19 March, 2019

Brexit Update: Trade Democracy and No-Deal Tariffs

Theresa May at European Parliament
by Helen Dennis

Rather than give you another unverifiable take on what might happen over the next few weeks, this post will focus on two rather more tangible developments – the ongoing debate about how the UK should make trade policy going forward and the government’s plans for tariffs in the event of no-deal.

More Trade Democracy? Good Lord!

Over in the House of Lords, the government has faced a series of defeats on its Trade Bill. This is the Bill designed to govern the process of “rolling-over” existing EU deals – some of which, like the UK-Chile agreement, have been signed already without the legislation in place!  Fairtrade campaigners have argued for some time that this Bill should be amended to deal with future trade deals too – the UK government is hoping to start trade negotiations from ‘Brexit Day’ but hasn’t brought forward any legislation to cover this new power.

Among other things, an amendment tabled by Lord Stevenson with wider cross-party support, requiring parliament to vote on negotiating mandates, and to approve final trade deals prior to ratification, was passed 215 votes for and 168 against. This is great news for the trade democracy campaign and a big thank you to the 16,000 Fairtrade supporters who signed our petition on this back in the summer. Our hope is that momentum will now build for the government to accept this amendment once it returns to the Commons in the next few weeks.

No-Deal Tariffs

Last week, the government published its no-deal tariff plans – these are the rates of import duty that would apply in the event of no-deal between the UK and the EU.

As a reminder, this is tax that is paid by UK importers, and it is neither a direct cost to developing country exporters, nor directly related to the retail price paid by UK consumers. However, the amount of import duty levied does have huge implications for market access. If you are a UK retailer deciding where you should source your bananas – then the amount of import duty you will have to pay, which may vary from country to country, will feed into your decision-making process.

If a deal is approved by parliament, then last week’s published plans will not apply and the UK government will have a much longer period to consult on any future tariffs, and to design a new trade policy, hopefully through a participatory and inclusive process. However given the possibility of no-deal, businesses have been crying out for the proposed schedule so that they can plan in any additional costs. UK producers and developing countries too, have been watching eagle-eyed in order to understand how their market access might be affected.

As another reminder, under existing EU arrangements:

  • The Least Developed Countries (LDCs), such as Ethiopia, have duty-free, quota-free access (i.e. 0% tariffs). A broader set of developing countries also qualify for reduced tariffs through the EU’s unilateral preference scheme.
  • Other African, Caribbean and Pacific (ACP) countries also have duty-free, quota-free access via Economic Partnership Agreements (EPAs). These countries include Ghana, South Africa and the Dominican Republic. The difference is that these agreements are reciprocal and require those countries to liberalise and reduce their own tariffs over time.
  • A wider set of developing countries have reduced tariffs, and often zero tariffs, as a result of other Free Trade Agreements (FTAs) which they have signed with the EU. For example, Chile, Panama and Colombia.

Fairtrade exporters are affected by all of these deals – from flower producers in Kenya and coffee growers in Rwanda, to banana producers in Ecuador and sugar producers in Fiji.

So what were we looking out for in the no-deal tariff proposals?

1. Preference Erosion – the value of preferential deals for developing countries is relative rather than absolute. Lower tariffs provide an incentive for UK importers to source from those countries, but if everyone has the same rate, then developing countries could lose out to competitor countries who can cut costs in other ways. Historically, this has been a particular problem in the banana trade where Caribbean exporters have struggled to compete with multi-national corporations operating out of neighbouring Latin American countries. Closer to home, it has been a recent challenge for developing country cane sugar producers who have lost out to EU beet sugar producers.

2. Maintaining Existing Preferences – there is still a big risk that some developing countries might initially lose their market access through a no-deal Brexit. This is because some of the bilateral deals which grant preferential rates, often at zero, are not yet ready for ‘roll-over’. And you can understand why from a developing country perspective. Some of those governments may want to wait and see what happens over the coming weeks and will resist signing new deals under pressure. The UK has not yet signed roll-over deals with:  

  • CARIFORUM (Caribbean countries) – important for bananas and sugar
  • SADC, including South Africa – important for sugar
  • Ghana and Côte D’Ivoire – important for bananas and cocoa butter and paste

3. Tariff Escalation – NGOs like Traidcraft and the Fairtrade Foundation have long highlighted the issue of tariff escalation. Whilst it’s important to recognise that zero tariffs is the existing norm for a lot of developing country imports, including manufactured and finished products, like processed cocoa and roasted coffee, this preference is all too often granted in exchange for something else. Our argument has been that the UK and EU’s unilateral offer should be more generous, especially in relation to value-added products.

So what did we end up with? Unsurprisingly the no-deal tariff plans were a bit of a mixed bag but we are reassured that the UK government has tried to integrate development concerns into its calculations. That being said, (and as we said last week), this is no way to make trade policy. We would hope for much more consultation and participation going forward, as well as worked through impact assessments, things that should be achievable within an implementation period. For now, things that we noted:

  • The UK government has retained an import tariff on bananas. On the one hand this is a positive, as it is an attempt to avoid preference erosion affecting the smaller Caribbean producers. On the other hand, it is risky in the short term, given that a good number of relevant roll-over deals have not been signed.
  • No more tariffs on cut flowers. Another uncertainty had been the future UK-Kenya relationship. Rather than doing a bilateral deal with Kenya, the UK has attempted to address key sectors, like cut flowers, by rolling them into its ‘zero tariff’ offer. This means that Kenyan roses will be no more expensive to import than Dutch roses, but neither will they be any cheaper.
  • Development gain from sugar? The EU sugar regime was recently reformed with the abolition of a quota on EU beet production, impacting negatively on developing countries. The Fairtrade Foundation has argued that there should be a rethink of sugar policy and early indications from the no-deal tariff schedule are positive, with an attempt to rebalance cane and beet supply through tariffs and a new quota. However, as with bananas, there is a short-term risk to sugar producers if the CARIFORUM and SADC deals aren’t agreed in time.
  • Integrated Supply Chains protected. For the most part, complex products which require inputs from a number of countries, including other EU member states, will remain tariff-free when entering the UK. Fairtrade products manufactured in other EU countries, products like chocolate and roasted coffee, will not face any new tariffs, so those UK Fairtrade companies that source in this way can breathe a sigh of relief. There are of course exceptions to that rule – those tariffs that have been set out by the UK government, would apply equally to EU imports (where they haven’t done before). And of course no-deal, means that the EU is free to levy tariffs on imports from the UK, potentially hitting domestic producers.
  • Preference erosion hard to calculate. The wider impact of preference erosion for developing countries, beyond those products with which we are familiar at Fairtrade, is hard to ascertain. However, one has to assume that there would be a knock-on effect from the proposed unilateral liberalisation but this is hard to analyse without considering the different dynamics sector by sector. One sector to watch is wine (much debated in the tabloid press!) where preferential deals currently enjoyed by countries with EU deals like Chile and South Africa, may face more competition from places like Australia and New Zealand as a result of tariff abolition.

We all now wait with baited breath to see what will happen over the next two weeks – for whilst MPs have voted to rule out ‘no-deal’, this is not legally binding and we are still due to leave the European Union in nine days. All the talk is of an extension but with nothing yet agreed between the UK and EU, the clock is ticking.

Image by European Parliament from EU - May at the EP, CC BY 2.0, Link

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