Little change in 2020 – risk of no-deal remains from January 2021
After 47 years, the UK left the European Union at 11pm on 31st January 2020 and has now entered an 11 month withdrawal period. During this period until 31st December 2020, little will change for supply chains that operate primarily in the EU. There remains some limited risk as non-EU countries are not automatically obliged to continue treating the UK as a full EU member though most are expected to continue current arrangements. The main purpose of the withdrawal period is to allow the UK to negotiate a comprehensive free trade deal with the EU. The timescale appears far short of what will most likely be required and yet the UK government is insisting there will be no extension. This may be enough time for a basic deal, an extension may be agreed or no deal could beckon from January 2021.
Frictionless trade will go
Even if the UK secures a ‘no-tariff, no quota’, free trade agreement with the EU in time it is likely that trade friction will increase significantly. This is because the UK has already elected to leave both the EU customs union and Single market and has declared it wishes to set its own regulatory standards. Customs checks and non-tariff barriers can readily add 3%-7% to the costs of goods shipments and time delays. For agricultural commodities and food products this is significant potential friction. This could be experienced as soon as the end of the withdrawal period on 1st January 2021 or later, if the withdrawal period is extended. While potentially making it harder to export to the EU, profitability also adds costs to imports and may offer opportunities for increasing home grown supplies; especially of fresh produce.
Stronger UK import tariffs – for now?
Once the UK exits the EU withdrawal period; expected in January 2021, the UK will no longer apply current EU tariffs (taxes on imports) but instead will set its own. Under Teresa May’s government the UK had planned to cut import tariff protection well below EU levels or even to zero on a wide range of goods particularly food. The objective being to minimise any price inflation resulting from a hard Brexit. The new Conservative government have now announced they will review tariffs through consultation with industry. This follows recognition that to succeed in trade negotiations the UK needs some bargaining chips; setting tariffs low or to zero removes the incentive for other trading nations to make concessions (Canada reportedly abandoned attempts to roll-over its deal with the EU to the UK as the UK was planning to lower or drop many tariffs anyway). The good news at least in the short term is that that import protection for food and agriculture may be maintained closer to EU levels; the bad news is that UK aims to negotiate away much of its protection over time.
Brexit will never end
Assuming a basic free trade agreement can be secured in 11 months time, this will not be the end of the process. Perpetual negotiations with the EU are likely on a range of issues (as Switzerland knows full well) and the UK will also be engaged in complex trade negotiations with a range of global trading partners such as the US. The message for agriculture is that trading relationships will not stabilise at the end of 2020 and the industry should be prepared to adapt to a much less certain market environment. Consumers and processors will also be facing increased uncertainty of supply. This presents opportunities for Scottish and UK farmers to strengthen and develop producer groups and secure long-term supply contracts with end-users who should be keen to secure domestic supplies at least for a proportion of their requirements.
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