Alan Matthews, ECDPM Great Insights magazine, Summer 2018 (volume 7, issue 3).
The UK’s withdrawal from the EU will impact the food and agriculture sector of developing countries in various ways. The potential impact on agri-food trade flows will be significant. Brexit could also affect overall development assistance flows and foreign direct investment possibilities.
The largest impacts of Brexit on developing country agri-food trade flows will be on exports to the UK itself. The UK currently accounts for around 12% of all developing country agri-food exports to the EU. Of these, more than half enter the UK under ‘most favoured nation’ (MFN) terms (including MFN zero tariffs); one third under preferential trade agreements (free trade agreements, FTAs) and tariff rate quotas (TRQs); and a small share (around 7%) under the EU’s Generalised System of Preferences (GSP), which includes the duty-free quota-free Everything but Arms scheme for the least developed countries (LDCs).
Although positions may change, the UK has indicated that it does not wish to be in a customs union nor be a member of the EU single market in the longer term. This will necessarily lead to increased trade costs for agri-food trade between the UK and the EU 27, even if the two parties remain in an FTA with preferential zero tariffs. Depending on the nature of the future trade relationship, costs will rise from rules of origin checks, physical checks for regulatory compliance, customs clearance formalities, and the possibility of delays at border crossings.
These additional trade costs will lead to a process of trade destruction and trade diversion. Trade destruction means that the volume of trade between the UK and the EU 27 will be lower than it would have been if the UK remained an EU member state. Trade diversion will arise because third countries, including developing countries, will become more competitive in both markets relative to UK and EU 27 exporters. This effect will be mainly relevant on the UK market, because UK exports of agri-food products to the EU 27 are much less significant. Both trade destruction and trade diversion effects will improve the position of developing countries competing with EU exporters on the UK market.
Further effects could arise depending on the UK’s agricultural trade policy after Brexit. A country’s tariff schedule lists the maximum tariffs and other commitments that a country has agreed in negotiations not to exceed. The UK has said that it will adopt the EU’s tariff schedule as its bound tariff schedule at the World Trade Organization (WTO).
But if it wishes, the UK can decide after Brexit to reduce its applied tariffs below these bound tariffs on an MFN basis. To date, the UK has given no indication of its preferred future trade regime for agri-food products. If the UK were to lower its applied tariffs, this could open further opportunities for developing countries exporting to the UK on MFN terms. However, it would erode the value of preferences for those developing country exporters currently exporting to the UK under FTA or GSP tariff regimes.
The UK and the EU 27 must also decide how to administer the scheduled WTO EU tariff rate quotas (TRQs). Their initial proposal to split these scheduled TRQs on the basis of historic import quantities has been rejected by exporters as representing a reduction in their market access rights. Negotiations may have to take place between the EU, the UK, and principal suppliers on modification of this schedule under Article 28 of the General Agreement on Tariffs and Trade (GATT), which may require compensation to these suppliers if the EU TRQs are reduced.
Even if the UK maintains its existing applied tariff schedule, it intends to pursue an ambitious agenda of free trade deals which could provide additional market opening opportunities for developing countries. It has committed to replicating the Everything but Arms scheme for LDCs, but its intentions regarding the GSP are not yet clear.
Although the UK would be allowed to negotiate and sign FTAs during the transition period under the terms of the draft withdrawal agreement with the EU 27, it would not be able to implement them until after the close of the transition phase which is set to end on 31 December 2020. Most countries will want to wait to see what the terms of a future UK-EU trade deal will be before finalising negotiations on a bilateral deal with the UK (see also the article by David Jessop in this volume).
A more immediate issue concerns those developing country exports (around one third of the total) which currently enter the UK market under existing TRQs or FTAs signed with the EU. Under the draft withdrawal agreement, these exports would continue to enter the UK on the current terms until the end of the transition period on 31 December 2020, given that the UK would remain part of the EU Customs Union until then.
After that date, the UK would no longer be a party to those agreements. This means there is a possibility that UK applied tariffs (which have yet to be determined) would be levied on developing country exports that currently enter the UK market under the terms of an FTA. This would have a hugely chilling effect on the exports of the affected countries.
The UK is aware that allowing these agreements to lapse would have a very detrimental effect on trade flows. It has proposed that the current agreements with the EU’s FTA partner countries should be ‘rolled over’ so that they would continue to apply to trade with the UK, pending the opening of further negotiations at some future date.
Given its limited trade negotiating capacity, it could be some time before the UK is in a position to re-open negotiations on these agreements. Some developing country regions will fear that their agreements will not be given priority in this situation.
Developing countries with FTAs with the EU will need to decide whether they are willing to roll over these agreements with the UK. Some developing countries may hope to improve on their current terms of access under the EU agreements, but this would imply re-negotiating these agreements, which is not likely to happen immediately. It will be important for developing countries with FTA access to ensure that preferential access to the UK market can continue after 31 December 2020.
EU FTAs often include specific TRQ quantities eligible for reduced rates of duty which currently can be used either on the UK or on EU 27 markets. Developing countries that use TRQs as part of their FTA will need to negotiate to ensure that they are not in a less favourable position regarding market access after Brexit.
Developing country exports will also be affected by the future evolution of macroeconomic conditions in the UK. If Brexit results in a further deterioration in the value of the pound sterling, and if it reduces the UK’s long-term growth rate, as many economic models predict, household purchasing power in the UK will be adversely affected. This will likely be the primary Brexit impact on developing country exporters of tropical products where current EU applied tariffs are low or zero.
About the author
Alan Matthews is professor emeritus of European agricultural policy in the Department of Economics, School of Social Sciences and Philosophy at Trinity College Dublin, Ireland.
Photo: Agri-food project Mozambique. Credit: CIF Action/Flickr
This article was published in Great Insights Volume 7, Issue 3. Summer 2018