challenges over the constitutionality of the move.  (In effect the Parliamentary suspension means that the time available to debate legislation relating to Brexit is heavily circumscribed.)  A group of MPs opposed to no-deal, including from the governing Conservative Party, won a motion to bring forward legislation – which will be voted on tomorrow – to rule out such an outcome and to extend the Brexit deadline.  PM Johnson has indicated that if that legislation passes, he will seek to hold a vote to call a snap election (although agreement to this requires the support of two-thirds of the House of Commons).

Meanwhile, PM Johnson has instructed negotiators to step up the tempo of EU talks seeking a new deal to replace the earlier, unpalatable, Withdrawal Agreement.   The EU has signalled that it is open to exploring alternatives to the contentious backstop that achieve the same aim (the integrity of the Single Market, while avoiding a hard border in Ireland) – once the Withdrawal Agreement has been ratified.   The chances of a new deal appear extremely low. 

Business and trade uncertainty

The picture for business – in Britain and abroad – remains complex and uncertain.   The UK Government has updated its “Get Ready for Brexit” website, including a “Brexit Checker” for businesses to ascertain the steps they may need to take.  In most cases, however, the advice is necessarily heavily qualified because the situation is so uncertain and/or complex, meaning that firms, especially small businesses, may struggle to prepare sufficiently.  Most will probably conclude that a no-deal outcome will entail at least significant new red tape, both at and behind the border.

New Zealand exports would continue to face UK tariffs…probably

Where does that leave New Zealand exporters?  The Government has negotiated a number of helpful regulatory arrangements with the UK, to keep trade rules as close to the status quo as possible – including a ‘Vet Agreement’, mutual recognition for manufactured goods, organics standards, rules for inspection checks for apples and kiwifruit, fisheries catch certification and ‘data adequacy’ – and webpages from MFAT, MPI, NZTE and Customs also include material to help Kiwi businesses prepare.

The tariffs that exporters may face are less predictable, however.  In March, the UK issued a draft temporary no-deal tariff schedule.  However the UK Government website confirms that the documents are still drafts, subject to legislative approval.   Given the fraught political situation and Parliamentary suspension, it is not at all certain whether this will happen by 31 October.

New Zealand exports would still face tariffs and volume limits on sheepmeat and some dairy products, but are also likely to be traded into a chaotic market.

Splitsville: Country-Specific Tariff Quotas

Readers may recall from our earlier blog that while most imports would become duty-free overnight, a handful of agricultural products would still face tariffs and tariff rate quotas (TRQs).   Where tariffs on beef and some dairy product tariffs would be lower under the new schedule, sheepmeat, butter and some cheese would in the main still only be able to enter the UK via TRQs – with volumes limited to between one-third and one half of current levels, thanks to the UK and EU “splitting” of existing EU WTO country-specific TRQs.   (Readers may recall that this is a longstanding bone of contention, since in effect the split undermines the legally-agreed quality and quantity of access for New Zealand.)

Market disruption likely

Tariffs and TRQs aside, the market dynamics for New Zealand exporters and indeed for British farmers are likely to be very difficult.   For sheepmeat, while UK producers will be shielded from imports, without a new trade deal with the EU, British exports to the Continent (the major destination for UK sheepmeat) would face prohibitive tariffs.  The impact on markets will be significant.  Equally, the UK is a top dairy importer, and the EU the biggest dairy exporter; disruption to that trade is likely to have market impacts too.  

More broadly, it seems highly likely that existing infrastructure and border preparations will struggle to cope in a no-deal scenario, meaning delays and disruption at the border and to supply chains.  All in all, the potential shockwaves of a no-deal outcome mean that many in New Zealand will contine to watch this space very closely.

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